flwyd: (currency symbols)
I'm in New York for work this week, so I walked down to Zuccotti park last night to check out the general assembly for the Occupy Wall Street movement. Some thoughts and pictures are on my Google+ stream. Since it's a public post, you shouldn't need a Google+ account to view that though. If that's not the case, please let me know.
flwyd: (Vigelandsparken thinking head)
This short article about credit card companies getting rid of customers doesn't say anything new, but it catalyzed an interesting analogy for something I've been thinking about for a while:

Free Marketeers like to talk about the tragedy of the commons. Suppose 100 people live in a village and their local pasture can support 220 cows. Everyone can graze two cows and things will be fine. But then some clever fellow realizes he can get ahead by grazing an extra cow that slips under the radar. But then everyone does that and the pasture can't support that many cows, the grass dies, and then the cows have nothing to eat. Free Marketeers say that the solution to this problem is to privatize the commons so that an individual has an incentive to ensure the pasture survives.

Now suppose we replace "pasture" with "American consumers" and "cows" with "nonessential goods and services." The recent decade of boom, domestically and globally, was largely driven by cows nonessential goods and services foraging on grass American consumers. Big houses, expensive electronics, SUVs, sneaky fees, and other products made huge profits by stretching the resilience of American consumers. And while one or two industries stretching consumers beyond good fiscal discipline could be sustainable, when everyone piled on, the resource was tapped out and everyone's cows business ventures starved.

The Free Marketeer solution of privatizing the resource obviously doesn't work in this analogy -- private ownership of another person's economic activity is slavery. The other main resolution to the tragedy of the commons is regulation: the people organize a governing body which can prevent or punish those who try to graze more cows endanger the ecosystem for personal gain.

Remember: Be suspicious of anyone who has a vested interest in you making poor decisions. Credit card companies don't like people who pay off their full balance every month (the responsible thing from the card holder's perspective). Rather, they prefer people who make the minimum payment each month, but a couple days late so they can rack up interest and fees. (Except now they're trying to get rid of those people to reduce their risk exposure. Oops.) Therefore, the credit card company does everything it can to get you to make poor economic decisions. A commercial bank wants to make as much profit off your deposits, loans, and fees as possible, but a credit union wants to provide the most benefit to its depositors and lenders. Therefore, a credit union's policies are more likely to be in your favor.
flwyd: (mathnet - to cogitate and to solve)
[livejournal.com profile] mackys asks
What is a reasonable estimate for the ACTUAL value of the mortgage-backed "junk" securities that $810 billion of my tax dollars bought?
The answer to that question has fluctuated every few days recently, so note that everything I say could be wrong soon.

First, a timeline.
  1. US Financial System: OMG! We paid way too much for all these mortgages and nobody wants to buy them from us! O noes!
  2. US Treasury Secretary: You guys are too big to fail. I'll save you!
  3. Lehman Brothers: Save us, Henry!
  4. US Treasury Secretary: Wait, not you, Lehman.
  5. Lehman Brothers: <is dead>
  6. US Financial System: OMG! Did you see what just happened to Lehman, guys?!? I'm not going to give you any of the money I don't have in case you're the next Lehman.
  7. US Treasury Secretary: Ruh roh.
  8. US Treasury Secretary: I has a 3-page plan; let me show you it! Let me offer you a $700 billion "bailout" by buying all your "toxic waste." No oversight, no accountability. Sounds great, huh fellas?
  9. US Taxpayers: WTF?!? You're bailing out a bunch of bankers by buying toxic waste?
  10. Karl Rove: What happened to the Bush administrations public relations team after I left? That's the worst sales job ever.
  11. Senate Banking Chairman: Hey, I've got an 8-page better idea. The government should buy shares in banks. They'll get a liquidity injection and the government will make money when the banks do.
  12. US Financial System: <flail wildly>
  13. John McCain: In my many years in Warshington, I've fought wasteful government spending. And as president... Wait. For the next two days, I don't want to be president. I need to rush off to help the government hastily approve $700 billion in spending.
  14. Political Pundits: You're not a maverick. You're a loony.
  15. US President, US Treasury Secretary, Federal Reserve Chairman, Speaker of the House, Committee Heads, Attention Whores Presidential Candidates: Buying $700 billion of toxic assets sounds great. Here's a 100-page proposal.
  16. House Representatives in Tight Races: O noes! Our constituents found our phone numbers! Halp! I want to get reelected, screw this bailout.
  17. US Financial System: Well shiiiiiit.
  18. Emergency Conference Meeting: You know what people think is tasty? Bacon. Let's add 350 pages of pork.
  19. Somebody In The Meeting: *psst* Let's slip the stock purchase option back in there.
  20. US Senate: Tastes great, we're willing!
  21. US House of Representatives: Okay, I guess...
  22. Financial Commentators: So... the government is going to invent a price for a bunch of stuff which has no market value because nobody wants to buy it.
  23. Economists (some): Something must be done. This is something, therefore, it must be done.
  24. Economists (others): This is a terrible idea.
  25. Economists (still others): This might work, but I've got a better idea.
  26. US Financial System: I'm going to drink heavily for a week and then turn on MTV and the radio at the same time.
  27. US Treasury Secretary: I know I said there might not be an economy by Monday, but I'll need five weeks and some Wall Street executives on staff before I can do anything.
  28. Germany: Scheise! Now our banks are in trouble. Immediate action! Your money is safe in German banks!
  29. Europeans: Hey, now we have to guarantee our banks!
  30. Economists: Hey... that sock purchase plan is in the bailout plan. Let's try that.
  31. United Kingdom: Bollocks! Now our banks are in trouble. Immediate action! We'll take major shares in you chaps. kthxbai.
  32. World Financial System: Whoa... I think I'm still drunk.
  33. World's Major Central Banks: All together now: lower interest rates! That usually works!
  34. World Financial System: Crap! I mean Great! I mean... maybe?
  35. Iceland: We're melting! And not just because of global warming.
  36. US Treasury Secretary: World leader huddle!
  37. World Financial Leaders: Okay... we're not making progress running straight into the line. Let's run the option.
  38. US Treasury Secretary: But I hate the option. My fans always boo.
  39. World Financial Leaders: Henry... you can run the option or you can lose the game.
  40. US Treasury Secretary: Fine! I'll run the stupid option.
  41. World Financial Leaders: Okay, everybody. I know we've all trumpeted the wonders of the free market system for years. But the free market is having trouble, so we need to save it. Our plan is often called "nationalization." We're going to become part owners of major banks so they'll have money they can use to lube the wheels of the economy.
  42. Financial Commentators: Wow. The best option is socialism.
  43. John McCain: I'm gonna go ahead and NOT mention that in my campaign.
  44. US Financial System: Well... okay... I guess. But I won't move until everybody else moves too.
  45. US Treasury Secretary: Dear diary... the last month has sucked ass. But I think we're going somewhere.
So... what's the value of what taxpayers are buying? Like most questions in finance, the answer is "That depends on the future market." What are the pieces?

Henry Paulson (Secretary of the Treasury) wanted to solve the problem by spending $700 billion to buy mortgage-backed assets. (Essentially, that's a bunch of assets tossed in a pile. Except then somebody pulled pieces out of each mortgage and stuck them into other piles. It's like everybody in a neighborhood having spaghetti, but each noodle is really long and is on everybody's plate.) What would the value of these assets be? In some approaches to value, something is worth exactly what someone else is willing to pay. So in a sense, we'd be buying $700 billion of mortgage assets because we're willing to pay $700 billion. But then they'd be immediately worth much less because nobody else wants to pay $700 billion for them. In fact, nobody wants to pay much of anything for them. Part of the problem is that, under mark-to-market accounting rules, if nobody wants to buy a bank's piles of mortgages, banks can't pretend they have a bunch of money instead. And if they can't pretend they have a bunch of money, they have problems doing their normal bank activities like borrowing and lending money.

Under other approaches to value, the piles of mortgages are worth significantly more than nothing. Some percentage of the people who mortgaged their homes are making monthly payments, so the piles of mortgages are earning income. But investors don't think they can make a good guess about how many people will keep paying their mortgages, so they aren't willing to gamble on invest in them. If the U.S. government owned them, they wouldn't have to worry as much about accounting rules. The government would get the money that homeowners pay each month, meaning they'd have some real value. After a few years, once the economy settled down and investors felt like buying stuff again, the government would sell the piles of mortgages back and recover some of the taxpayer's money. In the mean time, the federal government would be the country's biggest landlord and end up owning a bunch of houses. I'll come back into that in a bit.

The main problem with the Paulson plan (aside from the world's worst marketing job) is that it put the government in the role of a really dumb investor. One of the main goals of the "OMG, save the banking system!" plans is to inject liquidity (i.e., money that's easy to spend) into financial system. If the government drove a hard bargain (what a private investor would do), they'd get a bunch of really cheap mortgages (great for the budget when the market improves later!), but banks wouldn't get much money they could spend. If they paid enough to get the money flowing (what a government would do), they'd probably end up losing a bunch of money in the end. The government has some smart people working out some rules for a reverse auction The federal government is good at losing money (call it an Investment Portfolio to Nowhere), but a lot of economists looked into the proposal and thought it wasn't very good.

Finally, Paulson bit the bullet and followed the European lead to the government buying major shares in banks. Some key things to note:
  • The government gets "preferred stock." That means that the government gets company profits (from dividends or sale of assets in case of a collapse) before normal shareholders.
  • The Treasury has said, on their honor, that they won't use the shares to influence the decisions of the bank.
  • This provides an immediate infusion of liquid cash (technically it's electronic, which is kind of like liquid... there's electrons flowing through wire instead of water flowing through pipes...)
  • Nobody has to make up a price for the piles of mortgages. The government's buying shares which currently have a market value.
  • If the banks get better, the government makes money when they sell the shares.
  • If the banks fail, the government gets a chunk of their assets.
  • This guy thinks there are some devilish details the banks can twist to connive with the sudden infusion of taxpayer money. (He lists "rotisserie baseball" as an interest. I hope that doesn't involve hitting a chicken with a stick.) Listen to the Planet Money podcast for his points. (As usual, Adam Davidson does a better job than I do at explaining this stuff.)
  • I think Treasury is still planning to buy "toxic assets," but their total available cash for toxic waste and bank stock is around $350 billion and the latter will take about $200 billion.
So what's the real value of the mortgage-backed securities taxpayers are buying? Hard to say. But we aren't spending $700 billion on them. What's the value of the bank stock we're spending $200 billion on? Hard to say, but if things get better the value should be more than $200 billion. The bankers don't really like the stock plan, but their collective overvaluing of the market got us into this mess, so tough cookies.

A caricature of the Soviet economic system is that everybody gets an identical place to live (owned by the government) and gives most of their money to the State. America, these caricaturists say, is better because we let each person decide what house to buy with their own money. But in the end, everybody ended up buying a house that looked just like all the other houses in their subdivision. And under the Paulson plan, the government would've owned a bunch of them and everybody would've paid their mortgages to the State. Under socialism, government men start with a plan to exploit their fellow men. Under capitalism, it just ends up that way.

Part of me thinks it would be really interesting for the government to own a whole bunch of suburban real estate. They could embark on projects to create local centers of employment and commerce, reducing the distance people would have to drive and thereby reducing dependence on foreign oil. They could turn vacant McMansions (in Denver lingo "Prairie Palaces") into housing cooperatives. The other part of me thinks housing cooperatives and local community development must grow bottom-up to have a chance of success. The federal government is good at doing big things like running national parks. A half-dozen hippies are good at doing small things like organizing a house inhabited by a half-dozen hippies. But I think there's a chance that the anonymous sprawl suburbs will become the new ghettos while former industrial buildings (aka lofts) become the hip expensive places to live. Centennial will be a really swank ghetto, but it'll still be a ghetto. Maybe we'll be listening to rap songs entitled "Straight Outa Rancho Cucamonga."

I've come to understand some interesting things about macroeconomics in the last few years, but hard-core capitalism still bothers me. At its root, it's a bunch of people doing stuff in exchange for imaginary pieces of paper. The main advantages of money are that you can do math with it and it can be exchanged multiple times. If you give me $10, I can later give the $10 to somebody else. Or I can divide it in half and give $5 to two people. But money isn't the only thing that can be exchanged. Much of the time, it stands in for time, effort, or information. If I give you an afternoon of my time and energy moving all your stuff from one apartment to another, you can't necessarily give that afternoon to somebody else. If you and I have sex for ten minutes, it has no (necessary) impact on your ability to have sex with somebody else for ten minutes... or two other people for five minutes. If I tell you a funny story and you want to tell it to two other people, there's no need to tell each only half the story.

Money is a tool to enable zero-sum games. But a very effective path to success is for multiple individuals to team up and play a game that's not zero-sum. Maybe that's why society gets so skittish about prostitution: it tries to mix a zero-sum game (paying money) with a non-zero-sum game (two people helping each other have an orgasm).

Remember that investing is essentially gambling with two important differences: Nobody's quite sure what the odds are and the house doesn't always win in the long run. When you invest money, you might get more of it back or you might get less of it back. When you invest time (hanging out with friends, playing games, having sex, relaxing in the sun on the porch) you know that hour of time won't come back, but you also know it won't suddenly turn into just half an hour. Remember that money isn't the only thing in the world worth exchanging with another person.

So that's all the economics questions I was asked on my original post. If I didn't bore you to tears and you didn't learn what you want to know from Planet Money, ask more questions!

Capitalism Fail

Thursday, October 2nd, 2008 10:11 pm
flwyd: (Om Chomsky)
My submission to [livejournal.com profile] failblog_rss:
capitalism FAIL / Bear Stearns / Merrill Lynch / Lehman Brothers / AIG / Wachovia / WaMu / Fannie Mae / Freddie Mac

Gotcha Capitalism

Monday, January 7th, 2008 08:55 pm
flwyd: (Om Chomsky)
Today's Fresh Air program featured an interview with Bob Sullivan, author of Gotcha Capitalism: How Hidden Fees Rip You Off Every Day -- And What You Can Do About It. He talked about arbitrary fees charged by banks, cell phone companies, cable companies, and others that can make up a major percentage of their profits. It sounds like a very informative book, especially for people who don't like to read the fine print. I do read fine print (though I don't usually enjoy it), and I will probably add this book to my "get around to reading it" list.

I think there's significant value in a lot of libertarian ideas, but their "get rid of government and the market will take care of it" philosophy doesn't win me over. I dislike dealing with government bureaucracy and oppose government control over private activities as much as the next hippie pagan techie. But I dislike corporate bureaucracy even more and oppose corporate disregard for privacy and personal freedom as well. "A free market would resolve this by selecting for companies with transparent processes and strong privacy policies" is the stock libertarian response, but Sullivan doesn't think it's true. He said that one hotel chain tried to be up front about their prices and it was a disaster because customers selected their competitors whose prices looked lower but packed a lot of hidden fees.

One reason I don't own a cell phone is that I choose not to participate in the rigged market of cancellation fees, incoming text message fees, convenience charges, and "you spent too long talking to your friend with a crisis" overage charges. My monthly local phone service + DSL bill is the same regular $44 every month; the only time I've had to call Qwest because of billing confusion was when I didn't understand the wording of "we've just started charging monthly for allowing long distance calls." But I'm sure that if I had mobile service through the same company, I'd be caught off-guard on a regular basis. One difference is that there are more government regulations of what and how companies can charge for local phone service.

At least with the government I know that all prices and fees are clearly published, the requirements are stated up front, and that caprice is against the rules. I'd rather be at work tomorrow morning than at the passport office, but at least I don't expect any surprises. Driving there in the snow, on the other hand...)

Buy Nothing Day

Thursday, November 23rd, 2006 06:08 pm
flwyd: (spam lite)
I always forget to announce this well in advance, but this is a reminder that tomorrow is Buy Nothing Day. Participate by not participating!
flwyd: (mail.app)
When making a purchase at Borders bookstore, customers typically receive a coupon good for a limited period of time roughly a week ahead. This is an interesting practice, encouraging repeat purchases while discouraging multiple-item purchases. It plays on the American belief that it's not how much you spend, but how much you save. Sales and discounts can induce people to spend money in the belief that they're being frugal by saving 25%, not realizing they would save 100% if they didn't go to the store.

I'm quite aware that it would be fiscally irresponsible to buy a book every week just because I've got a four day window in which it would be 20% off. (Ignore for the fact that I have a few dozen books that I want to read which are already in my possession and don't really need to keep buying more.) However, I've been pretty pleased by resent results. To wit:

I bought O'Reilly's Ruby Cookbook last weekend, which had a 30% off sticker on the cover. I liked this for several reasons. First, Ruby seems like an interesting and useful language, full of things like regular expressions, closures, easy filesystem access, and runtime modification of framework classes. Second, O'Reilly's animal covers and solid writing style makes their purchase release collector endorphins in geeks. Third, computer books are expensive, and 30% equates to $15; not a bad bargain. I then received a "20% off one item when you spend $10 or more" coupon, good for this weekend.

Since my birthday was in the middle of the week, this weekend counts too. Since I had a 20% off coupon, I figured I'd go find another birthday present. I didn't really need anything, but I figured a percentage discount on a big item would be suitable as a present. I'd seen Knuth's The Art of Computer Programming series at Barnes and Noble, but Borders' computer focus is on "get stuff done" technology than theory, so no imposing intellectual texts for me. I figured the best place to look for big ticket items would be the boxed set cabinet, where I found a number of intriguing items. There was a complete Red Dwarf boxed set for $250, but I think I saw most of the episodes on TV and couldn't really justify $200 for the privelage of watching them again. But then I espied a complete Monty Python's Flying Circus 16-DVD boxed set. The set is also available 2 DVDs at a time for $40 a pop, so the base sticker price of $199 is the efficient way to acquire such absurdity. 20% off puts it at $160, just $10 per DVD. I think a DVD of Flying Circus provides $10 worth of entertainment, and it seems unlikely that I'd be able to find the whole series used for much less, so I had an employee unlock the cabinet and took my selection to the counter.

I set the boxed set on the counter, produced my coupon, and handed over my Borders Rewards keychain. The item rang up at $79.99. The cashier looked at the screen, looked at the box (price tag face up), looked up and said "I can't beleive it's priced like that. Oh, coupon I guess." I declined to point out the numbers on the price tag, proferred my debit card, signed the thermal receipt, and wished her a good day.

I'm ordinarily a big fan of independent locally-owned bookstores, but I haven't patronized them much lately. Boulder Bookstore's computing selection is frankly pretty lame. The Tattered Cover has lots of good stuff, but I don't think I've been downtown or to Cherry Creek since... I bought a Mac Mini in March. Borders and Barnes and Noble, on the other hand, both have branches within walking distance of my office and my apartment. And really, how can you beat paying $80 for an item which would cost $320 if acquired piecemeal?

So... anybody want to have a Monty Python Party? Or a discussion about the relative merits of (Monty) Python, (Jack) Ruby, and Perl (S. Buck)?
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