Detailed Abstractions

Via Buzz.Yahoo.com (because I refuse to send people to the Huffington Post), the Huffington Post reports (here):

President Obama will unveil on Thursday a proposed levy on the nation’s biggest financial firms structured not just to repay taxpayers for the bank bailout, but to recoup some of the public subsidy that “too big to fail” banks have enjoyed on account of their implicit government backstop, a senior administration official tells the Huffington Post….

First, I honestly have a problem with senior administration officials lending their knowledge to such a highly partisan propaganda site as the Huffington Post.   They long ago stop pretending to care about being news or even being accurate and moved straight into MoveOn.org territory.

Now, I’m not saying the President or his staff must chose the outlets I would prefer, but they could definitely send out press statements or use seemingly “real” and more honest news organizations.  It’s not like the NY Times isn’t on the President’s side – why go to Huffington?

Either way – regardless of the merits (or lack thereof0) for this specific  marketing strategy – it seems quite obvious that Mr. Obama and his team lacks a fundamental understanding of economics.  Their continued reliance on government solutions to all economic problems, demonstrates a misunderstanding of the dynamics needed to keep this economic engine and society moving forward.

It seems they have an idea that they can model the economic behavior of institutions they define as “Too big to fail” as if this equilibrium is: A) possible to spot & B) static enough to allow the slow moving government the ability to legislate in a helpful way.

Indeed the current economic crisis itself lends credibility to the idea that the government is in no position to grasp the complexities that exist when dealing with so many interconnected businesses (here):

…”We are here to examine what happened in the public sector, what happened in regulatory agencies, what happened in enforcement agencies,” said Phil Angelides, the chairman of the Financial Crisis Inquiry Commission….

While investigating the public portion of the failure:

…Questions focused on failures around regulatory decisions to loosen bank leverage and capital limits, faulty credit rating agencies, a warning about epidemic of mortgage fraud and a decision by Congress and the FDIC to stop collecting vital insurance fees from ‘well capitalized” banks between 1996 and 2006….

They grilled DOJ:

…Panel members asked Attorney General Eric Holder to conduct an investigation into what, if anything the agency did after the Federal Bureau of Investigation in 2004 warned that mortgage fraud was so rampant that it was a potential “epidemic.”…

& the SEC:

…SEC Chairwoman Mary Schapiro was inundated with questions about the agency’s failure to oversee credit rating agencies, which provided overly rosy debt ratings for problematic mortgage securities….

The FDIC & Congress:

…Meanwhile, the FDIC and Congress were criticized for its decision not to collect deposit insurance premiums from well capitalized banks for roughly a decade between 1996 and 2006….

But it’s ok, because the FDIC agrees with them:

…Both Schapiro and FDIC Chairwoman Sheila Bair agreed that an SEC decision in 2004, under its chairman at the time, William Donaldson, to allow banks to identify how much capital and leverage they must have on hand, based on their own model-based formula, was a mistake that allowed banks to expand their leverage to problematic levels….

Where the lead to the obvious conclusion they were searching for the entire time – government help:

…Bair said. “I think the only place to tackle that on a system-wide basis for both banks and non-banks was through consumer protection rules that gave the Fed the authority to apply rules against abusive lending across the board to both banks and non-banks.”…

Now it might just be me, but thinking federal regulators with new powers over banks and abusive lending standards will get it right next time seems a tad optimistic…. you know, especially considering their massive failure with the current crisis.

Which is of course only a portion of the story.  The government, through various GSE’s, exacerbated the problems with global capital flows, by giving banks incentives to make riskier and riskier loans (here):

…The actual causes of our financial troubles were unusual monetary policy moves and novel federal regulatory interventions. Regulatory distortions intensified in the 1990s. Poorly chosen public policies distorted interest rates and asset prices, diverted loanable funds into the wrong investments, and twisted normally robust financial institutions into unsustainable positions.

We can group most of the unfortunate policies under two main headings: (1) Federal Reserve credit expansion that provided the means for unsustainable mortgage financing, and (2) mandates and subsidies to write riskier mortgages….

Please don’t misunderstand me – just because someone leaves their keys in their car doesn’t mean you should take it – so immoral actions on behalf of lenders, home buyers, and an inaccurate understanding of the true risks were also present in the prelude to this tragedy:

…There is no doubt that private miscalculation and imprudence made matters worse for more than a few lending institutions and individual borrowers….

& therein lies the true rub.  This imprudence is something for which the market should bear the price of their mistakes.  Only through bearing the true cost will their incentives ever line up with true moral behavior.  If you think a local bank or lender wasn’t able to sell every single loan to a GSE, they would’ve continued to allow bad loans to be made which they knew would sink themselves… well, that’s just not very likely and not very rational.

But don’t worry – I’m sure with these new and smarter people, this time they’ll figure out which banks are too big to fail, do it right, and only tax them in the amount they need to insure against the risk.

Is it just me or does Vice President Joe Biden actually appear to be a non-member of the White House staff?

I could be seeing patterns where they don’t exist, but it seems that each time Mr. Biden opens his mouth, the WH either ignores it completely or attempts to restate it.

Remember  the swine flu thing? (at NPR):

“I would tell members of my family — and I have — that I wouldn’t go anywhere in confined places now,” Vice President Joe Biden said today as he made the rounds of the morning TV news shows. “It’s not just going into Mexico. If you’re any place in a confined aircraft and one person sneezes, it goes all the way through the aircraft.”…

Followed shortly thereafter by WH clarification (LA Times):

…”I think the vice president misrepresented what the vice president wanted to say,” said White House Press Secretary Robert Gibbs….

Later in the day, Gibbs was pressed about the discrepancy between Biden’s original words and the White House’s.

“I understand what he said. I’m telling you what he meant to say,” Gibbs said…

After proving his immense knowledge of swine flu, he went on to call Russia a crumbling system (@ Washington Times):

…Secretary of State Hillary Rodham Clinton was forced Sunday to correct publicly Mr. Biden’s characterization of Russia as a crumbling country, a description that infuriated Russian officials and contradicted President Obama’s efforts to “reset” relations with the world power….

Just like that one crazy uncle, he’s the comedic gift that keeps on giving.  This week, as the White House has pushed hard to show how the stimulus has worked, Mr. Biden started using words like “depression” (@ ABC News):

In recent weeks, Vice President Joe Biden has said that the U.S. economy has been in what he calls “a great recession” and has stressed that it is not a depression, echoing the general consensus of the nation’s economists.

But today the vice president took some liberty with the economic terms to illustrate the continuing struggles of the unemployed in the United States.

For the millions of Americans without a job, “it’s a depression,” Biden said….

In fact, not only does Biden seem to misrepresent the curent administration’s positions, he isn’t even internally consistent (ABC News):

…Just two weeks ago, Biden said that he calls the current state of the economy “the great recession” because it’s “the single worst economic circumstance” the United States has been in, “short of a depression.”

On Oct. 2, Biden said that “fears of a depression have been replaced by forecasts of recovery” and on Sept. 3 Biden said that “instead of talking about the beginning of a depression, we’re talking about the end of a recession eight months after taking office.”…

Now it’s true that some statements made by VPs are seemingly stupid only because the VP is being pushed to say things the President can ‘t.  This is especially true during campaigns, but also during any actual administration.

Either way – I’m truly torn.  On the one hand, I honestly hope Mr. Biden starts getting invited to WH briefings in order to reduce his perceived idiocy on the world stage.  On the other hand – almost every time he talks, I get a good laugh.

That giant economic think-tank known as Google just announced their 3Q numbers.  Not only were the results good, but they had wonder news for all those worrying:  the recession has bottomed out:

SAN FRANCISCO, California — Google on Thursday declared the worst of the recession over and paved the way for a return to heavy spending on expansion as it reported a surprisingly strong 8 per cent jump in net revenues in its latest quarter….

Fear not friends – they aren’t basing this just on themselves, but all that economic data they have:

The optimism reflected what the company said was an across-the-board recovery in online advertising, with even the struggling financial services sector showing a return to growth….

Apparently though, Google forgot to tell Bank of America about its wonderful news (BoA 3Q):

CHARLOTTE, North Carolina (Reuters) – Bank of America Corp posted a $1 billion third-quarter loss as consumer credit woes eclipsed investment banking earnings, underlining why the bank remains on a government respirator….

I’m sure they just missed that… wonder what a really big blue chip company might be doing?  GE?:

General Electric’s third-quarter results showed just how fragile the U.S. economy remains, as its troubled financial unit dragged down earnings 44 percent, despite gains in divisions that make wind turbines, household appliances and broadcast television shows….

Not only are GE, BoA, and the 9.8% unemployed unaware of this great news, but even Google insiders don’t seem to know.  Looking at the public record, Google Insiders Sales, shows recent transactions for all senior officers dropping approximately 5% of their current Google holdings just last month.

Call me a raving skeptic if you will, but I’m thinking that you need to evaluate your decision making skills if you take your economic news directly from Google press releases.

Don’t get me wrong here, they make a great product and innovate better than almost anyone.   They are and will continue to be a force in computing for sometime to come because of their agile nature combined with some of the best minds in the world.  & I remember webcrawler… wow things are sooooo much better.

Regardless of their product however, it seems their investments into economic modeling & research in respect to business cycles is limited to zero.  I would add that if you’re an investor, that’s a good thing.  Better to let them do what they do best.

Why the press release then?  The only ones who know are those who drafted the press release and those with editing decisions prior to its release.  Without any information directly from one or more of these people, then reasoning is simply impossible to prove.

We can however ask some questions to try to find the likely answer.

(To be fair) The first possibility is simple honesty & stupidity.  Someone might have intended the “recession worst over” as a marketing technique to further enhance their aim to be seen as a very smart company.  All without realizing that overly simplistic analysis, based mainly upon very recent stock market activity and their profits do not make for effective proof.  Really, it’s just another anecdote that Google’s employees share.

Another, far more concerning possibility is their politics and desire to wish to see the President do well.  For years they have given most of their political donations to one particular party.  In 2008, Democratic candidates received 5 times more money than their Republican counterparts from Google.  Their employees, including top executives, gave 10 times more money to Democrats the Republicans.

Additionally, their search site has self-imposed constraints for arbitrary reasons.  For instance, Google refuses to allow gun dealers to advertise.   As a little experiment, slip over there real quick and run a quick search on swords or strippers.  Take note of the small advertisements to the right side of your search results.  Now do the same for guns and see what ads show up… I’ll wait.

They state their policy is to not allow advertising of weapons, but I think swords should qualify.

That could be an outlier, so let’s move forward assuming their ban on gun adverts is a true policy against weapons in general.

Then why did they also restrict advertising by Pro-life groups until forced by a judge to change their policy:

After a legal conflict between Google and The Christian Institute, filed when one the of religious foundation’s ads were rejected from the Google Adwords system, Google has changed their religious advertising policy to allow pro-life advertising to appear along with their secular and pro-choice advertising…

They did change their policy, but only after being sued.  Even giving them some credit for reversing their decision, their originally stated policy reeks of political and personal opinions:

The decision changes the former Google policy which excluded any ad containing a combination of “abortion and religion-related content“…. [emphasis added mine]

Putting all of this together, it’s hard not to reach the conclusion that Google is using its outstanding press relations due to their history as a vibrant and smart company to help those with which they agree.

Which is completely and totally their right.  It’s their right to put their money where they wish, to make internal policies as they see fit, and to accept contracts for advertising from those they want for any reason they want.  None of this freedom for me, but not for thee crap.  Let them do as they will I say.

Just make sure your informed and know who you’re doing business with as well.

PS:  If you’re not doing anything on a Saturday night and there’s positively nothing on TV including uninteresting infomercials about idiots unable to use blankets, then you can check out some pretty heavy economic think tanks.  First and foremost, the recognized economic powerhouse, generally recognized as the institution who makes the call on things like, when is it a recession?  When did it start?  When did it end?

NBER, or the National Bureau of Economic Research, has long been the a standard bearer in economic research in all kinds of aspects of life ranging from health care to labor studies.  They are the largest non-profit economic research organization in the US and boasts about the great minds working there.  In fact, 16 of the 31 American winners of the Nobel Prize in Economics, have been associates NBER, including one of my heroes: Milton Friedman.

PSS:  They could turn out to be right.  The luck of life sometimes means you can do the wrong thing and end with the correct result and vice versa – you can do the right thing and end with the wrong result.  Therefore, to correctly analyze thought patterns over time, any one result isn’t necessarily a deterministic factor.