Thursday, February 28, 2008
Tuesday, February 26, 2008
This new service is like "Got V-Mail" advertised on FOX. But this is free and offered by Google! They are accepting beta testers now, so get you phone number quickly.
I've got it installed on my more random, sometimes tech focused blog "Mobloggin"
Sunday, February 24, 2008
The following is an excerpt from a paper I wrote about the interdependency of foreign exchange currency markets, and the mortgage crisis.
Traditionally the money supply has been fairly well understood and controlled by an age old system of leveraging reserves to loan money to borrowers. The federal monetary policy regulated the percentage of reserves required to be maintained by the bank, freeing the bank to lend the remainder, making profit form the interest. In the old days the bank would keep the loan on their internal books, which in turn acted as an incentive to minimize the risk of the loans they issued.
In recent times banks and non-bank lenders (good example of non bank lender in this article from 1998) have developed a system by which they package loans and sell them to investment groups. These groups then use the loans as collateral for securities and sell the securities to investors. This process does two things, first it eliminates risk for the lending institution by taking the loan off of the origonator's books. Second it provides a loophole for lenders to subvert the reserve requirements established by the Federal Reserve allowing them to lend up to 100% of the value of the property.
From a bank's perspective this is a real win-win situation. Banks can now reduce their overall risk profile by selling off all but the very best loans, making them very stable. The Fed using it's traditional means of monitoring a banks reserve requirements are very satisfied.
The investors using the loans as collateral are also very happy with this new business process. Using new technology to help police the default risk of the loan packages, companies securitize the loan packages with some degree of confidence. The new security is in most cases less volatile than many other financial instruments, and offer a good rate of return for a reasonable risk. Unfortunately there is a dark side to this portion of the securitization process, since the rating of loan packages as securities is relatively new, there are not strong regulatory standards established providing the FED with oversight capability. The result is that the securitizer, often faced with a conflict between profit and reliable transparent ratings, can inflate the rating of the security.
I believe that this conflict of interest in the risk rating of this type of security is at the heart of the current loan crisis. On one hand the securitizer makes the most money on his investments by giving the investor the impression that these are low risk real estate backed securities with a great rate of return. On the other hand, he has to encourage the lenders to make loans no matter what the risk to keep the gravy train rolling. Meanwhile, the investment firms are acting under a different set of regulations than banks while perfoming a banking function... creating money!
The investment companies are effectively augmenting the money supply outside the traditional means established and monitored by the Federal Reserve. Would-be borrowers with some equity (or in some cases the expectation of equity) now have a way of securing money against their collateral quickly and at a reasonable cost. Borrowers can now take their expectation increased equity and convert it into money quickly for near term projects or expenses. Although the mechanisms are quite different, this approach to securitization of loans provides a means to generate revenue much like public corporations have been able to do in the past by selling stocks against their future profits or securing ventue capital.
I hope this makes sense...
Thursday, February 14, 2008
Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.
So, that's what they decided to do.The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20." Drinks for the ten now cost just $80.The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free.But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?'They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.And so:
The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (3 3%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings."I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!""Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I got""That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!""Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for drinks so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!And that, ladies and gentlemen, journalists and college professors, is how our tax system works.
The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.
This is a repost from Sound Politics Public Blog but it was making the rounds via email.
Saturday, February 09, 2008
I was just flipp'n through the channels and I came across a Glen Beck rerun on CNN headline news!?!
I generally stop in when I surf past Glen's show, because I enjoy watching crazy people talk about interesting stuff, but I couldn't take it, a CNN news show re-run... And even worse, It was Glen whining about Romney dropping out. His gripe was that Romney was the only financial genius running for the President, and the only hope for the country. Oh what to do?
Well Glen, you've admitted to not being an economist on other shows and I have to agree with you, your no economist. There are plenty of economics genius's working for either camp, I know some of them personally. The cure for our economy's problem is not one of math or supply and demand, it's one of selling one of several unpleasant solutions to an American population that only wants good news.
With our current account balance dropping to record lows by last September, consumers taking advantage of an underrepresented increase in money supply through cheap loans with low buy-in thresholds we've been on an economic bender for several years. Economics is a lot like drinking, you can indulge a little and take little corrections along the way (the french say it its good for you) or you can have a real blow out and have a big hang over the next day. With any luck, while your blissfully intoxicated you don't break any laws and get picked up by the police and screw up the rest of your life. To get back to the analogy, the U.S. have been on a binge for several years with all of our favorite trading buddies and it's time to pay our tab.
The bottom line is that the solution to our economic problems are not hard to figure out, but they take some real political courage to implement. When the next administration chooses between holding our population accountable, or punishing our allies for irresponsibly throwing money at us while we were on our binge, someone is not going to be happy. Ideally there will be a compromise somewhere in there where neither group gets rolled in the alley, our economy needs both groups to be happy.
The next president has to be good at getting children to take their cod liver oil before bedtime. That skill will come in handy when he has to talk U.S. consumers into getting used to tighter money supply (less real money in their pockets), and trading partners used to a weaker dollar (they own so many dollars a weak dollar is last on their Christmas list). Its going to be a tough sell both ways.
We need a skilled politician to sell some hard choices, Romney couldn't even sell himself... what chances would he have had.
For another interesting rant on the sour grapes some in the republican party check out my friend KT Cat.
Friday, February 08, 2008
First, National Security: If we pull out of Iraq before we have a chance to put the pieces back together, we will be facing a much more dire security risk from the Middle East than if we bail out because it has turned uncomfortable, and unpopular. It will take political courage to stick with Iraq until it is self sustaining (my estimate... 2 to 10 years).
The Economy: I have been playing with a couple of economic models over the past few months and if they are as comprehensive as they are advertised to be, the Medicare, Medicaid, and Social Security situation will become a real problem within the next ten years. If you don't believe me, just look at the growth projections from the Congressional Budget Office. We can't afford another large entitlement program that is going to increase exponentially as baby boomers retire.
Taxes: Targeted tax cuts act as incentives, to expand business. If you lower the burden on business they will respond by growing, more importantly growing businesses make more jobs than shrinking business. If you want to shrink business you tax it. The AMT is a very regressive tax, it is basically a success penalty, do we really want to dis-incentivize success?
Education: The democrats want to improve education, which I support, unfortunately, they want to increase taxs and re-allocate to tuition, which will increase the supply for educated adults but will decrease the demand for them. I personnally think that tax incentives could be created for companies to invest in the educational process, after all they are going to be the ultimate benefactor of an upgraded workforce.
Immigration: Immigration is one of the toughest problems we face today! Huge national security problem, but it is also a huge demographic and economic issue as well.
Developed countries have all had problems with a lower birthrate than required to maintain a vibrant workforce. Our illegal immigration is filling a vacuum caused by our low birth rates and hot economy; if we were to eliminate the illegal workforce our economy would have millions more jobs than workers. In that situation the only two options are to shrink our economy, or to export jobs to other countries; none of the options would be popular. Our illegal immigration problem has made our demographic crush much less painful that of Japan, Europe, or Russia who are going through a much more severe demographic problem than we are. China is going to see a real problem when their one child policy hits their workforce in 10-20 years.
Rule of Law: Rule of Law is the counterargument to the demographic/economic argument, how can a nation of laws (rule-of-law is to governments what opposable thumbs are to mammals) reward a large population of citizens for breaking the law? I don't believe you can! To make matters worse, amnesty would not fix the demographic/economic problem that caused the illegal behavior to begin with. The illegal immigration problem is tough, and I'm not sure anyone has it figured out.
Goning back to McCain, he demonstrates the courage and conviction that I think will make him a very good President. While he and I don't completely align on the issues, his principled approach to policy gives me some comfort that he will not stray far from the positions he has articulated during his campaign, and I can support that.