Monday, December 22, 2008

Not going to live in California forever

Reason #n why I'm not going to be in California forever: this ruling. The most recent in a long line of idiotic rulings from California's idiot brigade (aka our "Supreme" Court) has found again that you can indeed be sued for trying to save someone's life in an emergency. This after the last time they found the same thing, and the Legislature passed a law giving people immunity (a "Good Samaritan" law). Apparently, the idiots decided that the law doesn't apply to people who are not being good enough helpers, decided after the fact by the idiots, thus circumventing the entire purpose of the law.

California: nice place, except for the people.

Thursday, December 18, 2008

Zero-day budget creation

So I had an idea this morning for how California could pass a balanced budget in about one day of work. Now, I'm sure this is not a new idea, or restricted to just California, but I think it could work pretty well. Of course, like all other good ideas for helping a government function effectively, it's doomed to be ignored... but I'll post it anyway.

See, the problem in California is that the current process never works. You need a 2/3 majority to raise taxes/fees here (which is great), which means it's near-impossible to draft a partisan budget and ram it though the other party. Since politicians rarely negotiate with the other party, this means we have no budget for a long time, until enough time passes that enough people can get on-board with the "work around the law" plan. At no point does the system really produce a viable budget, or produce the desirable negotiation or compromise; moreover, it typically results in shortfalls, delays, and months of wasted time/effort.

So, here's my thought/proposal:

On the last day before a budget is due, if no balanced budget has been passed, the legislature will do a "zero-day budget". To do this, take all the major categories for the budget, and put them in a list in random order. Set whatever minimums are required by law for each category, and compute the total (which we'll call the "running total"). You also need the budget total, derived from the income projection for the next year, which we'll call the "limit". In addition, you need an "increment", which can be a fixed fraction of the total budget for all categories (eg: 1/1000), possibly rounded to a round number. Finally, you want some fast voting mechanism (eg: electronic, 30 sec timeout), which we'll call a "quick vote".

Now, starting with the first category in the list, and at its minimum budget value:

1. Increase the budget value by the increment, and hold a quick vote. While 2/3 of the legislature approves, increase the running total and repeat step 1.
2. When you fail a 2/3 vote, move to the next category and go to step 1.
3. If the running total plus one increment exceeds the limit, you are done. The totals allocated for every category are the budget for the next year, to be further subdivided by the administration for each category. This includes categories you didn't reach in the first round (if any).
4. If you reach the end of the list of categories, and you're under the limit, you can do one additional pass through the categories using the same mechanism, starting with the totals from the previous round. If the second round is also goes to completion, you have a budget (and a surplus for the year).

- The zero-day budget has no provision for increasing taxes/fees as part of the budget process, as designed. These should be approved independent of the budget itself by the normal 2/3 vote plus executive approval.
- The process doesn't have to occur on the last day before the budget is due, if the state wants to have a budget sooner.

That's my thought, anyway.

Tuesday, December 16, 2008

Important PR for the government

I expect that in light of the recent Fed rate changes, the implicit effects those will have on inflation, and the [obvious] statement that the Fed will have to very carefully contain inflation expectation, this page will be very important PR for the government in the next few years. On it, the BLS quotes a couple of BLS economists spewing utter BS about how the CPI is not bogus, and all the complete lies and statistic manipulation introduced over the year to keep the CPI artificially and incorrectly low is actually not utter BS.

Really, though... they might want to consider hiring a marketing team to advise them on how to appear credible. I'd guess if you're going to try lying to normal people, use pretty graphs and stay away from directly lying about simple, easy-to-understand facts. For example, when you say that hedonic regression is totally valid and not a blatant manipulation of the data, it just destroys your credibility with anyone who can understand the obvious lies you're spewing. Stick with time-tested, higher-level BS that everyone can relate to, like: "we're the government, we're here to help." Lies, PR, and statistics are hard to pull off credibly, and if you're going to convince people that inflation is under control as you print and spend trillions more every year, you might need more than this frankly pathetic first effort.

Monday, December 15, 2008

Opportunity to actually fix stuff

By now, pretty much everyone with an internet connection and a passing interest in the economy has heard about the Madoff hedge fund Ponzi scheme, and it's global fallout. Rather than dwell on this as an unmitigated disaster in financial oversight on the part of the SEC (it certainly is), or as a referendum on the utter failure of governmental oversight in preventing fraud (yep, that too), or even as a parallel to the pitfalls of non-transparent investment of enormous amounts of money in extremely questionable vehicles for ulterior motives (see: the Fed), I thought I'd instead hypothesize about how we could productively learn from this meltdown, and try to prevent future disasters when there inevitably is fraud.

Rather than get into the obvious (eg: effective oversight, which may be near impossible), or abolishing hedge funds in general (which does nothing, since the problem is fraud not hedge funds), I figure the best way to prevent fallout in the future is to take this opportunity to more clearly define who can, should, and cannot participate in "unsafe" investments such as unregulated hedge funds. See, they are already available only to "qualified" investors, which basically means people with enough assets that they can lose a lot and still be fine. That, as a basis, works well; it's in the secondary markets where it seems to break down.

See, the SEC doesn't track who invests in hedge funds, which effectively allows companies to "launder" the risk associated with them. For example, say a public company puts some of its assets in a hedge fund, and a pension fund buys shares in the public company. Now the public company meets the criteria of a "qualified" investor, so it's allowed to buy into hedge funds. However, the pension fund almost certainly should not be making risky investments, so it's buying public company stock instead of hedge funds. However, we have created a problem: if the hedge fund goes under, the public company loses lots of money, and thus so does the pension fund. In effect, the pension fund is investing in risky assets.

How to fix this? Well, I'd suggest a tracking qualification of "risk level", tracked by the SEC, based on underlying asset classes and purchases. As an entity offering an investment (company, fund, etc.), you should be required to maintain and publish your risk level, based on your investments and level of disclosure. This would allow every entity which should not be gambling in risky investments (eg: pension funds, banks, public corporations with retained assets, etc.) to be precluded from doing so at the organization level, without substantially increasing the regulatory or oversight burdens, which (as demonstrated) has no beneficial effects. Plus, if done correctly, you wouldn't have bubble explosions of risk like the most recent one, as ultra-risky investments like RMBS's backed by hopes of dreams (unrealistic ones at that) would be marked as "ultra-risky", and thus be precluded from ending up indirectly on the balance sheets of "essential" financial corporations or the government itself through risk laundering.

Simple solutions are usually the best.

Great video on government spending and the economy

Ever question if increased government spending might actually help the economy, rather than hurt it like every other time it has happened? Well, then this video is for you. You can learn many valuable things, like how wealth redistribution is not actual economic stimulus, and how big government causes the economy to grind to a virtual halt.

Of course, none of this is new, or particularly rocket science. What's amazing is that there are still people, in this country, today, who believe that big government will help them be more prosperous, and wonder why the government fabricating trillions of dollars to hand out to people could possibly be bad. I mean, it's like finding people who really do still believe the earth is flat: yeah, I'd guess they exist, but in America? Now? Roughly 50% of the voters? Boggles the mind.

Stay in school, kiddies; learn the basics of how the world works so you don't grow up dumb. When the nice man on TV talks about enormous "stimulus packages" of government deficit spending and how it's supposedly going to help you, ask your parents how socialist wealth redistribution helps you. Then hold onto that thought until your old enough to vote, and don't repeat the mistakes our generation is saddling you with.

Wednesday, December 10, 2008

Why banks aren't lending

Feel free to gloss over this post if the reasoning is also blatantly obvious to you, but it seems some [dense] people in the world are baffled that although banks have received upwards of $500 billion in direct cash injections from the government, as well as more than $2 trillion in US currency "loans" for their secret (and presumably worthless) collateral, yet private credit is still very tight, and most of the bank money is either in deposit at the Fed, or invested in Treasuries paying 0%. Well, let me explain why this is expected and easily predictable.

See, the country has been running on borrowed time/money for a while. We have destroyed our industrial base while simultaneously running up huge consumer debt. This combination has allowed people to continue living "the good life", despite the fact that our country runs a huge trade deficit, and policies which actively discourage industrial production, development, and wealth creation (eg: environmental restrictions). Add to that our large tax burden, unfunded long-term social service liabilities, and massive leveraging in the financial sector enabled by cheap money (ie: Greenspan's Fed policies, continued by Bernanke), and you have a very unstable and unsustainable system. Once it starts to crack a little, there's very little to stop the decline, until the whole system "bottoms out".

Now, there would be a number of things we could do better to stabilize the system. For example, we could encourage saving and people living within their means, instead of encouraging people to spend more than they earn, and convincing them that everyone is entitled to "the good life" without earning it. We could reduce the tax burden on individuals and private businesses, to encourage economic growth. We could encourage industrial growth and competition, to be competitive in global trade, and close the trade deficit. We could fix our long-term social liabilities in some manner. We could force the various local governments to balance their budgets, to stop deferring their liabilities with accounting tricks and relying on cheap borrowing to perpetuate their debt. We could raise the borrowing rates from the government to slow monetary expansion and discourage massive leveraging, as well as reduce tangible asset prices (such as housing prices), making those assets more affordable for everyone, while simultaneously reducing systemic risk in the financial industry. We could do any or all of those things, or other things, to make our future prosperity more viable.

Unfortunately, we have a government built on corruption and immediate gratification, and we're not doing any of those things. In fact, if you consider each of them, our government has not only chosen to not pursue any of the good plans, but has chosen to pursue exact opposite plans in most cases, which are assured to have at least no positive effects, and probably amplify the depression. But wait, that's not all! In addition to all our bone-headed policies, we the people have also elected a socialist leader to "fix" the problems by nationalizing industries, adding onerous health-care costs to private businesses, and distributing wealth away from the "evil" private businesses. In short, we've created the perfect storm of the exact wrong policies for every single element of fixing our economy and future prosperity: we have done everything possible to ensure economic failure.

Now, our economy is historically resilient despite governmental efforts to the contrary, but even optimistic people would concede that our economic suicidal obsession will probably win out this time. Banks see this clearly; it's their business after all. Why in the world would you loan money to a private business, when every short-term force and the vast power of the government are aligned to ensure that those businesses fail? Why would you loan money to individuals when most of them are already in massive debt, and the government is likely to eventually force you to forgive that debt (because you're an "evil" corporation)? It just doesn't make any sense at all.

Add to that various pseudo-government entities trying to lend money without respect to risk in order to keep asset valuations artificially inflated (eg: the FHA, because apparently non-affordable housing is a government priority worthy of spending your taxpayer money on), and you have a situation where private bank lending is not going to make sense while the government interference continues. Couple that with the government's strong desire to keep cheap credit flowing, and you'll get increasing cries for nationalization, as the banks continue to lose money because they are unable to lend in a way which makes business sense (being undercut by pseudo-government lending entities, which don't are about losing money). Some private businesses (eg: auto companies) will also be nationalized, to keep people "employed" in money-losing "industry" in a sort of unionized, above private sector employment welfare system. Eventually everything will need to be nationalized due to the inability to compete with the government (which is not concerned about making money), and outcries for equal compensation and benefits compared to previously nationalized workers. Soon thereafter we'll achieve the socialist "ideal", and we can all live happily ever after like everyone in all the previous socialist countries have.

Anyway, if you're curious why banks aren't lending, that's why; it's an easily predictable and inevitable consequence of our government policies, nothing more, nothing less.

Tuesday, December 9, 2008

"Paper" money and the financial games governments play

An interesting thing happened today: short-term Treasuries sold with negative returns (link). This means that you get less money back at maturity for them than you pay today; ie: worse than holding cash. "How can this happen?", you might be inclined to wonder. Therein lies a very interesting context and back-story...

See, in my mind it starts with the fractional reserve banking system and the Fed. The banking system is what allows currency in circulation to multiply, as banks loan out money based on fractional deposits. This allows the amount of loans outstanding (and consequently the amount of money outstanding) to be significantly larger than the actual sum of deposited "hard" money held by the banks as reserves on the loans. The mathematical maximum in additional money is 9x the "real" deposited money; in practice it's typically closer to 2x.

As an aside, derivatives also add "fake" money to the financial system. These are conditional debt instruments, where someone promises to pay someone else if something happens. Financial companies held these as assets, against liabilities they had incurred (borrowed money, other derivatives, etc.), which added to the total "fake" money in the system. This has disastrous effect if/when it comes to pay off all these debts and some player in the middle in insolvent, and the "unwinding" process makes everyone else also insolvent (eg: the financial meltdown in the US), but is tangential to the whole money game discussion.

Now enter the Fed. They print "real" money, in the form of federal reserve notes (aka US currency), which are one thing the banks are allowed to hold as "real" deposits. This is also what's used to "purchase" Treasury notes, which is what the government sells to finance its debt. So at long as the currency supply is relatively constant, it has meaning, and the financial system can function.

Only, recently, the Fed has been doing interesting things. For example, they have been making massive "loans" to undisclosed people/companies/nations for undisclosed terms and accepting undisclosed collateral, on the order of trillions of dollars. The money given out for these loans (from the Fed) is "real" money, US currency, accepted for banking reserves and able to be subsequently borrowed against. Also, the Fed isn't disclosing the interest rate it's charging, but the Fed officials have said they are expressly trying to "recapitalize" banks, so you can bet the rate is close to zero.

Now say you were an enterprising bank, with access to the secret backdoor Fed lending programs, and wanted to "recapitalize" yourself (ie: make more money to pay yourself with). You could borrow from the Fed, then buy US Treasuries! Whatever you make on the Treasuries is profit, with no risk. It's even better than that, though: you get to show the Fed's money on your balance sheet instead of whatever worthless collateral the Fed is [temporarily] laundering for you, and you can also borrow against that "real" money to buy more leveraged investments! Might as well, right... it's not like there's not more bailout money where that came from if it doesn't work out.

Which leads us to an interesting question: who exactly is funding our massive debt spending handout wealth-redistribution programs? Let's see: the Treasuries are being purchased by banks, who are borrowing the money from other banks, who are lending on the basis of fractional reserves of federal reserve notes, which are loans based on junk collateral held by the Fed. So in essence, the Fed, in coordination with the "paper" monetary expansion allowed by fractional reserve banking, is funding the massive national borrow and spend binge. Huh... interesting.

When does this end? When the Fed calls due the loans, which causes the same unwinding process which created the financial crisis in the first place; that is, never. So who's financing the debt? Nobody is; it's all "paper" money created by fractional reserve banking and loans of "real" money from the Fed. So can we continue to borrow/print money forever? Well, I think, technically yes, until the currency ceases to have any value at all. Cool, huh?

Saturday, December 6, 2008

On DRM and piracy

I'd like to point out that this article is pretty fricken funny: Spore was the top pirated game for 2008. If you're not laughing at the delicious poetic irony already, read on for the brief explanation...

See, Draconic Restriction Malware (DRM, also called Digital Rights Management by some marketing departments trying to distort the name to hide what it does) is software or other restriction devices which prevent purchasers from fully and arbitrarily using something they have purchased. Usually DRM is found in software, but the music industry is also well-known for abusing their customers with DRM, as are other well-known anti-consumer organizations.

Now, Spore was published by EA, and become fairly well-known not for the game itself, but for the particularly onerous DRM added by the publisher. In particular, one aspect of their Malware additions was the requirement that EA's servers be available online, your system communicate with them, and they allow you to play the game, every time you start the game (and possibly periodically while it was running). That means if EA ever had a system failure, or decided to shut off support, or wanted you to pay them more money later, or decided for any other reason to disable their server, you would no longer be able to play the game you purchased (due to the embedded Malware). Needless to say, potential purchasers were not amused, and EA lost an indeterminate amount of sales.

I should point out as an aside that the nominal reason people include DRM in their products is to prevent piracy. It's only a nominal reason, though, since studies have demonstrated conclusively that the piracy rate for games with DRM is identical to that of games without DRM, so in reality that rationale is non-existent. What DRM actually does is frustrate legitimate users, hamper sales, and build bad-will. I'm not sure why companies choose to add Malware to their products to accomplish this, but I'm also not running EA, so there could certainly be ulterior motives I'm not aware of.

Anyway, it comes as somewhat humorous irony, then, that Spore, possibly the most maligned DRM-infested game of the year, was also the most pirated game of the year, emphasizing all the previous points like a MAC-truck to the face of whoever made the DRM-inclusion decision at EA. Hope those ulterior motives were good, and enough to make up for the lost sales and good-will, otherwise that decision was probably one of the most colossal blunders of recent memory.

Friday, December 5, 2008

Idiot of the day

Today's nomination for Idiot of the Day goes to Tom Daschle, for his self-serving pronoucement that reforming health care will spur the US economy. Now, I'm sure Tom is as self-serving as any other [ex-]politician, but seriously, you'd have to be a moron to take that statement at face value.

Let's look at Obama's health-care reform plan, in a nutshell. He wants to make medical insurance mandatory for everyone, and he wants to make businesses pay for it (directly through penalties or indirectly through increased taxes). By socializing medial insurance, you'll get a standard baseline coverage plan for everyone, but at a higher overhead cost (because the government is horrible managing costs in enormous bureaucracies). So the change would increase health-care costs for businesses, while simultaneously increasing health-care taxation on businesses.

Maybe the great and mighty chosen one would like to explain how doubly increasing health-care costs is going to "spur the economy". Alternatively, maybe "spur" in this context means "trample and beat mercilessly until dead". All things considered, though, I'll go for option three: Tom Daschle is a self-serving, lying moron, and my nomination for Idiot of the Day.

Thursday, December 4, 2008

Bernanke is funny

So today, Bernanke commented that lenders were not doing what was in their best interest by modifying mortgages they service to keep people in homes they cannot afford. Now, I'm not sure when Benny became a comedian, but let's examine that pronouncement:

- By modifying the loans they don't own, banks would be violating the contracts with the owners of the securities, exposing themselves to lawsuit costs and judgments for the write-down value (normally the loss to the investor, which would become the bank's loss if they illegally modified the loans).

- The amount of write-down required to keep people in the houses they bought would, in many cases, be much larger than the current loss in value of the home, even subtracting the cost of foreclosure. Since foreclosure is still possible in the country (at least for two more months), it's still the most cost-effective option in those cases, even with the barriers the government is scurrying to erect. Strike two, Benny.

- Modifying loans keeps people in the house longer while the house continues to decrease in value, and if they default later (more than 50% of the loans modified so far have already defaulted again, something like 90% probably will eventually), the bank loses more money. No rational person thinks the housing market is going to magically stop correcting to where it should be any time soon, even the NAR (news flash: they lie). Moreover, the banks' situation is likely to get worse in a couple of months, when the socialists who don't give a rat's ass about preserving private businesses are running the country. Thus, the best thing the banks can do with obviously bad loans (financially speaking) is foreclose ASAP, while it's still possible. Strike three, Benny, you're a funny guy.

Now, you could take from this that Benny is just an idiot, and I wouldn't fault you, but I'd guess that's not correct. More likely, Benny knows exactly what's going on, but he's doing the same thing the auto executives are doing when they extol why they deserve a piece of the wealth redistribution programs for their otherwise admirably-run businesses: lying. Tell me again, uncle Benny, how the secret undisclosed assets the Fed is holding as collateral for trillions in US dollar loans (and thus are "as backed as US currency" in the financial sense) are totally safe (even though you can't tell anyone what they are), and the US people are not getting screwed by your backdoor unregulated shadow-government financial machinations... I like that fairy tale...

Wednesday, December 3, 2008

Cost of college

In a surprise to nobody, the explosion of cheap private credit has made college ridiculously expensive and unaffordable for many people. I'm sure we'll have lots of opinions from pundits and politicians on how we can help people mortgage their futures to send their kids to college, but I have a novel solution to the problem:

How about we stop giving out cheap loans to everyone and subsidizing the risk with public debt? "How does that help" you ask? Well, I'll explain.

See, lots of cheap money means everybody can borrow for things they consider important investments. Many people think college education fits in that category, so there has undoubtedly been lots of borrowing (mortgages, etc.) to finance college. That, in turn, drives up college prices, due to simple supply and demand.

If we reduced the flow of cheap borrowing, there would be less money competing for college spots, so prices would go down. It would also have the added bonus of reducing prices for all the other essential assets (making everything thought of as "essential" more affordable for everyone), as well as reducing systemic risk in the financial system. And, as if that wasn't enough, as an added bonus it would save the country money, instead of inflating the national debt by trillions trying to pay off the people who caused the housing crisis as a great big "thank you" present for causing the current state of the economy! Basically, a solid win on all counts.

No surprise, then, that the talking heads are all talking about doing the exact opposite, "worst reaction possible" sort of plan. It might be funny, in a way, if it wasn't my future livelihood being destroyed by idiocy.

Monday, December 1, 2008

Money supply explanation

Just wanted to point people at this post, cause the video is interesting. I'd also like to plug my response on the post, because I've been meaning to write my own blog entry on it, but for now the response will suffice. I'm not sure how important it is for the average person to understand how the money supply works, and coincidentally inflation/deflation, but I'm pretty sure it's vital that if we want to preserve our monetary system and likely our country as a whole, we get some people who do understand it and care about preserving it making decisions about it, instead of the hopelessly corrupt blithering idiots in Congress currently.