My views on GM

So, I’ve been putting a lot of thought into what my old employer, General Motors, should do. I think that they should go through a Chapter 11 bankruptcy, and the Federal Government should guarantee the Debtor-in-Possession financing (DIP financing). I think that this is the best way for GM to go.

Why Chapter 11 bankruptcy? Chapter 11 is a bankruptcy where the debt holders, the DIP lenders and the previous debt holders, assume ownership of the company, restructure it into a going concern, and emerge from bankruptcy where their debt has been converted into equity. Chapter 11 would be better than a Chapter 7 (Liquidation of assets) bankruptcy because the wholesale sell off of GM assets would signal the end of GM. While GM isn’t the mainstay of the GDP that it once was, the 2 to 3 million jobs that depend on the Big 3 (Ford, GM, and Chrysler) area very important.

Chapter 11 would allow the new owners to do things that should have been done 5 years ago: 1) fire top management (who finds it re-the-f@#k-diculous that GM’s CEO says it is the management that got them into the problem that is best to get them out of the problem), 2) have a judge change the UAW contract so that their health benefits are inline with what the average US employee has, 3) fire half of the management employees.

Top management has to go. Rick Wagoner has been the captain that has presided over this shipwreck. He might have inherited an untenable situation; but he has no credibly anymore. Bob Lutz might be a design guru, but there hasn’t been enough cultural change to the way GM designs cars to merit him staying around. I have heard many great things, from varied sources, about the CFO, Fritz Henderson, will probably not survive the new owners.

The UAW needs to understand that they are in the same boat as the rest of us for healthcare. The Big 3 are no longer the cash cows that they once were. The Big 3 can no longer price or produce their way to more cash or profits. The gold-plated benefits the UAW receive can no longer afforded. And, AND, AND! I do not believe the arguement that they have made enough concessions as of recent. $300 a year in premiums for a no co-pay, no out-of-pocket healthcare benefits? They should have to pay the same premiums a month the rest of the workforce has to, have the same co-pays, and the same out of pocket costs. It is time the UAW got its head out of the 1970’s and joined the 2000’s.

GM has WAY too many white collar employees. The plant I worked at went from 1,600 hourly employees and 100 salaried employees at the plant’s peak; to 300 hourly employees and 120 salaried employees. Not only is the increase in salaried employees disgraceful, but the number of senior managers (8th level and above, for those GM savvy among you) went from 6 to 9. From my contacts still at GM, this bloated salaried structure still exists. There is an executive rank employee at GM whose job title is “Executive In-Charge of People Not at Work.” The new owners of GM should wield the sword quickly, and often.

Why should the taxpayer be on the hook for the DIP financing? Here’s why: banks, PE firms, hedge funds, and other lenders of DIP financing are unwilling to give GM the estimated $30 billion it would take to get GM through the bankruptcy. The credit market is too tight for most lenders to take that big of a risk, even with the benefits of DIP financing. (DIP financiers get first dibs on all monies collect if the restructuring fails and the company goes into liquidation) If the taxpayer guarantees the shortfall between the DIP obligation and the liquidation revenue; then a couple of bigger firms would probably be onboard for the DIP financing, due to the upside on exiting bankruptcy successfully.

Giving the Big 3 a bailout would allow the current management and the unions to continue a business model that simply doesn’t work anymore. Both the management and the unions seem determined to do everything in their power to accept reality and update their practices to the current business climate. If GM, Ford, and Chrysler were to continue their failed business model for 5 or 10 more years, that would make the restructuring cost that much more, and kiss the $25 billion in low cost loans, in the current bailout scheme, good by. I enjoyed my time at GM, and by God, I still only drive GM; but the time for emotional, heroic actions is past, and now it's time for GM to painfully reconcile its practices.

Later,

B

A Sad November Day

I am sad. As a big John McCain fan, his loss hurt. I doesn’t just hurt because my side lost, and their side won; but, rather, I am sad because not enough of my countrymen hold in high esteem the values and character that John McCain embodies.

But, that, my friends, is the extent of my sadness. I am lining up behind OUR president. I want him to succeed and I will do my part, as an American, to help this country, and all of my fellow countrymen, be as successful as possible.

In four years, it will be time to duke it out, again, (well, two years and three months, as long as this damn election cycle lasted) but, till then, we are all Americans; and our fortunes are tied together.

A Liberal's Effect on the Market

So, I got to thinking about the polls around the presidential election. The first thought that came to my mind is the polls are bunk. If you look at Real Clear Politics you can see different polls that each have 1,000 plus sample sizes, that are taken right around the same time frame, where the averages, plus or minus the error margin, do not overlap. This is ridiculous, a sample of 1,000 plus people of should give the average of a population of 122 million (the voting public) 95% of the time, inside the margin of error.

Then I had another thought. I wonder if the market is correlated to the expectations of the election? It should. The two candidates have very different ideas on regulation, free markets, corporate taxes, and various other factors that influence the market. So, the market should care about the outcome of the election, and the prices should reflect expectations of the election.

So, here’s what I did, I took the daily average of the Real Clear Politics average and the closing price of the Dow since August 1st. I then took the change in the poll average and the change in the Dow. I then checked, on a one day lag, if the market reacted to the movements of the poll average. I used a one day lag because I assume that the traders, analysts, and other market participants generally digest their political information after the NYSE and the NASDAQ close. One other consideration that I made was this: the change in poll numbers over the weekend is a Monday minus Friday delta, just as the change in the Dow close is a Monday minus Friday delta. I’ve also looked at a two day lag, a three day lag, a average of the next three days’ delta, and a four day delta average.

What I found was this: on the days John McCain closed the gap in the polls, the following day the stock market would climb. On the days when Barack Obama gained in the poll average, the market would go down. The numbers are this: average gain for McCain in the polls 0.74% for an average gain of 1.86 points in the Dow. For Obama, his gains in the polls were an average of 0.67% for an average drop in the Dow of 66 points. A two day lag reverses the effect, and a three day lag re-reverses the effect. The average delta for three and four days shows gains by both candidates have a negative effect on the Dow; however, an Obama gain has at least twice the negative effect that a McCain gain has.

This study is not scientific, and there was little if any effort to try to control for outside factors. I did this little exercise because I was curious and I am a huge dork. Still, the data is what the data is. (The data are what the data are, I suppose) And, if one only takes the lead Obama has in the RCP Average and runs a correlation of it on the Dow Price (not the movement in price, just the price) for that time frame, one will find it is negative correlated. I also ran a covariance and found the Obama’s lead has a negative covariance to the Dow Price.

I made a pretty graph of the One Day Lag scenario. Yay for me.

Later,

B

5 year old car batteries suck

So, this last Monday, I was getting ready to leave work. I go out to my car (a 1999 Pontiac Sunfire) and I try to start it. Nothing. Gee, that's weird, it ran this morning. So, I look to see if I left anything on in the car. Nope. No reason it should have die while sitting in the parking lot.

So, it is 5:14PM, and basically, everyone but two guys are gone. One guy pulls his Buick Century around and we try to jump it. Nothing, still. Shit! So, I have to get a ride halfway home, and get my roommate to come pick me up. Embarrassing.

The next day I wear jeans (I was the envy of everyone at work wearing jeans on a non-Friday), packed up my socket set, packed an old sweatshirt, and headed off to work in my truck. I was more than a little upset because the truck gets 14 mpg on premium gas and the Sunfire gets around 32mpg on the cheap stuff. At about 3:00 PM I go to the local AutoZone to buy a battery, the homely, yet helpful girl at the counter looks up the battery for in their system. She starts naming off different batteries; but I interrupt with:

Me: Cheap. I want the cheapest one you got.

Homely Sales Rep (HSR): That will be $65 for the battery.

Me: Not bad.

HSR: A $12 core charge. And Tax.

Me: Core charge?

HSR: You bring us your old battery, you get the $12 back.

Me: Oh, like a soda bottle return.

HSR: What?

Me: Never mind, I’ll take the battery.

After this mildly entertaining distraction I went back to work. At 4:57, after most people had left, I changed the battery in the parking lot. It wasn’t as easy as I had hoped, the Stanley socket set I had only hade 3” socket extenders, so that made getting the battery “holder” bracket hard to get on and off. And, the stupid engineers at GM had the air intake hose running right in front positive lead of the battery. I had to push the hose back (which that hose is sturdy stuff) to get the positive leave on and off. And, I think I kind of stripped the negative lead, but not so bad that it won’t hold, for now. All said and done, it took me 35 minutes to change the battery. And the car works now.

What sucks is that I now have two vehicles in the parking lot, and I can’t find anyone that likes me enough to give me a ride to work to get both vehicles home. It never ends.

Later,

B

More musings on a Monday, what the ....

So, I’ve watched a weekend news show this weekend, and one of the liberal commentators railed on how the middle class has been shrinking, and that it is the fault of Republicans/conservatives. The funny thing is, that while this lady might be partially right, her answer was WAY wrong. She advocated for the Employee Free Choice Act, which basically allows unions to do card checks. (A card check is where a union has to get 50% plus one person to sign a union card, and then the company is forced to recognize a union. It basically does away with a secret ballot vote to unionize. It also has a couple really one-sided collective bargaining rules.) I think this is a bad idea that ranks up there with hydrogen filled blimps and New Coke. If you look at every American industry that has heavy union influence, you will see a failed industry. Steel Companies: Dead. Airline Companies: Dead, a couple of times. Auto Companies: In their death throws.

So, I would be remiss, and hypocritical, if I all I did was throw stones at this idea, and not offer a better one. So here is my plan: Cut corporate tax rates to 30% with a plus/minus 5% based off of a ratio of the Firm’s Top 20% earners total income to the bottom 80% earners total income.

I think this wouldn’t be that hard to manage, already most of the income needed for this calculation is reported to the IRS; things like Options, restricted stock, etc for the top earners would have to be calculated. The hard thing to come up with would be: what is the desired ratio? 50/50? 20/80? 80/20? There is a proper ratio that helps growth the wealth of the middle class while still giving enough incentive to the exceptional managers to work hard, and deliver good results, to keep the economy growing.

Why is this superior? Because it allows for choice. If a firm is driven by the performance of its top level managers, and the firm would seriously falter if they left, then it might be reasonable for the Top 20% to earn a lion’s share of the wages provided by the firm. The shareholders wouldn’t mind, because they would earn more with the ‘good’ Top 20% earners with the 5% increased income tax than they would with bad leaders and a 25% income tax. On the other hand, if the leaders of a firm can be changed out without much loss to the firm, then the share holders would demand the ratio that would get the -5% corporate income tax adjustment.

The beauty of this program is that it isn’t some cockamamie plan to try to grow the wages and compensation pie, but rather an incentive system to influence how it is cut. If a firm is successful when the Top 20% are responsible for much of the performance, and they are compensated the best, then it makes sense to tax the firm at a higher corporate income tax rate. (Rich people only spend so much; they don’t spend in proportion to how much more they make then the middle class) If the firm pays its Bottom 80% well, then it should have a lower corporate income tax rate for two reasons: 1) at a lower rate, it would return more to its investors, making it more successful and much more likely to be a continuing concern; and, 2) the Upper Middle, Middle, Lower Middle, and Lower Class people who earn more would most likely spend most of their increased earnings – thus growing the economy.

The draw backs would be the measurement and enforcement of this policy. As I originally stipulated, measuring the total income/compensation shouldn’t be too hard; but some instruments used to compensate execs are hard to value, and they are not always realized in the same year they were issued. Enforcement would be a problem, too. There would have to be a group of people at the IRS to determine if each company submitting its compensation ratio was doing it honestly, correctly, and fairly. However, the IRS is full of people that deal with this type of ambiguity regularly, so it shouldn’t be too much of a leap for the IRS to develop this capability.

In conclusion, I do think that it is time the middle class receive some lovin’ from governmental policy. However; the policy shouldn’t be so dogmatic and ideological that it ends up causing economy-a-cide. I think that my plan, fully fleshed out, would allow for middle income growth, economic growth, and is more libertarian in approach and would represent the least amount of government growth of the two plans presented.

Later,

B

Marginal Income Tax Rates and Refined Musings

So, I’ve been thinking further about some of what I wrote yesterday.

The first is the idea of raising the top Marginal Tax Rate back to 39.5%. Will this really increase tax revenues? My hunch is yes; and the data might seem to indicate that. Using http://www.irs.gov/, and http://www.econstats.com/ I was able to pull a few numbers. I pulled the nominal GDP from 1986 to 2005 (they had it to 2008 Q2, but my data range was limited to 2005) and I used the IRS website to pull the total income tax revenue for the top 1% of earners from 1986 to 2005. (It should be noted that more than the top 1% pay at the top rate, but the data was broken in top 1%, 5%, 10%, 25%, 50%; so getting the income tax revenue by the top Marginal Rate payers was not possible with these sources) Using either the IRS site, or the OMB figures from http://www.whitehouse.gov/ I was able to get the top Marginal Rates for each of those years. For each year I divided the income tax revenue that the Top 1% of earners paid by the GDP of that year – I call this ratio “Top 1% income tax paid as a percent of GDP” (T1%GDP). I then took an average of these ratios for each of the distinct Marginal Rate periods. One thing that was interesting is that income from the Top 1% changed at a different rate, sometimes in the other direction, than the Marginal Rate did. Case in point, when the top Marginal Rate went from 48% in 1987 to 33% in 1988 (a reduction of 31.2%) income from the T1%GDP, grew 1.4%; when the Marginal Rate went from 33% to 31%, a 6.1% reduction, again, T1%GDP grew 4.3%; when the marginal rate went to 39.6% from 33%, a growth of 27.7%, T1%GDP grew 47.1%; and, finally, when the Marginal Rate went from 39.6% to 35%, a reduction of 11.6%, the T1%GDP fell 16.7%. If, in 2006 and 2007, the Marginal Rate was 39.6%, and the same average %GDP was pulled in as during the actual 39.6% years, that would have represented an additional $70 billion in revenues. Of course, I have to add the caveat that there are plenty of other things happening in these year besides changes in the Marginal Tax Rate that could affect revenue, and the sample sizes are small, but revenue would most like go up.

The second thing I was thinking about is that if LLC’s and S-Corp’s were allowed to be at a lower Marginal Tax Rate then the highest individual Marginal Tax Rate (my suggestion was 30% small corps, 39.6% for individuals) that every individual that earned more than $250k would find a way to convert their income into a small business income. While some of this happening isn’t too bad, allowing everyone to do it would be counterproductive. Unfortunately, I couldn’t find any data on the size of small business produced the most amount of employment. If, say, firms that had $8 million in revenue, and $1 million in net income produce 90% of small biz jobs, I would create a second, Marginal Tax Rate tier for small businesses that bumped up to 39.6% for any net income above and beyond $1 million. However, since it is an accepted fact that most small business do not do more the $1 million in revenue (much less $1 million in net income) a very rigorous study would have to be done to determine the right level of net income to boost a business from the discounted small business income tax rate to the full on 39.6% small business income tax rate.

Hmmm, I will have to think about these things further.

Later,

B

Musing on an Economics Tuesday

So, here are some of the things I’ve been thinking about:

1) I wish Barack Obama would stop saying he is giving a tax cut to 95% of Americans. He is not, he can’t. To get a tax cut, one must pay taxes, and only 62% of Americans actually pay taxes. What Obama is proposing is giving everyone in this county several ‘refundable’ tax credits, with the average being somewhere around $1,000 a tax filer. A ‘refundable’ tax credit is different from a deduction in that a deduction offsets any tax you incur, so, you have to make enough to pay taxes to take advantage of the deduction - a ‘refundable’ credit is where you get the $1,000 whether or not you have a tax liability to offset with the $1,000. There is another name for a ‘refundable’ tax credit: welfare.

2) I was feeling pretty good about the bailout until I read this. Prof. Zingales brings up many good points on how the original bailout was a bad idea, and how the modified bailout leaves a lot to be desired. The problem that I have with Prof. Zingales plan is that it would require a lot of administration; and if there is one thing the Federal Government has proven, it is this: it is very inefficient at administering anything.

3) I have my own plan for turning around the economy. Here it is: lower the corporate income tax rate to 20%, keep the capital gains tax rate at 15% for individuals, raise the top individual tax rate back to 39.5%; and create a separate tax bracket for LLC and S-Corp small businesses so that income derived from them is only taxed at 30%. There are few reasons I think this would help.
A) Businesses create jobs, and businesses are started when the return offered to the shareholders exceeds what they can get in other investments. Taxes lower the Net Income, and thus lower the return. So, by lowering the business taxes more firms would be created, more people employed, more good purchased, new technologies brought to market, etc.
B) Raise the top individual tax rate to 39.5%. Companies do not keep income/cash; S-Corps and LLC’s do not be definition, and C-Corps do not by function. A company earns a negative return (because of inflation) on any cash it keeps on hand, so a company either pays its excess cash to it employees (more people employed) or as dividends to its owners. So, to the extent that these increased rewards are passed onto the people who already make a lot, the government should get a larger chunk of the pie.
C) Small businesses that are S-Corps and LLC’s pass through their income to their owners. So the return that is calculated is based off of the tax rate the owner pay as an individual. So, if the business throws off more than $250k a year, the owner is taxed at the top bracket. While this seems reasonable at first blush, it isn’t; here’s why: If, say, the business had $10,000,000 in revenue, but $650,000 in income before taxes, that’s a 6.5% margin. Under the current system (and assuming my top bracket tax increase) the after tax net income would be $393,250, or a 3.93% return, less that a government bond. If, however, the income was classified as small business income, and taxed at 30%, the after tax net income would be $455,000, or 4.55%; greater than a government bond. This example is a bit contrived; but it illustrates how effective tax structure can affect business investment decisions: the return possible by the business has to be greater than the possible alternative investments.

4) I guess Prof. Wildman was wrong, Paul Krugman's being a first class ass was not enough to keep him from getting a Nobel for economics.

Anyways, those are a few of the things I’ve been think about recently. Oh, and the Browns won last night. Woo-Hoo!

Later,

B

Credit Default Swaps

What is a Credit Default Swap (CDS)? Basically, it is bond insurance, usually. Due to the Clinton and Bush administrations not wanting to regulate the CDS market (codified in the Commodity Futures Modernization Act of 2000) it also became a way to gamble on financials.

Here is how a CDS is supposed to work: Person A owns $1 billion par value worth of a 10 year ACME Company (ACME) bonds that pays 8%; so Person A gets payments of $80 million each year from ACME for the next ten years. Person A really only needs $40 million a year to be happy, so Person A is looking to lock in a 4% return. Enter Person B; Person B thinks that there is only a 2% chance a year that ACME will default on the bond; so, Person B, knowing a little about probabilities, and such, knows that Person B needs $18,292,719.31 a year to cover the expected value of default on ACME’s bond. Or, to put it another way: Person B is willing to sell insurance on the bond for at least 1.829271931% of the par value of the bond peryear. So, since Person A is willing to pay more for the insurance than Person B is willing to charge, a deal will eventually happen; to continue this example, lets assume both are happy with 3% of the par value of the bond. So, Person A is getting $80 million a year from ACME, paying Person B $30 million a year to insure the cash flows (including the repayment of $1 billion at the end of year 10), thus netting Person A $50 million a year of ‘riskless’ income.

Well, let’s make this example a bit more complicated: suppose that Person B is happy with $15 million a year in income, and Person C thinks there is only a 1% chance that ACME will default, so, Person C, also knowing a bit about probabilities, is willing to cover ACME’s bond at $9,561,792.50 a year. Or, Person C is willing to insure the bond at 0.956179250% of par value of the bond. So, as with Person A and Person B; Person B and Person C’s bid-ask spread is positive, so a deal will take place. Let’s say they agree on 1.25% of par value of the bond. So, Person B receives $30 million a year from Person A, and pays person C $12.5 million a year to insure the bond. This can happen again and again, as long as someone thinks the payments they receive are greater than the expected value of payout on a default.

There are a couple of issues that CDS’s bring up: 1) counterparty risk, 2) lack of transparency, and 3) speculation. One of the biggest drivers of the bailout is counterparty risk. In the my example Person B and Person C are just people, or they could be hedge funds, private equity firms, banks, businesses, pension funds, etc; what they are not are insurance firms. The lack of regulation allowed these entities to take on these risks without having the necessary assets to cover the losses incase of defaults. Lets consider what happens if ACME defaults after 5 years: Person A ask person B for $1 billion, and Person B asks person C for $1 billion. Person C has received $12.5 million for 5 years which it has used to buy T-Bonds a 4%, so Person C (a retirement fund) only has $67.7 million for this asset. So, Person C goes bankrupt and has Person B (a hedge fund) seize the $67.7 million plus the $100 million Person C had in assets for the retirement fund. Person B (the hedge fund) has the $167.7 million, plus the $15 million for 5 years, which it invested at 4%, or $81.2 million; or, $248.9 million in assets from the CDS’s. But, being a hedge fund they had $150 million in assets under management, so Person A seizes all $398.9 million of Person B’s assets. So, Person A, with their $50 million a year at 4%, expected to have $1.6 billion in total value at the end of year 10, but only will have $814.9 million, or 51% of expected value. This is 18.5% less than the original $1 billion Person A paid for the bond. Also, Person B and Person C are wiped out in this situation.

In the current situation, lots of banks, hedge funds, insurance companies, and other institutions entered in to lots of these transactions. A lot of companies bought and sold these kind of CDS. So, as illustrated above, once a link in the chain is broken, the system soon collapses; this is called counter party risk. More broadly, counter party risk is the risk associated that the other party in the transaction will not be able to cover their position. (Person B and Person C did not have enough assets to pay Person A $1 billion)

The second big issue is a lack of transparency. Both the Clinton and the Bush (the second) administrations declined to regulate this market. Because this market wasn’t regulated a couple of problems occurred. The first was mentioned above, the insuring firms did not have to have enough assets on their books to cover the losses. The second issue is that because each transaction was private, every entity buying insurance did not know who the originator of the insurance was “re-insuring” the obligation to. They might transact with an entity who resided in a jurisdiction where legal recourse couldn’t be taken. (Imagine that Person C couldn’t be sued) This lack of transparency led the potential for something bad to happen grow in both probability and scope.

The third big issue that CDS’s created is gambling on financials. In the end, people didn’t have to own the bonds to buy insurance. Imagine that Person A believed ACME might fail 10% of the time over the next 10 years, so they agreed to the contact in the above example with out actually owning the bond. They would still get the $398.9 million with only having the out lay of $30 million a year. Firms were allowed to make bets on defaults without actually having to own the bonds.

Perhaps that is the ‘casino like atmosphere’ that John McCain is talking about. Anywho, that is what a CDS is, in its most simplest form.


Later,

B

Economics Tuesday: The Economic Crisis

Well, folks, its been a while since I updated my blog, and even longer since an economic Tuesday Blog. Why has it been so long? Meh, I'm lazy and I've been busy. Down to the topic: Why is the economy in the toilet?

Well, I am going to attempt to explain that to the best of my understanding and ability. So, a while ago, at the end of the Clinton years and the beginning of W's years, the economy started to slow down (the internet bubble was bursting). As a result, G.W. gave just about every U.S. citizen a $300 check and the Paragon of Central Banking, Alan Greenspan, lowered the Fed Funds Rate. These two measures were taken to jump-start the economy; and the were moderately successful. While the $300 check's effect is debatable, the consequences of the rate cut, both intended and otherwise, are quite apparent. As money loosened through the middle of 2001 the economy started to strengthen, as banks were willing to take more risk because their Cost of Capital was cheaper. The Federal Reserve (The Fed) was aggressive in their rate cuts to deal with the imploding Internet bubble; and then some whack jobs flew planes into the World Trade Center Towers. The 9/11 attacks sent a barely recovering economy into a full-on crash (no pun intended); and then the Fed got to cutting the Fed Funds Rate in earnest. An initial problem with this is that the Business Community got used to the low Fed Funds Rates; any time the rates were raised the Market punished stocks. So there was a lot of pressure on the Fed to keep rates low, and the pressure came from all side.

Here is how this plays into the current crisis: when the Fed lowers the Fed Funds Rate, the lower rate is eventually reflected in home loans. This made it quite cheaper to borrow money to buy a home. This started to put price pressure on homes to the upside: think about it this way, a perspective home owner would have to pay $1,153 a month for a $150,000 home at 8.5%, the same buyer could afford a $203,000 home for $1,152 a month at 5.5%. So, this increase in people’s ability to get money allowed them to start to pay a little bit more for the same house (it is hard to think someone would pay $203k for a $150k house; however, it isn’t unthinkable for them to pay, say $161k for the house if they really wanted it; a 7.3% premium).

The cheapness of money was on key factor to the credit crunch / housing collapse. Another key factor is the easing of eligibility of credit; the banks made it easier for people with lower credit scores to get good rates. When housing prices started to rise, banks started to make more money on their loans, and once the bulk of the credit worthy borrowers had refinanced and/or bought new homes, the banks had to find new people to lend to keep the money coming in. Banks decided to make it easier for less credit worthy people to get decent rates; and thus lower the eligibility to qualify for, and lowered the rate charged to the dreaded SUBPRIME borrowers. The banks were not being completely reckless with this idea, before the wild lending days of the mid-2000’s, the Federal Government forced lenders to lend to low-income individuals in traditionally disadvantaged groups through special programs. The analysis of this debt showed that these lenders were not much worse on default than traditional borrowers and the Federal Government provided a backstop. So the banks started giving subprime borrowers cheaper money. Guess what this did: it cause housing prices to go up.

This positive pricing pressure caused home prices to go berserk in hot markets. Notably, housing price went through the roof in Las Vegas, southeast Florida, and southern California. And this created the issue that proved fatal: high risk loans to suspect borrowers. Like any good addict, the housing industry kept doing more and more to catch the same buzz. Cheap money to legit borrowers, gone. Cheap money to subprime borrowers, gone. And now, housing prices were so high that legit, and subprime borrowers couldn’t afford the houses at normal rates….. Enter ARMs/Option ARMs; Adjustable Rate Mortagaes, that’s the ticket.

The beauty of the ARMs are what make them so dangerous, and what sent a hot housing market in to fully overheated mode. An ARM operates likes this, one can borrow a huge amount of money at an excessively cheap rate for an introductory period, usually two years (which is soooooo evil, in itself), and then mortgage adjusts to the Prime Rate plus some percentage. Using the old example, let say our guy can borrow for a introductory rate of 2%, so for his $1,153 he can afford a $312,000 home for two years, and if his rate adjusts to 9.5%, he has to pay $2.326 a month. The reason 2 years is evil is this: if you own your primary residence for two or more years, and sell it for a gain, you don’t owe capital gains taxes. The ARM loan was developed to encourage people to buy houses with the intention of selling them for a gain in two years, and if they didn’t; they’d be crushed by the new rate.

A very important part of the puzzle, and perhaps the hardest to understand, is the securitization of the home loans. Freddie Mac and Fannie Mae are companies that would buy up home loans, convert their payments into bonds, and sell the bond to investors. Here is the how and why. The how is like this, if you are giving me a payment of $100 in a year, and I need $90 now, I can sell your $100 obligation to me to an investor for, let’s say, $95. I have $5 more than I need, and the investor get an extra $5 in a year. Now, the math for determining the amount someone is going to pay for the obligations of a home loan is complicated, but essentially it is just selling a future obligation today. The why is this; a bank has to get the principle back on a loan as quick as possible so it can lend it out again, so a way to speed up this process is selling a receivable. So, if Local Bank give me a mortgage at 5.5%, and sells it to Fannie or Freddie at 3.5%, Local bank makes 2% on the loan. Fannie and Freddie take all of those obligations, bundle them together, and sell them as bonds. Think of it as them reselling it again at 3.25% to other investors. (Making only 0.25% doesn’t sound like much, but when they do this with trillions, yes, trillions, of dollars of mortgages, 0.25% ends up being a lot of cash)

The problem started when people refused to keeping paying more for the same houses. Builders kept building, house flippers kept trying to flip houses, and brokers kept trying to sell Adjustable Rate Mortgages; but people kept demanding less. Like any good, when less housing is demanded, the price of housing falls. The only problem is that those damn ARM loans started to adjust up after two years. The US Post Office carrier that was living in a $400,000 home he wanted to flip couldn’t afford it anymore; so the bank took it back. So Freddie and/or Fannie couldn’t make the payment on the bond they issued with the house as collateral. When the bond became less valuable, the banks that made big bets on these bonds saw their returns go from largely positive to largely negative. These banks became less credit worthy because they had too few assets to cover their debts because their assets became largely worthless. Other banks became scared of doing business with these banks because they are less credit worthy. Then there it was, these banks that were century old going concerns became cash poor in short order because other banks were scared of doing business with them; and when a bank is cash poor it is a dead bank.

Everyone is point to the executives at Wall Street as the culprits, but as far as I can see, there are a lot of people out there that share some of the blame: the Fed for cheap money, banks for loosening credit standards, brokers for lending money to speculators, borrowers for speculating and/or trying to get into a house they can’t afford, Freddie and Fannie for buying too much junkie subprime mortgages, investment professionals for putting too much trust in subprime backed bonds, and some other elements. Yeah, greed and the need to make the next quarter’s earning did drive some of this; but it is a bit simplistic to heap all of the blame on them.

Later,

B

Very happ!

So I got to have a great week with my brother. I got to hang with him, cut up with him, see the Dark Knight with him, etc. I am glad that he is enjoying his time Korea; but I sure do hope he comes home in April. Man, I hope he comes home.

Today is a good day

Like the poet Ice Cube says, "I have to say, it is a good day."

Today is the day that my little brother, Luke, comes home from Korea. I haven't seen him since April of 2007, so its been a while. I can't wait to hang out with him, shoot the breeze, play video games, etc. It is a good day.

Peace out,

B

Windfall Profit Tax and Dummies

I have a lot of hippie-liberal friends. They’re okay, but they’re a bit dogmatic. That would be fine; but, they’re a bit stupid about it. The thing that as been driving me crazy is the liberals going around clamoring for a ‘windfall profit tax.’ Whenever I hear someone talking about this panacea of American economic woes, all I hear is ‘I’m stupid.’

Why am I so down on the Windfall Profit Tax? Am I just a Right-Wing Nut Job? Am I a shill for Big Oil? Do I like to see the little man get crushed? (Okay, okay, okay, I do like to see the little man get crushed, but the others are false) No, it is just that I see through this deceptive tripe.

The argument for the Windfall Profit Tax on Big Oil is flawed. It presumes that the level of profit the Big Oil companies are making is excessive. The argument goes like this: Exxon-Mobil made $43.6 billion in profit over the last four quarters. On the face of it, this seems like a huge amount… hell, that is more than the GDP of most of the countries on earth. I argue that, that amount of profit is not a ‘windfall’; but, rather, the right amount of profit for Exxon-Mobil to be making. I took the time to look up the Revenue and the Net Income of Exxon-Mobile and 27 other name companies. Exxon-Mobile had $473.9B in revenue and $43.6B in net income, for a profit margin of 9.2%. For all 28 companies, the total revenue was $2.523 trillion with net income of $247.7 billion, for a profit margin of 9.8%. I argue that Exxon-Mobile isn’t any more profitable than these successful, name companies; it is just that the cost of their raw materials (namely, oil) has gone up tremendously over the past few years and they have raised prices to keep their profit margins inline.

Now, there will be some idiots out there that will have the counter argument of: why don’t they lower their profit margins so gas is cheaper and the common man would be hurt as much by the rising cost of oil? This argument has all of the trappings of Leftist quackery: it almost sounds logical, it is populist, and it is, in the end, suicidal. If a company lowered its profit margin, the company’s investors would pull their capital out of the company. It would be similar if you or I made 9% on a Government Bond we bought for $10,000; but when we bought $100,000,000 worth of bonds, the Government came back and said something like this: Well, you were happy with your $900 before, and we don’t want to pay you $9,000,000; so we are going to tax your interest on your $100,000,000 until you just have $900 left. How would you feel about the Government turning you 9% investment into a 0 .001% investment?

So, the next time you hear a liberal talking about a ‘Windfall Profit Tax’, point at them and call them stupid. It only takes a little bit of time and effort to see through the silliness.

Below are the companies I looked up, their revenue numbers, and their profit margin. All data was attained by looking at their Income Statements on Yahoo Financial. Profit Margin is defined as Net Income / Gross Revenue. I used the last four available quarters to come up with the annual numbers. (Click on 'photo' to enlarge and see the data)

The Pounding, the Screeching, the Scraping

So, I work in a building that is more of a converted warehouse, than an office building. It is not some cool, old, dare I say, stylish warehouse; but some generic, suburban sprawl warehouse. This isn’t a bad thing, on most days. It is new, very clean, open, and nice. The front half of the building was converted to office space so that a couple of business units could have offices away from our sister company. Also, the platform (bigger than a business unit, still too small to be our own division) has its HQ here.

Here is where the problem, the building is so nice, and the old, beat up building our sister company has is so, well, not nice, that all of the Platform level employees want an office here; and the business units that share the space want more space. So, what to do, right? Well, the warehouse part of it is used to story inventory (it’s a warehouse, after all) and do electrical component integration. So, we took part of the space where the component integration is done, and are making more warehouse space.

So, here is where it becomes a problem. My office is RIGHT next to where the remodeling is going on. I see various construction guys walking past my office all day. Some speaking English, a lot speaking Spanish, especially the drywall crew. The framing of the walls was okay, most putting anchor bolts down, and putting the metal studs up, some noise, but not too bad. Monday sucked, a lot, because they drywall crew was putting drywall screw after drywall screw into the metal studs. Reetch! Reetch! Reeetch! All the goddamn day long. It was horrible. Yesterday was an extension of Tuesday: Reetch! Today started off with me watching some guy on stilts mud and old doorway that was closed. As I allergic to dust, I am not looking forward, at all, to when they sand the drywall.

All through out the day, I hear various noises associated with building office space: cutting, screwing, hammering, et al. I gave me a headache Monday, and if there is too much dust in the air, it will give me one today. I’m glad that I scheduled my self to visit the US HQ for US business unit.

Later,

B

Gold Medals, and the like

I have to admit, I really don't care about the Summer Olympics.

The big story is if Michael Phelps can get eight gold medals; and people are saying if he does that may be the biggest achievement in sports ever. First, swimming is not a sport, it is an athletic event. The difference is that if one can make the other actively lose, it’s a sport; otherwise, it’s an athletic event. Second, it isn’t even the greatest Olympic accomplishment ever, the Dream Team was more dominant than Phelps, Aleksandr Karelin’s dominance in Greco-roman wrestling was greater, boxing is replete with wars that were/are much more engaging than this.

I also could care less about the Redeem Team. I think it is neat that some NBA players decided that they could be just unselfish enough to represent the Red, White, and Blue; and that they’ll kick ass. However; I just can’t get into the world’s best pound on the masses. If they win, yeah, the expectations are met, but that’s all…. no great victory, just met expectations.

I care not for gymnastics. Again, great athletes, but not a sport. Plus it’s participants look like emaciated pre-pubescent girls, and overly muscular effete guys. Track and field is much the same, but the female participants look like butch badasses. And, no matter how fast those 100M guys go, I can beat them with my truck.

I have particular distaste for rowing. An exercise should not be an Olympic event, even if it is the sport of the Ivy Leagues. Ditto for weightlifting, if I wanted to see a strongman competition, I could watch ESPN2 late night.

I think I were to watch the Olympics I would watch judo, wrestling, and boxing because, well, I like violence. I would watch women’s beach volleyball, because they prance around in bikinis that appear to be a size too small. I might BMX cycling on the odd chance that one of those dumb bastards might wreck, real bad like.

Until the Olympics is over, I suppose I’ll be regulated to renting movies and watching re-run of Law and Order on TNT.

In 2010 I’ll watch the winter Olympics as there is nothing better than Olympic Hockey. Well College football is, but it happens every fall.

Peace out,

B

Is the HRC really Jason

Remember Jason, the bad guy from all of those Friday the 13th movies? No matter how many times you killed his ass, he kept coming back to kill underage drinkers and promiscuous teenagers. I think Hillary Rodham Clinton might be the real life Jason.

She just wouldn’t die and June, and with her new editorial piece in the WSJ she has put herself back into the national political scene. Factor that with Slick Willy’s comments from the weekend, and it seems like the HRC is setting up the DNC convention for a coup; or, (this is where my cynical nature really comes into play) she is trying to help Obama lose so she can be the nominee in 2012.


Hmmm, maybe hockey masks and machetes have been replaced by blue pantsuits and political operatives.

Later,

B

Why was I even worried?

Last time at this year, I had dropped some coin on the John McCain Presidential Campaign and I thought to myself, “Man, I like the guy, and I think he’ll be the best leader, but it seems like he is dead in the water.” Then the Campaign called asking for more money, and I thought, “Am I sending good money after bad?” (BTW, good money after bad is a time honored Reschly tradition)

Well you know how this story ends up: Johnny Mac stays strong, reiterates his message, and delivers crucial wins in crucial states and wins the Republican nomination.

So, I must be a whimpering moron. Everyone was writing J.McC. off for the general election. Everybody and their brother were saying it was going to be Obama in a landslide. The doom and gloom talk about the McCain campaign was so intense, that my loyalty was beginning to be shaken.

Then, as if it were a pedantic Rocky movie, the McCain Campaign started counterpunching and hurting the Obama Campaign. The McCain Campaign is attacking the Obama Campaign using, well, attack ads. The weird thing is that all the Obama Campaign can do is defend. If the Obama Campaign can ever get on the offensive, it will be worse than the beating Draggo put on Apollo Creed. But, and there is a but at this point, the Obama Campaign seems unable to take the initiative – they’re not a dollar short, but they are four or five days short. Weird.

I am optimistic about McCain’s chances (Zogby has McCain up 42 to 41 now) but I have to remember than, despite a great performance, Rocky lost to Apollo in the first Rocky.

Later,

B

Barack is the Democrat's Christ

My conservative friends and I were sitting around talking about the election. now, most of us know, and admit, that we are in for a terrible November. We were talking about the campaign, and we were talking about Barack's speeches. Then my friend, Scott, started going off, "That guy is going to save the world and heal my soul. Ever listened to one of his speeches? He promises you everything. Paying too much for gas? (He throws his hands up in the air, almost giving the touchdown signal) Barack Obama. Don't have a job? (TD signal) Barack Obama. Don't want a job? (TD signal) Barack Obama. Don't want to pay support to your baby mama? (TD signal) Barack Obama. Got the gout? (TD signal) Barack Obama. Wrecked your car? (TD signal) Barack Obama."

Needless to say, that was cracking my shit up. Also, our liberal friends we un-impressed. They would try to make a point, but one of would throw up the touchdown signal and say "Barack Obama". For the balance of the night, anytime anyone would talk negative, or talk about a problem; yup, you guessed it, touchdown signal and "Barack Obama".

Later,

B

P.S. If you need to ask what the touchdown signal is, don't talk to me.

My thoughts, upgraded.

I saw this article on MSNBC.com, originally from the New York Times. It is an interesting read, evidently Barack Obama was a super smart lecturer at the University of Chicago Law School (disclaimer, I am a grad of the Chicago GSB), who was a great speaker, able to debate ideas with the best of them, and he never stated a position that could hurt him. I think it is this last point that could derail him.

If you look at the issues page of his campaign site, he has the same generic Democratic ideas that have been watered down to appeal to the Center. Here’s the deal, if I wanted someone to peddle Democratic Ideas to me, I would have voted for Gore, or Kerry. The thing is, is that I think Barack is capable of the “REALLY BIG IDEAS” (Prof. Gould, I did pay attention in class), and I would change my vote Barack if he would express them. Instead I get: I’ve got change you can believe in, the same tripe the Democrats have been shilling for 20 years, but dressed up in flowery rhetoric. I don’t want that.

I want: I am going to change the tax structure by raising income tax, but lowering corporate taxes. The tax revenue will remain neutral until corporations start paying out more of the earnings they are keeping. You see, the trickle down people almost had it right, if you lower the tax rate on businesses they grow, but because they aren’t people they don’t hold onto cash. They spend the cash either as dividends, as capital investments, or increases to salaries. Which every way they choose GDP grows, people have more money, and the tax base growth increases tax revenues. If you charge people one or two percent more of the income in taxes, but increase their wealth by three, four, ten percent, their happier. It’s a win-win.

On a related note, I’m glad John McCain (my boy) said that everything was on the table for Social Security, even payroll taxes. I’ve been DAMN tired of him being a shill for the tired old Republican line. In 2000, McCain was the man of un-assailable integrity who had big ideas to run the country by. The only ‘maverick’ idea he’s kept is giving amnesty to the 12 million illegal immigrants that are here. (I’m going to go out on a limb and say I support that, too) Allowing a discussion about raising the payroll tax to facilitate talks to craft a common-sense solution seems like a GOOD thing, not a right-wing thing, but a good thing. It is good to see that McCain isn’t tied to trying to be Mr. Traditional Republican 100% of the time.

So, to conclude, McCain still has my vote because he has expressed his big ideas before, and might agian reclaim them; rather Barack Obama might eventually express his big ideas once he gets the job. I guess a bird in hand beats two in the bush.

Later,

B

Wow, again wow.

I saw the Dark Knight last Saturday, and all I have to say is: Wow!

Normally, I don’t let my hopes get up around the summer fare in movie theaters; not because I’m some hoity-toity movie snob, but; rather, because I love big summer blockbusters, from the original Star Wars movies, to Jurassic Park, to E.T., to Pirates, and such. The problem has been that for most of the recent summers the bug summer movies have been formulaic and the only thing that makes them big is that they are sequels or that they have action flick stars in them. But that isn’t the problem this summer, I liked the new Indy Movie, I loved Iron Man, I’ve heard good things about Hancock from non-critic type people, loved Wall-e, and I enjoyed Harold and Kumar escape from Gitmo. So my expectations were raised for the Dark Knight.

So, with my expectations raised I did have a lurking fear that the Dark Knight would disappoint me, I mean, nothing can live up to the hype that it has been receiving. Every once in a great while, I am dead wrong, by a lot. The Dark Knight was AMAZING. I am thinking about making a trip to the IMAX theater at the new swank mall to see it. Heath Ledger does deserve an Oscar nod for his Joker role. What’s more amazing is that Christian Bale was not upstaged by Ledger’s performance. Adam Eckhart and Gary Oldman both gave good performances, too. Now, this movie was even more dark (in tone as well as lighting) than Batman Begins, and much more so than the artsy Batman movies of the 80’s and 90’s.

What topped off my movie going experience was the trailer for the new Terminator movie starring Christian Bale as John Conner. It looks awesome.

Later,

B

A New Record

This morning was a new record for me.

Stoopid V-8. Stoopid Shell gas. Stoopid inflation.

More musings on my vote.

Well, I have to give Barack Obama much credit. He, and his campaign, have not made any mistakes here recently. They do not take any risks at all, they have a huge lead, and they are protecting it at all costs. This guy is a media darling, his campaign knows value of high production moments, and the guy delivers a speech like I’ve never seen before. I hope that this guy will be our Kennedy, Lincoln, Churchill, etc. He needs to be the guy that can inspire a nation.

He is my fear; he’ll be Bill Clinton, Part II, The Big Disappointment Strikes Back. Bill Clinton had great promise, and his presidency went well because he always did the most popular thing. Bill Clinton came into the Whitehouse with great promise. He was going to be the guy who transformed America and recaptured her glory. But, alas, instead of being the Democratic Ronald Regan, he became the divisive catalyst that polarized American politics. Clinton became the poison he was, I think; because he stood for nothing but what was most popular. Sure, he was left of center most of the time; but he was whatever was most politically convenient. He had convenient women, he lied about them when it was convenient; he loved the poor and oppressed, but let them die when it was convenient (Rwanda, anyone?); he compromised his stated values when it became necessary to improve his position.

So far, I’ve seen Obama tack to the center, and maybe that’s okay. Most candidates, Republican and Democrat, must pander to their respective party’s more hardcore constituents to gain the nomination, because it is these cooks who vote in primaries, and these hardcore constituents tend to be much further from the center. So, I’m giving Obama a pass. Maybe he is more main stream, or maybe he is more left-wing; but either way, he is moving his position to gain the election. Such is necessary, to some degree, from any candidate.

But here is the deal: when will Obama state his true values; and, when it be politically inconvenient for him to stand by those ideals, will he stand steadfast to them? Since I don’t know this about Obama, I still favor McCain.

Another thing I haven’t seen, is how does Obama do in non-scripted moments? When he has a teleprompter, can control the topics, and has a high production value situation: there are none better. What happens when he is under pressure and dealing with the un-known? Will he still be Obama the orator, or a befuddled, stammering mess? Can he defend his policy plans, or will he implode like he did with the capital gain tax revenue questioning? McCain’s not the greatest, but he deals and adapts well. This is another reason from me to stay with McCain.

One thing that is interesting, now that high gas prices have curbed our consumption, and politicians have started to talk about making real, hard decisions to end out dependence on foreign oil, crude prices have started to fall. I just hope that two things happen: 1) we actually carry out most of these plans, and, 2) I hope gas prices fall.

Later,

B

A week of surprises

So, this week has been an interesting one. I had two occurrences, while dissimilar and completely disconnected, that equally disconcerting. They are a traffic ticket and flowers.

I got the traffic ticket Monday. I was traveling East through the intersection of Broadripple Avenue and College Avenue and I looked up at the light. I couldn’t see what color the light was, because the lenses were foggy and the sun was setting behind me. Also adding to the situation was that traffic in front of me was continuing through the intersection, the other direction was still stopped, and in general the intersection was very busy. I knew something was amiss when this guy turned left right in front of me, and gave me a really dirty look. My suspicions were confirmed when two patrol cops, who were doing no turn on red stops, motioned me over for blowing the red light. Needless to say, the guy wasn’t swayed by my explanation of difficulty in seeing the light.

The second thing that got me out of sorts was that my mom sent me flowers for my birthday. Now, I appreciate the thought, and it is a nice arrangement of flowers; but I maintain that flowers are for women and bees. (I do not think that the bees would care for the big mylar balloon that said ‘Happy Birthday’) All of my female friends, and my gay friends, thought it was sweet; but they agreed that it was most likely lost on me. My straight guy friends mocked me, which is to be expected.

Anywho, go Boilers and go Browns. I can almost smell football season.

Later,

B

What my vote costs?

Upfront: I'm a John McCain Supporter. I’ve donated to his campaign, and more than just a trivial amount. Proudly, I supported him in the Summer of 2007 when everybody and their brother was writing him off.

With that disclaimer being said, my vote is for sale. (Not literally Mr. FBI man, but in a figurative way) The question is this: what is the cost? The cost is the first candidate that comes out ands talks tough about reducing inflation. The first guy that comes out and says he is going to put pressure on Bernanke to raise the Fed Funds Rate is going to get my vote.

Why is this important? Because all commodities are affected by inflation. While not all of the price of a commodity is due to inflation effects, some of it is. (We would still have higher gas prices, but they would not be as high) When the cost of money is high, it is expensive to have money tied up in a commodity, when the cost of money is low, it is cheap to hold commodities.

Here is an example: I have a $1,000, and I want to buy a futures contract to get corn delivered to me in October. Now, the price I pay is the Cost of the Corn (c) times the Cost of Capital (1+i): (c) x (1+i). For our example, lets say the base case is this: a contract costs $10, $9 for the corn and $1 for the interest. Therefore, I can but 100 contracts for Corn. Lets say our friend, Mr. Bernanke, lowers the Fed Funds rate and makes money cheaper. So, for a while, the cost of the contract would be $9.50; $9 for the corn, and $.50 for the money. So now I can buy 105.2 contracts. What happens is this, everybody can buy those extra 5.2 units of corn, so the demand on corn goes up. When the demand goes up, prices will follow to reduce demand to the capacity of corn produces. So balance is restored to something like this: a contract costs $10; $9.5 for corn, and $0.50 for interest.

The actual machinations for this process are much more complex, but in a nutshell, that’s how Fed Funds Rate affects commodity prices. The draw back is that expensive Fed Funds Rates increase the borrowing costs for business, home owners, and other borrowers of money. The problem is that the Fed is working so hard to keep the Financial Sector going that it has let inflation go crazy. Having Freddie, Fannie, Bear, Lehman, Goldman, etc still functioning is VERY important; but those results have to be weighed against the impact of a family of four paying $300 a week for groceries. Maybe there can be some more pain in the Financial Sector so the rest of the Country is driven over the edge.

Regards,

B

P.S. To see some excellent ecomonics discussion from the liberal point of view, go here.

Things on my mind

So, I've been listening to Barack Obama giving speech after speech on how he is going to make America better. First let me say that this man is such a good speaker that I really want to believe in what he is saying. He says many wonderful things: health care for everybody, taxing the really rich, fair wages for women (it is debatable if women are really that under paid), and less dependence on foreign oil. Sadly, the cold-hearted analyst in me prevents me from failing for this comforting rhetoric.

First I will take on the two ideas of healthcare and women’s fair wages. The burden for both of these initiatives will fall on the employer. Both of these initiatives will result in a greater cost of employment, or in effect, raise the price floor on labor. As this graph from a previous post shows: when a price floor is above the demand-supply equilibrium, consumption of the good, labor in this case, goes down. Now, should women be paid less for being women? No. Should there be remedies for such bigotry? Yes. However; the study that everyone quotes, the American Association of University Women, shows that, controlling for all other factors, that women near what the men make, and the situation is getting better for every new generation of women. Healthcare is a whopper in which no one, my self included, seems to have a good answer on. Senator Obama’s plan is bold and expensive. There has to be an equilibrium where the trade off in getting people the basic human need of healthcare provided is balanced against the health of the economy. I don’t think Senator Obama’s plan is thoughtful enough of the equilibrium.

On taxing the rich, I think Obama might be half right. I think that income taxes can be raised on people who make more than $250,000; especially if there are more and more opportunities for people to make that much. However; I think he needs to pull his heard out of his rear-end and understand that he can lower other taxes to grow the economy. He needs to leave the capital gains tax at 15%, and lower the corporate taxes to 15% also. When the capital gains taxes were lowered to 15% there was an explosion of capital gains activity; because, unlike income, recognizing of capital gains can be timed to favorable conditions. Lowering the corporate tax rate will increase formation of new, and growth of old corporations by the fact of making it easier for companies to earn a return. By lowering the threshold for a business to be profitable, more people will start more companies. More companies means more people making money, more people paying taxes, more people getting health insurance, more welfare recipients becoming self-supporting wage earners, and a host of other social benefits. That is where I have a fundamental disagreement with Barack Obama. I believe in growing the economy is best way to get out of the current mess.

The second thing on my mind is this. How weird it would be to have a radio controlled valve that could allow you to choose to shoot blanks or live rounds. My only fear is that the neighbor might get a new garage opener, and poof, a baby is on the way.

Later,

B

Why the short term view hurts

When one makes a decision, one must look at the long term impact as well as the short term impact. In late August 2007 I had a Cadillac SRX that was three years old and had 120,000 miles on it. The thing about a Cadillac SRX is that it is built on the Sigma platform, and the only cars built on the platform are the Cadillac STS, CTS, and the Buick Enclave and GMC Arcadia. Why is that important? Because when the brake pads need replaced it costs $180 for the non-OEM pads instead of $20. This is because everything on the high end platforms is performance/luxury parts, and they ain’t cheap. A second thing about my SRX is that I wrecked, slightly, when I first had it, and I must have bent the right front mounting bracket for the strut. That thing would burn through a strut in 3,000 to 20,000 miles; and that was a $500 repair bill.

So, taking all of those things into account, I decided to get a new car. Now, I like my vehicles nice. I like the to be somewhat trendy / eye-catching. I like them shiny and new too. So, for me it was down to a Buick Enclave (same exact thing as a Cadillac SRX, just $5,000 less) and a GMC Serria Denali. The Enclave was tight, it had the back up camera, telescoping and automatically controlled steering wheel, and all of the other things that make a vehicle go from okay to WOW! The problem was that they were so popular at the time that GM wasn’t offering any discounts. The GMC was equally tight. It is a pickup truck, it has most of the same features the enclave did (no auto steering wheel settings and it only has back up radars, no camera) and, in addition, it has a 405-hp V-8 engine. Did I mention that it is a big, black, beautiful pickup truck; and GM was offering deals to get them off the lot?

Well, the little economic cars didn’t get a second look. The small Buicks and Pontiacs just didn’t rate a look. Sure, they were $15,000 to $20,000 cheaper, and they got 30+ m.p.g.; but they didn’t make me go wow. So guess what happened, I bought the Denali pickup truck.

Flash forward 10 months. I am paying $4.20 a gallon for a truck that gets 14 miles to the gallon. On a good week, I get this kind of picture. I have gone from a weekly gas expense of around $25 to something like $100. That is an extra $3,900 a year in gas costs. If gas stayed at the $2.50 a gallon cost, my cost would still have gone up to $60 a week. Think if I had bought a car that got 35 m.p.g., my costs would be somewhere around $40 a week in gas. But, still, I wanted to be WOWed when I bought the truck; and, I guess, I still am.

Later,

B

Ahh, what a summer it is shaping up to be

First of all, for those who know me, I survived the Fourth of July just fine. My traditional partner in crime was a wimp, and scurried off to the in-laws house. I also played it low key and didn't light a single firework. (That is some what sad, but we all mature, eventually, right?)

Well, I must say that I am enjoying this summer. The weather in Indy has been quite nice, other than a few powerful storms. There have been plenty of fun little tings to do around Indy. And lets not forget the movies, ohh, the movies.

This summer has seen a renaissance, if you will, of the movies. There's the new Indiana Jones movie, which was good. My second favorite movie of the summer, Iron Man, would be a number one movie most summers. Harold and Kumar Escape Gitmo was funnier than I anticipated. The new Hulk movie looks good, and would have been seen in the theaters if gas wasn't $4 a gallon. My number one movie of the summer, so far, is Wall-E, and regardless of what this douche-bag writes, it is pure entertainment fun; not some gripping political commentary to turn kids on to environmentalism. I am looking forward to The Dark Knight, and, to a certain degree, Tropic Thunder. All-in-all, the summer is great, but I think the best movie is coming out February 13th: Friday the Thirteenth (remake).

Another great happening this summer was Eli’s dedication / blessing. It was so much fun to see Erica, Maddy, Jess, Baby Barb, Mom, Dad, Sara, Mark, and Eli; and to spending some time with my family was epic. Taking the 130lb TV up to Sara and Mark’s, and moving it into their apartment was quite the happening, too. (Not to be confused M. Night Sham-a-lam-a-ding-dong’s new movie, The Happening)

The thing that would cap off this summer would be going to Chicago to see Jeff, Jess, and all the other Chicago friends I have. It would be the next level of awesome if my friend Liz came down from Milwaukee, but seeing as she is running her shop (click on the link to the right); she said I’m out of luck. Well, maybe getting a girlfriend would make the summer awesome, too; but no one is holding their breath on that.

Well, really, the thing that would make this the greatest summer ever would be if I got a chance to see Luke. Seoul is too expensive to visit; however, Luke is scheduled to be home in either September or October. Still, it would rock major league to go see Luke whilst he is living in South Korea. Also, click on the link to Luke's blog, you'll find out that he's one of the funniest writers there is.

Later,

B

Taxes, Kurt Hauser, and the Election

Hi all,

As some of my previous posts have pointed out: I am a dork. More precisely, I am a economics dork. Recently, David Ranson published a column in the Wall Street Journal that claimed that regardless of the marginal income tax rate on the highest earners in the country, tax revenue remains, roughly, about 19.5% of GDP. Mr. Ranson called this the Hauser Effect after Kurt Hauser, the person he credits as first bring up this phenomenon. Mr. Ranson goes on to claim that this means that regardless of what the tax rate is, the rich are willing to pay only so much in taxes; therefore, high tax rates on the rich are pointless.

Well, there are two things about this article that set the economics world a blazing: 1) it is specific conclusion drawn from two general data points, and, 2) it is right leaning. I will address point two first. Liberals (they like to be called ‘progressives’ now, but a rose by any other name is still a slack-jawed, mouth breathing, hippie, liberal) went ape-shit over this (rightly so, probably.) This conclusion undermined their argument for justice, and the rich doing their (extra)part for being so rewarded by society. The idea that the lefts plan to redistribute wealth by taxing income of the top earners falls flat in practice was a slap in the face. This finding could not stand, and they set about discrediting the thesis.

Which brings me to point one. They might not be that far off. There are plenty of valid criticisms of the Hauser Model presented in the article, here, and here. There are a couple of really good criticisms that get at the heart of Ranson’s analysis, and a couple of good criticisms that point out some context around the Hauser effect.

The context arguments complement the foundational arguments, so I will address them first. The graph (courtesy of the WSJ) shows that tax income stays around 19.5% despite the changes in the tax rate. What the WSJ fails to mention is the changes to other taxes that occurred when the top tax rate was changed. For example: when the tax rate was lowered in 1986 several loop holes where closed, payroll taxes were increased, etc. This led to an increase in other tax revenues, while the taxes collected from the top earners went down. (See the Congressional Budget Office site for historical data.)

So, with that little bit of context, we get a chief criticism of the article, and the Hauser Effect: it contrasts the change in the top marginal income tax rate against total tax revenues, as a percent of GDP. The total tax revenue is not solely dependent upon the revenue of the top earners, it has many components: income tax, social security tax/payroll taxes, corporate taxes, excise taxes, and 'misc' (wtf?). So, in any given year, the income tax revenues might have gone down(up) with a corresponding offset to the other taxes going up(down). Furthermore, the revenue from income taxes is not solely dependent on the highest marginal income tax rate. There are several tiers to the income tax, and a gain(loss) in the highest marginal income tax bracket can be offset by a loss(gain) in the lower income tax brackets. A more appropriate graph would be on where the revenue from the top marginal income tax bracket, as a percent of GDP, was compared to the top marginal income tax rate. The findings, I suspect, would be more ambiguous that Ranson's article asserts.

One thing that bothers me about this whole discussion, people are arguing about taxing the rich, and if it pays off. One thing that the graph makes quite clear to me is that tax revenue is about 19.5% of GDP. The real discussion shouldn't be does taxing the rich move that closer to 20%, 21%, 25%, etc; but, rather, what strategies can be exercised to grow the GDP? An analysis of which policies (lower income taxes, lower corporate taxes, more free trade, etc) have had the greatest impact on raising the GDP, and we should ensure that our government follows, and builds upon those policies.

The argument presented in the column is simple: rich people will only pay so much, in absolute dollars, in taxes, and they will hide, divert, re-class income, or simply reduce how much they earn to avoid taxes; and thus, the effect is they earn less in taxable income, which reduces the total GDP, so their taxes, as a percent of GDP, remains neutral. This conclusion is incorrectly drawn from the data presented. The thesis could very well be true; however, a more precise analysis of the correct data must be done to determine the validity of this conclusion.

Well, I am all dorked out, and looking forward to a four day vacation.

Later,

B

I am all that is Dork!

So, as you all know, or should know, I was robbed. Twice. In the first robbery (evidently if you are not home, it is burglary, but it is cooler to say robbery, makes it more dramatic) the sons-a-bitches got my lap top. Now, losing my tax returns, having my accounts and passwords on there, various games loaded on there, and such was bad; but the worse thing was that all of my iTunes songs where on there. That sucked.

I was/am lucky that my iPod was in my truck for both break-ins. So, all of those songs that I purchased are still on my iPod. However, here is the problem, wait for it, steady: your iPod is sync’ed up to a particular version of your operating system. If you lose your computer, crash the hard drive, upgrade Windows, and various other calamity, you will not be able to get you songs from your iPod to your computer; and vice-versa.

This was the situation I was in. Now, there are several shareware, open source, and third party vendors that have programs that will ‘rip’ songs from you iPod to your PC; but I’m a cheap bastard (more truthfully, I couldn’t get them to install on Vista) and so I typed in “How to get songs from iPod to Computer Vista” into the Google search bar. After wading past all of the adverts and such, there was a nice Yahoo thread that told me to do the following.

1) Connect iPod
2) On iTunes control panel, select the iPod on the left pane
3) In the iPod section make sure that the “Enable Disk” function is checked for your iPod (evidently this selection makes it necessay to use the ‘Safely Remove Hardware’ utility for USB devices
4) Open Windows explorer and select the iPod (called USB mass storage device, usually drive F:)
5) Under options for the select ‘Show Hidden Directories’
6) Go to the following Directories -> iPod Control -> Music
7) Copy the entire Music directory to a point on your hard drive
8) Open iTunes, go to the file button, select Import Files, browse to the new music directory, open each of the sub-folders (names F00, F01, F02, etc) and copy all of the files.
*Note: iPod gives the files random names, but it will be able to figure them out when it uploads them to iTunes.

Well, it took me more time than I would like to admit to figure that out (the whole ‘Enable Disk’ thing was beyond me); but I figured it out. So I am happy, because I saved all kinds of money in recovering the songs and I defeated the smarmy iTunes, and I remain King Dork.

Later,

B

So, what number do you choose?

So, I am reading the Freakonomics blog and they are discussing the Prisoners Dilemma game. They had an interesting couple of blog posts as to what question would you ask the other prisoner if you, yourself, were the other prisoner.

A brief aside: The Prisoners Dilemma is as follows: Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal: if one testifies ("defects") for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must make the choice of whether to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act? (Shamelessly lifted from wikipedia)

What happens in a one round game of the Prisoners Delimma is that each guy rats on the other, and both do 5 years; whereas, if they both trusted each other and shut up, they’d each do 6 months. The purpose of the questions of the blog is to use the best question to get enough information from your fellow prisoner to make the best decision for you. Here are the top 5 questions:

1. “How old are you?”

2. “What is the number of ethics courses you’ve taken, minus the number of economics courses you’ve taken?”

3. “Given that you are in a bar, would you prefer to pursue the most attractive person in the bar, or would your efforts focus on someone less attractive?”

4. “What is the name and address of your most cherished family member?”

5. “Have you read Freakonomics?”

My favorite is #4 (the eventual winner) because it really doesn’t seek information, but rather communicates a sociopathic warning. Which question do you like? Can you think of a better question? How do you rank the questions? Mine is 4, 2, 1, 3, and 5. I think #4 is the best for the stated reason; #2 is next because there is a working theory that people who take a lot of economic courses are cold and calculating and people who take lots of ethics courses are more cooporative (according to the people I know, people who take a lot of accounting and finance courses are boring); #1 is next because older people tend to be more cooporative than younger people, #3 is next because this is an incorrect demonstration of the Nash Equilibrum from the movie a beautiful mind; and, lastly, #5 because it was included in the list cause the guys at the Freakonomics blog are self-agradizing,

I think my claim to King Dork is safe.

Later,

B

A Big Dream

I have a plan, idea, dream, whatever; and it is big. It is still in its infancy, so I can not go into too much. Should the plan progress, I am going to fully pursue it. When I do people are going to say things like “Wow, do you really think you can do that?” “That’s a HUGE risk.” “Why?” “What if things go wrong, what will you do then?”

I know my parents will think I’m nuts. I’m pretty sure my sisters and my brother will shake their heads in disbelief. My friends will think I’m being grandiose, but they might think I can pull it off. I have no clue what my colleagues will say, but by then, their opinion won’t mean quite as much.

I know this, yet I still want to pursue this big dream. It isn’t so much that this has been a life long dream, and that somehow once this thing is done, I’ll be fulfilled. But, rather, it is going to be a monumental thing to pull off; and I want to achieve something that 99.9% of the people in this world wouldn’t dream of doing, much less do it. I can tread water in life, and achieve modest gains professionally and personally; or, I can swing for the fences.

I will take my swing. I will do it because a life of incremental gains seems inadequate to me. I feel if I strike out, I will only do so professionally; the risk taking, the work involved, and the willingness to let go of the safe route will be personally fulfilling no matter the outcome.

Yeah, I’m going to take my swing.

Later,

B

I am nerd, hear me roar

So, I play Massive Multiplayer Online Role Playing Game (MMORPG) World of Warcraft (WoW, for short). This game is nerdy and addicting, so I am all about it. This game is based on two factions, the Horde and the Alliance, completing missions and fighting each other. As a person's character (an avatar, if you will) completes missions, kills monsters, etc he/she gains levels and gets cooler weapons, spells, abilities, etc.

I’ve taken my WoW nerdiness to a new level: the economics of a Netherweave Bag. A bag, in WoW, is like any other bag, it is something you carry items in. A Netherweave Bag is a 16 items bag: one can carry 16 swords, flowers, pigs heads, etc in this bag. It is one of the best bags for an avatar to have.

How does one get a Netherweave Bag? Great question! One’s avatar must have tailoring as an ability, build up that ability to a high skill level and have to appropriate materials to create the bag, or buy it from another player. The materials to make a bag are bolts of Netherweave and rune-thread. Bolts of Netherweave are made from Netherweave cloth and rune-threads are bought from vendors. It takes 24 Nethwerweave cloths to make the requisite number of bolts of Netherweave, and 1 rune-cloth to make these nice bags.

Gee, Brian, that’s great, but that’s nerdiness that is inherent to the game, how do you increase the nerdiness level? Another great question! It is all about how much one can auction the Netherweave Bag for, and how much it costs to make one. (Quick side note, money in the game works as follows: 100 copper pieces = 1 silver piece, 100 silver pieces = 1 gold piece, pretty simple) The costs of making a bag are as follows: a rune-thread cost 42.5 silver, netherweave cloth either costs the time to kill enough bad guys to loot 24 netherweave cloths, or purchase 24 netherweave cloths from other players at the auction house. Now, I choose to purchase the cloths from other players, and I usually pay between 12 and 15 silver pieces per cloth. Doing simple math, that means I spend between 3 gold, 30 silver, and 50 copper pieces; to 4 gold, 5 silver, and 50 silver pieces per bag. The nerdy part comes in when I acution the bags for between 5 gold and 50 silver pieces to 7 gold and 90 silver pieces per bag.

How is that nerdy? Well, for no more than the quick couple of minutes it takes me to purchase the material, create the bags, and send them to auction I make between 2 gold, 19 silver, and 50 copper pieces profit, and 3 gold, 87 silver, and 50 copper profit. I realized that there is a mispricing between the cost of the materials, and the price people are willing to pay for the bags. This pricing scheme give anywhere from a 66% to 117% profit margin; this has to be making economic profit. A 5% to 10% profit margin could be seen as a just recouping the cost of capital; but at the stated profit margins: marginal revenue is much greater that marginal cost. I theorize that it is because the people who auction off the Netherweave cloth are under pricing their goods. I, and the others who auction off the bags, are consistent about not going under the 5 gold, 50 silver price for the bags; so while the price of the bags might be high, not enough competition has come in to drive prices down; so the mispricing must be on the component side. The price of the rune-thread is set by the system (the vendors are Non-Player Characters, NPC’s, who don’t change their prices and have an infinite supply) so the only variable is the netherweave cloth.

I am King Nerd, because not only do I play the game, and make gold making these bags,; but, I get a HUGE kick out of charging and getting paid too much for the services rendered. This is not a true arbitrage situation, but it feels just about as good as one.

Later,

B, the Big Nerd