Detailed Abstractions

With high levels of bipartisan anger, not only affecting elections, but affecting polls on the flagship legislation… er, I mean, the monstrous health care bill which no understands as well (here via WaPo):

…A CNN poll last week found that only 25 percent of Americans want Congress to pass a health-care bill similar to the one it has been working on for the past year, while 73 percent say Congress should either start from scratch or not pass health-care legislation at all (other polls show support for the bill in the low 40s). …

The White House is once again, on a media blitz to prove the administrations’ efficacy and job one is selling the idea the simulus worked.  While they have seemed keen enough to not discuss actual housing or job numbers, but instead spend time on nebulous items such as “saved jobs“, they are nonetheless telling us with great frequency what the stimulus did for us.

Vice President Joe Biden (here via ABC News):

Vice President Joe Biden said today that it is “taking a while” for the nation’s economy to “get out of this ditch” but credited the Obama Administration’s stimulus legislation, enacted one year ago, for laying a foundation for long-term economic growth. …

As well as President Obama himself (here via USA Today):

President Obama credits the one-year-old economic stimulus legislation with staving off a second depression …

The President even sent high level officials all over the country to prove the stimulus worked.  In one case, they used construction for residential housing to spotlight the great work the stimulus package has done for Cincinnati (here via Cincinnati.com).

With unemployment numbers continuing to rise (UE Rate for January 2010 10.6%)

& defaults on existing mortgages doing the same (here via Reuters):

…More than 8 percent of homeowners were behind 30 days or more on their mortgage loans, up 4.4 percent from December 2009 and 21 percent from last January…

& just like the last media blitz the White House went on to prove the stimulus was working (here via DA), they have spent approximately 34% of the money they claimed to need originally (here via ProPublica).  Combining the money spent and tax cuts approved listed on Recovery.gov they find:

…the government has now moved at least $272 billion into the economy, or 34 percent of the total amount approved by Congress last February….

So there you have it.  Successful stimulus program is now defined as a jobless, homeless, shaky recovery, for which the majority of the money requested has yet to have been spent.

• Proving once again that fascism isn’t just a word, Italy (here via Economist) gave three Google executives six-month suspended sentences for “allowing a clip of an autistic boy being bullied to be viewed on Google Video, which the judge said broke Italy’s privacy laws. “

Just to clarify, I’m not pro-autistic-bullying and would think a civil trial isn’t out of the question, but jail?

• Fannie Mae needs more cash, but just 15 billion… from the taxpayer of course (here via RTTN News).   Seems like people might not agree with this (here via WSJ):

The Obama administration’s decision to cover an unlimited amount of losses at the mortgage-finance giants Fannie Mae and Freddie Mac over the next three years stirred controversy over the holiday….

Probably why the decision was made over the holidays.

• Crazy fundamentalists blame the Golden Girls for homosexuality (here via ChristWire).

• Democrats & President Obama, all firmly against the Patriot Act after signing it, vote to  prevent all measures from lapsing (here via Wired) for the next full year.

• Harvard intellectual tells us why allowing corporations to spend money on politics is bad (here):

…To understand why, it is important to focus on the individuals who make decisions for companies. When corporations decide which politicians to support, what kind of messages to send, and which political outcomes to seek, their general investors are not consulted. Rather, such decisions are likely to reflect the preferences and objectives of the insiders who manage the companies, ostensibly on shareholders’ behalf….

A little interlude for a thought experiment.  Change which politicians to support and which political outcomes to seek to which charities to support and which cultural outcomes to seek.  Or try reality and change it to, which lobbyists to support and which regulatory outcomes to seek.  But of course, he defines the problem for us:

…And politicians that benefit from corporate spending and access to corporate resources will have an interest in serving the insiders’ preferences and objectives….

Which presupposes politicians already don’t have this interest, presumes it will get much worse, and last, but not least; for spending to have any affect at all, voters have to be swayed to vote against their interests.

It seems the default assumption of every perceived risk these days is simply this:  there can never be too many laws when trying to protect people from themselves.

• CalTech researchers say the brain is wired for equality (here):

…Specifically, the team found that the reward centers in the human brain respond more strongly when a poor person receives a financial reward than when a rich person does. The surprising thing? This activity pattern holds true even if the brain being looked at is in the rich person’s head, rather than the poor person’s….

Oddly enough, the Freakanomics blog posted this with little comment (here) proving environmental factors such as working for the NY Times can affect even innovative economists.  I’ll admit there might be more, but from what they’ve shown, the results do not necessarily say anything about equality at all.  A perfectly reasonable answer is one of need: a rich person doesn’t need a windfall as much as a poor person.

CalTech’s reasoning:

…It’s long been known that we humans don’t like inequality, especially when it comes to money. Tell two people working the same job that their salaries are different, and there’s going to be trouble…

Conflating the thinking that comes with social status and worth when compared to colleagues and equality of results.  It could be in a lot of cases, the person making less might think they work harder and deserve more, not equal.

• & finally, via the Hill.  Did Nanci Pelosi really say that

…”They’ve had plenty of opportunity to make their voices heard,” she said on CNN’s “State of the Union” Sunday morning. “Bipartisanship is a two-way street. A bill can be bipartisan without bipartisan votes. Republicans have left their imprint.”…

According to many reports from recent “economist” we are on are way.  Starting with the “Sage” Warren Buffet (here via Calculated Risk) arguing that supply has dropped below demand, which effectively will balance out the system:

…Our country has wisely selected the third option, which means that within a year or so residential housing problems should largely be behind us…

The NY Times  (here):

After a plunge lasting three years, houses have finally become cheap enough to lure buyers. That, in turn, is stabilizing prices, generating hope that the real estate market is beginning to recover….

& Our trusted Federal Reserve Chairman Ben Bernake (here via CNBC):

Federal Reserve Chairman Ben Bernanke told lawmakers Tuesday he expects the downtroddenU.S. housing sector to improve by the end of the year, a senator who participated in the closed-door meeting said….

At first, this might seem like some sort of an agreement, however there is one stark difference.  Mr. Buffet spoke in February 2010, the NY Times piece is from July 2009, & Mr. Bernake spoke in February 2008.

The timing of the statements is instructive, as each was based upon changes in supply and demand.  The problem all had in their given time frames appears to be the same – you simply can’t count on economic activity trending when the growth was due to temporary incentives from the federal government.

As with Cash-for-Clunkers (here), Cash-for-Appliances (here), and recent tax breaks and money for lending, Cash-for-Homes will fail as well.  A temporary relief program will only provide temporary relief and is already showing signs of weakness.  From WaPo (here):

…Even as the housing market shows signs of improvement, including in new data released Tuesday, economists warn that it could take up to a decade for many homeowners to regain equity in their homes, while some people in the hardest-hit regions of the country may not see a recovery during their lifetime. …

CNBC (here):

The recent slump in housing is making some analysts uneasy about a recovery that many thought sustainable just a couple months ago and comes at a time when the Federal Reserve is nearing the end of a critical, year-long program to support the mortgage market….

& Time (here):

For a while there, it seemed the housing market had made the turn to recovery. Housing sales were up in nearly every month in 2009. But today it looks like real estate is headed back down again…

Delaying the inevitable will just make the pain worse.

Bank of America announced today it’s plans to repay the $45 billion dollars in tarp money to get out from under the restrictions of the government (AFP):

…The bank based in North Carolina said it would repurchase the preferred shares issued to the US Treasury as part of TARP, but would not immediately buy back the warrants, or options to buy additional shares.

“This is good news that the bank can get out of the TARP and can stop having to answer to public and government criticism,” said Jon Ogg at 24/7 Wall Street….

The policies BoA is trying to escape from includes restrictions on the top 25 individuals in the company including the CEO.  I and many others wrote about what a disastrous policy from the new administration this truly was (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment…

Just two days earlier, I also wrote about BoA’s issues with getting a new CEO hired under all the government restrictions (here).  Indeed, at least four potential candidates have simply stated they don’t want the job.

Now, if these policies were actually designed to do this, incentivize those companies with TARP money to pay it back as quickly as possible, bravo!

Taking the language from the administration I doubt it, but it’s always good news when a major business under intense governmental scrutiny shows the quickest to its financial health is to remove the additional scrutiny.

This also  parallels with a recent NBER Paper on the global economic recession (abstract here, full paper purchase price $5).  In the full paper they try to prove the thesis that the main problem with the global economy is that investment money from developed countries should be flowing into developing countries, but instead developing countries such as India and China have investment income flowing into developed countries like the US & Britain.

& This seems pretty intuitive.  In general, investment money will flow to inefficient markets, industries, and companies in an immature market.  The reason is easy – it’s more and faster bang for the buck.  However, in a mature economy like the US and as we move forward in time, there are less and less efficiencies to be gained through anything other than new technologies.

In an immature market it’s the opposite case.  Industries and companies are new.  Small amounts of investment money can return great efficiency gains and therefore monetary gains.

Some people try to blame us citizens, consumerism, and capitalism in general for this failure, but that’s actually the opposite of the truth as well.  The reason Chinese citizens save so much more of their disposable income than do US citizens isn’t because they are more frugal, but have less real options to invest domestically even though major efficiency gains are theoretically possible.

As the abstract states:

…The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored….

This doesn’t mean the US doesn’t have fault – so long as we continue to allow the government to write blank checks of any amount without respect to the deficit and ignoring huge unfunded liabilities such as MediCare – we seem to be on a sure path to a back slide.  I’m not really into prediction making as it’s obviously fraught with so many problems, but I’ll never understand how the solution to cheap money and an over investment of housing, is to keep money cheap and incentivize home buying (here).

Either way, it’s good news for BoA, with investors showing their interest with heavy after hours trading (here).

As should’ve been expected and according to all recent news, having a Treasury Department position of paymaster isn’t working out so well for the free market.

Earlier this year, against all basic free market principles the Obama Administration through the Treasury Department started setting up compensation boards (CNN):

WASHINGTON (CNN) — An amendment in the $787 billion economic stimulus package passed by Congress Friday would severely restrict bonuses and other forms of compensation for top executives at companies receiving federal bailout money….

Due to all the negative publicity surrounding the government’s handing over billions of dollars in tax payer dollars to corporations which deserved to fell, Senator Dodd explains:

…”The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy. American taxpayers deserve better,” Dodd said….

Now it might just be me, but I’m not sure Wall Street executives are allowed to vote on appropriations bills and then force the treasury to distribute the funds as they see fit.  It seems Mr. Dodd is blaming Wall Street for the government’s failure to handle the crisis correctly.

With all logic aside though, they went forward.  Not only did they seek to limit overall compensation of the highest paid, but asked for refunds from bonuses already given – one provision in the bill:

…The secretary of the Treasury must review past compensation paid to the top 25 employees of TARP recipients and seek reimbursements “if those payments were contrary to the public interest or inconsistent with the purposes of the [stimulus package] or the TARP,” according to Dodd’s statement….

& People everywhere rejoiced…. I mean complained.  In what was an obviously anti-capitalist move sure to do more damage than any political good it might bring about, people everywhere spoke up (examples here, here, & here), including NBER (abstract here – paper costs $5):

…Important facts about compensation are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way….

Even little ole me could see this as a negative and wrote about this here just a month or so ago (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment….

& now we have exactly what was shown through economic analysis and basic logic to be true (@Bloomberg):

Nov. 23 (Bloomberg) — Bank of America Corp.’s board may extend its search for a permanent new chief executive officer into 2010 if directors can’t settle on a candidate in the next three days, according to people familiar with the matter….

…At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches….

…That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”…

Is it now time to stop calling obvious results  (Un)?intended Consequences…

With the recession ending (@MSNBC):

WASHINGTON – More than 90 percent of economists predict the recession will end this year, although the recovery is likely to be bumpy….

Or maybe a double-dip (@Politico.com):

…All that’s enough to convince some observers that the economic recovery is faltering and could be heading for a “double dip” recession. And that would mean the recent green shoots of recovery turn out to be just a pause in a much longer economic slide….

& a stimulus which has saved jobs (@USA Today):

WASHINGTON — States have reported using stimulus money to create or save more than 388,000 jobs so far this year, buttressing the Obama administration’s claim that the $787 billion plan has had a significant impact on the economy….

Or maybe not (@WashingtonExaminer):

…Even if we take at face value the White House claim that it created or saved all these jobs with approximately $150 billion of the economic stimulus money, a little simple math shows the taxpayers aren’t getting any bargains here: $150 billion divided by 650,000 jobs equals $230,000 per job saved or created. Instead of taking all that time required to write the 1,588-page stimulus bill, Congress could have passed a one-pager saying the first 650,000 jobless persons to report for work at the White House will receive a voucher worth $230,000 redeemable at the university, community college or trade school of their choice. That would have been enough for a degree plus a hefty down payment on a mortgage….

Maybe some perspective is needed.  To truly put it in context, let’s look at the Great Depression (@Cato):

…According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward.

How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure — not the stock market crash — pushed the United States into the Great Depression….

As written here before (here, here & here), economic predictions are inherently tricky and the government does a very poor job because politics always gets in the way of objective truths.  NBER who is usually the group society follows for when a recession starts and ends told us in December of 2008 that December 2007 was the beginning of the dive demonstrating that most “objective” economic truths are only found in hindsight.

In fact, some brilliant legal minds have made just this point to contemplate delaying financial regulations intended to mitigate similar future scenarios in which we might find ourselves (here).  Richard Posner’s analysis:

The Report is premature in two respects. The first is that it advocates a specific course of treatment for a disease the cause or causes of which have not been determined. Now it is not always necessary to understand the cause of something you don’t like in order to be able to eliminate the effect. If you have typical allergy symptoms you may get complete relief by taking an antihistamine; it is not necessary to find out what you’re allergic to. But generally, and in the case of the current economic crisis, unless the causes of a problem are understood, it will be impossible to come up with a good solution. The causes of the crisis have not been studied systematically, and are not obvious though they are treated as such in the Report. (Remember, the Great Depression of the 1930s ended 68 years ago and economists are still debating its causes.)…

Note – this doesn’t mean that we don’t understand basic incentives and most likely results.  Like chaotic systems in which minor changes in the beginning state of a system can show drastic changes in the end results, our economic system is so complex as to defy attempts to model very specific changes.  Though with hindsight and true analysis, we can get to a point where we know with probabilities what has happened and what will likely happen given specific policies.

For instance, if we make houses cost less by giving tax breaks or whatever, sales will increase for the time that incentive exists.  If the incentive is timed, then some sales will just be premature sales and show corresponding decreases in future quarters.

Meaning, we can use a basic understanding of incentives in order to gauge most likely results, but today only with hindsight can we show real numbers on very specific things such as the stimulus bill’s impact on house sales or jobs.

& even then, given the inherent difficulty in defining a “saved” job and politicians willingness to ignore any data contrary to any rosy picture they wish to present, any economic predictions or numbers coming from politicians should be suspect by default.

This morning, news outlets everywhere carried recent news out of the Treasury Department.  The Pay Czar, who is certainly living up to the moniker Czar, announced today (WallStreetJournal):

The U.S. pay czar will cut in half the average compensation for 175 employees at firms receiving large sums of government aid, with the vast majority of salaries coming in under $500,000, according to people familiar with the government’s plans.

As expected, the biggest cut will be to salaries, which will drop by 90% on average. Kenneth Feinberg, the Treasury Department’s special master for compensation, also intends to demand a host of corporate governance changes at those firms….

Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

Beyond that, this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment.

In a free society, within reason, individuals should be able to contract for any reason they want.  In this case, you have employees who have privately contracted with their employers for certain remuneration based upon their perceived worth to the company.

I say perceived work, because obviously not all hiring decisions work out for the company even if the employee does very well at their job.  Personality conflicts, culture conflicts, and even performance problems are some of the reasons why a new hire might not work out as expected.  Unless specifically stated in the employment contract, even in these cases the employer’s general resource is firing, not taking back pay.

Adding to this is the simple, real, true fact that this is by its very nature an ex post facto punishment for perceived mismanagement.  It has been a legal tradition for centuries, a that passing laws, which retroactively punish people, is against a free in democratic society.

In fact it’s in the US Constitution and universally recognized by a number of treaties including Universal Declaration of Human Rights and American Declaration of the Rights and Duties of Man (from Wiki):

…no person be held guilty of any criminal law that did not exist at the time of offence nor suffer any penalty heavier than what existed at the time of offense. It does however permit application of either domestic or international law….

To be fair, there are some uses for ex post facto laws which have been recognized by our supreme court including allowing for Congress to grant administrative agencies the ability to do just this thing.  So legally speaking, this might be ok, however to anyone who proposes to value freedom, it should be obvious that even allowing administrative agencies this power was a massive failure of all branches of the government.  They are supposed to protect our freedoms, not remove them one at a time.

Either way – it’s intuitive that both contract rights & ex post facto laws are required for a free society.  If the government can interfere at will in private contracts and retroactively punish you for perceived wrongdoings, you have no ability to make relevant decisions for your life as you have no ability to be secure that those decisions will continue to hold true.

This insecurity is what creates instability in most third world countries today.  This lack of basic economic & legal foundation is what continues to plague most of the planet and yet we seem to be moving on the same path.

A week ago or so, a Democratic non-profit held a focus group of GOP members & Independents (here).  Among other interesting things they found, they noted how the GOP members opposed the President because they felt he was attempting to fundamentally move away from our founding principles.

They went further to note how this differed from Independents “underscoring the extreme disconnect of the conservative Republican base voters”.

I will say this move is absolute proof that the GOP members have it right.  If the administration allows this travesty, it is without a doubt a complete move away from not only our founding principles, but away from freedom in general.

For more than 20 years now, with legislation leading back almost 40 years, the United States government has been pushing the idea that every citizen should have a home.

Based upon several studies showing high correlations with positive societal behavior for homeowners, politicians, leaders, non-profits, lots of people pushed for easier access to affordable housing.  In a Federal Reserve report published in 1999, they state:

A number of recent studies attempt to measure whether there are nontraditional benefits to homeownership, such as increases in the success of children (Green and White [5]), citizenship (DiPasquale and Glaeser [3]), and a variety of family outcomes and attitudes (Rossi and Weber [11])….

This is only 1/2 the story of course.  What these studies, our politicians, our leaders, & the rest of them  can’t conclude from this data is whether home ownership actually affects any of these additional traits.  The study itself hints at this:

…Because of the preferential tax treatment accorded homeowners, particularly low-income homeowners, and the large degree of wealth accumulated in housing, these authors argue that it is important to know the full range of homeownership benefits and costs. However, given the difficulty of credibly assigning causality to housing externalities, it is not surprising that such factors have been previously ignored.

In one such paper, Green and White [5] find a strong statistical correlation between homeownership and the likelihood of dropping out of school or becoming pregnant. Yet a reasonable interpretation of their result is that of omitted variable bias. Clearly, homeowners are different from renters along a variety of dimensions. As a result, those factors that are latent in their work, such as parental skills, interest in the educational process, wealth, and family stability, potentially bias upward any homeownership effect….

In other studies, they show correlations between home ownership & wealth accumulation, to help give more force to the “everyone needs a home” meme (study dated 2004):

For many years the federal government has promoted homeownership as an important goal for low-income families. A primary motivation of this policy goal is the concept that owner-occupied housing can be an important means of wealth accumulation, particularly for those lower-income and minority families that are able to purchase homes….

They as well admit the difficulty with this assessment:

…However, very little has been done in the housing literature to determine the importance of housing and non-housing sources of wealth accumulation. This determination has been difficult to address for three reasons. First, detailed wealth information on families is seldom available on a consistent basis. Second, such information on wealth is even less likely to be available over time so that changes in wealth can be observed. Third, the process of housing wealth accumulation is dynamic. Housing wealth accumulation depends critically on how soon a family that is renting becomes a homeowner, whether or not the family graduates to more highly valued owned units over time, or becomes a renter again and never regains homeownership….

With the current practice of press & political standards however, you might be hard pressed to find any evidence that assigning non-traditional benefits to home ownership is anything but an unqualified good.  The majority of reports dealing with low income housing stimulus are positive  (here & here).

In some cases, overly emotional logic is used (here):

After business dried up in May, Jodi Morris’ employer, an insurance agent, stopped sending paychecks.

Since then, the 43-year-old single mother has had to sell almost all of her furniture – her kitchen table and chairs, bed frames, dresser and armoire, and living room set – to pay the bills.  Morris and her 7-year-old daughter, Karly, now sleep on mattresses on the floor of their two-bedroom Ahwatukee apartment. And with no table, the two eat dinner on their cream-colored couch.

An eviction notice that arrived this month threatened to put Morris and Karly out on the street.  But Morris could be the first Phoenix resident to receive a lifeline from the federal government that seeks to rescue those on the verge of homelessness….

& without exception, our government is not immune.  The US government is right now, before the housing crisis even fully contracts (I wrote about it here), spending money to help low income families purchase homes.

Even before the housing crisis though, economists, experts, non-profits, were asking whether home ownership should be considered an unqualified good.  Unfortunately, reports questioning these basic assumptions are a very low percentage compared to the constant noise.

In some cases, even questioning the wisdom of subsidizing low income home ownership has resulted in kill the messenger attacks from non-profit groups, community leads, and even Democratic leadership, by leveling charges of racism.  With a simple misdirection trick, questioning the basic assumptions is anti-low income & since low-income households are generally minorities, questioning these assumptions must be due to institutional racism.   Politicians and leaders everywhere have a grand ole time setting up straw men in a fields of hay while standing by with gasoline and matches, but we should expect more.  We should expect to be able to ask all relevant questions we can and to get answers to as many questions as possible.  Lastly, we should let the data lead to its natural conclusion.

Assuming we truly want the best answers we can get and the best progress we can have, we must be willing to ask tough questions and live with the answers reality presents.

Anything less is little better than just allowing random superficial rhetoric to control policy.  It’s almost like we never moved away from the world Richard Feynman spoke about in 1974:

…But even today I meet lots of people who sooner or later get me into a conversation about UFOS, or astrology, or some form of mysticism, expanded consciousness, new types of awareness, ESP, and so forth. And I’ve concluded that it’s not a scientific world.