28 May 2010

Tech Ed

The O'Reilly publishers web site has some interesting discussions. I visited recently and found this one dealing with bettering education through "entrepreneurship". My BS radar went off, and I was moved to comment. Here it is:

Be careful here. For profit "educational" companies are regularly taken to court for over-hyping and under-delivering, although not nearly often enough. I worked for one, thankfully it was closed down. Education is inherently philanthropic, and for profit outfits are inherently evil. Mixing them yields the expected results.

As to the assertion that "tech" is what makes education more "efficient", keep track of the reviews of "charter schools"; most do no better than the "union dominated" public schools they displaced.

It isn't the "unions" that choose books and establish the curricula, it's the managers, often political hacks.

The alternative schools that do better are those which require the parents to engage. Fact is, if your parents are poor, stupid, and don't care; odds are you'll grow up the same. It is no fluke that Mississippi and the other members of the Southern Flank have been at the bottom of achievement; the Southern Flank is all about being poor and stupid and NASCAR and fishin' and huntin'.

I can recommend the thread. The author does have something provocative to say, even agreed with my comment (of course, who wouldn't?), and some of the comments are thoughtful.

26 May 2010

Too Stupid to Fail

The report, released (well, sort of) by the Interior Department Inspector General clarifies what those of us who are suspicious of the Right Wingnuts have long asserted: let the Fox guard the Chickens and the Fox will eat comfortably. What the ObamaNauts need to do, and haven't been willing to do, is to smear the Right Wingnuts with their growing pile of excrement.

The Bushies made all these messes, and the American voter needs reminding, daily, who did what to whom. They tend to believe the lies that come out of the Rovian Spin Mill; left to fester, they will seize the opportunity to blame Obama for BP's (and the Bushies MMS) perfidy. Democrats need to get some balls. If they don't, we're all toast.

According to today's news reports, BP is waffling about sealing the well. BP, not too surprisingly, is said to have overruled Transocean's men with regard to loading mud; BP took a "shortcut", presumably to save a few bucks. If ever there were a case of Too Big to Fail, it is these rigs. What was obvious to anyone with a smattering of engineering or physics training, that there is NO margin of error with these rigs, means that hard and fast rules have to be set and enforced. Break the rules, and you never, ever get to drill here again. One strike, and you're out.

Such a regime will only work, I should mention, if those guarding the Chickens aren't the Foxes. The Bushies did this, and must be held to account.

19 May 2010

Dee Feat is in Dee Flation

Despite the continuing braying from the Right Wingnuts that Inflation is On The Way, Right Now, I'm Telling You, You Must Listen to Me; well, it isn't. Today's CPI shows that Core prices are down, again. The Core CPI has been bouncing back and forth between slightly up and slightly down for some time. They ain't no flation no how.

The Wingnuts/FreshWater economics crew must be having apoplexy. Inflation just won't happen. What they won't admit is that it has happened, but only in the limited arena where all the money went: the stock market. And, in just irony, the stock market has been experiencing deflation the last month or so. And not because there's any real economic reason, but because deflation is a self-fulfilling prophecy, particularly in a stock market. Buying a stock isn't buying any "thing", just a chit that you've bet that the share price will move up (or down) in the future; which future might be a few minutes, hours, days, etc.

Deflation is mostly propelled by the willingness to postpone consumption; in the depths of a Great Depression it will occur because consumers have less income, but that's rare. (The stagnant median income period of Reagan/Bushies would have been deflationary but for all that smart money housing equity, but that's another episode.) For real goods and services, postponing consumption leads to real loss: you don't get to play with the tchotchke. Stock market purchases, on the other hand, are only valuable unless they're appreciating (well, if you're not shorting, but that's for another episode) in value. Not even Buffett made his money from the dividends; he, along with the rest of the trading crowd, was/is into "buy low, sell high". So, if the share prices drop a bit, that's enough incentive to stop buying. People stop buying (take money out of the market) and all share prices go down. Note, that nothing bad has happened in the real world. Just some traders who've decided to enter into a death spiral.

Both the Obamanauts and the Tea Baggers use the line about Wall Street being separate from Main Street. It always has been, and always will be. What happens on Wall Street is fundamentally a world apart, and should be. It has no real connection to the Real World; no more than any casino does.

14 May 2010

Treacle, Treacle, Little Star

I stumbled across this bit of nonsense yesterday. I was reminded of that ditty, suitably adapted: Treacle, Treacle, Little Star. The juvenile effrontery, of a PhD in economics (well, from Chicago), beggars the imagination. I was propelled to respond, and thus I did, and pass it on here.

You, and the rest of the FreshWater Crew, are such an idiot. You dress up your idiocy in flowery prose, but the base facts remain: the housing boom involved two factors; the need of the beleaguered middle class to maintain its status in the face of falling median income during the Bushie years, and your beloved Dr. Greenspan's foolish interest rates. Those such as you have turned Political Economics into just politics. Shame on you.

An even casual perusal of the historical record, not to mention regulation, shows that the ratio of median house price to median income is stable. Moreover, the news record makes it quite clear that from about 2002 mortgage companies, banks, and builders inflated house prices in response to low interest rates. Econ 101 teaches that interest rates and prices are inversely correlated. And it was so.

The creation of CDO and MBS and the like happened to satisfy a demand for "safe" instruments that paid higher rates than Greenspan countenanced. And it was so. First mortgage companies, then banks in response, fiddle mortgage contract terms in order to support increasing prices in the face of stagnant median income. As you should know, housing payment as a proportion of income is historically stable; both by regulation and prudent lending. The prudence part of the process was winked at; the payment remained stable by fiddling the calculation of that payment. Thus were born Alt-A, interest only, flex payment, and all the rest.

These factors were known by 2003. A recent article in the Times revealed that the Fed raised the issue internally by 2004.

It also well known in the profession that the USofA is one of the few where home mortgage interest is deductible, and that this leads to excess expenditure in housing.

The notion that housing is investment is poppycock. There is no real return on housing. Housing produces no output, whose value accrues to society. The "return" lies only in the ability of mortgagees to continue to pay. In times of inflation, real mortgage cost decreases in the face of the money illusion in increasing wages.

The fact that there was no wage inflation in place during the Bushie years is a head smacking clue that something corrupt was driving price appreciation; there was no pressure from rising median income to justify house price appreciation. Do you get it now???????????

"...it is too early to blame a majority of the housing boom on irrationally exuberant home buyers, because even without these things a historically unusual housing boom may well have been efficient."

That is the stupidest statement I have ever seen from a PhD in economics. You entirely ignore the factual historical record. Mortgage companies, bankers, and builders took advantage of an artificial (because it derived explicitly from Greenspan's decisions, rather than the Invisible Hand) demand for home mortgages to produce housing at prices they wished rather than what would be supported to the extant median income. You can't derive an explanation for the mess by ignoring the driving cause of all things economic: median income.

The FreshWater is dead, long live the SaltWater.

12 May 2010

A Capital Idea

Your house is just a home. It ain't no investment. This is one of the fundamental themes proposed by this endeavor from Day One. One of the more poignant ways of stating it: there's nothing useful, from a capital investment point of view, to be gained by employeeing rednecks to pound nails in Nevada, Arizona, and Florida. One Florida politician remarked that a large part of the problem there was that in order to restore the state's economy, it is necessary to pay rednecks to pound nails, again.

The USofA is the most extreme of the developed countries in its treatment of house building. Not only are we one of just a few which permits the deduction of mortgage interest, we permit and encourage sprawl, and we have the wonders of the Home Equity Loan. We I was a kiddie, these were referred to as Second Mortgages, and having one was a blot; only Bad People took out Second Mortgages.

The ground, so to speak, shifted with the 1973 OPEC oil embargo. Interest rates were forced to sky high levels (the foolishness of this is a matter for another episode), thus depressing home prices. Those who bought then began to reap windfall capital gains beginning with Reagan as interest rates fell and house prices rose. They, of course, saw this turn of events as spectacularly smart decision making. Umm. No, they were just lucky. Most rich folk got there because they were lucky.

So, we get to the Dot Com bust, and Greenspan's urge to lower interest rates. As rates dropped, prices rose. And Bushies everywhere took credit for their genius at making money flipping condos. It all came crashing down, and would have whether or not SubPrime and Alt-A loans had been created. The ratio of median house price to median income is, to all intents and purposes, fixed.

The demand for "safe" securities exceeded what was available, so the collateralized debt obligation and mortgage back security were created. To satisfy this demand, mortgage companies (not, by and large, banks; no matter what the Wingnuts say) started to fiddle the rules in order to produce more and more high value mortgages. No one cared to look at the base assumption: home mortgages are "safe" only so long as the ratio of median house price to median income holds. Break that assumption, and you break the "safety". And so it was.

Housing as a sector that absorbs fiduciary capital, is a Bad Idea. It is not investment, simply because, unlike a newer and better machine tool or factory building, housing does not aid in the production of any good or service. It is this increase in productivity that drives what economists call Real Return on Investment. The only way that housing pays any return is if the owner remains gainfully employed, and the building doesn't *decrease* in value. Housing is *merely* fiduciary investment, not unlike buying stocks. Buying stock is a bet that the seller is too stupid to see that the sale price is lower than it will be in the future.

It's no accident that as the USofA has declined, a growing percentage of corporate profits comes from financial manipulation, reaching 40%. It is no accident that Banksters (Morgan Stanley, most recently) are happily walking away from housing that no longer is worth the mortgage balance. It is no accident that mere civilians have figured this out, too. An economy (or the country) is as strong or robust as the physical goods it produces. The American Revolution has many causes, depending on whom one reads; economists tend toward the anti-Mercantalist argument, which is an economic system where a dependent economy exports raw materials (often food stuffs and related) to a Mother Country in exchange for manufactured goods; we wanted no part of being on the losing side of the trade. Currently, such goods make up an increasing proportion of what the USofA exports. We have, by de-industrializing and financializing, turned the calendar back 200 years. Now, that's nostalgia. All we need now is plantations and slavery.

10 May 2010

Fat Man in Famine, and Squeaky Greece Takes the Wheel [UPDATE]

There was a time, dating back to the middle (dark) ages and for many centuries later, when portliness in a prospective spouse was a virtue, rather than a problem. The reason was famine. Since regular supplies of adequate food didn't happen until, realistically, after World War II, the specter of food shortages and outright famine was always hovering in the near future. A load of lard meant that one's spouse (and one's self, come to that) would be more likely to survive meager mealtimes.

The same principle applies in micro-economics: the very wealthy are nicely larded for depression. It was Andrew Mellon who said, shortly after the 1929 crash:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.

It was in Mellon's self interest (I can't force myself to say, enlightened self interest, because it surely was not) to see this happen. Note that he didn't include capital in the liquidation scheme (stocks, as he well knew, were not capital). This was a time when daily enemas were considered a key to good health and long life, Kellogg being a prime example. Mellon was merely advocating a healthy dump for all those miscreants who had unjustly filled up at the economic trough. Since Mellon, and the other robber barons of the day, had oodles of capital to hand, a period of deflation would be a good thing. Deflation lowers prices, which increases the value of one's capital. It's a matter of earning returns without risking anything. It is the case that wealth, as intelligence, is not absolute, but relative. Making everybody else (or at least, those one considers below one's self) poorer makes one's self richer.

Which bring us to the PIGS, Greece specifically for now. The PIGS are the five, presumed, effluvia from the Euro; Portugal, Italy, Ireland, Greece, and Spain. Of the five, Ireland is the surprise. The others have always been somewhat "backward". Ireland, on the other hand, has been done in by its recent machinations in the banking mess. A common currency is a good thing for Europe, in general, but as the Great Recession has made abundantly clear, a common currency means either a common (centralized) fiscal policy or none at all. The Germans (bless those Krauts) would rather the answer be none. What they seem unable to understand is what Eccles' said; capitalism's continued existence requires that most of the folks have most of the money, since the productivity increases resulting from increasingly mechanized (and, today, computerized and robotized) production have to be distributed. If this does not happen, collapse occurs. We here in the USofA have been skating on the edge of collapse since Reagan, since he and the Bushies worked very hard to restrict distribution of the productivity increases. Demand was supported by folks spending all that wonderful house price appreciation money. Ooops.

The Germans, and our native Wingnuts and Tea Baggers are too stupid to understand that the Golden Goose in all of this is not the Capitalist (what they insist on calling entrepreneurs, incorrectly of course), but the middle class consumer. Without the consumer, there is no market for all that prodigious output. Thus, Greece (and the other PIGS) must be supported, just as the endangered middle class here in the USofA. Without that support (call it re-distribution if you want), demand falls further and capital loses value.

Unless you are a Mellonite, of course. And therein lies the danger. Stupid people voting for Mellonites, on the fantasy that they will become Mellons in their lifetimes.


I re-read, mostly, when comments come in, and on occasion (and this is one) I see that I've left out a nugget.

Today's nugget is another of those shibboleths much beloved by the Wingnuts. They say (Jeremy Clarkson ringing in my ear) that most jobs come from Small Business, and that Small Business is the key to growth, and blah blah blah. What they conveniently omit is the productivity problem. Most Small Business is hamburger joints, hair salons, and dog washers; that is to say, non-capital intensive retail service work. Even the Wingnut economists (begrudgingly) admit that productivity increases haven't come in service sectors. So where has all that productivity come from?? Well, of course, autos and steel and the rest of capital intensive manufacturing. Not to mention that the Small Business jobs so beloved by Wingnuts are flipping hamburgers and washing dogs at (sub) minimum wage. Such a deal.

08 May 2010

What Thursday Means

It is now Saturday morning, following Golden Gate Thursday, and none of the Usual Suspects in the Pundit Gang have (that I've read or heard, at least) taken up the issue of what The Plunge means going forward. Lots of words regarding forensics and post mortems, and the like, but nothing dealing with the change in structure of stocks.

Herewith my modest attempt.

First, Blankfein and his Merry Band of Visigoths were reacting to the Day of the Long Knives on Wednesday, when Democratic leadership let it be known that they were serious. This was the Merry Band's object lesson: we can destroy the economy in minutes, and we will if you don't leave us alone. Remember the Prime Directive of Social Darwinism: never attribute to stupidity that which can be motivated by malice; malice wins every time.

Second, what happened to all that stock that changed hands? Where did it come from and where did it go? According to the Usual Suspects (depending on which you read), some 40 to 60 percent of trading of NYSE stocks actually occurs on outside electronic exchanges. From reading message boards of stocks I follow, many retail investors were stripped by stop losses during the plunge. It is legend that hedgies and the like don't use stop losses, given that they have these wonderful computer robots to do real time trade analysis. Other reports out of Swan Dive Thursday say that, yes, hedgies were victims of stop loss when the S&P crossed one of its moving average points. Hoisted on their own pitards, that.

But such movement doesn't change, in the aggregate, the distribution of stock ownership: hedgies traded back and forth, so what? On the other hand, many (most, perhaps?) retail investors use stop losses, since really it's their own money at risk. All of that Mom and Pop stock went into hedgies at really cheap prices. NASDAQ has said it would cancel trades that were below a 60% line (Reuters: Nasdaq Operations said it will cancel all trades executed between 2:40 p.m. to 3 p.m. showing a rise or fall of more than 60 percent from the last trade in that security at 2:40 p.m or immediately prior). As far as I find in the news today, NYSE's electronic exchange did the same, but NYSE proper did not. But this still leaves a tsunami of really cheap stock now in the hands of hedgies. The retail investor using his/her web browser connection was locked out most of the afternoon as all this went on. Schwab couldn't even display positions for most of that time, let alone execute orders. Retail could have picked up some nice bargains; 59% is a very nice discounted price.

Once the Dow hit minus 1,000 (actually, 998.50), those same computers kicked in to buy up the stocks. Again, only 60 percenters will be undone. The loss for the day was about 350.

What is different come Monday morning? Mostly, retail investor will be much poorer and holding an even smaller proportion of stocks. Hedgies will have made billions, on paper (unrealized capital gains). The question is: what will they do with this fortune? Will they trade up the market to increase the gains, greedy bastards that they are? Or will they flip the shares, thus causing a cascade of mini-plunges? Friday's loss is instructive. There was no bad news, and what news there was, was good. But another loss on the day.

So, I'd expect a damped oscillation of losing days for a week or so. Blankfein and his Merry Band will drive home the point.

06 May 2010

Ouch, That Hurt

You all have heard what happened today. I watched it in real time, although Schwab froze up and I couldn't even see my stuff, much less buy or sell. Not so much fun being a retail investor.

This was Goldman's shot across Obama's bow. The NYSE (and I will suppose NASDAQ) claim that there was no failure of the systems. On the other hand, there was no news at the time of the 500 point dive. This was an inside job.

05 May 2010

About Housing Prices, redux

I have spent a few entries in this endeavour talking about how it was that the Great Recession was not a Black Swan event. In particular, that I saw it coming by 2003. Thanks to yesterday's reporting, I found it in the NY Times, we now know that the Fed agreed with me. We didn't know it at the time, of course. Once again, I feel vindicated, but more importantly, this should be enough for anyone to tell those who make the Black Swan assertion to shove it up their sphincter.

The money quote from the article:

In the June 2004 meeting, Stephen D. Oliner, a Fed researcher, cautioned that housing prices appeared to be out of line.

"I don't want to leave the impression that we think there's a huge housing bubble," Mr. Oliner said. "We believe a lot of the rise in house prices is rooted in fundamentals. But even after you account for the fundamentals, there's a part of the increase that is hard to explain."

Ya think????? Median housing expenditure to median income is a stable, long term value. It can't get out of whack without fiddling going on. The Fed knew it by mid 2004. I knew a bit before that, and I'd expect they did, too. The data was just that obvious.