The Rabid Independent, Nonpartisan solutions, independent policy ideas

New Paradigm; Same Government

Now that the swamp has been drained we have figured out that a completely deregulated financial sector was always a bad idea.  The economy has crashed and in all likelihood we will see an appropriate collection of new regulatory laws written and enforced in the near future. 

Consumers have been jolted into the realization that you can’t build wealth by gambling and borrowing.  Their shock will manifest itself in a savings rate somewhere in the 10% area.  Plasma TV sales have dropped of off have a cliff.  Vegas is in real trouble. Soon 2007 will start to look about as familiar to us as 1927.

But one thing has not changed.  During the long extended bubble of leverage and ever increasing government debt, the US government acted like no one cared what they did or how irresponsibly they behaved.  We had unlimited ear-marks, unlimited lobbying, unlimited unpaid –for tax cuts, and unlimited defense dept. toys,. The government had an endless supply of cash to sprinkle all over the world (or dump off the back of trucks in Iraq). 

As long as the unemployment rate is below 7% the masses pay little or no attention to government budgets.

Then suddenly, just as politicians were arguing about their obligation to be thrifty, they have been given a new pass to spend and spend and spend.  In the short run I understand that we need an economic agent who will spend while everyone else is cowering with fear.  In the long run however we will need an entirely new mentality out of our public servants.  It’s not fun to be a government leader and announce huge cutbacks and huge increases in taxes.

Why is it so hard to cull the fat even while you protect or add to the stimulus programs we all need so desperately.  Can we still afford military bases all over the world?  Does every earmark improve productivity and reduce unemployment?  Can we afford Medicare and Social security without any means tests?

After we produce a new set of laws for financial industry regulation we will need to totally overhaul how our drunken government does business.  I believe it will take an entirely new crop of politicians .

Taxing Bonuses – Can’t We Ever Get This Right

What’s wrong with wall street bonuses paid in deferred stock with a 2 year look-back.  If you lose money the next year then there is an allowance to claim some or all of the prior year’s bonus.  That’s it. 

If an institution that has received a government loan makes a good hire then he will want a competitive offer. It’s true that right now most places aren’t paying that well but they are paying better than whatever you’ll get after a 90% tax rate.  Every bank with a loan will get the worst of the worst so we’ll never get any of the loan back, or at least it will take a lot longer when you have the worst talent in the world.

If the US government owns a majority of the stock then that is a special case (AIG).  If we have only made a loan (and taken very little equity) then compensation is set by the board of directors.  That’s the law.

Popular outrage is not with the bonuses themselves, it’s with the contradiction between huge losses and big bonuses.  It’s with gross mismanagement and a complete failure to regulate. 

Stupid populism makes bad policy.

We Must Become Insurgents

In Afghanistan we will never succeed in building the country’s infrastructure, controlling their government and reducing graft or their bustling drug business.  They will never love us and see us as liberators.  The terrain is unconquerable.  A big chunk of the population believes that Sharia law is the way to go.

My plan is to pull every man out and periodically use drones to strike the Taliban or more importantly Al Qaeda training sites (if they exist).  We need to think like an insurgent who jumps out of the jungle, takes a shot and then goes back into hiding.

We cannot manage this country or occupy it.  Our goal was always to ONLY stop them from giving safe haven to terrorists who then plot and train and plot and train.  The Taliban are only our enemy if they befriend Al Qaeda. We cannot referee a civil war and we should not stop the people from having the government they vote for.

Let’s reduce our strategy to what’s possible. 

I love drones.

What Gave Regulation Such a Bad Name

Way back in the 70’s Jimmy Carter and his advisors (specifically Alfred Kahn)  figured out that in certain cases government oversight and control over some industries was producing gross inefficiency.  This lead to their deregulation of the airline industry and later the trucking industry.  Believing this to be success libertarians were heard to yell “I told you so” and our business culture embraced all aspects of deregulation including disinterest in enforcing anti-trust law.  The stock market loved  all the new buyouts and new entrants into industries that used to be restricted.  The telephone industry was the next big whale to be set free, and all was good.

The problem is that regulation also means law enforcement.  Laws against pollution dumping, political payoffs, fraudulent accounting and illegal alien employment all came under indictment.  Laws that protect worker safety, guarantee a minimum wage, or require proper and complete product information were looked upon as unnecessary- just burdensome paperwork.  Many companies avoided these laws by moving many workers to countries without such laws.  No one cared- it was good for profits.

Then along came Enron.  This was a perfect case study of how a company can avoid every regulatory rule protecting shareholders from excessive hidden leverage, losses and taxable income.  It also exposed the crazy new compensation schemes where a company could go bust while certain traders kept huge bonuses.  There are other examples but this one was in the finance world that had become the primary business of the US economy after it moved its manufacturing industries offshore.

Thus when corruption ran amuck in the housing finance industry  all the “regulators” had been well trained to look away.  No one had learned anything from Enron. The SEC was effectively closed.  Everyone, even most democrats, still describes regulation as inherently evil as though Alfred Kahn were still in the White house.

Is it so hard to differentiate between excessive government control and proper enforcement of appropriate necessary laws?

The Populist Cry- “No Bailouts For Anyone!”

Let’s imagine a world where we go along with Ron Paul and refuse all bailout money to every financial institution that is in trouble.  We let them all go under.  Let the chips fall where they may.  Many believers of this hands-off economic policy seem quite secure – as if they not only know that the fallout will be benign or that they know they won’t be injured in the ensuing tsunami. 

Can we imagine a world where all the major banks closed, most money market funds went into liquidation and any borrower who needed to roll over debt was shut down.  The FDIC would be broke so don’t expect to get the $250,000 maximum from your savings account.  The stock market would be down about 90%.  All the debts you have like your car lease and your mortgage – they would all be intact, but you would would have no income.  Let’s not forget that the average citizen began this mess with virtually no savings.

So all the people who want to pull the plug are either

  1. far more liquid and insulated from catastrophe than I am or
  2. failing to appreciate how huge the downside will be in a system without a solvent financial industry

Are all these people hording gold bars or $100 bills in their mattresses?  Maybe they’re short the stock market.

Maybe they haven’t thought this through at all.

College Education Arbitrage

The two most overpriced goods in the US economy are health care and private education.  In the latter case we have been told that the cost of teachers has risen because these highly educated people could easily go and work on Wall St. or Silicon Valley.

Now all those fabulous job opportunities have dried up, yet tuition rates are unchanged as are professor salaries.  So after all tuition paying parents have suffered a loss of 40% in their net worth, they are now looking at their options and public education institutions are back on the table.  Many excellent students will now go to their local state university rather than pay $40m for a private college unless they can argue that it’s worth it. 

This will cause the spread to narrow between the quality of student that goes to each institution.  Rankings will narrow between them as many of the most overpriced mediocre private colleges suddenly find that applications dry up.  Here are some of my favorites:

  • Short USC vs. Buy UCLA – they’re right next door to each other, UCLA is ranked higher and costs less than half as much (for a California resident).
  • Short Boston University vs. Buy U. Mass.  U Mass is ranked 102 and costs $10m while BU is #50 and costs $37m!  (honorable mention on the short side to Northeastern – $34m).  U Mass is going up at BU’s expense.
  • Short USD vs Buy UCSD.  UCSD is ranked 35 and costs $9m for in state applicants while USD is ranked #102 and costs $34m! (honorable mention on the short side to Pepperdine- $37m and ranked below almost every UC college).
  • Short U. of Miami vs. Buy U of Florida.  The former costs $35m and is ranked #51 while the latter costs only $4m and is ranked higher at #49.
  • Short Wake Forest vs. Buy UNC Chapel Hill.  Wake forest is ranked only 2 spots ahead of UNC and costs $30m more for a state resident!

Any private college that depends on location to attract students is in trouble.  Will people continue to pay huge extra $ for good nearby skiing or to just be in (say) Boston?  How important is a tan at $40m/yr when you can get the exact same tan down the street for 1/4 or 1/8th the cost.  Luxury good prices for mediocre education are coming to an end.

Why is AIG Only Our Problem?

If all the major AIG losses come from it’s London operation by trades done with all kinds of international counterparties then why is this ONLY a problem for the US government?  A huge percentage of those swaps were done with foreign banks to save them from failing  a BIS test for minimum capital.  When the US makes good on these trades for AIG it is saving  many foreign banks.  The US government should demand that some of the money come from the European Union.

When the US government pays out these CDS obligations to say Goldman Sachs or Barclays bank, it is paying (apparently) 100 cents on the dollar.  Isn’t AIG bankrupt?  These trades should be settled like they would be in a bankruptcy court.  

Are we so afraid that its counterparties are so fragile that they may fail if the taxpayer doesn’t fork out the full 100 cents?  If they do pay out 100 cents then shouldn’t the taxpayer get compensated with equity in the bank they just saved?

Death of the Morning Paper

We are all familiar with the problem of advertisements migrating to the web and away from newspapers.  The loss of revenue is devastating and everyone expects most papers to be gone in a year or two.  About 10% of the adult population actually reads a newspaper every day.  The readership decline has been steady and looks irreversible. 

The papers can’t fix the advertising problem but they can address the readership slide.  The internet now gives everyone the headlines so what is the point in reading yesterday’s news when you already know what happened.  You must be seeking more depth or you don’t have a computer.

The newspaper can’t sell yesterday’s news.  It has to change its print copies to tell you something that either wasn’t in the web headlines or give you an opinion or commentary on that news item.  Young people don’t read newspapers and they don’t watch the nightly news. They do watch Jon Stewart. 

The newspapers have to get rid of simple reporting and produce more investigations, analyses, commentary and criticism. 

That’s So “07”

The world is a different place than it was in the bubbly ‘95-‘07 period.  In the old world every communications major became a real estate agent.  Fabulous new retail stores were opening every day.  Everyone was contemplating some kind of house renovation.  Every cocktail party conversation included some discussion of massive unrealized real estate gains – usually in a primary residence.

Today when I see something from the old world it strikes me as weirdly anachronistic.  Many people don’t seem to have been reading the papers or opening their 401K statements.  If they did they would then see that many things that make little or no sense in the new world such as:

  • Restaurants that charge more than $17 for pasta or whose menus say “market price” for fish
  • Movies where most of the characters seem solely devoted to shopping
  • Students who think college is just an opportunity to drink and study business
  • Athletes who expect to get huge raises every year
  • Sports franchise owners who continue to give athletes those crazy raises
  • Portfolio managers who ignore price and stick to buy and hold mantras which have all failed
  • Watching CNBC
  • MIT grads who want to be quants
  • Conservatives who want everything to go back to the way it was a few years ago
  • Economists who think 3rd world countries will help us out of our economic morass
  • Private elementary schools that charge over $12m a year

Our Crazy Financial World

We may be getting to the bottom of how much AIG’s London “traders” actually lost … $500bn!!  And in August 2007 they couldn’t imagine losing $1.  That’s what their quantitative analysis was worth. (Go HERE)

And the Chinese want guarantees on the bonds they hold.  Aren’t US Treasury bonds already guaranteed by the full faith and credit of the US government?  What more do they want?

Their trade surplus is melting so their entire mercantilist model is in trouble.  It is down 50% year over year and don’t forget 30% of all their production is for export.  That’s a 15% hit on GNP.

Wow

Fair and Unbalanced

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