Friday, January 30, 2009

Jim Cooper on the Stimulus

Jim and ten of his fellow Blue Dogs voted against the stimulus. Where were the other 40?
Unfortunately, some longtime House members saw the recovery plan as an opportunity to advance parochial political agendas. Some of these may have been good ideas, some may have been bad ideas-but we didn't get a chance to discuss them, and they weren't designed to help our economy recover in the short term. (Many of them contained new, long-term commitments.) President Obama delivered a bipartisan, win-win proposal, and Congress turned it into the rare lose-lose: a plan that may fail to stimulate the economy while saddling our children and grandchildren with unprecedented debt.
UDPATE: "Never let a good crisis go to waste," Obama's chief of staff on stuffing the stimulus like a turkey.
Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There's another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities.

Thursday, January 29, 2009

How long 'till we get there?

If the current crisis is like past ones, then
Unemployment rises and housing price declines extend out for five and six years, respectively. On the encouraging side, output declines last only two years on average. Even recessions sparked by financial crises do eventually end, albeit almost invariably accompanied by massive increases in government debt.

The other side finally shows up

But the Do-Nothing Crowd needs a better name, like "save our children."
...government stimulus plans have a long history of failure. Remember last February’s $168 billion economic stimulus package? President Bush called it “a booster shot for our economy” and promised that it was large enough to have an effect. It wasn’t, and it didn’t work.

This time around, the Do-Nothing Crowd argues that the new spending — which dwarfs last year’s effort — is probably insufficient and definitely unwise. It is largely an economic argument. But there is also a cultural dimension. Many of the Do-Nothings argue that a painful recession is the best way to destroy America’s runaway culture of irresponsibility and debt. Economic turmoil, after all, has a way of grounding Americans.

Schiff and the other Do-Nothings argue that the government should simply allow the economic chips to fall where they may. Dramatic belt-tightening across the board is the only way, they say, to stop the endless cycle of borrowing.

“Our standard of living needs to come down to the point where it can be supported by organic output,” says Schiff. “It’s brutal, but it’s called capitalism, and it works. The alternative is called socialism, and it doesn’t work.”

The recession is an opportunity, not a threat

Instead of eliminating Saturday delivery, can't we get rid of the whole thing?
Faced with dwindling mail volume and rising costs, the post office was $2.8 billion in the red last year. "If current trends continue, we could experience a net loss of $6 billion or more this fiscal year," Postmaster General John E. Potter said in testimony for a Senate Homeland Security and Governmental Affairs subcommittee.

Wednesday, January 28, 2009

Does anyone expect the stimulus to work?

Not consumers, who have the lowest confidence since the 1960's.
UPDATE: Shiller wants fiscal policy to stimulate our animal spirits:
the sense of trust we have in each other, our sense of fairness in economic dealings, and our sense of the extent of corruption and bad faith. When animal spirits are on ebb, consumers do not want to spend and businesses do not want to make capital expenditures or hire people.

... Especially now, when conventional monetary policy is ineffective, since short-term interest rates on safe assets are close to zero, Keynesian theory would argue that the government should have a fiscal target. If spending would otherwise be less than full employment GDP, the government should put more money into people's pockets.

Economists against the stimulus

They say that if you laid all the economists end to end, they would still never reach a conclusion
Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we the undersigned do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan’s “lost decade” in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

Credit crunch squeezes MBA students

I guess Citibank and Sallie Mae have some other things to worry about:
A number of leading business schools and graduate programs were dealt a serious blow this fall when big private lenders including CitiAssist and Sallie Mae (SLM) suddenly terminated their popular "no co-signer" student loan programs. The canceled loan programs, which typically allowed applicants to obtain up to $150,000 without a co-signer to assume stewardship of the loan should the borrower default, were a financial lifeline for many international students, many of whom have no other way to finance their MBA educations. They were yet another victim of the credit crunch, which has decimated many private lenders and made those still in business more cautious than ever.

Even cartels need a strategy

DeBeers strategy of supply control is no longer working.
By the end of the 1990s, the business model of controlling supply and managing how much of its inventory went to market at any time was no longer effective: New sources of diamonds were discovered in sufficient quantity that they could be sold competitively outside of De Beers' central selling organization. Demand for diamonds was dropping at a time when demand for other luxury goods was increasing. Brand-conscious consumers viewed the stones as anonymous commodities, and the precious stones, long marketed as an emblem of eternal love, became tainted by the phrase "blood diamonds" and came to symbolize the ill-gotten gains of rogue governments.
So they are trying to stimulate demand:
Under its "Supplier of Choice" program, De Beers had the goals of stimulating diamond demand by 5% per year; improving the efficiency and margins of all De Beers operations, from mining to sales; and leveraging the De Beers brand by offering De Beers-branded jewelry directly to consumers.

Tuesday, January 27, 2009


The stimulus bill will undoubtedly carry "domestic content" or "buy American" requirements. This could provoke a protectionist round of retaliation from our trading partners.

The recession of 1929-1931 was turned into the Great Depression by the protectionist policies of the US.

Monday, January 26, 2009

Keynes on Obama's stimulus package

Via ThinkMarkets:
Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.
It looks as if Lord Keynes would not be among Obama's "consensus"

Entitlement train wreck is ahead of schedule

First stop, Illinois:
A financial war is brewing -- and it's likely to pit these public employees against Illinois taxpayers who are responsible for paying those generous pension promises. There simply isn't enough money in all these retirement plans (see box) to send out the promised checks. If you think Bernie Madoff had a Ponzi scheme going, wait until the wave of boomer retirement hits the reality of pension underfunding.
Next stop could be anywhere

To be sure, Illinois is not alone. The Center for Retirement Research at Boston College estimates that state pension plans have losses greater than $865 billion, a loss of nearly 40 percent in just the last year.

The National Bureau of Economic Research says the value of pension promises already made by U.S. state governments will grow to approximately $7.9 trillion in just 15 years. And the report predicts that as much as $1.75 trillion of those benefits cannot be paid.

thanks Medicare

Not only do we subsidize Viagra consumption, but we also have to pay for the resulting infections:

It's a Thursday night at one of a half-dozen hot spots at the 20,000-acre Central Florida complex called The Villages, the largest gated retirement community in America - and one of the most popular destinations for New Yorkers in their golden years - where the female-to-male ratio runs 10 to 1.

It's a widower's paradise, and the word on the street is that there's a big black market for Viagra.

Though The Villages - which spans three counties with 40,000 homes and more than 70,000 residents - boasts 34 golf courses, nine country clubs, two downtown squares and a slew of restaurants and bars, getting lucky is one of the residents' primary pastimes.

The huge complex began growing rapidly in the mid-1990s, and reported cases of gonorrhea rocketed from 152 to 245, of syphilis rose from 17 to 33, and of chlamydia from 52 to 115 among those 55 and older in Florida from 1995 to 2005.

The state's sexually transmitted disease rate among those over 65 is one of the fastest growing in the country, one report claims.

In 2006, a local gynecologist reported that she treated more cases of herpes and human papillomavirus at The Villages than she did when she worked in Miami.

"I get offers for sex all the time," brags Dave, 70, who, like others who spoke about their sexually active set, asked that his real name not be used, "especially by women in their 70s. They say, 'Are you busy tonight? I'll show you a good time.' "

Breaking news: demand curves slope downwards

Vermonters are just finding this out

...proposed increases in monthly health care premiums and out-of-pocket payments will reverse the state's progress shrinking the number of uninsured Vermonters. More than 11,000 Vermonters enrolled in state health programs over the past year, bringing the percentage of uninsured down to 7.

"People are having trouble paying premiums now," said Trinka Kerr, health care ombudsman, noting her office is getting "hammered" with calls. "Any increase in cost-sharing is going to decreased access, and this is a terrible time to be doing that. Making access to health care more difficult is so short-sighted."

Maybe their legislature can repeal the law of demand.

The Real Cause of the Financial Crisis

Yes, yes, we have all heard the roots of the financial crisis traced to loose expansions of credit. But what were the factors that led to those policies? Here's one writer's opinion. Ranking just above the increase in "casual dress" policies (huh??), business school education gets the blame.
When it comes time to write the history of the decline and fall of the United States of America, what will be the major themes? Imperial overstretch, failure to address the problems of the time and the enervation of the people will all figure prominently, just as they have in previous national decays. Some of my personal favorites are destruction of the essential and honored professions of journalism and the law, and the rise of “casual dress.”

But those future scholars will find a target-rich environment in yet another place: the rise of the business school and the primacy of “financial services” in American society. Not for nothing was America’s self-destruct sequence set off by the first president with an MBA. It was no coincidence that the most catastrophic economic event since the Depression (and maybe worse) was caused by the top graduates of the nation’s leading business schools working with their infallible computer models.
Having received an MBA education, I can attest that the author's perspective contains more than a few inaccuracies. The most glaringly obvious to readers of this blog is that MBA students are taught that "mergers [are] always beneficial."

Sunday, January 25, 2009

The Faustian bargain is unraveling

Chinese students entering the workforce are having a hard time finding jobs, and this is putting stress on the bargain that the regime struck with the Chinese people:
The anxiety level of the ruling Communist Party, whose legitimacy is pegged to maintaining economic growth, is rising in lockstep with that of the frustrated workers and job seekers. On Monday, Prime Minister Wen Jiabao said at a cabinet meeting that “this year’s employment situation is very grave,” according to a government report. Earlier, the government ordered state-owned companies not to lay people off.
Some have predicted a more adventuresome Chinese foreign policy. There is nothing like a war to get your mind off domestic troubles.

Friday, January 23, 2009

Keynesian stimulus, NOT

Income (Y)=Consumption (C)+Investment (I)+Government spending (G);

Consumption (C) is a fraction "c" of disposable income, income(Y) - taxes (T).

The above equations (Keynesian model) imply that Y=[I+G-cT]/(1-c), or that tax cuts will raise income by the factor c/(1-c), the so called "multiplier." As my income goes up, I buy stuff, which raises the income of the sellers, and they buy more stuff, and so on. The net multiplier is c/(1-c), estimated to be around 1.5.

HOWEVER, last summer's rebates failed to have the predicted effect. In the graph below, the increase in disposable income failed to raise consumption. The Keynesian stimulus failed becaise consumers perceived the tax cuts as temporary and decided to save rather than spend.

Thursday, January 22, 2009

Bush's legacy: Keynsian revival

When I was in undergraduate school, we were taught that giving jobs to the unemployed to dig ditches and then fill them in would boost our aggregate income. But by the time I got to graduate school I was told that these jobs had to be paid for, which represent future liabilities and taxes, which takes resources from the private sector.
What's the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.
It is interesting that one of George Bush's legacies is the revival of Keynesian stimulus--his tax cuts were classic fiscal policy designed to offset economic downturns to "fine tune" the economy.

The Blue Dogs would never let this happen

...or so I hope:
2009-2010 will rank with 1913-14, 1933-36, 1964-65 and 1981-82 as years that will permanently change our government, politics and lives. Just as the stars were aligned for Wilson, Roosevelt, Johnson and Reagan, they are aligned for Obama. Simply put, we enter his administration as free-enterprise, market-dominated, laissez-faire America. We will shortly become like Germany, France, the United Kingdom, or Sweden — a socialist democracy in which the government dominates the economy, determines private-sector priorities and offers a vastly expanded range of services to many more people at much higher taxes.

Wednesday, January 21, 2009

Method to the Madness

Although the government's response to the financial crisis may look haphazard, I just heard a talk by one of the outgoing Bush administration economists who said that the administration's response to the financial crisis is following the Swedish government's response to its credit bubble in early 1992. The Swedes took three steps to address their financial crisis:
  1. Guarantee transactions between banks;
  2. Inject capital into banks; and
  3. Separate the good from the bad banks and let the bad banks fail.
He said that we are 2/3 of the way through the program. But the third part of the task is invariably the hardest. The Swedes had only 6 banks; we have 20,000.

UPDATE: from today's WSJ
There is nothing mysterious about the policy steps that need to be taken to get us out of this mess as quickly as possible. It is not rocket science. In fact, it was successfully carried out by the Scandinavian authorities back in 1991. The banks must be forced to disclose their "toxic" assets (the German banks have about 300 billion euros, the U.K. banks probably 200 billion pounds, and the U.S. banks maybe $800 billion). Then these must be written down to market prices with the hit being taken by shareholders and bondholders -- but not depositors. If that means most banks become insolvent, then so be it.

Irony: government creates more uncertainty.

The threat that the government will take ownership of banks is creating uncertainty about the future of bank stocks:
Investors are dumping bank stocks "because they don't know what the next government solution is going to be, and there's a fear that whatever it is, it's going to ultimately be dilutive to shareholders."
Isn't government intervention supposed to calm markets?

Monday, January 19, 2009

Clergy facilitate the movement of kidneys to higher valued uses

With over 100,000 people waiting for a kidney, and only 8,000 supplied by accident victims, the US black market flourishes.
By accident or by design, she believed, surgeons in their unit had been transplanting black-market kidneys from residents of the world's most impoverished slums into the failing bodies of wealthy dialysis patients from Israel, Europe and the United States. According to Scheper-Hughes, the arrangements were being negotiated by an elaborate network of criminals who kept most of the money themselves. For about $150,000 per transplant, these organ brokers would reach across continents to connect buyers and sellers, whom they then guided to "broker-friendly" hospitals here in the United States (places where Scheper-Hughes says surgeons were either complicit in the scheme or willing to turn a blind eye). The brokers themselves often posed as or hired clergy to accompany their clients into the hospital and ensure that the process went smoothly. The organ sellers typically got a few thousand dollars for their troubles, plus the chance to see an American city.
Odd role that clergy play in this drama.

Newsweek advocates central planning

Facing declining circulation, Time and Newsweek are aiming at a smaller, niche audience:
The rival editors are turning out weeklies that are smaller, more serious, more opinionated and, though they are loath to admit it, more liberal. They are pursuing a more elite audience, in print and on the Web, abandoning the old Henry Luce notion of catering to the masses. It is nothing less than a survival strategy.
Resurrecting an argument they probably made 50 years ago, Newsweek advocates state planning of the economy:
Once seen as the bad habit of an immature economy, China's state meddling is now seen as a bulwark of stability. "Government control of the most capital intensive sectors leaves me optimistic about China's prospects," says CLSA economist Andy Rothman. "The government can say to companies in these sectors, 'Continue to spend, don't defer your investment plans'." Despite the falls in its biggest export markets and its own stock markets, China's economy looks likely to grow more than 7 percent in 2009—down from the double-digit pace of recent years, but stronger than most. Corporate loan rates are actually up, as state banks loosen credit. In a nation where investment is "the backbone of sustainable growth," accounting for 40 percent of GDP, the state is once again ramping up investment to fight serious threats to growth, says Morgan Stanley Asia chief Stephen Roach. "What we're seeing is that the Chinese command-and-control system can actually work more effectively than other market based systems in times of economic stress," he says.
Leaving aside the issue that it's notoriously difficult to get accurate economic statistics about China, I think it's questionable whether you can tie the continued economic strength to wise bureaucrats. And, even if it's true that they did something right this time, does that mean strong and regular government intervention in the economy is a good thing on average?

Friday, January 16, 2009

Nixon goes to China

President elect Obama has promised entitlement reform:
"What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further," he said. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."

Thursday, January 15, 2009

What do you get when you subsidize failure?

What is Treasury doing with the TARP funds?
The magnitude of the cash involved is so large that to the average human being it is an incomprehensible abstraction. The captain of one respected financial trade organization here in Washington, D.C. says that, all told, government "investment" and commitments aimed at ending the financial crisis total $9 trillion.

Treasury Secretary Paulson and his minions have used some of the TARP funds to buy assets; some to bolster the capital of troubled banks and corporations; and some to merge troubled banks that they have deemed "too big to fail" into other supersize banks to create new banks that are "way too big to fail." All this is designed to get credit flowing again.

But so far, it hasn't worked. In fact, it's made the credit situation worse, according to community bankers. They charge that the government's generous support for the large financial institutions has engendered a serious liquidity problem at smaller institutions. Newly minted banks like GMAC, Goldman Sachs (ticker: GS) and Morgan Stanley (MS) are so desperate for funding that they are offering savers above-market rates, stealing depositors from smaller institutions that have little or less government aid and consequently lower profit margins.

If the situation persists, it could push these otherwise healthy community banks off the cliff.

"If anything, our system is more unstable today than it was when this whole thing started in the fall of 2007," says Camden Fine, president of the Independent Community Bankers of America. He bristles that the government has decided to aid large institutions at the expense of the smaller ones, "We need to bust these Cyclopes up so that they never again hold a gun to the taxpayers' heads," he says.

Bootleggers and Baptists

In this blog, we have talked about the use of government policy as an element of competitive strategy (Make the rules or your rivals will). Susan Dudley has a terrific Primer on Regulation with lots of fun examples of how to use policy to further your own ends:
Like the bootleggers in the early 20th century South, who benefited from laws that banned the sale of liquor on Sundays, special interests need to justify their efforts to obtain special favors with public interest stories. In the case of Sunday liquor sales, the Baptists, who supported the Sunday ban on moral grounds, provided that public interest support. While the Baptists vocally endorsed the ban on Sunday sales, the bootleggers worked behind the scenes and quietly rewarded the politicians with a portion of their Sunday liquor sale profits.

Modern day stories of bootleggers and Baptists abound. A 2000 Department of Energy regulation banned the sale of low-priced washing machines under the guise of increasing energy efficiency. Who were the biggest supporters of the ban? It was not the consumers, who by a margin of six-to-one preferred to purchase lower-priced machines. It was the washing machine manufacturers—because now they would be able to sell expensive “front-loading” models at an average price of $240 more than the banned machines—who worked behind the scenes to draft the regulations.

Is risk going down?

In May, we asked where the risk went, as measures of volatility declined dramatically. In September, volatility rose dramatically. Now, it has recently fallen again. In addition, the TED spread between risk free treasuries and the rates that banks charge each other has declined again:
The premium that banks pay to borrow money compared with the U.S. Treasury narrowed to the least in five months, signaling the freeze in credit markets that began 18 months ago is starting to thaw.

The difference between the London interbank offered rate, or Libor, that banks say they charge each other for three-month loans in dollars and the yield on the three-month Treasury bill, fell 12 basis points to 98 basis points today. The so-called TED spread last closed below 100 basis points Aug. 15. Dollar Libor dropped to 1.09 percent today, the lowest level since June 2003.

Wednesday, January 14, 2009

Beware the Experts

Confirmation bias is a tendency to notice or interpret information that confirms your prior belief (and avoid info that would contradict those beliefs). I think the tendency to believe in financial market "experts" reflects this bias. We believe that people should be experts, so we pay attention to info that confirms this belief. I was reminded of this recently when someone asked me about whether it made sense to take money out of the stock market (my response: I don't really know, but my feeling is that research shows trying to time the market doesn't work out so well). This person pointed out that one of the cable news financial "experts" was recommending this strategy. Of course, this same expert was touting the strength of the market shortly before its fall (but most people don't tend to remember that).

Here's a list from Business Week of the worst predictions from 2008 - experts feature prominently.

Tuesday, January 13, 2009

Jimmy Stewart on fractional reserve banking

Classic clips from "Its a Wonderful Life."
Short and sweet version (21 seconds):

Long version:


144,000 resident left California last year:
...years of rising taxes, dead-end schools, unchecked illegal immigration and clogged traffic have robbed the Golden State of its allure
Art Laffer predicted as much five years ago, when he moved to Nashville.

How many subprime auto loans will default?

After GMAC received $5.9B from the US government, they lowered lending standards:
No longer would buyers need a credit rating of 700 or higher. Now, people qualify with scores as low as 621, which is 2 points above "poor" and 102 points below America's median. As columnist George Will put it, GMAC is using taxpayers' dollars (more accurately, money borrowed against tax receipts far into the future) to issue subprime loans.

Capitalist gains; socialist losses

Nice article on why our natural aversion to risk could not overcome the heads-you-win,-tails-we-lose incentives set up by the US government.
What would help ameliorate future financial crises? The government should not be in the business of hiding real risks through political imperatives, or of insulating corporations from the risks that they have freely taken. Doing so confounds the normal risk signals that keep the market in balance. For risk aversion to keep markets working, people and corporations have to be allowed to assess real risks and to fail if they take inappropriate risks. Only the people who produce wealth can properly assess how best to risk it in future investments. The Warren Buffetts of the world can do that. The Ben Bernankes cannot.

What are you giving up during the downturn?

From the BBC:

Monday, January 12, 2009

This is "Eliminating" the Competition

The most recent post talked about how the Pittsburgh MLS has been trying to eliminate low cost competition. Eliminating the competition, however, isn't limited to traditional businesses. And, the recent economic slowdown is increasing rivalry in all types of "businesses."
Veteran observers of Japanese organised crime are predicting a sharp increase in violence in the coming weeks as two rival yakuza crime syndicates threaten to battle it out for supremacy of the protection, prostitution and drugs rackets in the centre of the city.

The stakes are rising fast. With many of their business interests such as property and construction battered by the country’s deepening recession, the gangs are scrambling more aggressively for the profits from rackets such as blackmail and loan-sharking, which thrive in the more glamorous districts of Tokyo, according to one authority on the yakuza.

Friday, January 9, 2009

How to eliminate competition from low price competitors

[The Pittsburgh MLS] excluded any type of listing other than the traditional full-service style of real estate broker listing agreement, which is typically associated with a non-discounted commission.

But don't let the FTC catch you doing it:

The FTC's consent order settling the charges bars [the Pittsburgh MLS] from imposing restrictions that discouraged brokers who subscribed to the MLS from offering lower-cost, limited brokerage services to home sellers in the Pittsburgh area.

How to run a Ponzi scheme

Here is a letter sent to the SEC asking them to investigate Madoff:
C. Red Flag # 2: why would a Broker-Dealer (like Madoff) choose to fund at such a high implied interest rate when cheaper money is available in the short-term credit markets? One reason that comes to mind is that Madoff couldn't stand the due diligence scrutiny of the short-term credit markets. if Charles Ponzi had issued bank notes promising 50% interest on 3 month time deposits instead of issuing unregulated Ponzi Notes to his investors, the State Banking Commission would have quickly shut him down. The key to a successful Ponzi Scheme is to promise lucrative returns but to do so in an unregulated area of the capital markets. Hedge funds are not due to fall under the SEC's umbrella until February 2006.

Red Flag # 3: Why the needfor such secrecy? if I was the world's largest hedge fund and had great returns, I'd want all the publicity I could garner and would want to appear as the world's largest hedge fund in all of the industry rankings. Name one mutualfund company, Venture Capital firm, or LBO firm which doesn't brag about the size of their largest funds' assets under management. Then ask yourself, why would the world's largest hedge fund manager be so secretive that he didn't even want his investors to know he was managing their money? Or is it that BM doesn't want the SEC and FSA to know that he exists?

Red Flag # 14: Madoff subsidizes down months! Hard to believe (and I don't believe this) but I've heard two FOF's tell me that they don't believe Madoff can make money in big down months either. They tell me that Madoff "subsidizes" their investors in down months, so that they will be able to show a low volatility of returns. These types of stories are commonly found around Ponzi Schemes. These investors tell me that Madoff only books winning tickets in their accounts and "eats the losses" during months when the market sells off hard The problem with this is that it's securities fraud to misstate either returns or the volatility of those returns.

Red Flag # 17: Madoff does not allow outside performance audits. One London based hedgefund, fund offunds, representing Arab money, asked to send in a team of Big 4 accountants to conduct a performance audit during their planned due diligence. They were told "No, only Madoff's brother-in-law who owns his own accountingfirm is allowed to audit performance for reasons of secrecy in order to keep Madoff's proprietary trading strategy secret so that nobody can copy it. Amazingly, this fund of funds then agreed to invest $200 million of their client's money anyway, because the low volatility of returns was so attractive!! Let's see, how many hedge funds have faked an audited performance history?? Wood River is the latest that comes to mind as does the Manhattan Fund but the number of bogus hedge funds that have relied upon fake audits has got to number in the dozens.

Thursday, January 8, 2009

Is anyone worried about the deficit?

In addition to rising Republican concerns about the size of the stimulus, which has not been factored into the CBO’s 2009 fiscal deficit projection, fiscally conservative “blue dog Democrats” are now more likely to drag their feet on the measure.

Wednesday, January 7, 2009

Why didn't they ask for better prices?

Competition among loan wholesales for mortgage applications along some unusual dimensions:
The wholesaler's job is to buy loan applications from independent mortgage brokers so that lenders can turn them into loans. Wholesalers are paid on commission: the more loans they generate, the more money they make. ...

But as the housing bubble inflated, ... the deal-making turned frenetic. Multiple wholesalers began inundating mortgage brokers with offers for the same applications. Some brokers chose to exercise their power by asking for something extra in exchange for their business: sex.

If mortgage wholesalers had been paid based on profitability, would this have resulted in higher prices for the applications instead of sex?

Guess who wants on the gravy train?

If we are going to bail out Detroit, why not the San Fernando Valley?:

Porn moguls Larry Flynt and Joe Francis are appealing to the U.S. Congress to grant the adult entertainment industry a $5 billion (GBP3.3 billion) bail out - because it is suffering from the global economic meltdown just as much as others.

Hustler magazine entrepreneur Flynt claims adult DVD sales have plummeted in the last 12 months, with figures down 22 per cent from 2007.

Profiting from the Bust

As more companies begin to fail in this floundering economy, it creates opportunities for others. Think about all of those physical assets no longer deployed in their highest valued use. As you might expect, this situation creates an opportunity for someone to step in and move the assets to a higher valued use.

Business Week recently profiled a number of liquidation companies that are experiencing a big increase in business. As a director of one of the liquidation companies puts it: "we're a sophisticated mortuary that monetizes assets."

Tuesday, January 6, 2009

Fools and fanatics are certain of themselves; wiser people are full of doubts.

Bill Spitz, former Treasurer of Vanderbilt University, offers a sober perspective on the markets, (and channels Bertrand Russell). He draws three conclusions from the current crash
  1. Most people don’t learn from their mistakes. The bursting of the housing bubble was as predictable as the bursting of the Tulip bubble in 1637.
  2. The global economy is closely linked--who would have throught that a decline in US housing prices would cause all three Icelandic banks to fail.
  3. Anyone who depends upon short term borrowing is exposed to serious risk of not surviving--just ask Bearn Stearns or Wachovia.
So what does he recommend now?
Market tops occur when most people believe that good times will last forever. Two years ago, you should have been very skeptical of that commonly held view. In contrast, market bottoms occur when everyone believes that things will continue to get worse.

I don’t know where the bottom is. But, I do know that it is impossible to find an optimist anywhere, and there appear to be fabulous values in high quality stocks, corporate and municipal bonds, emerging market stocks, REIT’s, and closed end funds among other categories. So, my advice to you is: don’t panic, stick with your investment plan, and if you have any courage, stand up and take advantage of what I think will turn out to be historic opportunities.

What do Madoff and Social Security have in common?

Answer here.

Monday, January 5, 2009

More fingers point at Congress

Earlier we blogged about the mea culpa by Henry Cisneros on pushing Hispanics into subprime loans that they could not afford. Now we have analysis from the WSJ alleging a correlation between Hispanic Congressional representation and subprime mortgages.
An examination of that borrowing spree by The Wall Street Journal reveals that it wasn't simply the mortgage market at work. It was fueled by a campaign by low-income housing groups, Hispanic lawmakers, a congressional Hispanic housing initiative, mortgage lenders and brokers, who all were pushing to increase homeownership among Latinos.

Price Elasticity for Retail Coffee Shop

So what do you think the price elasticity of demand for a cup of coffee is at a local coffee shop? My guess would be that it's pretty elastic, especially if there are a lot of nearby options.

Apparently, the owner of one of my local shops disagrees. I stopped by to buy a cup of coffee last Friday, and the cashier says "$2.62". I told her I ordered just a regular cup of coffee thinking she must have misunderstood my order because I know a coffee at this store costs $1.89 from previous visits. She replied that "Prices have gone up a little bit." A little bit?? Oof, that almost a 40% increase. And, this with another coffee shop right next door to this one, and two others within a similar walking distance. I think the owner is going to get an unpleasant lesson in basic economics (I know my quantity demanded is going down, down, down.)

Sunday, January 4, 2009

Can we have growth without follow-on crises?

James Grant says "NO!"
Capitalism, like invention, is disruptive, ... past efforts to ensure future safety have only increased long-term instability. That’s because well-meaning protections against “systemic risk” — even government insurance for bank deposits — encourage recklessness.

Saturday, January 3, 2009

Prius demand off 50%

As predicted by my former colleagues at the US Dept of Justice, Prius demand is way down, due to falling gas prices.
Toyota sold 2,174 Camry Hybrids last month, ... . The only two Toyota models to see an uptick last month were the Sequoia and Lexus LX 570, which are two gigantic SUVs.