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  • Archive for the 'Economics & Finance' Category

    Thrift and the Virtue of Home Made

    Posted by Sgt. Mom on 20th April 2021 (All posts by )

    It amused me this week, to read of the list of professions which have proved historically to always provide a living of sorts to those who practice them; fine carpentry, construction carpentry, metalworking, innkeeping and I don’t know what-all. Seamstressing was not among them, which is a pity … but since it his historically been an almost exclusively female-practiced profession/hobby/amusement, perhaps it’s one of those things that we can really blame the patriarchal establishment for. Women could make a living, even if relatively a barely marginal one from sewing, although if you glommed onto a high-visible and high-value client who patronized you extravagantly, a certain degree of prosperity would be assured  … but I think mostly that it was one of those things that women were expected to do anyway as part of keeping and maintaining a house, which brought the wages down for those exercising the skill professionally. Eh … never mind. Read the rest of this entry »

    Posted in Business, Culture, Current Events, Customer Service, Economics & Finance | 57 Comments »

    The Logic of Insatiable Centralization

    Posted by David Foster on 8th April 2021 (All posts by )

    People and businesses have been leaving New York City, and the state of California, at a considerable rate. Some of these people/businesses are *resources* from the standpoint of government and its leaders: they are tax money on the hoof.   Cuomo, de Blasio, and Newsome would surely like to have a way of keeping them there.  Would these leaders, if they were allowed, favor a legal prohibition on exits, or at least a prohibitive tax penalty for such exit? This is the logic of the Berlin Wall, or of the Reich Flight Tax, the Reichsfluchtsteuer.   Such things may seem impossible in America, but the Dems have pushed for a lot of things that would have previously been considered impossible in America.

    Comes now Janet Yellen of the Biden administration, with a proposal for a global minimum tax on businesses, thereby nailing the feet of companies to the floor and keeping them from going elsewhere to avoid excessive exactions.  Just as Blue-city mayors would rather not have to worry about offering a tax system that is fair and economically-rational, the same is true of the Blue Biden administration.

    As a writer at Ricochet has pointed out:

    (Yellen’s proposal) is a terrible idea, for a very simple reason: “harmonizing” between governments eliminates competition between them. And it locks in the kind of bloated incompetence that is a feature of even the best governments out there.

    We want companies to be able to shop for their preferred home, just as we want Americans to be able to move to low-tax states. Similarly, if a poor country is trying to attract tenants (companies), why should they not be able to offer advantageous tax rates or less bureaucratic overburden?

    It would not just be a matter of keeping companies from moving–the proposal would also tend to reduce or eliminate pressure to keep taxes low and minimize government waste.

    Basically, this global minimum tax would represent the collusion of the political and bureaucratic classes against everybody else.

    And against diversity–any diversity of political and economic philosophies.

    “Progressives” don’t like fine-tuning incentives; they like issuing prohibitions and giving orders.

    Posted in Economics & Finance, Leftism, Taxes | 38 Comments »

    Worthwhile Reading

    Posted by David Foster on 28th February 2021 (All posts by )

    Vitaliy Katsenelson writes worthwhile content for those interested in investing, art, classical music, and philosophical thoughts about life in general.  See his recent post about coveting and envy.

    Doggedness, canine and human.

    A piece about skateboarding and flying, with thoughts from St-Exupery.

    Speaking about flying, TxRed the Cat Rotator writes about some of her aerobatic experiences.

    Projecting (simulated) 3D images onto your plate.

    Doctors and state borders.

    Posted in Arts & Letters, Aviation, Economics & Finance, Medicine, Music, Philosophy, Sports | 11 Comments »

    “Learn to Code”…Still a Dem Thing

    Posted by David Foster on 8th November 2020 (All posts by )

    In early 2020, Joe Biden advised coal miners facing unemployment to learn to code, saying:

    Anybody who can go down 3,000 feet in a mine can sure as hell learn to program as well… Anybody who can throw coal into a furnace can learn how to program, for God’s sake!

    I critiqued this ridiculousness in my post Shovel That Code.  (Does Biden think that coal miners stoke furnaces?…That stoking furnaces is a big factor in today’s job market?)

    Comes now Obama associate Rahm Emmanuel, with precisely the same advice to unemployed retail workers.

    There’s going to be people, like at J.C. Penney and other retail [outlets]. Those jobs are not coming back.  Give them the tools, six months, you’re going to become a computer coder. We’ll pay for it, and you’ll get millions of people to sign up for that.

    There is not an infinite demand in the US for entry-level programmers.  Much offshoring of programming work is taking place…see my post about telemigration…and automation of programming work, which has been happening since the introduction of assemblers and compilers in the mid-1950s, is ongoing.

    In my post about Biden’s learn to code comment, I said:

    Can you imagine what these people would do to the economy if they ever achieved the degree of power that they so avidly seek?

    We may find out, although hopefully the Senate will provide some degree of sanity check.

     

     

    Posted in Economics & Finance, Energy & Power Generation, Tech | 38 Comments »

    Why I Like Ike

    Posted by Kevin Villani on 15th October 2020 (All posts by )

    Why I Like Ike. The Greatest of the Greatest Generation followed by the Worst of the Worst.
    —-

    Dwight D. Eisenhower served during the Great War, lived through the Great Depression, and led the Allies to Victory in WW II. But perhaps Ike’s greatest contribution was his leadership as President of the United States, ensuring the peace and building America’s infrastructure while imposing additional sacrifices on his generation to eliminate the WWII debt burden, the failure to do so after the Great War being the primary cause of the next. His hard won legacy of freedom and democracy has been completely squandered over the last half century by fiscally irresponsible Baby Boom politicians.

    The Clinton Administration cut the deficit every year, averaging only .8% of GDP, the lowest since the Eisenhower Administration, leaving the budget in what was predicted by many at the time to be a permanent surplus. But the deficit during the Obama/Biden Administration averaged 5.9% of GDP, the largest since WW II, increasing the outstanding debt accumulated over the centuries by 70% and now exceeds 100%, the level at the end of WW II. The CBO projects that under existing law, including repeal of the 2017 tax cuts in 2025, that will double again to 200% of GDP over the next generation as the $200 trillion in unfunded liabilities continue coming due. State and local governments face similar unfunded liabilities that they are prevented from borrowing to fulfill, so subsequent federal bailouts as currently demanded will add to these federal totals. This CBO forecast implies declining middle class/middle age after-tax incomes even as debt and deficits balloon.

    The Biden Plan

    Read the rest of this entry »

    Posted in Big Government, Economics & Finance, History, Politics, Public Finance, Tradeoffs, USA | 23 Comments »

    Obamacare – The COVID-19 Virus of U.S. Healthcare Insurance

    Posted by Kevin Villani on 30th September 2020 (All posts by )

    It tricks its way in and infects the vital organs.

    Obamacare promised to reduce the cost and improve the availability of health care services in the U.S. without reducing the quality, generally considered the world’s best. By traditional metrics, e.g., the health of the American public, the cost, and the share of national resources devoted to healthcare, Obamacare is a total bust. As with any government program targeted to a single metric, a higher percentage of the population has insurance, whatever the cost or coverage, but even that has been declining since the enforcement mechanism, a grossly excessive individual mandate, was eliminated.

    Obamacare made some households feel more financially secure, others less so. But it’s an illusion from a broader perspective as federal, state, and local finances are virtually all unsustainable. The federal government spent about $1.5 trillion on health care in 2019 and states about $300 billion. Handing out stacks of newly printed $100 bills to assist households with medical bills would have been a much cheaper and simpler solution.

    The current Rube Goldberg monstrosity reflects the attempt to achieve the universal coverage and uniform quality of national health systems while maintaining private medical services and private health insurers under the misleading banner of “insuring the uninsured.” Many analysts believed Obamacare was purposely designed as a Rube Goldberg contraption intended to end with a “bang,” paving the way for “single payer” or “Medicare for all” – the current progressive goal. But like virtually all failed government programs, Obamacare whimpers on.

    To repeal and replace would admit the obvious. But the “single payer” and “Medicare for all” proposals aren’t an actuarial insurance fix, merely a progressive federal tax. Their perceived merit is eliminating insurance company administrative costs (and administration), profits and actuarial premiums with political premiums – payroll taxes that contribute to total Treasury tax revenue. Politicizing the premiums will further politicize provider payments, two steps toward nationalized healthcare, the likely goal of many proponents.

    Socialized national healthcare may be preferable to it. But politicians deny and mis-represent the European national healthcare systems’ inferior medical performance and deny the totalitarian necessity even while issuing multiple mandates and threats under Obamacare. The original separation of the private and public healthcare systems in the U.S. – the original “public option” – is another, arguably better option.

    The Winding Road to the Obamacare Dead End

    In a competitive market economy health expenses would largely be paid from personal precautionary savings or medical insurance, the premiums sufficient to cover actuarial claims according to the “law of large numbers” for unpredictable claims, with insurance reserves for worse than predicted experience, e.g., due to a pandemic. All insurance requires a degree of “assurance” to mitigate avoidable claims, a “moral hazard that the insured will take greater risks.

    The U.S. health insurance industry in the early twentieth century followed the path of the savings bank industry of the prior century. Individual not for profit (mutual) firms (Blue Cross and Blue Shield) started appearing during the Great Depression for employees (initially teachers). The big expansion came when during WW II, FDR, no stranger to fascist business methods, capped wages but not benefits creating a loophole for un-taxed employer health insurance benefits that persists today, an advantage over individual plans paid mostly with after tax income.

    Health care needs of the poor were addressed by a variety of public, civic and religious institutions. During the first half of the 20th century, driven largely by public health concerns, municipal hospitals provided health services but with independent fee for service doctors, whereas housing policies followed the fascist Wehrmacht model, paying private developers and builders to construct public rental housing.

    Public healthcare, like public housing, was definitely below average. But the World Health Organization (WHO) Constitution of 1946 declared “enjoyment of the highest attainable standard of health”—defined as “a state of complete physical, mental and social well-being and not merely the absence of disease or infirmity”—“is one of the fundamental rights of every human being,” reaffirmed in the 2020 Democratic Party Platform.

    Similarly, in market economies housing structures are considered a capital investment financed with debt or equity, owned or rented. But the United Nations identifies adequate affordable housing and secure tenure as a “fundamental human right.”These assertions followed the destruction of WW II and rise of European “democratic socialism,” but were foreshadowed by FDR’s New Deal policies during the Great Depression and his Second Bill of Rights in 1944.

    European national Healthcare systems reflected this uniformity, with one standard for all under Britain’s system, whereas the French system allowed about 10% of the population to opt for higher quality care with private insurance.

    The U.S. went in the opposite direction in the 1950s and 1960s. Federal expenditures for housing and health services were increasingly directly subsidized with federal progressive taxation, less intrusive to the private sector than prior methods or European systems, albeit more so than subsidizing income directly. The advent of federal Medicaid and Medicare subsidized insurance led to the decline of public hospitals (as did the movie “One Flew Over the Cuckoo’s Nest.” ) But the Budget Act of 1974 making expenditures more transparent shifted lobbying efforts to less transparent tax subsidies and to regulation by the Administrative State.

    So progressives targeted finance and insurance, where the subsidies are often opaque. The objective became achieving a socialist incidence of both cost and delivery of health services by subsidizing and manipulating the private insurance market. The problem with FDR’s freely granting of multiple “rights” including healthcare and housing during this “fireside chat” was that they were not his to dispense. Progressive “rights” are nothing more than meretricious socialist promises implemented with a totalitarian stick that violate the unalienable rights in America’s Declaration of Independence that are the cornerstone of a market system, the reason for multiple conflicting and confused Supreme Court decisions regarding Obamacare.

    The Clinton Administration first proposed Hillarycare, the precursor to Obamacare, in 1993. When that failed, it turned to housing, where it was too successful. These latent New Deal viruses later turned deadly. Some three and a half years ago I argued that the two legislative centerpieces of the Obama Administration, the “Dodd-Frank Act” (the Wall Street Bank Bailout) and the “Affordable Care Act” (Obamacare) had the same fatal flaw. Politicians basically intervened in finance and insurance markets to provide equality of home ownership and medical care across all incomes without transparently paying the price. The effects spread like a deadly virus, distorting all the incentives, checks and balances that kept the private system afloat, replaced by universal one-size-fits-all mandates. The sub-prime lending debacle, like the Wehrmacht, lasted a decade, the current age of Obamacare (see Appendix).

    The Building of a Rube Goldberg Contraption: Doubling Down on “Pre-Existing Distortions”

    Read the rest of this entry »

    Posted in Big Government, Economics & Finance, Health Care, Medicine, Obama | 17 Comments »

    Larry the Liquidator is on the Line

    Posted by David Foster on 17th September 2020 (All posts by )

    The current behavior of the Democratic Party and its allies in media and academia reminds me of the 1991 movie Other People’s Money.  The main character, known as Larry the Liquidator, specializes in acquiring companies for the purpose of selling off their assets.  When the film opens, his new target is a struggling company called New England Wire & Cable Company.  Larry calls on the CEO (Jorgy) and says that by his calculations, the company would be better off from a shareholder standpoint (and hence from the CEO’s standpoint) being broken up and sold off in pieces.  Jorgy,emotionally connected to his family-founded company and  conscious of his position as the town’s leading employer, is appalled at the very idea and refuses to give in.

    Nevertheless, Larry prevails in the resulting proxy fight, and the company falls into his hands.  But there is a deus ex machina…Kate, the beautiful lawyer who has been hired to defend the company, identifies a major new market for the company’s products: the stainless steel wire cloth required for automotive airbags.  (And, of course, Larry (Danny DeVito) has fallen head-over-heels in love with Kate (Penelope Ann Miller)

    The Dems and their allies appear to care about the long-term existence of the US and the welfare of its people as little as Larry the Liquidator cares about the continued existence of New England Wire and Cable and its employees and customers.  They will happily sell it off to miscellaneous parties…various ethnic and gender groups and pressure groups…promising those groups an appreciation in their ‘stock’, in the form of government goodies or at least self-esteem and the pleasures of righteous anger. And regardless of whether those promises are actually fulfilled, the Dems and their allies will, like Larry, collect their substantial fee.

    And, in fairness to Larry, there are indeed cases whether spinoffs, breakup, or outright liquidation is the best thing for a company, sometimes the only thing.  (That would likely have eventually turned out to have been the case with New England Wire & Cable absent Kate’s highly-improbably ‘invention’…it seems clear that Jorgy was not managing the company well in the existing circumstances…if he had been, he would have uncovered the wire-cloth opportunity himself..and was unlikely to change his ways.)  But breaking up a company is a very different thing from fragmenting a company and a society.  And, while Larry has had no prior involvement with NEWC, the Dems and their allies have mostly lived here all their lives and benefitted greatly from doing so.

     

     

    Posted in Business, Economics & Finance, Film, Leftism, USA | 41 Comments »

    Contracts Breeched: Freedom Cancelled

    Posted by Ginny on 10th September 2020 (All posts by )

    A previous post mentioned trust and the responsibilities of government to keep up their share of their contract to provide safety and the kind of order property rights demand. Such trust comes easily when our respect is internalized. Benjamin Franklin and Jonathan Edwards both spoke of teaching the young “virtuous habits”. In the America in which I grew up that kind of respect was internalized – and not just in towns of 500 in the Great Plains – Thomas Sowell talks of his boyhood in Harlem with such affection. This too, is critical of the broken contract of so many politicians with their citizens surrounded by the rubble of riots.

    In Property and Freedom, Richard Pipes examines “property” in terms of land, but also money and goods; what is “proper to man” – including his inalienable rights. I’ve found his journey to follow the historical development of different societies’ definitions of property and man’s relation to it interesting.
    Read the rest of this entry »

    Posted in Book Notes, Current Events, Economics & Finance, Political Philosophy | 10 Comments »

    Quote of the Day

    Posted by Jonathan on 9th September 2020 (All posts by )

    From an interview with Stanley Druckenmiller:

    This massive market rally is due in large part to the measures taken up by the Fed since the pandemic began, Druckenmiller said. He noted that, while the central bank did a “great job” in March by cutting rates and launching unprecedented stimulus programs to sustain the economy, the follow-up market rally “has been excessive.” He also said that for the first time in a while, he is worried about inflation shooting higher.
     
    “The merging of the Fed and the Treasury, which is effectively what’s happening during Covid, sets a precedent that we’ve never seen since the Fed got its independence,” Druckenmiller said. “It’s obviously creating a massive, massive mania in financial assets.”

    You don’t say.

    Posted in Economics & Finance, Quotations | 19 Comments »

    New Frontiers in Offshoring

    Posted by David Foster on 6th September 2020 (All posts by )

    Babysitting…of kids in Japan, via Zoom, by women in Rwanda.

    Relates to my posts telemigration and Covid-19, Remote Work, and Offshoring.

     

    Posted in COVID-19, Economics & Finance, Internet, Japan, Tech | 7 Comments »

    Covid-19, Remote Work, and Offshoring

    Posted by David Foster on 13th August 2020 (All posts by )

    The general attitude toward working from home has certainly changed over the last several years.  In 2013, the then-CEO of Yahoo!, Marissa Mayer, banned work-from-home at her company.  And in 2017, IBM established a similar ban. Both of these actions were based on perceived needs to improve productivity and collaboration at those companies

    But in 2020, a lot of companies that moved to work-from home in the Covid-19 environment…because they had no choice if they wanted to continue operating at all…have apparently found it to be working to their satisfaction, and many though not all employees like it, too.  And there is starting to be significant impact on where people choose to live…see these comments from the governor of New Hampshire, Chris Sununu.  The term ‘zoomtowns’ has been applied to locations where people choose to live and work remotely, based on a locality’s attractive characteristics and good Internet connectivity.

    I do think that a comprehensive work-from-home environment can result in losing something in terms of unplanned interactions…I’ve personally observed several significant product and business initiatives that resulted from such interactions, and there are also interesting historical cases. But such things are difficult to measure, and financial benefits and convenience of work-from-home are likely to prevail, perhaps excessively so in some cases.  In any event, the Yahoo! and IBM approach of broad-scale top-down corporate edicts is unlikely to be a good one.

    Another kind of remote work involves the use of people at remote locations…though not necessarily at home…to perform machine-control tasks that would previously have had to be done on-site.  The robots being used by Federal Express at its Memphis facility sometimes encounter problems that they can’t solve…they can be ‘advised’ by humans located in San Antonio. There are projects underway to make municipal water treatment plants remotely operable, either for emergency backup (as in a pandemic) or for normal operations, and there are also initiatives focused on remote operation of other kinds of infrastructure, utility, and industrial facilities.

    If something can be done by people who are remotely located within the United States, then in most cases it will also be doable by people who are remotely located in other parts of the world.  In my 2019 post telemigration, I wrote about the increasing feasibility of offshoring services work, not only manufacturing.  A lot of this has been going on for software development as well as for customer service.

    It may turn out that, in many cases, remote work in the US turns out to be just a waystation on the road to remote work somewhere else.

    Posted in Business, COVID-19, Customer Service, Economics & Finance, Energy & Power Generation, Management, Tech | 42 Comments »

    Is the Biden Economic Plan on the Right Track?

    Posted by Kevin Villani on 31st July 2020 (All posts by )

    It promises to improve economic well-being relative to current economic policy for average and particularly less well-off citizens now and in the future, and to do the same for citizens of other countries including all immigrants. Can it deliver?

    The Mock Democratic Platform was released in February, the Biden-Sanders Unity Task Force a few weeks ago, and the draft 2020 Platform a few days ago. The economic plan is the most ambitious progressive anti-capitalist agenda at least since FDR’s New Deal and arguably in American history. It consistently proposes numerous government carrots and sticks to achieve its economic objectives, doubling down on the New Deal and Great Society methods.

    Causes and Consequences of Reducing Capital and Labor Productivity

    Potential national wealth is limited only by the amount of capital (national savings) and the incentive to maximize the productivity of capital (e.g., with new technology) and labor (through appropriate education and training). Politics often distorts individual incentives for the worse.

    Politically Re-directed Investment

    The US national savings rate hovered around 3% after turning negative in 2007-2009 and again now. The Biden economic plan for politically re-directing resources to, e.g., conservation, clean energy, transportation, manufacturing, infrastructure, affordable housing, etc. by subsidizing public and taxing private investment more has some merit. However, it may have problematic economic returns and the total cost is many multiples of total national savings.

    Education and School Choice

    Biden would limit the competition with public schools by restricting higher performing charter schools. Higher education would be made either affordable or free with reduced entrance requirements to compensate for a poor primary education, but higher education only contributes to individual and national wealth to the extent it improves productivity, e.g., with more STEM graduates.

    Labor Market Intervention

    By traditional measures, the country was fully employed prior to the Covid-19 epidemic, but the Biden plan calls for the “creation” of multiple millions of new high paying jobs, both in the nominally still private sector and the public sector. Pay would be raised by eliminating the right to work without being forced to join a union, something private sector unions have demanded since the passage of the Taft Hartley Act of 1947. But Biden plans to go beyond that, forcing all states to unionize public employees as well. For those that fall out of this broad union net, the federal minimum wage would start at $15/hour, superseding state laws. These are the tools that progressives historically used to keep blacks, other minorities and recent immigrants out of the labor force, and is is difficult to see how they would do otherwise this time around.

    Trade Protection

    As these politically inflated domestic labor costs will again be uncompetitive internationally the Biden plan opposes any trade deals, calling for manufactured goods to be sourced and stamped “made in America.” Consumer prices would have to rise commensurate with labor costs.

    Immigration

    Borders would be relatively open and immigrants incentivized to come both by the decline in export-related jobs and the benefits of the U.S. social welfare state. But they would be excluded from the formal job market by the union and minimum wage requirements once inside the U.S. border.

    Taxation, Debt and Money Printing: The Limits of Expropriation

    All senior mob leaders know two things well: 1. There is only so much extortion money to go around (gangster killings are usually over excessive greed), and 2, There are limits to how much you can extort without killing a business. At their peak in the 1980s the New York Mafia “owned” the labor unions that extorted from business, enabled by a symbiotic relationship of both with the Democratic Party. Sooner or later taxpayers and consumers always pay.

    Debt and Taxes

    State and local governments are in dire straits and blue states are technically insolvent, demanding a bailout. Federal funding has morphed the states into Soviet era oblasts with the federal government the funding source of first resort.

    Current federal debt is $27 trillion, exceeding that of WW II as a percent of the economy, with over $200 trillion in additional contingent liabilities.. The current federal deficit for this fiscal year is over $3 trillion, to which the Democrat-proposed Heroes Act would add an additional $3 trillion. Candidate Biden has offered tiny constituent groups, e.g., caregivers, almost $1 trillion, large constituent groups such as the environmentalists’ Green New Deal could cost upwards of $100 trillion, with lots of constituent promises falling in between.

    The Biden plan calls for reversing the Trump corporate tax cut that stimulated investment and exports. Taxing the “rich” will raise some revenue in the short run but reduce investment and growth in the longer run. Middle class taxes will follow, although he is committed to restoring the (blue) state and local income tax deduction for the relatively wealthy.

    The Federal Reserve and Modern Monetary Theory

    Having gone past the limit, a gangster may turn to counterfeiting as a last resort. The Federal Reserve is already “printing” enough money to be the primary buyer of Treasury debt and at the current pace would own it all in two years. Under the Modern Monetary Theory espoused by the Sanders campaign and now implicitly incorporated into the Biden economic plan, debts and deficits don’t matter so long as the Fed can print money to purchase them. The Biden plan adds “racial equity” to the Fed’s full employment and price stability goals to reduce differences in wages and unemployment.

    Biden’s Plan is an Extortion Racket on the Left-Behind Track

    Across time and space the evidence supports competitive market capitalism as the source of virtually all human economic progress. The Biden economic plan is essentially an extortion racket that fails to recognize its inherent limits, doubling down on the bad policies of the current Administration while eliminating the good, apparently because the Party’s octogenarian leaders either never learned the limits or have lost control to the young radical left. This plan so far exceeds the limits that even partial success could easily lead to hyper-inflation.

    There is a sense that America can always turns things around if it gets derailed but the progressive perspective dominates America’s intellectual elite and media. Argentina was once on the capitalist fast track parallel to the U.S., but progressive President Juan Peron switched tracks in 1946, and Argentina has been left behind ever since.

    Kevin Villani

    —-

    Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

    Posted in Economics & Finance, Elections, Politics | 34 Comments »

    Reshoring

    Posted by David Foster on 3rd May 2020 (All posts by )

    The consulting firm Kearney updates their numbers on the foreign sourcing and US manufacturing of products.  Lots of interesting data.

    Posted in Business, China, Economics & Finance, Latin America, Management, USA, Vietnam | 32 Comments »

    Worthwhile Reading

    Posted by David Foster on 22nd April 2020 (All posts by )

    Waiting for Good Dough.  Excerpts of some thoughts on central banking and monetary policy, from a newsletter issued by Paul Singer’s hedge fund, Elliott Management.  Best post/article title I’ve seen in a long time.

    Remote work in industry during the pandemic and maybe afterwards…some thoughts from the CEO of GE Digital.

    Skills development in industry.  Career progression doesn’t always have to involve college education.

    Grim excerpts and critiques an Atlantic article which is a rather hysterical attack on a class of people who are very different from the author.

    Venture capitalist Marc Andreessen (he was coauthor of the first widely-used web browser and cofounder of Netscape) writes about the need for America to focus on building things. Surely most of us here will agree with that spirit, but a lot of his specifics seem dubious to say the least. Stuart Schneiderman offers some thoughts; worthwhile comment thread.

    A cat and a dog offer differing views about the merits of the work from home approach.

    Posted in Big Government, COVID-19, Deep Thoughts, Economics & Finance, Education, Leftism, Tech, USA | 11 Comments »

    Rethinking the Value of Cities in an Era of Plague

    Posted by Stephen Karlson on 6th April 2020 (All posts by )

    It’s the tension between “contagions for good,” the possibilities for sharing ideas and exchanging goods in thicker markets, and “contagions for evil,” when it’s your viruses and bacteria that are being shared with others.
    Read the rest of this entry »

    Posted in Civil Society, COVID-19, Deep Thoughts, Economics & Finance, Tradeoffs, Urban Issues | 18 Comments »

    In Medias Res

    Posted by Jay Manifold on 4th April 2020 (All posts by )

    What I’ve got so far:

    1. Everything’s on the table. The likelihood that your preexisting ideology or priorities are an entirely adequate match to what this situation truly requires of us is close to nil. “In a time of drastic change it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that no longer exists.” ― Eric Hoffer
    2. That said, your life experience will give you insights. Privilege your experience over your ideology and nominal priorities.
    3. All disasters are local. Concentrate on your meaningfully immediate environment, which in this case will be the local market for medical resources. For most of the US, that will be our MSA. For those outside an MSA (metropolitan or micropolitan) that will be their county; and for some it will be the group of counties that feed into the one hospital in the region.
    4. Deprioritize pandemic news from outside your local area. There are people in the massive NY/NJ/MA outbreak that I worry about, but what happens there will only modestly resemble what happens in the KC MSA, not least because of the difference in population density, which can approach 20x.
    5. Mitigate or avoid your own risk (including the risk you pose to others) by both following the hygiene advice we’ve all heard and minimizing your physical interaction with anyone outside your immediate household. Internalize R₀ = b × k × d, where R₀ is the reproduction number of the virus, b is the probability of infection given contact with an infectious person, k is the contact rate, and d is the infectious duration. While the nominal R₀ of COVID-19 is ~3, your personal R₀ can be driven to < 1 by your own behavior.
    6. The general form of the challenge confronting us is abrupt wide variation in formerly relatively constant phenomena. In Talebian terms, we have migrated from “mediocristan” to “extremistan.” The multiplicative nature of a novel viral pandemic, especially by comparison to the relatively predictable seasonality of influenza viruses, has a thick-tailed (power law) probability structure and complex payoffs (notoriously ranging from large numbers of nearly asymptomatic cases to abruptly life-threatening “cytokine storm” reactions). For detail, see The Fourth Quadrant: A Map of the Limits of Statistics.
    7. So we find ourselves at serious risk of running out of ventilators, ICU beds, and even hospital beds generally, to say nothing of supplies (but see “all disasters are local,” above), raising the prospect of significant second-order mortality among those unable to obtain adequate care for entirely unrelated illnesses and injuries.
    8. In this connection, many prior customs, techniques, tools, and materials are being revealed as highly dysfunctional and, if all goes sufficiently well, will be swept into the dustbin of history. The bad news for me is that my earlier fears about easily-bottlenecked processes have been realized. But we may look forward to significant adaptation, including deregulation of medical services.
    9. Similarly, a large number of purported fixes and remedies will fail. Folk remedies, in particular, seem likely to be disastrous, and this blog’s audience needs no persuasion that attempts at central planning will fail thanks to the Hayekian local knowledge problem. In that connection, and to quote something I wrote a few years back: “John Gilmore famously said that ‘the Net interprets censorship as damage and routes around it.’ The future adaptation of representative democracies will depend on our capability, as individuals, to interpret endemic institutional dysfunctionality as damage and route around it.”
    10. The relatively vulnerable are closer to the center of the network: affluent, living in high-density major cities, well-traveled, extroverted, socially active, with large numbers of regular contacts (even if mostly in a “bubble” as per Murray’s notorious quiz). But some are the alienated and defiant who reject risk avoidance or even risk mitigation tactics (or attempt folk remedies instead), ordinarily associated with …
    11. The relatively invulnerable, who are at or near the edge of the network: impoverished, living in rural or low-density metro areas, untraveled, introverted, socially isolated, rarely in face-to-face contact with others. Many of these people have mental health issues and associated substance abuse problems. But the relatively invulnerable are also the intelligent and conscientious who promptly adopt appropriate risk management strategies.
    12. The post-pandemic preferences of the relatively invulnerable will have massive economic and cultural effects. I expect a reasonably quick partial recovery from the economic shutdown, but full recovery may take several years. Many of the “third places” which have done well over the last few decades will not regain their patronage, and as of early April 2020, we can only guess which ones. Fond hopes of some of my co-religionists aside for a sudden revival, I believe church attendance and involvement will be well down in the aftermath, and will not significantly grow until the next “Awakening,” which per Strauss and Howe should occur at mid-century. Until then, believers will be culturally marginalized and congregations will be smaller—but comprised of relatively fervent, active members.
    13. Geopolitical risks are heightened, especially US-China tensions, and if Xenakis’ “58-year hypothesis” holds, this very year will see an echo of the Cuban Missile Crisis.
    14. The most important output of this process—and it is a process, with inputs, providers, outputs, recipients, etc—will be a collective lessons-learned database, comprised of both tacit and explicit knowledge, and somehow transmitted to future generations.

    Posted in America 3.0, Big Government, Business, China, Christianity, Civil Society, COVID-19, Culture, Current Events, Economics & Finance, Health Care, Human Behavior, International Affairs, Libertarianism, Military Affairs, Organizational Analysis, Predictions, Religion, Society, Systems Analysis, USA | 34 Comments »

    From the Cosmos to Strings: Parallels of Economics to Physics

    Posted by Kevin Villani on 24th March 2020 (All posts by )

    The first macroeconomic model of the U.S. economy consisted of 20 boxes of punched cards at 2000 cards per box that I would wheel on a dolly stacked five feet high to the main frame computer center where it took about three days to get results back.

    Mathematics is the language of physics. Graduating with a BS in mathematics in the 1960’s, I faced a choice between my two minors, physics or economics. Some famous physicists had already declared that the quest for a unified mathematical explanation of the cosmos and its smallest building blocks was at hand. In economics, the attempt to build a mathematical macro model of the U.S. economy and fully integrate it with the micro economic mathematical models of human behavior represented a new frontier. I chose economics.

    In retrospect, physicists are still searching for a Grand Unified Theory (GUT) of the universe. In economics, mathematics and statistics have widened the disagreement about how the economy works and the proper role of government in economic management.

    God and Physics: from Aristotle to Hawking

    Aristotle (382-324 BC) described the cosmos of round bodies in motion circling around the earth. It took almost two millennia until the sun-centric Copernican model was popularized by Galileo, who was imprisoned by the Pope, the political enforcer of orthodoxy at the time, in 1633 for heresy, forcing him to recant. But only a half century later, Newton described the mechanics of the universe and sun-centric solar system in Principia Mathematica (1687), which remains the cornerstone of basic physics.

    In Newtonian physics, motion and speed are calculated relative to what you are moving away from. Maxwell’s discovery in the mid-1800’s that the speed of light was “absolute” required an explanation that stumped many physicists until the young patent office clerk Albert Einstein, unaware of these efforts, provided the novel Special Theory of Relativity (1905) that if light speed was constant space and time must be relative.

    His mathematical model proved over time to provide a more precise description of the movement of heavenly bodies, but the implication of his equations that the universe was expanding violated his belief in a master plan of a “creator,” so he inserted a mathematical cosmological constant (what economic model builders would subsequently call a “dummy variable”) to stagnate it. But other physicists confirmed his original model, which in reverse required a mathematical ”singularity” – a beginning of time with a “big bang” from an infinitely small spec. The Catholic Church approved this model in 1952 as consistent with its orthodox views of a creator.

    In 1970 Stephen Hawking proved that the big bang theory was the only one consistent with the existing models of the universe, but he later challenged those models. First, the violent path of destruction and creation over billions of years subsequent to the big bang that ultimately produced the building blocks of life was a “million to one shot”- is ours just one of millions of universes? Second, macro models of the universe broke down at the mathematical singularity, which remains inconsistent with micro models of the very small – in my youth molecules then atoms made up of protons, neutrons and electrons, now subatomic “quarks” and more recently sub-quark vibrating strings.

    The scientific method is a slog: to understand the universe, the models must not only be tested empirically but compared to all the potential alternative explanations. Pre-conceived orthodox ideology has at times set the investigation back centuries.

    The Progressive Orthodoxy of Mathematical Models in Economics

    Macro economics, the desire to understand and control the workings of the economy at large, developed in response to the Great Depression. The roots of the mathematical approach to economic management trace to the founding of the Econometrics Society in 1930. John Maynard Keynes published his General Theory of Employment, Interest and Money in 1935, the title invoking the universality and finality of Einstein’s General Theory of Relativity published two decades prior.

    Paul Samuelson’s Foundations of Economic Analysis (1947) provided a mathematical model of micro economic consumer and business behavior. I was a regular reader of Samuelson’s Newsweek columns in high school and used his undergraduate economics text at UMass, where I worked on the first macro economic model of the U.S. economy developed at the University of Pennsylvania by Samuelson’s first PhD student Lawrence Klein.

    As a student of former Federal Reserve Board economist Pat Hendershott, I worked on the first Flow of Funds model of the U.S. financial sector. The main frame computer at Purdue University would run the punch cards of a professor’s research overnight, a big improvement. Such macro economic models are “Keynesian” central government centric by design: fiscal and monetary policies are modeled to control the economy, mitigating recessions and unemployment.

    But other models haven’t been ruled out. In The Forgotten Depression (2014) James Grant argues that the Depression of 1921 – there was no official designating body at the time – following the end of the Great War cured itself in 18 months due to official benign neglect. In Grant’s view (and many others, including economists living through it) what made the subsequent Depression “Great” was massive political intervention that prevented the required adjustments.

    While the merits and long term effectiveness of “small scale” and “counter-cyclical” measures remain debatable, the merits of the socialist centrally planned economies are not: hundreds of millions died and the remainder suffered economic stagnation while the capitalist world prospered. Only self described democratic socialist Bernie Sanders openly touts the performance of the centrally planned economies, but there isn’t much difference in the government centric policy approach of progressive politicians.

    This macro narrative is generally consistent with anti-capitalist progressive ideology of business, workers and consumers dating back to Marx that is accepted by the majority of more recent college graduates. Economic statistical research across a wide spectrum from discrimination and labor exploitation to income inequality and market failure is offered in support, albeit inconsistent with a competitive market system. The competitiveness of the U.S. economy implies that correlation is too often assumed to imply causation without rigorously considering alternative explanations.

    Creative Destruction Produces Economic Expansion

    Humans owe their very existence to the massive creative destruction of the Cosmos (whether or not by the grace of God) for we are all made from the dust of exploding stars. In the economic sphere, virtually all human economic progress is attributable to capitalist competition and creative destruction, favoring the adaptive over the sluggish. Mathematical models haven’t adequately described entrepreneurial innovation. Progressive intervention to mitigate downside risk of creative destruction, broadly or to specific political constituencies, is highly correlated with stagnation.

    Historically, even natural disasters including pandemics such as the corona virus (I assume it was “natural”) have provided opportunities for creative destruction. Consider, for example, the requirement that university students study online during the pandemic. While traditional colleges aren’t yet offering rebates, we know from experience that without the room, board and administrative costs and with increased productivity of fewer professors, online degrees can be provided for as little as one tenth the cost of the traditional approach.

    Progressive proposals for taxpayers to foot the entire bill for the high cost model may be called democratic socialism but are indistinguishable from democratic crony capitalism for the political elite.

    Kevin Villani

    —-
    Kevin Villani was chief economist at Freddie Mac from 1982 to 1985. He has held senior government positions, has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on how politicians and bureaucrats with no skin in the game caused the sub-prime lending bubble and systemic financial system failure.

    Posted in Book Notes, Economics & Finance, Public Finance | 4 Comments »

    Ruin and Recovery

    Posted by David Foster on 21st March 2020 (All posts by )

    A brokerage note I received recently included the following quote:

    What has so often excited wonder, is the great rapidity with which countries recover from a state of devastation, the disappearance in a short time, of all traces of mischief done by earthquakes, floods, hurricanes, and the ravages of war. An enemy lays waste a country by fire and sword, and destroys or carries away nearly all the moveable wealth existing in it: all the inhabitants are ruined, and yet in a few years after, everything is much as it was before.

    John Stuart Mill, Principles of Political Economy, 1848

    Questions for discussion:

    –How well has Mill’s assertion held up over the 170 years since he wrote the above?

    –Will American recovery from the Coronavirus follow Mill’s pattern, or is there reason to think that it will be different this time, and not in a good way?

    Posted in COVID-19, Current Events, Economics & Finance, History, Human Behavior | 7 Comments »

    How to fix US empty store shelves in 48 hours

    Posted by TM Lutas on 18th March 2020 (All posts by )

    It’s never a pleasant thing to stand up, alone, in the face of a national mania and provide an unpleasant solution. I’ve been putting it off for some time.

    Finally, I’ve had it. Nobody who does this for a living seems to be willing to step up to the plate so I guess I’m stuck doing the job. The free-market solution to excess demand over supply is to raise prices. We are not raising prices to end the empty shelves because the government in various jurisdictions has made it illegal to raise prices in the face of an emergency.

    Nobody has had the courage to say this. Everyone who has taken a basic economics course in the US knows this. This lack of even discussion on how to fix the empty shelf problem is deeply weird and nobody is talking about the odd silence either.

    Update: Kudos to John Stossel who did address this issue (from a different perspective) a few hours prior to my publishing this. His article is here.

    Posted in COVID-19, Economics & Finance, Politics | 30 Comments »

    SARS-CoV2/COVID-10 Update 3-5-2020 — “As long as you remember to keep breathing and don’t fall asleep, it’s basically just like the flu.”

    Posted by Trent Telenko on 5th March 2020 (All posts by )

    Issues covered will be on COVID-19 spread, World Headlines, the 3-4-2020 Seattle Public Health Press conference, World Headlind Summary, Corruption at the WHO, Bad and good news COVID-19 medical developments. the Political/Demographic Implications of COVID-19 for the Gov’t Elites, and the social media and videos COVID-19 tracking source section.

    Top line, There are currently 97,138 confirmed COVID-19 cases worldwide, including 3,351 fatalities as of the March 5, 2020, at he 4:48pm ET time hack on the BNO News corona virus tracking site (https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/) There are 80(+) and growing umber of nations including China plus three “Chinese special administrative regions” (Macao, Hong Kong and Taiwan) that have reported COVID-19 infections. China, Taiwan, Hong Kong, Japan, Thailand, Singapore, Italy, Iran, Germany, R.O.K. and the USA all appear to have local, or endemic, spread of the disease. Russia, Egypt, and Columbia appear to have joined the endemic spread list as well due to airports in the UAE and elsewhere picking up air travelers originating from those nations as sick with COVID-19.

    WORLD HEADLINE SUMMARY (3/5/2020)

    o New Jersey confirms first presumptive case
    o NY state cases double to 22
    o Seattle closes 26 schools
    o Pentagon tracking 12 possible COVID-19 cases
    o Illinois reports 5 more cases
    o NYC reports 2 more cases, raising total to 4
    o Italy postpones referendum vote; death toll hits 148
    o WHO’s Tedros: “Now’s the time to pull out the stops”
    o Tennessee confirms case
    o Nevada confirms first case
    o New Delhi closes primary schools
    o EU officials weigh pushing retired health-care workers back into service to combat virus
    o Italy to ask EU for permission to raise budget deficit as lawmakers approve €7.5 billion euros
    o Beijing tells residents not to share food
    o 30-year-old Chinese man dies in Wuhan 5 days after hospital discharge
    o Cali authorities tell ‘Grand Princess’ cruise ship not to return to port until everyone is tested
    o Global case total passes 95k
    o Lebanon sees cases double to 31
    o France deaths climb to 7, cases up 138 to 423
    o EY sends 1,500 Madrid employees home after staffer catches virus
    o Trump says he has a “hunch” true virus mortality rate is closer to 1%
    o Switzerland reports 1st death
    o South Africa confirms 1st case
    o UK chief medical officer confirms ‘human-to-human’ infections are happening in UK
    o UK case total hits 115
    o Google, Apple, Netflix cancel events
    o HSBC sends research department and part of London trading floor home
    o Facebook contract infected in Seattle
    o Microsoft, Google, Amazon, Netflix cancel events and/or ask employees to work from home
    o Netherlands cases double to 82
    o Spain cases climb 40, 1 new death
    o Belgium reports 27 new cases bringing total to 50
    o Germany adds 87 cases bringing total to 349

    Read the rest of this entry »

    Posted in Big Government, China, Civil Liberties, Civil Society, COVID-19, Culture, Current Events, Dogs, Ebola, Economics & Finance, Iran, Medicine, Middle East, Miscellaneous, USA | 125 Comments »

    SARS-CoV2/COVID-19 Evening Update 2-25-2020: The Pandemic Hide the Name & Blame Games

    Posted by Trent Telenko on 25th February 2020 (All posts by )

    The themes of this update will be on issues of COVID-19 spread, World Headlines, border closings, the CDC news conference, developments with fomite spread, how American Public Health institutions build a liablity law suit proof diagnostic test and how that limits tests for community spread and a new recommended COVID-19 sites, social media and videos section.
     
    Top line, There are currently 80,420 confirmed COVID-19 cases worldwide, including 2,710 fatalities as of the 24 February 2020 at 5:24 p.m. ET time hack on the BNO News corona virus tracking site (https://bnonews.com/index.php/2020/02/the-latest-coronavirus-cases/) There are 39 nations including China plus three “Chinese special administrative regions” (Macao, Hong Kong and Taiwan) that have reported COVID-19 infections. China, Taiwan, Hong Kong, Japan, Thailand, Singapore, Italy, Iran and R.O.K. all appear to have local, or endemic, spread of the disease. Italy has spawned further spread in Spain proper, it’s Canary Islands possession, Austria, Germany, and possibly Croatia. And now Brazil in South America and Algeria reporting a case signals North West Africa have added two new regions to the Pandemic spread list. The virus has spread from Asia to Europe, North America, Australia and Africa.
     
    All of the above meets the pre-COVID-19 WHO standard for a “Pandemic” that requiring endemic spread in multiple nations in multiple WHO regions. However, the WHO just decided that it was time to retire the term “Pandemic” because…something…[insert reasons here]. The WHO statement for doing so was a master piece of unintelligible double talk that boils down to “Lets not scare the “Normies” and set off more “Run, Hide & Hoard” panics like seized Italy, ROK and Singapore in the last few days. Meanwhile the WHO is cheering-on China’s “Hospice-Prison system for the infected” Quarantine as a “Model” in aiding China’s restarting the World economy.

    ITALY COVID-19 Confirmed Cases and Deaths 25 Feb 2020

    ITALY COVID-19 Confirmed Cases and Deaths 25 Feb 2020

     
    World Headline Summary
    o WHO warns the rest of the world “is not ready for the virus to spread…”
    o CDC warns Americans “should prepare for possible community spread” of virus.
    o San Francisco Mayor declares state of emergency
    o Later, CDC says pandemic not a question of it, but when
    o Brazil may have South America’s first coronavirus case
    o Germany confirms 2nd case on Tuesday, brings total to 17
    o Italy cases spike to 322; deaths hit 10
    o Japan’s Shiseido tells 8k employees to work from home
    o Trump Economic Advisor Kudlow tries to jawbone stock markets higher
    o HHS Sec. Azar warns US lacks stockpiles of masks
    o Italy Hotel in Lockdown After First Coronavirus Case in Liguria
    o Algeria confirms 1st case
    o First case in Switzerland
    o Kuwait halts all flights to Singapore and Japan
    o Iran confirms 95 cases, 15 deaths
    o First case in Austria
    o Spain reports 7 cases in under 24 hours, including in Madrid, Canary Islands, Barcelona
    o Iran Deputy Health Minister infected with Covid-19
    Pandemic Border Closures
    Turkey, Iraq, Kuwait, Afghanistan, Pakistan, Turkmenistan, Georgia, Armenia, and UAE blocked border crossings by Iranians.
    Russia, North Korea and Vietnam are blocking border crossings from China
    Austria and Switzerlan are blocking border crossings from Italy.
    El Salvador on Tuesday announced it would prevent entry of people from Italy and South Korea.
     

    Read the rest of this entry »

    Posted in Big Government, Bioethics, China, Civil Liberties, Civil Society, COVID-19, Current Events, Economics & Finance, Health Care, Iran, Medicine, Middle East, Miscellaneous, National Security, North America, Politics, USA | 28 Comments »

    Wages, Employment, and Productivity

    Posted by David Foster on 21st February 2020 (All posts by )

    I think President Trump is quite sincere about his oft-stated desire to drive up the wages of low-income workers…especially young and non-college workers…and he does seem to be having some success at this quest.  It has struck me for a while that while this is a very good thing from the standpoint of the overall society, it is also likely to pressure business profit margins, with possible consequences for the stock market as well as for Fed policy.

    Yesterday the WSJ noted that “wages for 20- to 24-year olds are increasing twice as fast as for other workers…Overall job satisfaction in 2018 was the highest since 1994.”  At the same time, “90% of blue-collar businesses report operating with unfilled positions, and 29% say this has made them reduce output or turn down business.  Rising wages together with sluggish productivity growth are crimping corporate profits.  Between the fourth quarter of 2014 and the second quarter of 2019, profits for nonfinancial corporations  declined 17% and 46% for manufacturers.   The article quotes the Conference Board:  “The US will not be able to maintain its current standard of living unless the US government acts to significantly increase immigration, improve labor force participation, and, together with employees, raise labor productivity growth.”  To which the WSJ writer adds:  “Maybe the only short-term fix is to increase legal immigration–unless Americans want to see their living standards decline and more jobs exported.”

    Higher wages do of course drive productivity improvement…the US has been a pioneer in the mechanization of work in large part because it has been a high-wage country, and that mechanization has helped to enable further wage increases.  This doesn’t always require any new inventions:  there are always productivity tools available that will make sense to a business that is paying $25/hour for labor but would not make sense to one paying $15/hour.  The process isn’t instantaneous, though.

    Concerning immigration as a solution to labor shortages: commentators sometimes lose sight of the fact that GDP per capita matters for broad-based prosperity, not just absolute GDP.  And the only way to increase GDP per capita is through productivity improvements and higher labor force participation rates.  Increasing the raw number of workers doesn’t do this.

    The Conference Board statement appears to put a lot of emphasis on things that the government should do, and the WSJ emphasizes more (legal) immigration.  Some increases in legal immigration may well be a good idea…as would increases in American fertility rates…but the main issues, I think, are productivity and the labor force participation rate.  The actual productivity numbers don’t reflect all the talk about (and even the realities of) robotics and AI.  Maybe this is largely just a matter of implementation lags, maybe it reflects increasing bureaucratization and ‘compliance’ costs throughout our economy.

    My concern is that margin pressure may lead (in conjunction with other factors, like already-high valuations) to a sharp stock-market decline, which could have electoral implications.  Such decline might also lead to many deferrals of productivity-improving investments.  Alternatively, Fed concerns about rising wage rates as a possible signal of incipient inflation could lead the central bank to increase interest rates excessively as a preventative.

    And any electoral result which substantially increases Democratic party power could lead to massive upsurges in legal and illegal immigration, with consequent wage pressures, demoralizing many workers who are now on an positive track and deferring the need for productivity investments.  Any attempt to deal with such wage pressures by establishing high Federal-level minimum wages would add much rigidity to the systems, creating problems of many kinds.

    Discuss, if you feel so inclined.

    Posted in Business, Economics & Finance, Elections, Tech, Trump, USA | 21 Comments »

    Democratic Presidential Candidates Debate the Origins of the 2008 Financial Crisis and Systemic Failure

    Posted by Kevin Villani on 18th February 2020 (All posts by )

    Are greedy racist “Wall Street” bank lenders responsible, or progressive politicians?

    The housing finance systems of some developed countries have failed, but only the U.S. federally dominated system failed systemically twice in two decades, the second time in 2008 with global repercussions. Then Republican Mayor of New York now 2020 Democratic presidential candidate Michael Bloomberg blamed politicians for pushing lenders to make loans to “poor people” in low income neighborhoods that they couldn’t afford. 2020 progressive Democratic presidential candidate Warren, apparently reflecting the views of the Party, responded to Bloomberg: “That crisis would not have been averted if the banks had been able to be bigger racists.” 

    The Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 creating Warren’s proposed Consumer Financial Protection Bureau and the Financial Stability Oversight Council (FSOC) to Monitor and Mitigate Systemic Risk made up of the various financial regulators reflects the Warren/Democratic narrative. This narrative is the foundation of not just housing and financial sector policy proposals, but the entire progressive agenda.

    I’m from the federal government and I’m here to help you.

    That’s the punch line to the joke about the three biggest lies Pres Martin used to tell about a half century ago as past Chairman of the Federal Home Loan Bank Board (FHLBB) (hence Freddie Mac’s first Chairman) and Vice Chairman of the Federal Reserve System.

    The first wave of “help” came after the repeated waves of bank failures with the creation of the Federal Reserve System in 1913. The second wave came during the Great Depression with deposit insurance and associated regulation of the banking and savings and loan industries. This was followed by the creation of FHA mortgage insurance: to stimulate FHA demand, Fannie Mae was created make a market for which there were few buyers or sellers. By the late 60’s, rather than end a failed experiment Fannie Mae was “privatized” and the public monopoly was subsequently expanded to a tri-poly with the addition of Freddie Mac and Ginnie Mae, all funding fixed rate mortgages (FRMs) first introduced by FHA. As Milton Friedman famously said, “there is nothing so permanent as a temporary government program.”

    It didn’t help potential borrowers much. The resulting federally dominated U.S. Housing Finance System had been touted as the best in the world, a model to emulate for developed, developing and transitioning economies alike during the three decades prior to the 2004-2007 sub-prime mortgage lending debacle and globally systemic financial crisis of 2008. But the benefits are hard to identify: the U.S. homeownership rate is about the same as in the mid 1960’s under the prior savings and loan system in spite of a 50% increase in female labor force participation, a historically low real interest rate and a dramatic shift from detached single family to condo apartments.

    Civil rights legislation culminating in the Fair Housing Act of 1968 made racial discrimination in home sales a federal crime. The black homeownership rate which rose more than that for whites during the 2004-2007 sub-prime lending spree has returned to about where it was during the 1960’s.

    Market Discipline versus Public Regulation

    It didn’t help existing lenders much either. In the 1970’s federally sponsored agencies competed directly with federally chartered savings and loans whose investments were limited by regulators hamstrung by politicians to FRMs, forcing them to borrow short and lend long with callable insured deposits. Systemic failure was assured when interest rates rose as they did in the late 1970’s, with failures strung out over the 1980’s as regulators seized but often didn’t close zombie institutions, often run by academics.

    Systemic risk, the simultaneous failure of many or all firms (and households) in an industry or across industries, primarily afflicts mixed progressive financial systems, i.e., those with privately owned but publicly regulated financial institutions. Firms in an un-or-less regulated market economy may be fragile but “Wall Street” traders mitigate systemic risk by betting against weak firms and industries, either forcing corrective action or failure– hence the derogatory political reference to “speculators.” At the other extreme, state owned financial firms generally fail financially but face only a political bankruptcy constraint.

    Two types of progressive policies created systemic risk. First those intended to mitigate the failure of individual firms with public insurance and prudential regulation, making failure less frequent but more systemic. Regulators prevent commercial bank failures purportedly to protect public confidence in the payments mechanism. Second are those policies intended to universally favor borrowers and/or creditors – like requiring mortgages to have a fixed rate – making systemic failure more likely and more costly.

    Underwriting Mortgage Credit Risk: Discrimination and “Disparate Impact”

    With the exception of the Great Depression and 2008 financial crisis, home mortgage credit losses had been “Gaussian (normally distributed),” that is, they followed a predictable pattern that allowed them to be insured according to the law of large numbers, for all practical purposes eliminating uncertainty, hence risk.

    Loan data during the sub-prime lending debacle unambiguously supports Bloomberg as minority lending skyrocketed. Progressives imputed racist motives to excessive minority lending, arguing that “predatory” lenders “tricked” minorities into accepting loans they couldn’t afford so they could later foreclose. There is some truth to the first part, as banks solicited minority borrowers with loans they had to know were risky. But they had little incentive to foreclose, as that always resulted in a deep loss. What did motivate lenders?

    Homeownership was no more affordable for black households during the 2004-2007 sub-prime lending bubble than it was in the 1960’s for a variety of reasons. But current Democratic presidential candidate Deval Patrick argued in 1994 as Deputy Attorney General of the Department of Justice that any final lending distribution that contained racial disparities—disparate impact—relative to population was a violation of federal law unless the lender could prove otherwise. Such “proof” of non-discrimination would be difficult to produce at best, since the disparity itself was considered proof of racial prejudice, and the cost of a legal defense is generally crippling. This was called “confiscation by consent decree” at the time and later “extortion by consent decree” for which Gaussian credit risk models didn’t apply.

    Avoiding Black Swans

    Former trader –now internationally recognized risk expert – Nicholas Nassim Taleb describes in his 2007 book The Black Swan “how high impact but rare events dominate history, how we retrospectively give ourselves the illusion of understanding them thanks to narratives, how they are impossible to estimate scientifically, how this makes some areas – but not others – totally unpredictable and unforecastable, how confirmatory methods of knowledge don’t work, and how thanks to Black Swan-blind “faux experts” we are prone to building systems increasingly fragile to extreme events.”

    Was the 2008 systemic failure an unpredictable Black Swan event? Politicians and their regulators who push the “Wall Street greed” narrative argued that nobody could have foreseen it, but Taleb exempts only economist Nouriel Roubini Crisis Economics (2010) from that delusion, who (pg. 16) concludes “it was probable. It was even predictable…” based on the failure of prudential regulation. But how did that fail? Systemic failure had long been predicted (by me and others, including the Federal Reserve) based on the progressive policies that attributed illegal racial discrimination motives to traditional income and appraisal underwriting.

    No Skin in the Game

    The sub-prime lending bubble of 1995 through 1998 financed with opaque securities issued by independent finance companies that following SEC rules reported phantom profits burst with no systemic consequences. By 2000 many of these former sub-prime lenders and securitization practices had migrated to the federally insured commercial banks in part to finance Community Reinvestment Act (CRA) lending commitments. These increased 500 fold after the deregulation of interstate Banking in 1994 when discretionary regulatory permission for M&A activity was held hostage to a favorable public CRA Report. Pushed by regulators and pulled by the big potential M&A payoff, borrower down payment requirements were virtually eliminated and bank “regulatory arbitrage” minimized capital requirements, virtually eliminating any Skin in the Game (Taleb, 2018). This asymmetric “trade” was irresistible.

    The Perfect Storm

    The Big Short by Michael Lewis presents the progressive narrative of “greedy” speculators who were shorting the housing market but doesn’t explain why they failed to prevent the bubble from inflating to systemic proportions by bankrupting lenders. The reason is that the cheap Federal Reserve credit continued to be channeled to the housing bubble by Fannie and Freddie. Historically conservative, they were now led by politically anointed CEO’s who, facing no bankruptcy constraint, willingly followed the path to perdition. This path was paved by HUD’s “Mission Regulator” who not only ratcheted up the lending goals well beyond prudent limits but in 2005 imposed a new goal that they maintain a 50% market share with these private lenders. Propped up by the federal government, all the big players were going for broke simultaneously.

    This was guaranteed to fail. Financial institutions reported several trillion dollars (pgs. 157-158) of home mortgage credit losses after the bubble burst and 10 million homeowners lost their homes over the next six years in spite of massive government efforts to avoid or delay foreclosure. Like the lending bubble, the foreclosure bubble was much bigger for minorities. Yet The Financial Crisis Inquiry Commission Democrat Majority Report (2010) spun the narrative that the systemic “risk” was due mainly to traditional liquidity concerns.

    I’m from the federal government and I’m here to blame you.

    That’s no joke. During the Obama Administration Patrick, then Governor of Massachusetts led the multi-state suit against lenders alleging discrimination in foreclosures based on disparate impact. At the same time, current DNC Chairman Tom Perez was pursuing “disparate impact” cases against lenders under the Fair Housing Act as Attorney General Eric Holder’s Deputy.

    In a 2009 Financial Times editorial Taleb proposed ten principles to avoid a repeat of 2008:

    What is fragile should break early, while it’s still small.

    No socialization of losses and privatization of gains.

    People who were driving a school bus blindfolded (and crashed it) should never be given a new bus.

    Don’t let somebody making an incentive bonus manage a nuclear plant – or your financial risks.

    Compensate complexity with simplicity.

    Do not give children dynamite sticks, even if they come with a warning label.

    Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence.”

    Do not give an addict more drugs if he has withdrawal pains.

    Citizens should not depend on financial assets as a repository of value, and should not rely on fallible “expert” advice for their retirement.

    Make an omelet with the broken eggs.

    All good advice, all ignored by politicians and regulators who created the Rube Goldberg dystopia they rail against.

    —-

    Kevin Villani

    Kevin Villani was Chief Economist at Freddie Mac from 1982 to 1985 and HUD from 1979-1982. He has been affiliated with nine universities, and served as CFO and director of several companies. He recently published Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

    Posted in Big Government, Book Notes, Economics & Finance, Public Finance | 11 Comments »

    COVID-19 Update Morning 2-14-2020

    Posted by Trent Telenko on 14th February 2020 (All posts by )

    There are currently 65,213 confirmed COVID-19 cases worldwide, including 1,486 fatalities. Of which 4,823 new cases and 116 new deaths were reported in Hubei province, China.
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    There are several trends in this update, as well as the headline summary. First Community spreading of COVID-19 is now established in Hong Kong (attached graphic), Japan and Singapore.

    COVID-19 in Hong Kong

    COVID-19 in Hong Kong

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    Second, the shut down of China as an economic power seems near complete. See the JP Morgan coal for electricity usage and the Goldman Sachs economic projection charts attached to this post. The JP Morgan chart shows that while traditionally daily coal consumption – the primary commodity used to keep China electrified – rebounds in the days following the Lunar New Year collapse when China hibernates for one week. This is not the case this now. There hasn’t been even a modest increase, indicating that so far there hasn’t been a return to work.
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    2020 Chinese Coal/Electrical Consumption

    2020 Chinese Coal/Electrical Consumption

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    Short Form — Lack of Chinese coal use/electric power generation indicates the scale of Chinese industries that are shut down…AKA near total.
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    And the “Just-In-Time/Sole-Source in China” world-wide, Multi-national corporation, economic shut down virus is gathering a huge economic momentum. Nissan has shut down auto production in addition to South Korea’s Hyundai for lack of Chinese parts. Rumor has it that Ford has the same issue — as their heater coils in their autos are sole sourced in China — and will soon shut down auto production.  Anything cheap or disposable in the world economy is sourced in China, and the Chinese economy is now off-line for the foreseeable future.

    Near Term Economic Projections for China

    Near Term Economic Projections for China

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    Third, China is again playing games with COVID-19 numbers and particularly the announced deaths to keep the death rate at 2.1%, saying deaths were “double counted”?!? (See JP Morgan graphic).
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    Dodgy Chinese COVID-19 Infection Numbers

    Dodgy Chinese COVID-19 Infection Numbers

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     This has been ‘officially noticed’ by the White House.
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    See:
    White House does not have ‘high confidence’ in China’s coronavirus information, official says
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    Fourth, American COVID-19 are now officially 15 with a case in San Antonio, Texas from a Wuhan evacuation flight and no deaths. I say “officially” as there possible COVID-19 death in Boise, ID. See:
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    The possible COVID-19 victim was a 71-year-old man found dead on Feb 9 in an advanced state of decomposition. He returned from China Feb 5. The initial testing came up negative, but additional tests are being run. The cause of death has not been released.
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    An idea of what “Community spreading” in Singapore means can be seen in the following report:
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    “Singapore Casino employee confirmed with COVID-19; symptomatic Feb 5, hospitalized Feb 9
    On February 13, 2020, the Central Epidemic Command Center (CECC) pointed out that the confirmed case of coronavirus disease 2019 (COVID-19) in Singapore announced on February 11 is an employee at the casino in Resorts World Sentosa Casino. The employee developed symptoms on February 5 and was hospitalized in isolation on February 9. Travelers who visited the casino during the communicable period (February 4-9) are advised to call 1922, put on a face mask and seek immediate medical attention as instructed if suspected symptoms develop within 2 weeks. Moreover, such travelers should inform the physician of any relevant travel history when seeking medical attention.”
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    World Headline Summary:
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    o China says 1,716 medical workers have been infected
    o Singapore reports largest daily jump in cases amid increased human-to-human transmission
    o Hong Kong reports 3 new cases
    o Hubei’s new party boss orders quarantine tightened
    o President Xi touts new “biosecurity law”
    o Hong Kong Disney land offers space for quarantine
    o Chinese company says blood plasma of recovered patients useful in combating the virus
    o US mulling new travel restrictions

    -end-

    Posted in China, Civil Society, COVID-19, Current Events, Economics & Finance, Energy & Power Generation, Health Care, Medicine, Politics, Urban Issues, USA | 59 Comments »

    The Roaring Twenties, Revisited

    Posted by David Foster on 6th February 2020 (All posts by )

    Here’s a piece that mentions some of the technological, social, and economic trends that were important in the 1920s, and goes on to discuss seven tipping points that the author thinks will be key in the 2020s.

    Posted in Economics & Finance, Energy & Power Generation, History, Society, Tech, USA | 13 Comments »