Archive for November 2008

A Well-Deserved Honor

Boston City Hall as the world's ugliest building.  I would add an honorable mention to Boston's Peabody Terrace, the ugliest building I have ever lived in.

Choices Make a Difference

I have no problem if women want to spend four years at college studying (at their own expense) the role of indigenous women in the postmodernist Marxist movement of 1960's Paraguay, or whatever.  However, I do have a problem when these same folks later complain that their income is below average or they are under-represented in the board room.  Just peruse the top and bottom of this list at Carpe Diem

College degrees most dominated by women include library science, consumer science, social science, education, language, psychology, and gender studies.  Top college degrees most dominated by men include construction trades, engineering tech, transportation, military technologies, engineering and computer science. 

Sorry, but I cannot imagine any possible restructuring of society and the economy where the first list is more valuable and has higher income potential than the second list.

$485 Billion in Value Destroyed, and Counting

David Yermack has an awesome essay in the WSJ this weekend, encouraging Congress to just say no to spending $25-$50 billion bailing out Ford and GM.  Why?  Well, beyond the obvious moral hazard, these companies are value destruction machines of epic proportions.

Over the past decade, the capital destruction by GM has been breathtaking, on a greater scale than documented by Mr. Jensen for the 1980s. GM has invested $310 billion in its business between 1998 and 2007. The total depreciation of GM's physical plant during this period was $128 billion, meaning that a net $182 billion of society's capital has been pumped into GM over the past decade -- a waste of about $1.5 billion per month of national savings. The story at Ford has not been as adverse but is still disheartening, as Ford has invested $155 billion and consumed $8 billion net of depreciation since 1998.

As a society, we have very little to show for this $465 billion. At the end of 1998, GM's market capitalization was $46 billion and Ford's was $71 billion. Today both firms have negligible value, with share prices in the low single digits. Both are facing imminent bankruptcy and delisting from the major stock exchanges. Along with management, the companies' unions and even their regulators in Washington may have their own culpability, a topic that merits its own separate discussion. Yet one can only imagine how the $465 billion could have been used better -- for instance, GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan and Volkswagen.

Like GM Executives Buying Toyotas

I am not sure this chart from Mark Perry requires much comment, except to say the contrast on the same metric for the children of members of Congress would be even more stark.

Kelo Update

The AntiPlanner has an update on the New London, CT development that spawned the notorious Kelo case.  In short, they tore Ms. Kelo's house down against her will, and then the whole development deal fell through.  The city now has a nice vacant lot.

The homes of Susette Kelo and her neighbors have all been torn down or removed. But, except for the remodeling of one government building into another government building, virtually no new development had taken place in the Fort Trumbull district by May, 2008.

Having spent at least $78 million on the Fort Trumbull project, the city had awarded development rights to a company named Corcoran Jennison, which planned to build a hotel, an office complex, and more than 100 upscale housing units. The developer had until November, 2007, to obtain financing.

When that deadline lapsed, it received an extension to May 29, 2008. In desperation, the developer sought an FHA loan of $11.5 million. When that didn't work and May 29 came and went, New London revoked the agreement.

Quantum of Solace

First, I want to preface that I absolutely loved Casino Royale.  I had expected not to like it, being skeptical of Daniel Craig and the apparently trendy substitution of Texas Hold'em for Baccarat.  But the movie was fabulous, easily the best Bond ever, and a long-overdue retooling of the franchise.  In comparison, the campy Roger Moore 70's Bond movies are almost embarassing.

All that said, I was disapointed in Quantum of Solace.  The movie was entertaining and worth the price of admission, but two aspects really hurt the movie for me:

  1. The directors have adopted the currently popular edgy filming style of action sequences which involve lightning quick cuts and jerky camera pans (used in the Bourne movies, for example).  The style really increases the confusion of the moment, and has its place in creating tension and giving a first person feel to the action, but it gets tiring and confusing after a time.  Compare the opening chase sequences in this movie to the absolutely fabulous chase scene through the construction site near the beginning of Casino Royale.  I thought the Casino Royale sequence was much a better, but I must admit I am a big fan of long tracking shots over quick cuts, so I guess your mileage may very.  There was one shot I thought really cool in the new movie.  Bond and mystery villain #3 or 4 fall through a glass ceiling, and you fall with them POV-style. 
  2. The movie seems to be a return to the WTF-style plot of a lot of modern action movies, especially sequels, that put one-upping the action sequences of the previous movie over having a coherant plot.  I don't mind twists and turns, but in the end, all the motivations have to make sense.  I mean, how many mystery guys can Bond chase, kill, and then say, well, I guess we'll never figure out who that guy was.  The early parts were like the Seinfeld version of action movies -- they are not about anything, they are just chase scenes.  And, I still don't understand why the bad guys in QoS are doing what they are doing.  Its another one of those "spend a billion dollars in a vast conspiracy to make $100 million" Bond villain plans.  In contrast, Casino Royale was anchored to what I think was the best Ian Fleming book, and it stuck close to the book.  Even when it deviated, for example with the shift from bacarrat to Texas Hold'em, it actually improved the plot, as it shifted to a game that at least involves some skill.

Update:  I feel I need to clarify one thing.  I am a huge fan of the old Bond movies.  Goldfinger, Thunderball, Diamonds are Forever, Goldeneye -- all great.  Despite my comments above, I even like most of the Roger Moore films, though you have to take a different approach to them.  But the formula was tired.  The Survivor formula was hugely popular at first, but in season 9 or 10 or whatever, it's just done.  You either are repeating the same tired cliches, because you feel locked into a formula by your fans who will get pissed (as they did with Casino Royale) when you violate the formula, or you fall into the trap of trying to top yourself with goofier and goofier plots.  I actually thought the series was dead around about View to a Kill, but Pierce Brosnan really brought new life to the series for a while. 

Update #2:  Tigerhawk has similar thoughts

Regulation is About Protecting Incumbents

Darin Morely sent me this.  Woe be it to the upstart competitor with a new business model who challenges an incumbent with political connections.  This goes double when the incumbent is the government itself:

One of the great things about the web, obviously, is that it allows for much more efficient communication that opens up new and useful offerings. For example: the web offers the ability to find other people traveling to the same general place you're heading and to set up a convenient carpool. It's good for the environment. It's good for traffic. It just makes a lot of sense. Unless, of course, you're a bus company and you're so afraid that people will use such a system rather than paying to take the bus. That's what happened up in Ontario, as earlier this year we wrote about a bus company that was trying to shut down PickupPal, an online carpooling service, or being an unregulated transportation company. TechCrunch points us to the news that the Ontario transportation board has sided with the bus company and fined PickupPal. It's also established a bunch of draconian rules that any user in Ontario must follow if it uses the service -- including no crossing of municipal boundaries -- meaning the service is only good within any particular city's limits.

All of us in the states need to be prepared for more of this corporate economy thing in the US.  I saw last night on Sunday Night Football that NBC is really going hard on some green initiative, including having a green peacock.  GE (parent company of NBC) is a smart company and sees the writing on the wall.  It understands the new administration and Congress seem hell-bent on moving us to a more European model.  In that model, there are 10-20 corporations per country that insinuate themselves into government and get the opportunity to help run the country to their own benefit.  GE wants to be one of these chosen few.  The push is going on not just at NBC, but in light bulbs (betting on Congressional action to provide regulatory support for a new type of bulb they have invented) and in power systems (who are making large bets on wind that will not pay off without a government subsidy program).

In the near term, GE may need a bailout in its financial arm.  GE must have seen that GM made a huge public push for its Chevy Volt over the last 6 months, spending hundreds of million in advertising on a car that does not exist yet. Why would a company near bankrupcy do this?  We now know the advertising was aimed at Congress and the Administration, not consumers, trying to burnish their green image to give Democrats enough political cover to vote for the bailout their UAW supporters so desperately need  (any chapter 11 would likely result in enormous restructurings of union contracts).

So Just What Was the Omitted Intervention

In a post earlier today on the mortgage market meltdown, I wrote:

And that is what the argument usually boils down to - someone smart should have been watching them.  But lots of smart people were watching all the time.  You can see one such person featured in Lewis's article.  Guys run all over Wall Street looking every day for some single digit basis point spread they can make money off of.  But untold wealth was just sitting there for someone who was willing to call bullshit on the whole CDO/CDS pyramid game.  These guys playing this game were searching for people to bet against them.

And despite this, despite untold wealth as an incentive, and companies looking for folks to take the other side of their transactions, only a handful saw the opportunity.  Thousands of people steeped in the industry with near-perfect incentives to identify these issues ... did not.  What, then, were our hopes of having some incremental government bureaucrats do so?  Usually, after this kind of crisis, there are lines of pundits and writers ready to suggest, with perfect hindsight, new regulations to avert the prior crisis.  But, tellingly, I have heard very few suggestions.

So in this context, I found these comments by leftish Kevin Drum, certainly no knee-jerk advocate of free markets, quite interesting:

No argument on the greed and ideology front, but I'm curious: was there really anyone who made the right call on all this at a policy level? There were, of course, plenty of people who recognized the housing bubble for the idiocy that it was (Alan Greenspan notably not one of them), but were there any major voices making specific policy proposals to slow down the bubble? Or rein in the mortgage market? Or regulate the CDO/CDS market in a way that would have prevented some of
the damage? I'm talking specifics here, not just general observations that the FIRE sector was out of control. Arguments about interest rates being too low count, if they were made for the right reason, but I'm interested mainly in more detailed recommendations.

I don't have any big point to make here. I'm genuinely curious. There were many moments in the past few years when perhaps something could have been done, but what? And who was proposing serious measures that would have helped? Any major Dems? Economic pundits? Wall Street mucky mucks? Who were the unsung heroes? Help me out here.

A Peak Inside the Boiler Room

I got another boiler room broker call today, so I guess the recent downturn has not flushed out all the cockroaches.  A while back I discussed the frequent calls I get from boiler room stock promoters.  The approach they use with me is this:

So the other day, I accidentally let one of them go further than I usually allow.  He said he was from Olympia Asset Management.  (There is an Olympia Asset Management web page, but I don't know if it is the same company and the web page has not been updated for several years.)  I let him run for a bit because a friend of mine runs a very well-respected financial planning firm with a different name but also with Olympia in the title, and for a moment I thought it might have been one of his folks.

Anyway, he proceeds to try to convince me that we have talked before and discussed a certain security.  "Remember me, we talked six months ago about ____".  Of course, I had never heard of the guy.  At this point I usually hang up, because I have heard this crap before -- it is a common pitch.

Its pretty clear to me now that this is what he is doing:

  1. Trying to imply that we have some kind of relationship we actually don't have.  Or worse...
  2. Trying to convince me that he touted stock A six months ago, so now he can tell me stock A has gone up in price.  Many reputable brokers built their reputation by cold calling people and saying:  Watch these 3 stocks and see how they do and I will call you back in 6 months.  That way, you can evaluate their stock picking without risk.  The modern sleazy approach is to pick a stock that has gone up a lot in the last 6 months, and then call some harried business person and pretend you called them with that pick 6 months ago, hoping that they will give you the benefit of the doubt.

The call just went downhill from there.  I hung up after his discussion of throwing Molotov cocktails into the cars of people he doesn't like.  That was right after I asked him if Tony Soprano was standing beside him listening in on the call.

Anyway, beware.  The guy today called me and asked me if I remembered him calling 6 months ago predicting the downturn in the mortgage market and the crash of the financial stocks.  You are not crazy - no matter how certain the guy seems, you really did not talk to him 6 months ago.

By the way, I am not the only one getting this pitch.  Ed Moed got the same pitch from the same script from the same company.  Many of his commenters share similar experiences.

Update: Wow, they sure do like Mitt Romney over at Olympia Asset Management.  I'm sure there was no arm-twisting here, when every single employee of the company seems to have given the max donation to the same candidate, with no breaking of ranks.

Update #2: Mike Murphy, CEO of Olympia Asset Management, was "a member of the [Hoffstra's] elite football team."  Wow.  Remember that time Hoffstra ripped through all those SEC teams?  Yeah, neither do I.  Anyway, this achievement does not hold a candle to the fact that I was once captain of Princeton Tower Club's elite intramural coed field hockey team.

A Better 404 Page

Google's got a new little widget one can embed in a custom 404 error page that looks like this.  Its cool because in addition to a search box, it claims to be able to provide the user the closest matching page in cases of typos.  I am playing around with it for several of my sites, though I don't think it is an option for the blogs -- I am pretty sure there is no way to implement a custom 404 page on a typepad search.  By the way, the Google dashboard / webmaster tools site is pretty helpful, particularly if you are really interested in where and how your search traffic is coming in.  I implemented a new sitemap for each of my blogs and uploaded them to google via the webmaster tools site and saw an immediate increase in search hits.

Kudos for Typepad

I have criticized the new Typepad editor several times in the last several weeks, and I stand by those criticisms.  It is just daffy to have a spell check without a "skip all" or "add to dictionary" option, for example.

But Typepad has really come through for me in the last several days.  Their customer service folks helped me modify some of my archive templates so that they include even my oldest posts, and the archives now have a new navigation structure.  Also, I would add that for all the problems I have had with the editor, the new publishing platform I am on is much faster, and at least once has been able to help me recover unsaved material I was writing, always a pet peeve of mine when using an online editor. 

Seductive Technocracy

The technocratic compulsion is very seductive to a lot of people (including, I think, our President-elect).  I can't tell you how often I hear "if we just had one smart person to clean up the mess..."  But it never works.  Just think about this auto czar idea being trial-ballooned this week.  Even if you could find someone brilliant enough to perfectly discern and synthesize the diverse buying interests of a hundred million consumers, he can never have the right incentives sitting in that government job.  Pretty soon he has group A insisting that he needs to mandate more fuel economy and group B that he needs to protect union jobs and group C that he needs to save jobs in Michigan in preference to Ohio and group D advocating for Ohio over Michigan and... you get the point.  All rolled up with the incentive problem that if he actually solves the problem at hand, he will be out of a job, so you can bet the problem is never fully solved.

My wife read the Michael Lewis article and comes back to me and says "I can't imagine how you can read that and still oppose government intervention and increased regulation."  I said, "why?"  Sure, people screwed up and did stupid stuff, but no defender of capitalism promises that won't happen.  Besides, what regulation would you propose?  "I don't know, but someone smart should have been watching them."

And that is what the argument usually boils down to - someone smart should have been watching them.  But lots of smart people were watching all the time.  You can see one such person featured in Lewis's article.  Guys run all over Wall Street looking every day for some single digit basis point spread they can make money off of.  But untold wealth was just sitting there for someone who was willing to call bullshit on the whole CDO/CDS pyramid game.  These guys playing this game were searching for people to bet against them. 

And despite this, despite untold wealth as an incentive, and companies looking for folks to take the other side of their transactions, only a handful saw the opportunity.  Thousands of people steeped in the industry with near-perfect incentives to identify these issues ... did not.  What, then, were our hopes of having some incremental government bureaucrats do so?  Usually, after this kind of crisis, there are lines of pundits and writers ready to suggest, with perfect hindsight, new regulations to avert the prior crisis.  But, tellingly, I have heard very few suggestions. 

Back in the 1980's, everyone was freaked out about junk bond-financed hostile takeovers, greenmail, leveraged buyouts and the like.   Since, while this activity has not disappeared, the wackiest of this behavior has really died down.  Do you remember that act of Congress and subsequent regulation that really curtailed this behavior?  Yeah, neither do I.  The fact is that, if they are allowed -- and if they are not shielded by taxpayer-funded bailouts from the consequences of their actions -- individuals learn from their excesses.  Or they go bankrupt.

The Bailout Playbook

Step 1:  Really, really screw up your industry beyond all hope of repair, while paying yourself a nice salary to do so

Step 2:  Claim to the world that your industry is unique and different, and failure of your company and/or industry will cause a chain reaction that will bring down the whole economy and cost the country many multiples of the bailout price tag

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Step 2 is obviously pulled off easier if either a) representatives from your industry run the Treasury department or b) the new President owes your unions big time for his recent victory in a critical state.  For those of you just trying to keep you small business afloat, don't try this at home.  No bailout will ever be forthcoming if you don't have the power to move electoral votes, but you should expect to pay for other people's bailouts.

Postscript: This is funny:

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I think if people still buy tickets on airlines that are operating out of chapter 11 (an item that has zero value if the company folds) then people will still buy cars.  This is so totally lame it is tremendously irritating.

Michael Lewis on ... Whatever the Hell is Happening on Wall Street

As usual, Michael Lewis is a great and informative read, trying to unravel the whole subprime mortgage / CDS / CDO bundle somewhat for laymen.  The article does not excerpt well, but I would summarize it in saying he identified four mistakes by the financial world.  The first two I would describe as real problems but not really new mistakes -- something similar could have been said about S&L's in the 1980's.  These are:

  1. A lot of subprime loans were issued to people with no freaking hope of repaying them, in an incredible general lowering of underwriting standards.  (we all should remember, though, the government and the media was trumpeting this as good news -- increase in home ownership rates, blah blah blah).
  2. People who bought these securities grossly underestimated the default risks, particularly in the crappiest tranches  (securitized packages of loans are resold in tiers, with a AAA tranche getting first call on any payouts, and the tail end BBB tier getting high interest rates but who takes the first principal losses if the loans default).

    But Lewis highlights two mistakes that are in some sense brand new.  These mistakes were effectively vast increases in leverage that acted as a multiplier for the subprime problem, while simultaneously spreading the problem into the hands of AAA investors who accepted the higher returns without paying too much attention to how they were obtained

  3. Someone started scooping up the BBB tranches from various securities packages, bundled these together, and somehow got a ratings agency to declare that the top 60% tranche of these repackaged dog turds were AAA. 
  4. Credit default swaps, originally insurance policies on loan portfolios, turned into a sort of futures market on subprime mortgage packages.  But, unlike futures markets, say in oil, where the futures trading volume are generally well under the total volumes of the underlying commodity flowing around the world, CDS values grew to as much as 100x the underlying commodity volume (in this case subprime mortgage securities).  CDS's went from a risk-management tool to a naked side-bet.

This is interesting stuff, and it was really only reading this piece that I think I started to understand #4 above (though if readers think I am describing this wrong, let me know).  All of this leads me to a few thoughts:

  • Nothing about this convinces me any of these firms need to be saved or bailed out.  Let them die.  Maybe the guys who rebuild the industry in their place will be smarter and more careful.  The country is going to face a recession whether Wall Street is bailed out or not -- too much (paper) value disappeared from consumer's net worths (or their perceptions of their net worth) for that not to be the case.  I lived through Texas in the 1980s when the S&L industry went bust almost to the last institution.   Nearly every one of the top 10 banks in the state went into FDIC recievership. 
  • I have seen people observe that this is an indictment of capitalism because so many people made such bad mistakes.  Sure.  No one said capitalism is a gaurantee against stupidity, or even fraud.  The difference is that the consequences of said stupidity and fraud have to be less in a free market system than if the same people had the power of cersion via government.  In a free market, these guys will fail and be wiped out and get washed away.  The people who they drag down may consider themselves to be innocent, but they participated of their own free will -- if they did not understand what they were doing, that is their problem.  In a statist system, you still have mistakes like this, but they are infinitely more catastrophic, as the stakes in play are often higher.  And the people who made the mistakes are never punished financially, because they are in charge of the machinery of state  (or friends of those in charge).  They make damn sure the power of the state is used to make everyone else pay for their mistake, kind of like ... this $700 billion bailout.
  • Lewis seems to have a hypothesis that the main system change that allowed all this to happen was the shift in ownership structure from partnerships to publicly-held corporations.  And certainly you do get some added agency risks with this, though I find this explanation a bit shallow.  I do think that folks with money are going to approach Wall Street "experts" and rating agencies with a lot more skepticism for a long time, and that can't be a bad thing.
  • The opportunity really exists for someone smart to start a brand new rating agency from scratch.  The only reason the current ones won't get wept away is simply that there are not many alternatives right now.  Warren Buffett should partner with someone well-connected with the new administration (Maybe Larry Summers, since there is no way he will survive a confirmation hearing with his men-are-from-large-standard-deviations-women-are-from-narrow-distributions baggage.)
  • Lewis is unfair in depicting all the mortgage lenders as predatory.  I am sure some were cheats, but remember that as far as Congress, the Administration, the Federal Government, and the media were concerned, these lenders making subprime loans were doing God's work -- they were expanding home ownership and bringing the dream of owning a home to poor people historically redlined, blah blah blah.  It is only with hindsight that we demonize them for doing the wrong thing -- at the time, absolutely everyone on in the country was pushing them to do exactly what they did.  This is also why Democrats struggle to suggest a resposive regulatory package to this whole mess, as any real reform would have to address minimum underwriting standards, which in turn would have the direct effect of limiting lending to the poor, an outcome with which no Democrat wants to be associated.

Update:  Just to be clear, as I have said before, this is about half of what happened.  There are really two stories, and usually authors focus on one or the other.  Story 1 is the steps taken by the Federal Government  (Fannie, Freddie, Community Reinvestment Act, mortgage interest deduction, low interest rates) that fueled the housing bubble and the expansion of credit to questionable borrowers.  It is described here, among other places.  Story 2 is the one above, how private firms decided not only to purchase these questionable loans made on bubble-inflated assets, but to leverage these assets up to staggering levels. 

Accountability to Forecasts of Doom

Activists are always making exaggerated statements on current problems and extrapolate these into forecasts of doom.  One thing activists really, really hate is when people come back later and hold them accountable for these forecasts.  You can see it as NASA officials squirm and fire off condescension at skeptics who have the temerity to actually check their global warming forecasts against actual temperatures.

If I had a newspaper, I'd have a special regular feature where I dig back 10-20 years in my archives to find such forecasts of doom and check them against reality  (actually, if I had a paper, I would not allow activist's press releases to show up virtually unedited as "news" stories, but that is another matter).  Heck, I could have a regular feature just reality-checking old Paul Ehrlich forecasts.

Well, I don't have a newspaper, but I do have a blog, and this is a new feature I am working on.  I am still trying to play with various search engines and news libraries (such as the NY Times) to see if I can come up with some kind of query format that efficiently digs up such predictions that are at least 10 years old.  I am still a little stumped on this, but I am working on it.

But, as a sort of beta-test of the feature, one such comparison fell into my lap today.  I remember my feminist wife reading a book published in 1994 called "Failing at Fairness."  This work was a big, big deal at the time.  Media such as the NY Times fawned on it.  I will let a 1994 review on the Society for Women Engineers' site summarize the book:

Failing at Fairness: How American Schools Cheat Girls eloquently describes the results of years of research into sexism in schools. The study began as an examination of gender bias in textbooks, and evolved into a decade of painstaking classroom observation uncovering a "hidden curriculum" in classroom interaction.   Authors Myra and David Sadker present a compelling tale of gender bias in education at all levels.

Taken at face value, the book more than proves the point of the subtitle: our schools cheat girls out of an education equal to that received by boys. The authors do an excellent job of pointing out some of the more subtle ways of favoring boys over girls. However, so many descriptions of incidents of sexism -- blatant, subtle, by old teachers, young teachers, male teachers, female teachers, and even by one of the Sadkers' own "trained" researchers -- are included that it can seem like overkill at
times. In addition, the wealth of statistics can be overwhelming, and yes, even slightly depressing.

One of the more horrifying aspects of Failing at Fairness is the discussion about standardized tests, their historical deliberate design as culturally biased for exclusionary purposes, and the dive in the scores received by girls as they progress through their education.

Current standardized test administrators claim to be more sensitive to cultural prejudices in today's tests, although minority students still score less than white students (at least on the SAT). Also, the book states quite plainly, "Regardless of ethnic or racial background, all American girls share a common bond: a gender gap in test performance that leaves them behind the boys." The prevailing opinion of the discussion group is that the tests are still exclusionary; they are not measuring achievement, but are rather reflecting the way students are taught.

I don't doubt that they found their share of anecdotal issues.  I am sure I could find them today.  But their overall premise that girls were getting hosed by primary education and that standardized tests were structured to exclude girls from college education made no sense even at the time the book was published:

male_female_jobs

The chart is from Mark Perry, and he shows a similar picture for bachelor's degrees, where women blew past men in 1981, and in PHDs, where women passed men in 2006.  People would laugh at this book today, as most discussion is about under-performance of boys.

I don't know the authors, but I would interpret this as the classic inability of activists to declare victory.  I am fairly certain that their hypothesis was far more correct in 1969 than in 1994.  But society really went through a step-change in the 1970s vis a vis attitudes about females.  The previous generation of women's activists did great work to make these issues plain and help lead change in societal attitudes.

But activists have a really hard time declaring victory.  From a quite personal standpoint, declaring victory as an activist is exactly the same as walking into your boss and telling him that the company really doesn't need your job position.  Money, prestige, academic advancement, and attention, and (self-esteem, for certain types of people) are all tied to there being a major problem.  If there is no longer a big problem, then all this stuff goes away.

Explaining Temperature History

I post most of my more detailed climate work over at my other blog.  But I wanted to repost here something I wrote in response to a number of request for a brief version of what is driving global temperatures.

My sense is that medium to long scale 20th century temperature trends can be explained mostly through three drivers:

1.  A cyclical variation driven by multi-decade oceanic cycles like the Pacific Decadal Oscillation (PDO):

pdo

2.  Changes in solar output, either directly as increased heating or indirectly via a variety of theories on things like cosmic rays and cloud formation:

sunspot

3.  A long term trend of up to +0.05C per decade that may include a CO2-warming component.

I am willing to posit a CO2 impact net of feedbacks of perhaps 0.5-1.0C over the next century.  This may appear low, but is the only scale of number reasonably supported by history.  Any higher number would result in temperatures way too high historically.  And even assuming a number this high runs into the following problem:  There was probably a trend of about this magnitude emerging from the little ice age 200+ years ago and extending into the 20th century.  You can see it in the glacier numbers below:  (source)

Those that want to assign the temperature trend, once the sun and the PDO are removed, post-1950 to CO2, need to explain what effect was causing the nearly exact same trend from 1800-1950, and why that trend conveniently switched off at the exact moment man's CO2 takes over.  In the context of the glacier chart, what was causing the glaciers to retreat in 1880, and why is that effect not the one at work today?

With evidence that the PDO has reversed to its cool phase and that the sun may be shifting into low gear, I think it is reasonable to posit warming no more than 0.5-1.0C over the next century.  For those who have not seen it, Roy Spencer has a new paper on the PDO, clouds and temperature history.   My video on why climate models overstate future warming through absurd assumptions of high positive feedbacks is here.

Yet More Economic Ignorance

Don Boudreax shares this leftish view of the auto bailout from Pat Garofalo:

More importantly though - as Pelosi and Reid said - "federal aid should come with 'strong conditions,' such as requirements that car makers build more fuel-efficient vehicles." Bill Scher at OurFuture writes, "With the auto industry in dire straits, we taxpayers have maximum leverage to demand the cars necessary to help lower energy costs, cut carbon emissions and reduce our dependency on foreign oil."

So, uh, only when the government gets involved do consumers have any leverage with producers in terms of what products they produce?  Hello?  I'm sure Circuit City execs will be relieved to hear this.

In free markets, consumers have all the leverage in determining perhaps not what gets produced, but at least what gets sold in any marketplace.  Producers who are unable to match what they produce to what consumers buy eventually go bankrupt.  In fact, it is this process of consumers exercising their leverage with GM that Congress is attempting to interrupt with a bailout. Consumers are telling GM loud and clear that GM is not making the cars at the price points they want.  Unable to do so, GM will likely fail.  This failure will result either in 1) GM, under bankruptcy protection, shedding any number of constraints that are preventing it from making what the consumers want or 2) GM liquidating its production assets to other owner/management groups who can do a better job with them.

This quote is a great example of the technocratic bent many leading Democrats bring to economics.  What these guys are asking for is not leverage for consumers, but leverage for a few Democratic technocrats to makeover the auto industry the way they want it.  People like Nancy Pelosi who would never in a million years be given the keys to a manufacturing corporation by a sane ownership group can effectively grab that jobs via the leverage her seat in Congress gives her.

Postscript: Garofalo adds:

and if you think about the ripple effects, they are the backbone of our manufacturing economy." Indeed, according to estimates, one in 12 U.S. jobs is tied to car manufacturing, and a bailout of the industry could help boost the U.S.'s ailing manufacturing sector.

A couple of points.  First, a GM bankruptcy is hugely, enormously unlikely to mean the whole company is just shut down.  If you have flown in the last 10 years, unless you have favored only Southwest Airlines, you probably have traveled on a carrier in chapter 11.  That's what chapter 11 is - a breathing space while the company continues to operate but is able to restructure its liabilities.  Personally, I would love to see the company go chapter 7 and have a new wave of innovative people take over the assets and see what they could do with them.  But it is not going to happen.  GM may shed jobs over the next year, but they are going to do so anyway in the teeth of a recession, not because they went bankrupt.

Podesta must know that the issue in a bankruptcy will not be jobs, but labor contracts  (airlines have practically patented the chapter 11 vehicle for renegotiating union contracts).  Most GM manufacturing employees would probably keep their jobs through a bankruptcy, but they may well lose their contract that says they get paid $75.86 an hour with 34.5 days a year of paid leave.  Garofalo and Podesta are shilling for the union over wage bargaining, not jobs.

The other observation I want to make is to ask why the loss of these 250,000 jobs is going to be so much worse than the loss of 500,000 jobs over the last several years.

auto_jobs

I know parts of Michigan suffered, but Podesta is claiming knock-on effects for the whole country.  So where were they?

Let GM Fail!

This is a reprise of a much older post, but it struck me as fairly timely.

I had a conversation the other day with a person I can best describe as a well-meaning technocrat.  Though I am not sure he would put it this baldly, he tends to support a government by smart people imposing superior solutions on the sub-optimizing masses.  He was lamenting that allowing a company like GM to die is dumb, and that a little bit of intelligent management would save all those GM jobs and assets.  Though we did not discuss specifics, I presume in his model the government would have some role in this new intelligent design (I guess like it had in Amtrak?)

There are lots of sophisticated academic models for the corporation.  I have even studied a few.  Here is my simple one:

A corporation has physical plant (like factories) and workers of various skill levels who have productive potential.  These physical and human assets are overlaid with what we generally shortcut as "management" but which includes not just the actual humans currently managing the company but the organization approach, the culture, the management processes, its systems, the traditions, its contracts, its unions, the intellectual property, etc. etc.  In fact, by calling all this summed together "management", we falsely create the impression that it can easily be changed out, by firing the overpaid bums and getting new smarter guys.  This is not the case - Just ask Ross Perot.  You could fire the top 20 guys at GM and replace them all with the consensus all-brilliant team and I still am not sure they could fix it.

All these management factors, from the managers themselves to process to history to culture could better be called the corporate DNA*.  And DNA is very hard to change.  Walmart may be freaking brilliant at what they do, but demand that they change tomorrow to an upscale retailer marketing fashion products to teenage girls, and I don't think they would ever get there.  Its just too much change in the DNA.  Yeah, you could hire some ex Merry-go-round** executives, but you still have a culture aimed at big box low prices, a logistics system and infrastructure aimed at doing same, absolutely no history or knowledge of fashion, etc. etc.  I would bet you any amount of money I could get to the GAP faster starting from scratch than starting from Walmart.  For example, many folks (like me) greatly prefer Target over Walmart because Target is a slightly nicer, more relaxing place to shop.  And even this small difference may ultimately confound Walmart.  Even this very incremental need to add some aesthetics to their experience may overtax their DNA.

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

I don't know if GM will fail (but a lot of other people have opinions) but if it does, I am confident that the end result will be positive for America.

* Those who accuse me of being more influenced by Neal Stephenson's Snow Crash than Harvard Business School may be correct.
** Gratuitous reference aimed at forty-somethings who used to hang out at the mall.  In my town, Merry-go-round was the place teenage girls went if they wanted to dress like, uh, teenage girls.  I am pretty sure the store went bust a while back.

Republicans to Receive Bailout from Congress

Congressional Democrats announced today that they had agreed to a bailout plan for Republicans after last week's devastating election results.  While exact details are unavailable, sources tell us that the Republicans will be given 4 seats in the Senate and 15 in the House.  Nancy Pelosi said in a statement today: "We've established pretty clearly over the last several months that failed strategies and management should not necessarily have to result in losses in market share, particularly for well-connected Washington insiders."

Asked for comment, Democratic strategist James Carville was giddy.  "This is brilliant.  It really doesn't give up anything of substance to the Republicans.  But it will sap the energy from the Republican Party for making any substantial changes, and make it more likely they will continue the failed strategies that led to this most recent loss.  After their recent failures, the Republicans were on the verge of being forced to reinvent their whole organization.  This bailout should reduce the likelihood of that substantially."

When asked if bailouts of AIG, General Motors, Ford, Chrysler, Freddie Mac, Fannie Mae, and Bear Stearns wouldn't similarly reduce the urgency to change failed approaches, Carville answered "no comment."

More on the Stagnating Wage Myth

A while back, when I discussed the stagnating wage myth, I observed that folks spreading this meme were careful to show figures only for cash wages, and not for total compensation.  In the period from 2000-2006, which is the typical period critics focus on (in part because it implies blame on the Bush administration, and in part because it lets them measure economic peak to trough) there has been a substantial shift in compensation mix from cash to non-cash benefits, including health care and paid time off.  Ignoring these components is particularly disingenuous given that many of these same critics have been long-time supporters of more paid time off and better company-funded health care.

As an example, this data (courtesy of Mark Perry) on the Big 3 automakers contracts is telling.  In 2000 (table page 3) it shows cash wages per hour worked at $22.71 and total comp at $43.57.  In 2006, the most recent year of data, it shows cash wages per hour worked at $29.15 and total comp at $75.86.  So, while cash wages per hour have increased about 4.25% compounded each year, total compensation has increased more than twice as fast, at 9.7% a year.  That latter increase is due both to a rapid rise in health care expenditures for employees as well as an increase in paid day off to 34.5 a year.  (by the way, if you are wondering why the UAW is fighting so hard for a government bailout, look no further than jobs with $75.86 an hour total comp. and seven weeks a year of paid days off.)

Obama Transition Site Gets Stealth Edit

Last week I quoted from the Obama transition site:

The Obama Administration will call on Americans to serve in order to meet the nation's challenges. President-Elect Obama will expand national service programs like AmeriCorps and Peace Corps and will create a new Classroom Corps to help teachers in underserved schools, as well as a new Health Corps, Clean Energy Corps, and Veterans Corps. Obama will call on citizens of all ages to serve America, by developing a plan to require 50 hours of community service in middle school and high school and 100 hours of community service in college every year.

Now, it says this:

Obama will call on citizens of all ages to serve America, by setting a goal that all middle school and high school students do 50 hours of community service a year and by developing a plan so that all college students who conduct 100 hours of community service receive a universal and fully refundable tax credit ensuring that the first $4,000 of their college education is completely free.

Ben Smith and others argue that Obama never said it was mandatory.  Fortunately, I got a screen shot of the "require" language before the Obama department of Truth got to the page (click for full size):

obama-service-plan

Thanks to Walter Olson for bringing the swap to my attention.

Postscript: 100 hours for $4000 is a pretty good deal.  Not many private sector employers offering $40 an hour to recent high school grads.  Everyone out there OK with the government paying the equivalent of $80,000 a year salaries to 18-year-olds for sorting food at the food bank?

Refresher: It seems that some basic definitions are in order.  If one is required to work at a certain task, he is not a volunteer.  If one is paid $4000 for 100 hours of labor, he is not a volunteer.  A volunteer is someone who works of his or her own free will without monetary compensation, solely for the satisfaction of helping out.

A Last Case for Payday Loans

Well, we have upheld the ban on payday loans here in Arizona.

The payday-loan industry, which flourished this past decade on Arizonans' almost-insatiable need for quick, short-term loans regardless of their high interest rates, may have to close down in Arizona unless state lawmakers can be persuaded to ignore voters' wishes.

Voters last week overwhelmingly rejected Proposition 200, a ballot initiative financed and written by the loan companies to allow them to continue charging high interest rates on small loans. That decision placed Arizona among a growing number of states that have effectively shut down the payday lenders.

So, payday loans from company A to person B are really popular with both A & B, and the industry has "flourished."  But persons C, who don't participate in this market, have decided that, for their own good, A & B need to stop engaging in this behavior.  One such third party explains it this way:

Sen. Debbie McCune Davis, D-Phoenix, opposed Prop. 200 and has steadfastly fought payday lenders. She sees no need to let payday lenders continue to charge higher interest rates than other lenders.

Her and voter's actions have effectively limited payday loan companies to charging total interest and fees equivalent to no more than 36% annual interest.  OK, you say, this seems like a really high rate.  That should be enough, right?  Well, the problem comes with fixed costs and loan size.  Lets look at an example.

A typical payday loan size and term is about $400 for 18 days (pdf).  A typical fee for such a loan is $50, which includes both fixed costs and interest.  Wow, annualized that is 250%.  Usurious!  So would you personally go out and get a payday loan?  No way! And that is why voters vote to ban them - they are not good for me personally, so they must not be good for anyone else.

But here is the problem.  How do you maintain a storefront and trained people and all the documentation and collection apparatus for less than $50?  The same loan at 36% would allow a fee of only $7.20.  That barely even covers paying someone to originate the loan at the counter, much less pay interest and a risk premium.

Try going to the bank and getting a home loan or some other type of loan for only a $50 fee.  Granted those loans are more complicated, but in turn you will likely get charged hundred and probably thousands of dollars in fees.  There is a large fixed cost component to the act of lending which we tend to ignore on larger loans, but is there none-the-less.  In fact, just try to go to a bank and get a loan for $400 at all.  They don't make them, outside of the credit card industry, which solves this problem in part through economies of scale and in part through cost-shifting costs to merchants, options not really available to payday loan companies.

And so far, we are only talking about fixed costs, not the underwriting risk of extending loans to about any person who wanders in the door and can sign his/her name.  Anyone remember sub-prime mortgages?  Maybe there is a justification for large risk premiums, after all, on loans to under-qualified borrowers.  Particularly when you consider that most payday loan customers could not qualify even for a sub-prime mortgage.

The best equivalent to a payday loan offered by banks is overdraft protection, where the bank will go ahead and pay out on checks where there are insufficient funds, though they will charge a $20-$30 fee per check paid.  As you can see, these fees are very similar in magnitude to those charged by payday loan companies, particularly when you consider that these fees are generally charged on checks that average about $150.  Also, folks who get one overdraft fee usually get several in a row.  People are willing to pay these fees because they are in fact lower than the fees of actually having a check bounce, which can incur similar fees from merchants as well as hurting one's credit.

So, you just had to write three checks to get the power and water and telephone turned on, and you are pretty sure the money is not there in your checking account.  You are facing $80 in bounced-check (NSF) fees or overdraft fees.  Now might you consider a $400 loan for a $50 fee?  Well, probably the answer is still no, you would put it on your credit cards.  But everyone doesn't have credit cards, or doesn't qualify for them, or don't have a lifestyle that allows for them.  Where do they go, short of Tony Soprano?

Update: A reader sent me a link to this report, comparing payday loan rates to overdraft protection, and finding them of similar magnitude.  The author calculates an average $28.61 overdraft fee on an average $155 bounced check yields an APR of 478%.  There is a fixed cost to lending, and small very short term loans cost a lot of money, no matter how you get them.

I will remind folks not to be fooled by 18% or 23% rates on credit cards and set that as the market rate for small loans.  First, this misses annual fees for the cards.  But more importantly, it misses merchant fees.  Merchants pay between 2.5% and 3.5% of everything you charge to the credit card companies.  This helps to subsidize rates and, particularly, subsidize the fixed costs of small lending transactions.

Grab Your Ankles

From Jim Moran of Virginia:

We have been guided by a Republican administration who believes in the simplistic notion that people who have wealth are entitled to keep it and they have an antipathy towards redistributing wealth and they may be able to sustain it for a while but it doesn't work in the long run.

Remember, though, calling them socialists is racist.  Video here.

One Movie, Two Governors!

Channel surfing last night, I ran into the Running Man, an unfortunate movie "adaption" of  a pretty good Steven King (as Richard Bachman) book.  For those who have seen one and not the other, they have little in common with each other. 

What I hadn't realized before was just how bizarre the casting for this movie was -- Richard Dawson, the cheesy game show host as a ... cheesy game show host.  Jim Brown, Dweezil Zappa and Mick Fleetwood?  The latter, by the way, as himself but in the future.  Whatever.

But the best part is that the movie has two United States governors in substantial roles -- Arnold Schwarzenegger (California) in the title role and Jesse Ventura (Minnesota) as one of the "stalkers" trying to kill Arnold.  Is this a great country or what?

Do ya'll know any others?  I know Sonny Bono did a Love Boat guest appearance, so there must have been two Congressmen  in one TV episode (with Fred Grandy of Iowa).  There may be a Fred Thompson +1 out there I can't think of.  And of course there were probably some Ronald Reagan matchups, but that is before my time.

Update:  Rob reminds me that the Ventura-Schwarzenegger team can also be found in Predator. 

Obama and the "Patriot Employer"

As mentioned in the updates to this earlier post, the Obama transition web site has, at least temporarily, purged out all the real content they had up about specific programs and legislative goals.  So, as a public service, I will help fill this information gap by re-posting an article I wrote about 9 months ago on the "Patriot Employer Act" sponsored by Barack Obama and likely a kernel for early 2009 legislative action:

Posted 2/13/2008:

It turns out, according to Barack Obama, (who hales from the party that doesn't believe in questioning anyone's patriotism) that I am not a "Patriot Employer." This is from the text of Senate Bill S. 1945 of which he is a co-sponsor (My snark is interspersed in italics): Patriot Employers are to be given tax breaks over unpatriotic employers (I presume this means that their tax rates will be raised less in an Obama presidency than those of other folks) with "patriot employers" defined as such:

(b) Patriot Employer- For purposes of subsection (a), the term`Patriot employer' means, with respect to any taxable year, any taxpayer which-

`(1) maintains its headquarters in the United States if the taxpayer has ever been headquartered in the United States,

OK, I guess I can comply with this. Though I am not sure the best way to begin an Obama "kindler gentler foreign policy" is to tell the nations of the world that we will be taxing their company's income in the US at a higher rate than our own companies.

`(2) pays at least 60 percent of each employee's health care premiums,

So the #1 determinant of patriotism is not commitment to individual rights but paying 60% of employee health care costs. I guess I am so unpatriotic

And, just from a practical standpoint, 90% of my employees are seasonal, hired for about 4 months of the year. To be patriotic, I have to pay their health care costs all year long? Also, since most of my employees are retired, they are on Medicare or an employee retirement medical plan. If they pay $0 in premiums and I pay $0 of that, do I get credit for 60%? Maybe the government can mandate a solution for zero divided by zero, like they did for the value of pi years ago

`(3) has in effect, and operates in accordance with, a policy requiring neutrality in employee organizing drives,

I presume neutrality means that in a hypothetical union drive, I do not express my opinion (and likely opposition) to said unionization drive? I am told that this also entails allowing card checks rather than hidden ballot voting. In other words, patriotism is being defined here as 1) giving up your free speech rights and 2) opposing hidden ballot voting. Uh, right. Besides, if a union organized our company, as unlikely as that would be, I would probably have to do a Francisco d'Anconia on the place.

`(4) if such taxpayer employs at least 50 employees on average during the taxable year-

`(A) maintains or increases the number of full-time workers in the United States relative to the number of full-time workers outside of the United States,

In other words, we don't want American companies growing overseas. This could also be called the "give up international market share act." This implies that it is unpatriotic for US-based Exxon to explore for oil in Asia and that it is more patriotic to let the Chinese national oil company do it. This implies that it is more patriotic for Coke to lose market share in Germany than to gain it. This means that it is more patriotic for Mattel to buy its toys in China from Chinese companies rather than run the factories themselves (and thereby be accountable themselves for product quality and working conditions).

This is beyond stupid. We LIKE to see US companies doing well overseas. If we have to import our raw materials, we feel more comfortable if it is US companies doing the extraction. Don't we? In the name of patriotism, do we really want to root for our domestic companies to fail in international markets?

`(B) compensates each employee of the taxpayer at an hourly rate (or equivalent thereof) not less than an amount equal to the Federal poverty level for a family of three for the calendar year in which the taxable year begins divided by 2,080,

90% of my workers are retired. They work for me to supplement their income, to live our in nature, and to stay busy. They need me to pay them based on the poverty line for a family of three, why? I will tell you right now that if I had to raise wages this much, most of my employees would quit. Many of them force me to give them fewer hours so they can stay under the social security limits for income. I discussed what rising minimum wages often force me to do here, but just as an illustration, a $1 an hour across the board wage increase would easily wipe out all the money I make in a year and put me into a loss position. In which case the lowered tax rate would not do me much good anyway.

`(C) provides either-

`(i) a defined contribution plan which for any plan year-

`(I) requires the employer to make nonelective contributions of at least 5 percent of compensation for each employee who is not a highly compensated employee, or

`(II) requires the employer to make matching contributions of 100 percent of the elective contributions of each employee who is not a highly compensated employee to the extent such contributions do not exceed the percentage specified by the plan (not less than 5 percent) of the employee's compensation, or

`(ii) a defined benefit plan which for any plan year requires the employer to make contributions on behalf of each employee who is not a highly compensated employee in an amount which will provide an accrued benefit under the plan for the plan year which is not less than 5 percent of the employee's compensation, and

Uh, I am not sure why it is unpatriotic for an employee to save for themselves, but I think 401k plans are a nice benefit. I would certainly offer one except for one tiny fact - ALL MY EMPLOYEES ARE ALREADY RETIRED!! They are over 65. They are drawing down on their retirement, not contributing to it.

This is at the heart of the problem with all US labor law. Folks up in Illinois write laws with a picture of a steel mill in mind, and forget that employment and employees have infinite variations in circumstances and goals.

So I am unpatriotic, huh. But if forcing companies to contribute to emplee retirement plans is patriotic, why is hiring folks once they are retired to give them extra income in retirement unpatriotic? In fact, maybe I could argue that 100% of the wages I pay go to retirement spending

`(D) provides full differential salary and insurance benefits for all National Guard and Reserve employees who are called for active duty, and

In other words, we of the government are not going to pay our employees (ie reservists on active duty) what they are worth and are not going to give them benefits, so to be patriotic you need to do it for us. We in Congress are not really very patriotic and don't support the troops, so you need to do it for us.

All kidding aside, I would do this in my company if it was applicable, but I really resent being piously told to do so by several Senators who don't really model this behavior themselves.

`(5) if such taxpayer employs less than 50 employees on average during the taxable year, either-...

blah, blah. Basically the same stuff repeated, though slightly less onerous.

Since when did patriotism equate to "rolling over to the latest AFL-CIO wish list?"