Understanding Money

For a long time I’ve been convinced that we mostly don’t understand how money really works.  It’s way too easy to think that the government must operate just like a household, and ensure that it doesn’t overspend – thus many of the current calls for austerity.  And obviously there are limits – we all know about 1920s Germany and Zimbabwe and many other examples of runaway inflation.  But typically there are additional circumstances driving such situations (such as reparation payments and crazy dictators)!

I found this column “Not Enough Money” from the National Review’s Ramesh Ponnuru interesting, because he believes many of the folks warning of impending hyper-inflation are probably fighting “the last war” instead of truly understanding the current situation.  Here’s a taste:

In warning about inflation, conservatives are crying “fire” in, if not Noah’s flood, at least a torrential rain. It may be that they are stuck not so much in the 1930s as in the 1970s — the time when conservatism forged much of its current outlook on economics, and a time when monetary restraint was badly needed. Conservatives also tend to think that loosening monetary policy is a kind of intervention in free markets, and therefore to be suspicious of it. But this is an error.

Inflation?

From John Mauldin’s last newsletter, in a section titled “So Where’s the Inflation?”:

The actual amount of bank loans is falling each and every quarter, with no signs of a bottom. Consumers are reducing their debt and leverage. Bank loans are being written off at staggering rates. Over 700 banks (I think that is the figure I saw) are officially on watch by the FDIC, with more banks being closed each week.

There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off. As more families fall into unemployment or underemployment, there will be more writedowns. Is it any wonder that banks are having to shore up their balance sheets and make fewer loans?

With capacity utilization just off all-time lows, why should we expect businesses to borrow to increase capacity? Inventory levels are much lower than two years ago. Businesses no longer need to finance as much inventory. They simply need less.

Dennis Gartman writes:

“Effectively the Fed had become a cash machine rather than a monetary expansion machine. At the end of last year, the multiplier had actually fallen to less than 1.0 and the trend remains downward. If anyone had told us five years ago that the money multiplier would be down to 1.0 we would have laughed. The laugh, however, would have been upon us, for it is there and it is still falling. Hard it shall be to sponsor strong economic growth when no one really wants to take a loan or when few banks want to make a loan. The ‘game’ of banking has been turned upon its head, and the strength of the economy suffers while inflationary pressures (at least for now) remain virtually non-existent.”

Bottom line is that there’s plenty of evidence that we’ve already had a lot of the inflation everyone’s worried about (it was just called a Housing Bubble, or rising tuition, or rising medical costs, not inflation).  Right now money is disappearing (loans being paid off or written off), and I think the Treasury and Fed are trying desperately to keep outright deflation from taking over.

This NYT article “Preparing for the next bubble” also had this interesting bit at the end:

So rather than trying to predict the number and type of bubbles, it may make more sense to look inward when trying to predict the future. Bob Goldman, a financial planner in Sausalito, Calif., said that clients often looked at him blankly when he asked them what it was they imagined for themselves in the future. Sometimes, they need to go home and figure out what sort of life it is that they’re saving for — and how much (or little) it might cost.

“People come in and talk about how we all know that inflation is going to explode next year,” Mr. Goldman said. “Well, we don’t all know that. We don’t know anything. But we can know something about our own lives, and there is a person we can talk to about that. A person in the mirror.”

It does strike me as strange that so many people seem to have such certainty about the economic future, when in fact no one really knows!  But it is indeed fascinating to ponder…

Democracy in action

Photo by Jonathan Maus / bikeportland.org

Today I went down to Portland City Hall to participate in a rally in support of the passage of the Portland Bicycle Plan for 2030 to build out a more comprehensive network of bike routes through the city.  The rally was followed by the City Council meeting to hear citizen testimony and vote on the plan.  It was the first time I had attended such a session, so kind of interesting.  Many of the initial speakers were clearly ‘insiders’ who had worked in various areas of city government and knew the players.  But there were plenty of neighborhood association representatives and others who mostly spoke in favor of the plan, with a few raising concerns and a few outright objecting to it.  Here’s more coverage from bikeportland.org.

Unfortunately because of the big turnout and the large number of speakers (probably 30+ got two minutes each), and followup questions from city commissioners, the vote was not held today and will be held next Thursday.  Democracy, not always pretty, but it’s hard to find better alternatives!

Update: A week later the City Council did approve the bike plan, and the next challenge is to find funding to ‘Build it!’

On Risk & Security

I like and agree with Bruce Schneier’s thinking here (when asked about whether a successful plane attack is inevitable in this Atlantic interview):

The fact that we even ask this question illustrates something fundamentally wrong with how our society deals with risk.  Of course 100% security is impossible; it has always been impossible and always will be.  We’ll never get the murder, burglary, or terrorism rate down to zero; 42,000 people will die each year in car crashes in the U.S. for the foreseeable future; life itself will always include risk.  But that’s okay.  Despite fearful rhetoric to the contrary, terrorism is not a transcendent threat. A terrorist attack cannot possibly destroy our country’s way of life; it’s only our reaction to that attack that can do that kind of damage.

I want President Obama to get on national television and project indomitability. I want him to dial back the hyperbole, and remind us that our society can’t be terrorized. I want him to roll back all the fear-based post-9/11 security measures.  We’d do much better by leveraging the inherent strengths of our modern democracies and the natural advantages we have over the terrorists: our adaptability and survivability, our international network of laws and law enforcement, and the freedoms and liberties that make our society so enviable. The way we live is open enough to make terrorists rare; we are observant enough to prevent most of the terrorist plots that exist, and indomitable enough to survive the even fewer terrorist plots that actually succeed. We don’t need to pretend otherwise.

New TSA regulations are for the birds!

I have to say I agree with this opinion piece, entitled “President Obama, It’s Time to Fire the TSA”

The TSA isn’t saving lives. We, the passengers, are saving our own. Since its inception, the TSA has been structured in such a way as to prevent specific terror scenarios, attempting to disrupt a handful of insanely specific tactics, while continuing to disenfranchise and demoralize the citizens who are actually doing the work that a billion-dollar government agency—an agency that received an additional $128 million just this year for new checkpoint explosive screening technology—has failed to do.

This quote explains the situation very well, I think:

Security expert Bruce Schneier nails the core incompetency: “For years I’ve been saying ‘Only two things have made flying safer [since 9/11]: the reinforcement of cockpit doors, and the fact that passengers know now to resist hijackers.'”

On Health Insurance Reform

As things heat up in the health care debate, I found this article a very good reminder of some of the shortcomings of the system we have in the U.S. today:  “You Do Not Have Health Insurance” by James Kwak.

The point of insurance is to protect you against unlikely but damaging events. You are generally happy to pay premiums in all the years that nothing goes wrong (your house doesn’t burn down), because in exchange your insurer promises to be there in the one year that things do go wrong (your house burns down). That’s why, when shopping for insurance, you are supposed to look for a company that is financially sound – so they will be there when you need them.

If, like most people, your health coverage is through your employer or your spouse’s employer, that is not what you have. At some point in the future, you will get sick and need expensive health care. What are some of the things that could happen between now and then?

• Your company could drop its health plan. According to the U.S. Census Bureau (see Table HIA-1), the percentage of the population covered by employer-based health insurance has fallen every year since 2000, from 64.2% to 59.3%.
• You could lose your job. I don’t think I need to tell anyone what the unemployment rate is these days.
• You could voluntarily leave your job, for example because you have to move to take care of an elderly relative.
• You could get divorced from the spouse you depend on for health coverage.

For all of these reasons, you can’t count on your health insurer being there when you need it. That’s not insurance; that’s employer-subsidized health care for the duration of your employment.

And the bottom line:

The first-order problem is that as long as your health insurance depends on your job, your health is only insured insofar as your job is insured – and your job isn’t insured.

Now I don’t claim to know what the solution is; but I definitely agree that there are problems with our current ‘health insurance’ model.  The employer-based system was a bit of an accident in the first place, and at this point I would think that many businesses would be relieved to be out of it, particularly those that have to compete with firms that don’t have to worry about such problems.  It would be great to see more creative thought going into how to improve the situation for both employers and individuals.

J.G. Ballard, R.I.P. : 1930 – 2009

Just saw the news that British author J.G. Ballard passed away today at age 78.  I first found Ballard in the mid-eighties, and was pretty blown away by the RE/Search volume containing several interviews that expanded my sense of what he was all about.  He had a clear-eyed view of the world, formed in part by his extreme experiences in his youth in Japanese war camps in Shanghai, that made for a potent literary imagination.  Some nice quotes from Iain Sinclair:

Everything that everybody else was bored by or appalled by, he was excited by. He wasn’t really interested in English literary parties and kept himself outside that.

He was bored by the heritage of Central London and, unlike other writers, never wanted to talk about what he was writing. He preferred to talk about ideas, or some weird news cuttings he had brought along.

Living out in Shepperton for so long, he was one of the first to undersand that the psychosis of suburbia was a fascinating thing to pursue.

I assisted with the RE/Search reprint of The Atrocity Exhibition that came out in 1990, and still have a copy of the manuscript for the annotations that Ballard did for that edition.  I remember that his short notes on certain surrealist art were very illuminating.  I will miss this true individual.

Genetics impasse?

A quick note on an NYT story today, front pager “Genes Show Limited Value in Predicting Diseases” by Nicholas Wade.  The lead:

The era of personal genomic medicine may have to wait. The genetic analysis of common disease is turning out to be a lot more complex than expected.

Since the human genome was decoded in 2003, researchers have been developing a powerful method for comparing the genomes of patients and healthy people, with the hope of pinpointing the DNA changes responsible for common diseases.

This method, called a genomewide association study, has proved technically successful despite many skeptics’ initial doubts. But it has been disappointing in that the kind of genetic variation it detects has turned out to explain surprisingly little of the genetic links to most diseases.

Can’t say I’m all that surprised.  I think in recent years the “man=computer” and “genes=software” metaphors have been way overdone, leading people to think that ‘cracking’ the genome would explain everything.  While it’s surely important, and study should continue, I think there’s got to be a whole lot more going on.

In related news, this post from Boing Boing is interesting… “Our ‘Missing’ Chromosomes” on the evidence of better explained linkage between human and ape genes, indicating that in humans chromosomes may have fused together which are separate in apes.

House of Cards, part 6

Joe Nocera of the NYT has a good story today explaining the situation around the bailout of AIG, entitled, appropriately enough, “Propping up a House of Cards”.  It appears that AIG sold all sorts of ‘financial insurance’ without going to the trouble of keeping any decent reserves in case they had to pay out.  Banks and others bought this insurance, making it appear that they were adequately covering their mortgage risk.  Here’s Nocera:

When a company insures against, say, floods or earthquakes, it has to put money in reserve in case a flood happens. That’s why, as a rule, insurance companies are usually overcapitalized, with low debt ratios. But because credit-default swaps were not regulated, and were not even categorized as a traditional insurance product, A.I.G. didn’t have to put anything aside for losses. And it didn’t. Its leverage was more akin to an investment bank than an insurance company. So when housing prices started falling, and losses started piling up, it had no way to pay them off. Not understanding the real risk, the company grievously mispriced it.

Second, in many of its derivative contracts, A.I.G. included a provision that has since come back to haunt it. It agreed to something called “collateral triggers,” meaning that if certain events took place, like a ratings downgrade for either A.I.G. or the securities it was insuring, it would have to put up collateral against those securities. Again, the reasons it agreed to the collateral triggers was pure greed: it could get higher fees by including them. And again, it assumed that the triggers would never actually kick in and the provisions were therefore meaningless. Those collateral triggers have since cost A.I.G. many, many billions of dollars. Or, rather, they’ve cost American taxpayers billions.

Unfortunately it appears that the domino effect of letting AIG fail would be a devastating series of losses around the world.  So we’ll continue to prop up AIG among others.  Limited liability for shareholders, but the liability for taxpayers appears to be unbounded.

Regulation done right?

This story from Newsweek’s Fareed Zakaria, “The Canadian Solution,” is worth a read.  He notes that Canada has come through the financial crisis in quite good shape.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada’s more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

While we may find the idea of regulation to be a necessary evil, it’s certainly worth studying what policies actually work reasonably well.  I log this under ‘sustainability’ as well, since it appears that the Canadian model banks will outlast ours!

I’m on the road for the next couple weeks, so probably light blog activity!