Monthly Archives: January 2009

Confidence game?

The unfolding news of Merrill Lynch just about boggles the mind.  From “Merrill paid employee bonuses before sale to Bank of America” on

Despite Merrill reporting a massive loss of $21.5 billion in the fourth quarter of 2008, the report noted that the company had “set aside $15 billion for 2008 compensation, a sum that was only 6% lower than the total in 2007, when the investment bank’s losses were smaller”.

“The bulk of 15 billion dollars compensation was paid out as salary and benefits throughout the course of the year,” the report said. Further, attributing to a person familiar with the matter, the report said that an estimated $3 to $4 billion dollars was paid out in bonuses in December.

Merrill and the Bank of America shareholders had approved the takeover on 5 December. “Three days later, Merrill’s compensation committee approved the bonuses, which were paid on 29 December,” it added.

It’s one thing for a profitable company to pay out big bonuses.  It’s another thing altogether for a company that is losing money to do it, then add the fact that the company is in the middle of being sold to a company that is being propped up with taxpayer funds.  This is the kind of thing that makes people very cynical.  Sooner or later it may even make them mad…

Here’s a take from a fellow I knew in college who writes a financial blog called Mean Street for the Wall Street Journal, Evan Newmark, in a recent post “Rise, Taxpayer, Rise”:

…it is amazing that Washington is still considering sending more tax money Chrysler’s way.Not that Chrysler isn’t pulling out all the stops to get it. This week, it announced a “global strategic alliance” with Fiat, another marginal, cash-starved automaker.

This “alliance” is not a plan for Chrysler’s viability. It’s a plan to wring another $3 billion in funding out of Congress to go along with the $5.5 billion of taxpayer money that’s already been put in.

Is Fiat putting any money in? No. Is Cerberus, Chrysler’s principal shareholder, putting any more money in? No. Will any investors put any money in? No.

It’s all up to you, the taxpayer. And with a trillion dollars in government stimulus in the making, that’s not going to change anytime soon.

But after another outrageous week like this last one, you may soon come to the conclusion that enough is enough.

Bob Reich’s calling it ‘Lemon Socialism’.

Put it all together and at this rate, the government — that is, taxpayers — will own much of the housing, auto, and financial sectors of the economy, those sectors that are failing fastest.

What’s left? Most of high-tech, entertainment, hospitality, retail, and commodities. So far, at least, we taxpayers are not propping them up. And when the economy turns up — perhaps as soon as next year, most likely later — these sectors have a good chance of rebounding.

But the others — the ones the government is coming to own or manage — are less likely to rebound as quickly, if ever. If anyone has a good argument for why the shareholders of these losers should not be cleaned out first, and their creditors and executives and directors second — before taxpayers get stuck with the astonishingly-large bill — I would like to hear it.

It’s called Lemon Socialism. Taxpayers support the lemons. Capitalism is reserved for the winners.

Folks who made bad decisions need to pay the price; if you want to profit from the upside, then you have suffer on the downside.  Enough with the giveaways that prop up undeserving losers (who don’t seem at all embarassed to be paying themselves off with the funds).

Predictably Irrational – Dan Ariely (2008)

Predictably Irrational is a book by Dan Ariely, a professor of behavioral economics at MIT, and it’s subtitled ‘The Hidden Forces That Shape Our Decisions’.  Ariely takes issue with the standard economics assumption of the fully rational man, and shows through various experiments a few of the many ways in which we make systematically irrational decisions.  Some topics I’ve heard about before, such as the effect of anchoring (the notion that thinking of a random number, such as a value between 1 and 100, can then influence how much you might be willing to pay for an item), but there’s plenty of new findings here that really make you think about your own habits.

I’ll let Dan himself tell you the bottom line, from page 239:

Standard economics assumes that we are rational – that we know all the pertinent information about our decisions, that we can calculate the value of the different options we face, and that we are cognitively unhindered in weighing the ramifications of each potential choice.

The result is that we are presumed to be making logical and sensible decisions. And even if we make a wrong decision from time to time, the standard economics perspective suggests that we will quickly learn from our mistakes either on our own or with the help of ‘market forces.’ On the basis of these assumptions, economists draw far-reaching conclusions about everything from shopping trends to law to public policy.

But, as the results presented in this book (and others) show, we are all far less rational in our decision making than standard economic theory assumes. Our irrational  behaviors are neither random nor senseless – they are systematic and predictable. We all make the same types of mistakes over and over, because of the basic wiring of our brains. So wouldn’t it make sense to modify standard economics and move away from naive psychology, which often fails the tests of reason, introspection, and – most important – empirical scrutiny?

Recommended, an easy yet thought-provoking book.

Inauguration Day

On the eve of the U.S. Presidential Inauguration (“ observe formally the beginning of”), just a few thoughts.  The election of Barack Obama has stirred many people’s hopes, and while I think it’s all well and proper to mark the occasion well, it’s an awful heavy burden for anyone to carry.  So far Obama has more than met my expectations of continuing to come across as thoughtful, calm yet fully in control, and genuinely interested in avoiding the pitfalls which have greatly limited the success of our last two presidents.

On this occasion, I can only wish Obama, his family, and his inner circle of advisors and deputies, great success in office.  Between economic meltdowns, foreign policy debacles, climate change worries, and a host of other pressing issues, they will have their hands full.  But of course there’s only so much that can be done from Washington D.C., and I know that Obama is fully aware that only if Americans really pull together can we jointly get through troubled times.

Trends and where we're headed…

Some economic trends as I see them… and my best read on where things are going.

1.  Productivity gains – we can now produce more ‘stuff’ with less labor input than ever.  In other words, labor is more productive than in the past.

2.  Capacity to produce than we can consume – possible output appears to be more than we can ‘sell’ or ‘afford’.  For example, the car companies are shutting down plants because they can’t sell all the cars they could produce.

3.  More labor in service jobs – since fewer labor resources are needed to produce the ‘stuff’, many people are now engaged in services jobs.  While some of these pay well (i.e. have high value add), many of them don’t pay very well.  What this means for overall buying power seems to be a relative decline…

4.  Massive use of credit has disguised the fact that we can no longer really afford all the things that we are capable of producing (at current prices anyway).  Krugman and others are calling this an ‘output gap’. In a related sense, the easy availability of credit has pushed up prices in some areas, such as housing and very likely stock prices (and even dividends, as noted in this NYT article “Easy Loans Financed Dividends”).  Unless prices come down again (or wages rise), there will be an imbalance.  Overuse of credit now finally appears to be leading to at least a short term upward bump in personal savings – however this may lead to a severe drop in business profitability, since consumption will drop further.  What is credit?  Ability to spend tomorrow’s productive work today.  We seem to have already spent quite a few tomorrow’s worth…

5.  Some business models are collapsing (music, newspapers, possibly most publishing).  Largely due to changes driven by the internet, producers in these fields are finding it hard to maintain revenues.  Other industries have too much capacity, such as real estate, construction, finance – they probably need to shrink.

6.  Where do we go from here?  It looks like some fairly large government stimulus plan will pass early in 2009.  Some things this may do:  (1) cut some payroll taxes – leading to slightly higher wages and lower labor costs, (2) some government spending, hopefully spurring some infrastructure maintenance that is needed in any case, and some new technology platforms (green energy? greener transportation?), and (3) some effort to provide assistance to homeowners in trouble (this seems tricky and problematic – what about speculative buyers? what about buyers who put no money down?  what about all the mortgage slicing and dicing into securities?).  Are these things enough to make up for the ‘output gap’? – seems unlikely, without some way of creating a transition from economic output that is no longer needed, to that which is needed and can be paid for.

Is there any alternative?  What if we didn’t do a stimulus plan?  Presumably the economy would slow down more, resulting in higher unemployment, which adds to an ugly downward spiral…  Would it achieve the necessary transition?  It would indeed achieve some destruction of output.  The bet is that a stimulus plan can ease the short-term pain and also help set the stage for a transition to more fruitful enterprise in the future.  But I wish those who argue for ever larger stimulus plans would admit that there are dangers and risks involved.  If a stimulus was always a net positive, then we might as well be doing it all the time…

7.  Where does the money for this stimulus come from?  Well, it has to be borrowed.  We’re already deficit spending by several hundred billion dollars, so the stimulus is all additional borrowing.  Will creditors line up to lend the U.S. more money?  What kind of interest rate will they ask for?  Is it a good bet to lend to the U.S. at this point?  (On the other hand, is there a better alternative for those with money to lend?).  All this is the tricky part, where it seems to be the most unknowns lie.  What all this does to the US Dollar over the next few years is anybody’s guess.

Update on Jan. 16:
8. The continuing mysterious bailouts of the banks is very troubling.  The amount of ‘paper money’ that appears to have gone up in smoke grows by 10’s or 100’s of billions at a time, and instead of having the people who made all these ‘bad bets’ paying the price, we the taxpayers are getting stuck with it.  The low information flow seems like a terrible sign – desperate officials are just somehow hoping that the massive losses will stop, but no one really knows what the banks are holding and how much more will disappear…  why any of us should have trust and confidence in our banking system at this point is a pretty fair question.

Congressman Blumenauer

There’s a nice profile of my Congressman, Earl Blumenauer, in today’s NYT. “A Bicycle Evangelist With the Wind Now at His Back” by Cornelia Dean.

And as support for cycling grows, he said, builders, the highway construction lobby and others have stopped regarding biking as a “nuisance” and started thinking about how they can do business.

With an eye on the potential stimulus package, cycling advocates “have compiled a list of $2 billion of projects that can be under construction in 90 days,” Mr. Oberstar said, adding that prospects are “bright.”

In addition, after many attempts, this fall Mr. Blumenauer saw Congress approve his proposal to extend the tax breaks offered for employee parking to employers who encourage biking. The measure, which Mr. Blumenauer called a matter of “bicycle parity,” was part of a bailout bill.

As always, times of crisis are also times of opportunity.  I for one am happy to have him pushing in this direction; I think he’s a good representative of the interests of the area.

What's needed for a 'free market'?

In the ‘Adam’s Fallacy’ post, there was a long stream of discussion in the comments, where some interesting issues were raised.

Perhaps it’s not Adam Smith’s fallacy or fault, but there is a conception that in a free market, the ‘invisible hand’ converts the self-interested actions of the participants in the market into a result that is to everyone’s benefit.  Sounds pretty easy!  But I think there’s a lot of necessary ‘foundations’ that are often left unspecified.

What factors are prerequisites for the working of ‘free markets’?  Here’s my a starting point of a list, with brief notes on each point.  I’d be happy to have any of these disputed or new ones added.

1. Strong notions of private property and ownership.  Things that aren’t privately owned, such as air and the seas, don’t make for good markets.  Some things seem to run toward natural monopolies, and these can also not work so well as markets.

2. Legal system of contracts and ability to press for damages in case of breach.  Also mechanisms for addressing externality problems (one party’s fruitful activities having a negative impact on unrelated parties).

3. Strong sense of cooperation and trust in the population.  It’s a very good question where this comes from and how it’s sustained…  We often take this for granted, but it’s not always present – here’s a funny but scary bit from Tony Horwitz’s book “A Voyage Long and Strange” where a person is speaking of the driving ‘rules’ in the Dominican Republic:

“Rule number one, defensive driving,” he said, accelerating as we approached a busy intersection. “Never stop at a red light, because the guy behind you won’t, and he’ll rear-end you.”
“What about drivers coming the other way?” I asked.
“Their light’s green, so they know to stop and then go very cautiously.  Yellow’s the easiest. You step on the gas.” He paused. “of course, a lot of the time the stoplights aren’t working. Then the rule doesn’t apply.”

Granted, this is a kind of cooperation & trust, but not one most Americans could feel comfortable with!

4. Common rules and a ‘level-playing field’.  In general it should not be the case that one company gets special privileges that its competitors do not – company success should be through superior performance, not superior connections.  Likewise it must be clear to new entrants what the rules are.  People must abide by the rules or face legal consequences.

5. A certain level of transparency – what does a product consist of? has it been shown to be effective in some sense?  This relates to creating a sense of trust.

6.  Institutions to help out where markets don’t really apply – charities for example.

7.  An educated populace with a variety of skills & ability to learn.  Along with this a certain willingness to give up old traditions and habits in order to adapt to market changes.

8.  A certain level of common infrastructure that is maintained – for example, transport systems, electricity and water and sewage.

9. A certain kind of ‘enlightened’ self-interest.   For a person, we might say that an ‘enlightened self-interest’ takes into consideration the ‘common good’ – if a person simply tries to maximize short term personal gain at the expense of all his neighbors, he may find that his narrow self-interest leads to a negative outcome.  Note however that for a corporation, by law the self-interest is in creating shareholder value, or in other words making a profit (can this be reconciled with an ‘enlightened’ self-interest?).

The bottom line of all this, I believe, is that where we see the most pure expression of ‘free markets’, we also see large government involvement to help achieve and maintain many of these pre-conditions.

Changing attitudes…

I found this story interesting, as it indicates the way that change in thinking sometimes takes place over generations…

It’s from “Car-free? In Japan, that’s how a generation rolls” by Yuri Kageyama, running in today’s Oregonian.

To get around the city, Yutaka Makino hops on his skateboard or rides commuter trains. Does he dream of the day when he has his own car? Not a chance.

Like many Japanese of his generation, the 28-year-old musician and part-time maintenance worker says owning a car is more trouble than it’s worth, especially in a congested city where monthly parking runs as much as 30,000 yen ($330), and gas costs 100 yen a liter (about $3.50 a gallon).

That kind of thinking — which automakers in Japan have dubbed “kuruma banare,” or “demotorization” — is a U-turn from earlier generations of Japanese who viewed car ownership as a status symbol. The trend is worrying Japan’s auto executives, who fear the nation’s love affair with the auto may be coming to an end.

Now the U.S. is a different place – much bigger and more spread-out; but similar changes in attitudes would not surprise me.  Certainly few young people would look to GM or Ford as a ‘shining beacon’ for the future – Apple would be a much more likely aspiration.

Adam's Fallacy – Duncan K. Foley (2006)

Adam’s Fallacy by Duncan Foley is subtitled “A Guide to Economic Theology”, and it’s about the best short guide I’ve found to the major streams of economic thought starting with Adam Smith.  The ‘fallacy’ as Foley describes it, is as follows: “Smith asserts the apparently self-contradictory notion that capitalism transforms selfishness into its opposite: regard and service for others.”  Foley argues that it’s all a whole lot more complicated, and he tries to point out the tangle of scientific observations from moral arguments as he reviews the ideas of Smith, Malthus, Ricardo, Marx, Keynes, and a few other economic figures.

Here’s how he wraps things up:

Capital accumulation has its own logic – the discovery and exploitation of opportunities for profit in specific historical and social circumstances….  It is only prudent for us, living with capital accumulation, to understand its logic as well as we can.  That we understand it as well as we do is largely the fruit of the intellectual labors of these great thinkers and their followers.  But understanding the logic of capital accumulation does not require us to surrender our moral judgment to the market, either as individuals or as political actors. The exploitation of any profit opportunity involves a range of consequences, some good and some harmful. There is no escaping the moral relevance of weighing the good and the harm in each case.

Still, this is an economics book, so even it has some dry stretches, but I do recommend it as a good starting point and general introduction.  In these days of bailouts, bankruptcies and stimulus plans, it’s worth some study.

Synecdoche, New York

On New Year’s Eve I made it over to Cinema 21 to see Charlie Kaufman’s film “Synecdoche, New York”.  It’s the mind-bending story of a theater director played by Philip Seymour Hoffman who dreams up a vast play that seems to be attempting to encompass the whole world, losing himself in the process.

My take on the film is that it’s looking at our unavoidable fate, and our efforts to avoid it or to find a way to ignore it.  But it seems to posit the danger that our efforts to avoid thinking about it can in fact drain our lives of the things that make it worth living in the first place.  For Kaufman in particular one can imagine that he could start to feel that his artistic creations have more ‘life’ than he does.

I have to say that I’m not sure why one character buys and moves into a house that is literally on fire.  Perhaps the whole thing is a dream…  (it does seem to start and end at precisely 7:45am).

I felt the film could have been a little tighter, that losing 15 minutes or so would not have taken much away from it.  Worth a viewing if you like the kind of self-referential brain teasers that Kaufman specializes in.  Here’s a strange review from Roger Ebert.

Best of 2008 – Listening

As always, I’m listening to music most of the time I’m home, so here are are few of the recordings from 2008 that have given me the most listening pleasure (no particular order).  I notice that almost all of these picks are from long established artists, even though I do try to listen to new things as well (I wasn’t sold by the chamber pop of Fleet Foxes, for example).

  • David Byrne and Brian Eno – Everything That Happens Will Happen Today.  Solid pop songs with an  open, positive vibe from Byrne.
  • Lucinda Williams – Little Honey.  A rock and roll record that ends with a nice cover of an AC/DC tune to finish things off (“It’s A Long Way to the Top”).
  • Stephen Malkmus & Jicks – Real Emotional Trash.  The band, now with Janet Weiss on drums, likes to jam.

  • Nick Cave and the Bad Seeds – Dig, Lazarus, Dig!!!  A powerful, funny, subtle recording, perhaps their best.  Unfortunately I was underwhelmed by the band’s appearance in Portland in September, which was instead  loud and sloppy.
  • Wire – Object 47.  The art-punks from 1977 are still going strong.
  • Stereolab – Chemical Chords.  Another long-time band doing good work.
  • Robyn – Robyn.  Pop/dance music from a young Swede.
  • Most fun song:  “Oxford Comma” by Vampire Weekend.

Older stuff that I enjoyed a lot this year:

  • Van Morrison – nearly the entire early seventies catalog.  What a wealth of music!
  • Bob Dylan – Tell Tale Signs.  A grab bag of material that sounded about as cohesive as any of his records.
  • Bryan Ferry – first solo record of covers was an interesting surprise I hadn’t heard before.
  • Flamin Groovies – Teenage Head.  Sounds a lot like the very early Stones, which is not a bad thing.
  • Dolly Parton & Porter Wagoner duets.

Best shows (not that I saw very many!):

  • Three from MusicFest NW held in early September in Portland: Battles, Britt Daniel w/Janet Weiss, and Nada Surf.
  • Michael Moore Quintet @ Bimhuis, Amsterdam – Feb 14.