Recently in Money Category

On Social Security

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As is usual for the 2nd, 3rd and 4th months of the year, this blog has been neglected. So just to have something new on top of the page, here's a comment I just left on a thread elsewhere.


Some things missing from this conversation:

1) Had the Bush plan for partially privatizing SS security gone through, 63 year-olds would have no problems because the plan was for those under 50.

2) "The market" is not equal to "the stock market." As other have stated, stocks are the way to go for younger folks, and as you get older, you gradually shift your funds to investments with guaranteed returns -- annuities, insurance products, etc.

3) That said, it's simply true that most people lack the financial literacy to manage their own retirement accounts. A civilized society ought to have some minimal safety net. Full privatization of social security is a fantasy, and if it weren't a fantasy, it'd be a disaster.

4) THAT said, Social security is not the minimal safety net we need -- it is a ridiculous ponzi scheme in which the people who need it most end up collecting the least. Young black men can start collecting SS at 65, but guess what? they're probably going to be dead before they're 70. Meantime, white millionaires get a $2000 check from the US government every month.

We need to lift the retirement age to 75, index benefit increases less generously and create a progressive scale whereby those who don't need it don't draw it. This is called welfare, and it should be as minimal as possible. Good luck making it happen!

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Making it up as they go

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If that sounds ludicrous to you, trust your instincts. These people really don't know what they're doing, and they're spending hundreds of billions to do it.

In an unusual joint statement, several U.S. agencies tried to clarify the government's goals as they prepare for Wednesday's launch of so-called stress tests, an attempt to measure the ability of large U.S. banks to survive a protracted recession.


[...]

The Obama administration announced its stress-test plans several weeks ago but initially provided little information. On Monday, the government issued a 500-word statement that the Fed, the Office of the Comptroller of the Currency and other government officials plan to begin running banks through rigorous tests to measure whether they hold enough of a cushion to continue lending during the downturn.

The federal statement still stopped short of explaining what economic conditions the government would simulate to determine a bank's health. Officials said Monday they will likely consider a series of nightmarish economic scenarios, including drastically lower housing prices, rising unemployment and continued negative growth. They will ask some 20 banks to predict losses for these events against asset classes such as auto loans, mortgages and commercial credits.

According to the government's statement, firms that need capital would be allowed to sell the Treasury convertible preferred shares, which the government can convert to common shares as banks need more common equity. This would improve banks' cushion against losses but would also boost the government's ownership stake.

Full story.

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Fixing the financial system

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This two part NYTimes editorial on what happened and how to fix it is worth a glance.

Some highlights with my comments below the fold:

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Give that man an award

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If our president can find it in his heart to award the highest honor he can give an American civilian to numskulls like George Tenet and Paul Bremer, than surely he can spare a Presidential Medal of Freedom for Harry Markopolos, the man who, for no other reason than the desire to see an SOB get nailed, tried for nearly a decade to tell the SEC that Bernie Madoff was a fraud.

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Sweatshop Free Crafting and Art

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by Mama-Lu

Wandering around the aisles of craft stores dreaming of projects used to be my idea of a great afternoon out. When I decided to chase the sweatshop-free dream, suddenly the aisles went from tempting to depressing.

It would be so easy to snatch up lots of fun, cheap supplies and create items for sale, but the "Made in China" label puts a damper on those ideas. In the end that's a good thing. I do not need a reason to buy more stuff, and buying things that might be more expensive keeps my purchases limited. The real temptation is to increase my Etsy shop profit by using sweatshop products. At the same time, every time I type "This is a sweatshop free product" it makes me feel like I can make a difference.

Honestly, yarn sources are not too bad. Beads for rosaries on the other hand is a little tricky. I did find beautiful beads from fair trade sources like Happy Mango Beads and Kazuri West, but these would send the cost of a rosary well beyond my price range. I could also buy from the Czech Republic, since they make beautiful beads and as members of the EU have trust worthy labor laws. In the end I ordered from American Woodcrafters Supply Co.

I am still a long way from being sweatshop-free in everything, but crafting is one area I am doing pretty well, even for the kids. Despite the distance I still have to travel, the more labels I read, the more committed I am to doing better.

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Awesome

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In the wee morning hours of Sunday, September 7, 2008, a reader on the website of the South Florida Sun-Sentinel browsed an old article on the 2002 bankruptcy of United Airlines. With hardly any other traffic on the site, that single hit moved the article into the "Popular Stories" list of the paper's business section. Soon after, Google News scanned the site and saw the article, but since it didn't find a 2002 dateline, it interpreted the article as new and added it to its index. Google News users began reading the story within minutes, and by Monday morning the "news" had been picked up by Bloomberg, a top news service for traders. When investors falsely believed the article referred to a new bankruptcy, stock for the airline fell by 70 percent in fifteen minutes, dropping the value of United Airlines by a billion dollars before NASDAQ froze trading.


The stock eventually regained most of its value, but legal action may result from the mix-up, and both Google and the news organizations involved are pointing fingers in the other direction. Google claims that human readers and its program Googlebot alike had no way to discern the date of the story, while a spokesman for the Sun-Sentinel argues that details from the story make clear that it refers to events from 2002--indicating that nobody who passed along the story actually took the trouble to read it.


Dear any company who has gone bankrupt in the past decade,

Please deposit $1,000,000 in my account or I will begin reading online articles about your bankruptcy on the websites of small town newspapers.

Very sincerely yours,

Somebody who is not Papa-Lu


More seriously, I'm all for the Google overlords -- who have algorithmatized news and even, to an extent, culture -- taking one in the arse, so I hope they have to pay big for this. My feelings about Bloomberg are ambivalent, but as a rule, companies ought to be held accountable for their algorithms.

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Catching Up

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Some good recent-ish reads:

  • 2 from the Claremont Review: "The Audacity of Barack Obama" -- a fairly balance view of Obama's governing and legal philosophies; and "Reforming Big Government" -- a sober assessment of the here-to-stay welfare state:


    Supply-side tax cuts did little to necessitate or even facilitate reducing the welfare state, and there is no reason to believe an explicit campaign for that goal will succeed where Barry Goldwater's failed. Given all that, conservatives need to weigh the costs and benefits of putting liberals' minds at ease by explicitly renouncing the war against the welfare state, the one that's barely being waged and steadily being lost. They could do so by making clear that America will and should have a welfare state, and that the withering away of the welfare state is not the goal of the conservative project, not even in the distant future. What libertarians will regard as a capitulation to statism is better understood as conceding ground conservatives have been losing for 75 years and have no imaginable prospect of regaining.

  • Rathering than listing them all, I'll just tell you to read everything John Zmirak writes at Inside Catholic (yo, Deal, add author archive links!)

  • Remember way back in... January 2008, when Ron Paul was widely dismissed as a nutjob for wanting to put the US back on the gold standard? Well, those loonies at the Wall Street Journal have given prime opinion real estate not once but twice to that fringe idea. Now, I'm not saying I'm a goldbug, but I'm not goign to hold my breath that many gold advocates will be acknowledging that Paul was out front on this.

That's all for now.I have many more I'll try to get around to in the next few days.

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Answering his own question

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James Surowiecki, financial writer for The New Yorker, is usually pretty good, but he must be playing dumb here.

What, exactly, is wrong with the "Hope for Homeowners" program that Congress enacted this summer? The program was intended to allow homeowners to trade out of their adjustable-rate mortgages into thirty-year fixed-loan, F.H.A.-insured mortgages at what were supposed to be lower rates. The Congressional Budget Office's initial projections were that almost half a million homeowners would use the plan. But in its first two weeks of existence--as with everything else, the plan took inordinately long to put in place, and didn't go into effect until October 1st--only forty-two people applied for help. And the government's now saying they think only thirteen thousand people are going to use the program in the first year.


Some of the shortfall appears to be due to borrowers waiting to see if the government will come up with a better plan, but the biggest problem appears to be that lenders aren't all that willing to take part in the program...

I'm not sure I understand the calculations that underlie the original lenders' hostility to the plan: isn't a guaranteed return of seventy to eighty per cent of the original loan better than the ever-increasing risk that you'll have to foreclose on a sizeable percentage of these properties? But what I really don't understand is why the C.B.O. thought four hundred thousand homeowners would end up using this program, when the real number appears to be less than a tenth of that. Didn't anybody talk to lenders before they wrote the bill and came up with this plan?

Is the following scenario that hard to imagine?

"Gee of course, Mr. Bernanke, we'll cooperate with whatever plan you'll come up with! Write down the debt? Oh, of course, we'd love to do that! I'm sure, oh golly, hundreds of thousands of borrowers will take advantage of such a generous program. We will market it as vigorously as we can and we certainly will not sit on our hands and wait for you to overreact to the next market hiccup and buy all of this junk from us."

How can Surowiecki suggest that borrowers are holding out for something better and not think the banks are, too? Is Joe the Plumber seriously more likely to play the government than, oh, say, Fannie Mae?

And to the extent the lenders are going to participate in this program, isn't it rational for them to hold off as long as humanly possible before offering to refinance any individual homeowner's loan? Let's say you're holding the $300,000 mortgage on this one bedroom shack in Compton, CA. The most rational thing for you to do would be to go on collecting that $3,000 mortgage check every month as long as you can. Say the buyer shows signs of stress by missing a payment, or deaulting on one of the credit cards he holds -- then you swoop in and try to renegotiate the terms.

One major problem with the government interventions thus far is that they have tended to assume a level of good faith by institutions that have committed fraud and negligence at every step of the process.

Speaking of which, I hope everyody reads Michael Lewis' Portfolio piece that tells the history of the subprime fiasco from the perspective of some guys who saw it coming.

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My stupid, stupid county

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We had three proposed tax hikes on the ballot this year. A property tax increase to fund county forest preservation, a property tax increase to fund township services to very poor folks and a sales tax increase to fund school buildings. I voted for the first two and against the last (shame on them for proposing a regressive sales tax to fund schools).

Well, none of them passed, which is not too surprising since who the hell really wants to pay more taxes? But what gets me is that the first two were landslides, 2-1 in the case of the township tax, while the school tax came within 300 votes of passing. It just goes to show that some people will vote for anything, even increasing the tax burden on the poorest citizens, in the name of education.

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Doom and Gloom Thursday

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The contradiction facing those who seek to lower prices is that the more money Bernanke puts out to fight off the collapse of housing prices, the more he weakens the purchasing power of the dollar, which in turn results in higher prices for oil--and a lot of other things.


Bernanke knows this. He is not a perversely obdurate man but one who is terrified at what might happen if housing prices continue to drop, since so many financial instruments are directly or indirectly affected by what happens with those mortgages, both the prime and not so prime. Entities as distant as drudgy, dependable municipal bonds can rise or fall on what happens with housing. Many municipal bonds, used to finance such exciting projects as street lights and storm sewers, are dependent on real-estate tax revenue expected from particular subdivisions. Thus, if the homeowners default, there may not be enough taxpayers left to pay the interest on the munis.

But municipal bonds aren't keeping Bernanke up at night. He is looking at the monsters of the Wall Street depths--financial arrangements with ugly names like credit default swap.

This kind of swap is a form of insurance dreamt up in the early 1990s for real-estate bond buyers to ensure that they got their money back in the event that the bonds defaulted. The market for credit default swaps now exceeds $45 trillion, more than the combined value of every residence in the United States. What started out as a sensible insurance mechanism has turned into speculation dwarfing the annual handle of all the casinos in the world.

Hanging in the air over lower Manhattan is what may happen if housing prices continue to fall, the bonds backing the mortgages on the foreclosed housing go into default, and those who sold the swaps aren’t able to come up with enough money to cover the losses. Maybe the trillions of dollars in commitments get worked out some way or another, or maybe, faster than the Fed chairman can get to his office to stop it, the system implodes into something the size of a billiard ball.

RTWT

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