Friday, February 27, 2009

Senator Kerry, Just Shut Up!

by Mr. Quarter

In today's Wall Street Journal, the most esteemed Senator John F. Kerry opines in a short article that eastern Europe needs our help. It also appears that Senator Kerry has few reservations about plagiarizing Mr. Quarter's posts! As I pointed out in my post a couple of days ago, central and eastern Europe is in dire financial shape due to mortgage lending in foreign currency. Most of their banks are foreign owned, so much of western Europe is looking at their investments swirling around the bowl - so to speak. The good senator then goes on to make his case that we cannot possibly let this happen as it will throw 20 years of alliance building down the drain. My questions for the good senator would be:

  1. Just who do you think is going to step in, since every country world wide is in the same economic boat. The Russians? Their stock market is in the tank. The Chinese? They are trying to prop up their own economy.
  2. Why is it the responsibility of the US to come to the rescue. Western Europe has the biggest interest, invested heavily there, and should be spending their resources to help their recovery. After all, isn't it they who will profit financially from a eastern Europe economic recovery?
  3. Your guy Obama just dropped a $3.7 trillion bomb on the the US taxpayer, of which almost half is deficit spending - that we have to borrow first. And the projection is for $800 billion deficits well into the future (if Obama is successful in "cutting the deficit in half") So what makes you think this country has the capacity or the will to spend one cent to save another country's economy at this point in time or for the foreseeable future?

Senator Kerry, you are a wanna be looser. You are essentially irrelevant, so get over it and move on. Oh, and do all of your fellow citizens a favor. Simply shut up!

Tuesday, February 24, 2009

The Mistakes and the Lies

by Mr. Quarter.

This post will discuss two issues that I have found interesting information on recently. The first is the underlying causes of the current economic problems and the second is the Obama budget and tax program proposed last night.

The causes of the current economic problems? Two foundation events that I have identified. The first event was alluded to in my post of February 20 where I quote Phil Gramm on the effects of the Community Reinvestment Act, a Democratic boondoggle that forced banks to make mortgage loans to customers that were unworthy of the loans. In that article, Mr. Gramm points out that in 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized, but by 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The second event was illuminated in this article published in Wired Magazine online on the 23rd of February. In 2000, while working at JP Morgan/Chase, a young man named David X. Li published what became widely recognized as a breakthrough mathematical model called the Gaussian Copula Function that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. Because of its elegance, it was widely adopted by financial and investment houses up and down Wall Street. Mr. Li's formula represented an ingenious way to model loan default correlations without even looking at historical default data. Basically, he accounted for this with a sort of coefficient that assumed that prices would not go down. As a result, banks and investment houses developed more and more complex financial instruments, slicing up bundles of mortgages, trading, insuring for default - all based on a formula that assumed no decline in prices. Guess what happened?

Incidently, Mr. Li. he now works in Beijing and heads the risk-management department of China International Capital Corporation which is the China sovereign wealth fund. He is currently unavailable for comment. One wonders whether this was a stealthy attack on America from within by a mole.

On the the Obama budget outline and tax increases. Mr. Obama is proposing a budget of $3.94 trillion with a $1.7 trillion deficit. Not to worry says Mr. Obama, much of this is paid for by increasing the income tax rate on those making greater than $250,000. Says Obama, "No one with an income under $250,000 a year will pay $1 more in taxes." Well, lets examine that a bit more. According an article the Wall Street Journal today, the IRS reported for 2006 (the most recent year this data is available) that income tax filers reporting over $200,000 annual income paid $522 billion in income tax at the top rate of 35% (this group is 7% of all tax payers and pays 57% of all income tax). Obama has indicated that his program will raise the top rate to 39.6% and that he will add another 2% through elimination of certain itemized deductions that are now claimed - so lets make the top tax rate an even 41%. We will have $1.75 trillion deficit and we need to come up with the money to close that gap. Well, through the magic of algebra (thank you Mr. Schwab) we can at least see in approximate terms how much tax revenue would be generated by increasing the top tax rate to 41% - about $104 billion additional. In fact, as the WSJ points out, if you raise the top income tax rate of all filers with income over $200,000 to 100%, the total revenue generated would be $970 billion - still not be enough to cover even the deficit. So where do you think that Obama is going to get the rest? That's right Mr. and Mrs. Oppressed Middle Class. He will be coming to your wallet next.

Monday, February 23, 2009

Revisit - How Bad Can it Get?

By Mr. Quarter

A couple of posts back, I mentioned the potential economic bomb that lurks in central and eastern Europe. As reported today in the Financial Times, the possibility of a financial collapse there could bring down the Eurozone. Policy errors by the governments in central and eastern European countries contributed to this looming economic explosion and the most egregious was that they encouraged households to obtain mortgages in foreign currencies.

In Hungary, for example, almost every mortgage is a foreign currency mortgage, mostly denominated in Swiss francs because of cheap Swiss interest rates. Net effect? Hungarian homeowners get farther and farther behind as the Hungarian forint falls against the rising Swiss franc.

So how could this bring about the collapse of the the "Eurozone?" The central and eastern Europeans made sure their banks were owned by foreigners, and in particular, Austrian, Italian and Swedish banks own a large chunk. The Financial Times reports that the exposure of Austrian banks to eastern Europe mortgage debt is about 80 per cent of Austria’s gross domestic product. If Hungarian households default, it is not Hungary that will go down, but Austria, and/or Italy and Sweden - a systemic event.

Sunday, February 22, 2009

The Deuce And The GOP

Michael Steele, the newly elected chairman of the Republican National Committee (RNC), has unveiled his stupid fresh strategy to revitalize the Grand Old Party and attract new supporters to the quasi-conservative cause...he's taking the GOP hip-hop. No, seriously.

In an interview Steele gave to the Washington Times, Steele plans an... “off the hook” public relations offensive to attract younger voters, especially blacks and Hispanics, by applying the party's principles to “urban-suburban hip-hop settings.”

So, all of you that are prone to vote Republican, prepare to learn a new language. You'll need to be hip to such phrases as;

Stupid fresh; so new only the hippest of hip-hoppers know about it. Common usage; "This commodities trading algorithm is stupid fresh!"

Off the hook; wild, bold, never before seen. Common usage; "This new Michael Bolton CD is off the hook!"

Taking it to the streets; essentially this means marching up and down some sidewalk carrying signs of protest with misspelled words, lead by a pseudo-charismatic leader who likes to chant in rhymes. The nature of the protest is immaterial. Common usage; "My 401k is trashed...I'm taking it to the streets!"

Keeping it real; nobody knows what this really means. Think of it as the hip way to answer the question, "How are you doing?" Common usage; "How are you doing?" "I'm keeping it real." (what did you expect?)

The man be keeping us down; since "the Man" is,, using this phrase is problematic. However, with a black president it may soon be possible for white middle aged Republicans to use this phrase without being lame (stupid). Common usage; " Capital gains taxes are going up? Damn, the Man be keeping us down!"

25 with an izL; prison sentence of 25 years to life (props to Snoop Dog). Common usage; "I hope Bernie Madoff gets 25 with an izL."

40; a 40oz bottle of malt liquor or beer. With the Man keeping us down, expect Jack Daniel's, Jim Beam and most single malt scotches to start offering their libations in this way. Common usage; "It's been a hell of a day Geeves...bring me a 40."

5 O; hip-hop code for the police, as in Hawaii Five-O, an archaic cop show popular amongst whites in the 1970's. Common usage, "I think my lame ass broker is running a Ponzi scheme on me...I'm calling 5 o!"

AK; the AK-47 assault rifle and its eastern European and Chinese knock offs, like the SKS. Common usage; "My AK is too big to conceal in the Summer, so I carry my 9 instead."

9; a nine millimeter semi-automatic pistol. Common usage; "Buffy, get me a 40 before I break out my 9 and bust a cap in your ass!"

Bust a cap; discharge a round from your favorite AK, 9 or other fire arm. Common usage; see 9.

Shout Out; say 'hi' to your homeys when speaking in front of an audience. Common usage; "I want to give a shout out to my polo instructor Trevor!"

Homey; someone from your 'hood', a friend, or someone who grew up or lives in your hood, whether you know them or not. Common usage; "I can help with that leveraged buyout. The CEO is my homey."

Benz; your Mercedes, or if you're lame, your homey's Mercedes. Common usage; "I'm purchasing a new Benz with my year end bonus!"

Dog; a friend. Similar to homey, but closer. Common usage; "What's the market doing today dog?"

Unfortunately, there's a lot more hip-hop lingo to learn before you can call yourself a hip-hop Republican, but don't be shy about trying out your new found patois with the homey's that hang out in front of the bodega late at night. No doubt they'll be so impressed that they'll cruise to the nearest voter registration office to proclaim their stupid fresh allegiance to the Republican Party.

For more info, contact Mr. Michael Steele at the RNC.

Peace out!

Nationalization of Banks

By Mr. Quarter

One solution to the current "crisis" of credit gridlock proposed by various Republican members of Congress and none other than former Federal Reserve chairman Alan Greenspan (who incidentally is responsible for monetary policies that brought this mess upon us) is to nationalize some or all of the banks "at least temporarily." The idea being that once the banks are nationalized, any "toxic assets" that are clogging up the credit pipeline can simply be transferred to the proposed "Bad Bank" without the necessity of trying to figure out the fair market value of those "toxic assets." As pointed out by Delroy Murdock in an article published in The National Review on February 20, the idea of government nationalizing banks is nothing new. It first appeared in 1848 in The Communist Manifesto. “The Proletariat will use its political supremacy, to wrest, by degrees, all capital from the bourgeoisie,” Karl Marx predicted. This would include “Centralization of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly.”

Friday, February 20, 2009

Original Sin

By Mr. Quarter

The origin of a lot of the economic issues today is that mortgage lending become increasingly politicized. According to a WSJ article published by Phil Gramm on February 20:

"The Community Reinvestment Act (CRA) requirements led regulators to foster looser underwriting and encouraged the making of more and more marginal loans. Looser underwriting standards spread beyond subprime to the whole housing market. The 1992 Housing Bill set quotas or "targets" that Fannie and Freddie were to achieve in meeting the housing needs of low- and moderate-income Americans. In 1995 HUD raised the primary quota for low- and moderate-income housing loans from the 30% set by Congress in 1992 to 40% in 1996 and to 42% in 1997. By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%. The results? In 1994, 4.5% of the mortgage market was subprime and 31% of those subprime loans were securitized. By 2006, 20.1% of the entire mortgage market was subprime and 81% of those loans were securitized. The Congressional Budget Office now estimates that GSE losses will cost $240 billion in fiscal year 2009. If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back (emphasis added)."

I think that about covers it. Enough said!

Tuesday, February 17, 2009

How Bad is it Really? Is it Worse than it Looks?

By Mr Quarter

The main stream media (MSM) and Obama are sounding the economic alarm with more and more urgency. Words like apocalypse, disaster, tsunami and the like are strewn about like so much confetti when ever there is a discussion of the current and potential future economic situation. Obama and the congress just put into place legislation to spend about $10,000 from each tax paying household over the next several years in order to halt the economic slide and avert what Obama and the MSM assure us is impending doom. The questions that seem to loom like the elephant in the room is, "Are things really that bad? If so, could it get worse?"

A recent analysis that I stumbled across suggests that, at based on the empirical data the current economic situation is certainly not equivalent to the 1930's and may not even be as bad as was experienced the recession of 1981. First, looking at the current unemployment figures, it is clear that an unemployment rate of 7.6% is not good and has increased from a year ago by about 2.2 percentage points. But, in comparison to prior times of economic history, the increase in unemployment must be put into the perspective of the available labor force and the total population of the country (i.e., one million jobs lost is less significant if the labor force is 50% larger). The current US labor force is approximately 156 million people, more than the entire population of the US in 1930 which the 1930 census puts at 123 million. Similarly, the US work force in 1981 was approximately 107 million or 50% smaller than today. Two comparisons of empirical data below illustrate the point.

This chart compares the percentage decline in payroll employment during today's recession with that observed in other economic downturns in the period immediately following "peak employment"

Similarly, this chart shows the job losses as a percent of the available labor force in one year periods during prior economic downturns.

The point being that the empirical data do not support the doom and gloom forecasts that are being bandied about.

Other economic indicators also tell a similar story. The chart below depicts four metrics commonly held forth as indicators of economic health and prosperity. The comparison is the 1981 recession period and 2008-2009. Clearly, none of these metrics approach the levels seen in the 1981 period.
So how bad is it really? Are conditions so bad that we needed to mortgage the futures of our children and grandchildren to fix it. Or, are the Democrat politicians merely spending money on pet projects and causes to ensure their continued political dominance. Anyone remember the quote from Rahm Emmanuel just before the inaugural, "A crisis is a terrible thing to waste"?

How bad could it get? This question is the one that nags and scares me personally. I am reading a lot about foreign financial conditions that have great potential to drag down the rest of the world. Three areas seem particularly vulnerable. First, eastern Europe (the EU states of eastern Europe, Russia, and Ukraine). The short story is that Austrian, Swedish, Greek, Italian, and Belgian banks have lent princely sums to private and government enterprises in these countries. Apparently, the expectation if a debt failure rate of 20%. Second, Great Britain is on the verge of bankruptcy. It has been reported in the past month that the major banks of Great Britain are technically insolvent. Third, Mexico is on the verge of becoming a lawless state without a government and is considered on the same level as Pakistan. No less than the United States military has assessed the situation in Mexico and concluded that "the government, its politicians, police and judicial infrastructure are all under sustained assault and press by criminal gangs and drug cartels. How that internal conflict turns out over the next several years will have a major impact on the stability of the Mexican state. Any descent by Mexico into chaos would demand an American response based on the serious implications for homeland security alone."

Personally, I don't know what to believe or expect. Certainly, all the published indicators are that things are bad and are going to get a lot worse. Is the answer to stockade and purchase provisions and personal armaments? Is the answer to buy gold? Should I sit here like a chump and watch it all go down while I make blueberry smoothies in the blender I bought with a credit card?

Funny thing is, where I work is doing OK business wise. A little slower than usual but nothing to panic about. I have the opportunity to talk to a great number of people from around the country and they say pretty much the same thing. And here is the real kicker, totally anecdotal and unscientific. I drive to work every morning on a 20 mile commute that takes about 45 minutes. There still seems to be the same number of other A-holes out there on the road, crawling along bumper to bumper. So either they are all still going to work .... or they are headed to the mall to buy the same smoothie blender that I got and they will use the increase in their credit limit that Tim Geitner got them.

Wednesday, February 11, 2009

The Wrong Question

By Mr. Quarter

Yesterday, Tim Geitner (our new Secretary of the Treasury) announced a plan to shore up the financial sector. The details of the plan are murky, however it seems to be oriented around increasing liquidity by trading federal dollars in exchange for assumption of bad debt paper that the banks and financial institutions are holding. In today's Financial Times, Martin Wolf opines that perhaps the question isn't really how to prop up the banks, but to "clean the Augean banking stables" and restructure the healthy banks while slaying the zombie banks immediately. I agree with this approach and extend that logic to the entire stimulus package that is in now conference in the congress (as an aside, Arlen Spector has lost my vote and I encourage all other Pennsylvanians to vote him out next year).

One type of "toxic asset" that the Geitner plan would purchase is called consumer debt obligations (CDOs). Now, most of us have credit cards and use them regularly. Every transaction we ring up on the plastic used to be bundled up with other hundreds of other peoples transactions as a CDO and sold as an asset to investors. I understand that as recently as last year, $100 in credit card debt could be sold to investors for $115 as a CDO. The investors figured to make a profit on the payment of principal, interest and late fees by the consumers that hold the charge accounts, and the credit card company made it's profit in the sale. But the economy started to turn, jobs were lost and people stopped making their credit card payments, and they stopped buying. The halt in consumption slows the economy even more, so more jobs are lost, and so on ad infinitum. Now the investors are holding "toxic assets" that are filled with delinquent credit card account debt and cannot sell the CDO asset because either the value has plummeted or the value cannot be assessed.

So here is the logic that I do not understand. The premise of the Geitner plan is that the government will purchase these toxic CDOs, among other bad assets to inject liquidity into the banking system and free up credit. The theory is that banks will extend new credit to consumers who will in turn go out and spend money on their credit cards to purchase goods and services, again running up personal debt.

Now most of us - or at least some of us, pay off our credit cards every month or we at least stay current on the personal debt service. So, increasing the available credit of this group really isn't going to stimulate diddly, is it? This group is already spending and, isn't likely to spend more simply because they get a notice that their credit limit was increased by $5,000. Alternatively, the consumers that were defaulting on the personal debt previously aren't going to go out and rack up new additional debt, are they? First, simple good judgement would prohibit that course of action. Second, if they are already in debt to the point that they cannot adequately service the debt then they are not likely to increase their debt load. Lastly, if they have not been making payments to service the debt or have filed for bankruptcy to escape the debt, are they going to have their credit increased? I think not.

No, this whole thing looks like a giant mistake that will burden our children and grandchildren with federal debt load that will rob them of anything close to the quality of life we have enjoyed to date. I strongly believe that it is time to clean the Augean stables of the economy, let the weak fail and the strong survive. As a nation, we will be stronger as a result.

Wednesday, February 4, 2009

The Deuce Expands On Liberty

Referencing my post, "The Deuce and Liberty", specifically seat belt laws, check out this.

Please note how your neighbors like to bribe your state officials with promises of serious cash if the correct laws are passed, tempting your state reps to pass laws they don't really want just so they can get their hands on the Benjamins.

Also note, according to the National Highway Traffic Safety Administration quoted in the article, in 2007 54% of people killed in auto accidents were not wearing their seat belts. This must mean that 46% of people killed in auto accidents were wearing their seat belts ( assuming that all cars on the roads are equipped with seat belts...doubtful, but close enough to not be statistically significant ). Do these figures match what you have been taught, or what you've read or heard? I was under the assumption that wearing seat belts significantly increased your chances of surviving an accident. These figures tend to argue against that.

54 to 46 is pretty close to a toss up. I'll continue to wear my belt, 'cause I like to do all I can to increase the odds in my favor, but I still think wearing seat belts ought to be voluntary for adults capable of, and having every right, to make their own decisions. As far as kids go...strap 'em in. You owe them that, until they can make their own decisions.