Tag Archives: Economics

Politics, Preparing for the worst

Building a House on Shifting Ground

When I build a house, or have one built for me – I don’t have the time, energy or money to learn and master all the skills necessary to build a house and still keep the job that will pay for building the house – I don’t expect to have to be constantly monitoring the foundations for cracks, the walls for squareness, the rafters for support, the duct work for leaks, the basic integrity of the house. There are some basic expectations that someone has about the initial state of a house. A lot of these expectations are defined in building codes. The foundations are deep enough that the house doesn’t immediately start shifting. Rafters are strong enough to support the weight loads. Septic lines are sealed to prevent gasses from escaping within the house. Electrical outlets are properly wired to prevent fires and electrocutions. There are basic expectations that society has learned over time and codified, so that I don’t have to learn the same lessons all over again.

Expectations are lessons learned from the past. Why don’t I grab an iron frying pan handle that’s on the stove before checking to see if it is hot? because past lessons learned have taught me that iron retains heat for a while and it is worthwhile to see if it is still hot before grabbing. But a frying pan on a fire is rather simple compared to the overall complexity of a house. Even individual systems in a house can be relatively simple – the water system is just a bunch of pipes and faucets tied together. The electrical system is just a bunch of wires running from a fuse box the outlets (actually let’s simplify it further and get rid of the fuse box and just run the wires straight the to pole in the street.) The structural walls, floors and ceilings are just wood boards nailed together. But putting those three systems: water, electrical and structural, creates a very complex system. You probably don’t want an electrical outlet in a bathtub – my expectation is that it wouldn’t be healthy – and where one system can or can’t go dictates where other systems can or can’t go. You probably want the walls to be where the electrical outlets are but not where the toilet is (by the wall, on the floor – yes. wall running through it – no.) Putting a bathtub in the middle of a bedroom floor might look really neat (especially if it is one of those clawfoot Victorian tubs, colored with a dark red enamel and with gold trim and fixtures) but there are some practical problems with having a tub in a bedroom. The problems are left to the reader’s expectations.

I do expect to monitor the condition of my house periodically, maybe every few years. Foundations will shift over time and corrections can be made before the damage becomes too great, if caught in time. Pipes and seals will degrade over time and will need to be replaced. The one that I have to stay on top of at my place is to stain the exterior siding every two years because we have strong UV year round that will break down the cedar siding rather quickly if it is unprotected. Materials degrade in time, gravity is unrelenting, the laws of physics are unrelenting. I need to monitor the changes and effects on my abode periodically – not constantly, because I have some basic expectations of how things work.

We learn through life what our expectations should be. It seems that some expectations we learn are not realistic. I mean,if you run off a cliff you will start falling right away, you won’t stay up in the air and not fall until you realize there is no ground under your feet. (I think that image has warped some folks expectations of how gravity works, but it is a learned expectation.) A lot of expectations I have are not personally learned but have been transmitted from the society around me, via osmosis, to me.

What brought on this rant of houses and expectations? I was thinking about the current financial mess on Wall Street, our euphemism for the financial industry, and what my expectations are. I don’t have the knowledge or expertise to comprehend and manage my assets across the width and breadth of the financial system. So, I have to entrust the care a feeding of my assets to strangers and to trust in the kindness of strangers – because I have some expectations.

I expect the financial system to be built on a solid foundation with interlocking fail-safes to prevent a collapse of the overall structure. Why did I have this expectation? Because the American economy has ridden through several financial storms before and has almost sunk before and we learned some lessons along the way and codified them. And then 50-60 years later, after things have been relatively stable, we removed those codes based on lessons learned and the almost immediately the system collapsed.

Going back to my house analogy, you are supposed to go around periodically and review the state of infrastructure, fix and patch what may be leaking, maybe shell out some big bucks to replace the roof that has been pounded by 10-20 years of hailstorms, in general do what is needed to maintain the function of the house. You don’t go around saying ‘this wall is in our way, let’s take it down’ without considering it is a load-bearing wall.

My expectations on the financial markets are that I should be able to:
invest in the growth of the economy,
have a long-term retirement fund,
plan to have growth in the long-term fund.
have knowledgeable functionaries to run the fund,
know that properly managed securities are a known entity,
assume that the functionaries know what they are doing,
assume that assets invested in will still exist after a period of years,
assume that I am not being invested in securities that will disappear into a bankrupt pit,
expect that funds will fluctuate over the short term but will grow over the long term,
expect the Republicans will do everything in their power to undermine my long-term security.

Overall, I know that investing in securities is fraught with peril and risk. But, I expect that the fund managers I am using will be doing their fiduciary duty to minimize the risk. And that fiduciary duty includes wandering around the house and looking for cracks in the foundation and leaks in the pipes and the roof. And moving my stuff away from the leaks and the cracks until the repairs are made. The SEC is the repair group to fix the leaks and cracks. If the cracks are being caused by a shifting foundation then they will need to jack up the rafters and shore up the foundation to keep the stability. Expensive project. Or they can let the foundation collapse, clear it and everything that fell with it away, and rebuild the damaged section on a new foundation. Probably an even more expensive project.

Am I being naive in my expectations? Are they realistic? or are they the cartoony “I am still safe until I look down and see that I am standing on thin air.”?

Building on Shifting Ground

General, Politics

Some Daunting Numbers

I was just checking out the Census Bureau Population Report on Households. We are up to about 114M households in the US today, with about 2.55 persons per household. (Read the report if you want to see how they breakdown household compositions.) Of course, another Census Bureau report says we are at 116M households with a average of 2.56 people per household. I’m sure it all depends on what their definition of a household is, related vs non-related, etc.

With the National Debt at about $10,000,000,000,000, that runs to about $87K per household. The $700,000,000,000 bailout Rescue Plan that Congress is reviewing at present would add another $6K to average household debt. The median household income per year is about $50K per year. All that means is the 58M households make less than $50K per year and 58M households make more than $50K per year. So our national debt could be paid off in less than two years if nobody spent any money and just paid down the debt. In the meantime, the operating budget of the US for the next year is budgeted at $3,107,000,000,000, or $27K per household. (that doesn’t include the bailout figures). But US Households will only have to pay ~$19K each, for $2,200,000,000,000; $500,000,000 will be paid by other income sources. (Corporate taxes are expected to gather up to $339,000,000), and the remaining $400,000,000 will be tacked on to the debt. (Good ol’ Republicans, leaving their legacy ever deeper.)

I am finding it very difficult to find an ‘average’ household income. Everyone wants to list the median income. Whether the average is relevant, I am not sure. Incomes in the 5th quintile can be very skewed.

Economics, General, Politics

re: Executive Compensation

I have been hearing a bit that, as a result of the current financial meltdown, the salaries, the golden parachutes and the exorbitant compensation many (if not all) financial executives receive should be reduced due to their incompetence and malfeasance, especially if they expect the fed to bail them out.  On the other hand, the company/corporation and its shareholders are the ones that set the compensation and they are the ones that pay it out.

I would suggest that any annual compensation in excess of the US President’s salary be treated as taxable profit for the corporation.  So the corporation can still pay an executive $1M, $10M, $100M, but everything over $400,000 is taxed as pure profit. ( I also suggest that the President’s salary be no more than 10x the average household income in the US. )

I’m sure that these executives will try to  find a way around this limit – like ‘personal service contracts’ a la sport compensation packages – and I will leave it to the legislators to figure out how to deal with this violation of the spirit of the rule. Maybe something as simple as “executives can’t be contractors”. From my limited understanding of the corporate structure, executives are the ones that can commit a corporation to liabilities by signing a contract or agreement.

The other area of compensation that gets really outrageous is bonuses. I don’t know if bonuses can or should be tied directly back to the salary tax, but I would suggest that bonuses be deferred. An executive’s bonus should be based on how the company is doing 5, 7 or 10 years down the road, and not on what has happened in the past quarter or the past year. If a bonus is premised on an increase stock price, then let it be the stock price 5 years from now.  If the executive is no longer with the company, big deal, they, or their estate, still get the bonus.  Give the executives an incentive to lay a solid foundation for future growth rather than trying to game the system for a short-term spike in the market. That is a call for the board of directors and the shareholders, but maybe we can motivate them to go in that direction.

Politics, Preparing for the worst

it is still a lot of money…

$700 Billion, $700 Billion, $700 Billion.  Now matter how often I say it, that is still a lot of money.  Maybe if I try $.7 Trillion, $.7 Trillion, $.7 Trillion. Yeah, that’s not as bad, but it is still a lot of money.

Let’s see, about a week ago the Bush administration proposed buying up a lot of ‘toxic’ debt from various institutions to help free up the engine of the US economy. We, the American People, are being asked to bail out a bunch of de-regulated institutions who went and did what the lapsed regulations were meant to prevent.  $700 Billion. And we are being asked to blindly follow the dictates of the very people who created this mess and to decide very quickly, like by tomorrow, before we even know what the full scope of the problem is.  $700 Billion. I don’t think so.

But let’s say the idiots in Congress decide to further mortgage the future and attempt some sort of bailout. I would suggest that we don’t pay more that $.10 on the $1, and that we don’t buy any derivatives*. This purchase should only limited to base mortgage securities.  With Fannie Mae, et. al. we already have half the mortgages in the country.  Then once we have all these sub-prime mortgages, we can renegotiate with the original mortgage holder for $.50 on the $1.  And We, The People, can make a bit of profit and maybe let folks keep their homes.  Of course, the drawback is that it will take 30+ years to close the books on this.  Maybe once we have restructured all these mortgages from sub-prime to prime, we can bundle them up as security instruments and sell them back to the free marketplace?

And we will take our national debt from $9.7 Trillion to $10.4 Trillion. When you say it that way, maybe it isn’t a lot of money. Oh, but wait, don’t we still have another $400 billion to add to the debt in the next budget? $10.8 Trillion – let’s round it out to $11 Trillion –  we can live with that.

Or maybe the institutions that are going to sell these securities to us at $.10 on the $1 can avoid the middle-man, take the write-offs and renegotiate with the mortgage holders directly for $.50 on the $1.

*Whatever we do, we should not buy derivatives, at least not until a majority of the country has passed an introductory calculus course.

Economics, Liberating Thoughts, Politics, Preparing for the worst

Whose Economic Policies Work Best?!?

Personally, I consider the National Debt to be the greatest threat to the future well-being of the United States. Followed closely by deficit spending. Given the economic news of the past week, with the Federal Government doing its best to socialize losses, I expect the debt will continue to grow. (Did you know the National Debt is about to hit $10 Trillion? That’s Trillion, with a Tr.)

Avedon compiled a review of past administration economic results that Dwight Meredith studied “Just For the Record” – covering 1962-2001.

The link has some specific numbers and links to other interesting pages.

A bit of Summary:
Continue reading Whose Economic Policies Work Best?!? →

Economics, Politics

Entering the economic quagmire…

I read an article over on Making Light and it got me to pondering.

What libertarians (and the softheaded quasi-libertarian burghers of science fiction fandom, most of whom think the Economist is a voice of reason) need to learn is that capitalism is never about free markets, or in fact “freedom” of any sort; it’s about using the power of the state in order to make it easy for large amounts of capital to get together and rearrange the rules for its own convenience. “Privatize the profits, socialize the losses” is the logical consequence of capitalism’s prime directive. What we wind up with is socialism for the powerful, and tough shit for everybody else.

“Privatize the profits, socialize losses” seems to be a very apt description of Wall Street Capitalism.  Every decade or two we seem to need to learn the lesson all over again. If rules and regulations get set up, the players learn to game the system while continually trying to undermine the regulators – Oh! they’re not needed anymore since we learned that lesson!

But I did start to ponder about the full matrix that the statement creates.

  1. Privatize profits ——socialize losses
  2. Socialize profits——socialize  losses
  3. Socialize profits——privatize losses
  4. Privatize profits——privatize losses
  1. is straight Wall Street Capitalism
  2. is probably straight Socialism
  3. is never going to happen, or is it philanthropy?
  4. is complete anarchy/ true capitalism

I must continue my pondering.

Economics, General, Politics

The New Colonialism

China | The new colonialists | Economist.com

Not all observers, however, think that China’s unstinting appetite for commodities is super. The most common complaint centres on foreign policy. In its drive to secure reliable supplies of raw materials, it is said, China is coddling dictators, despoiling poor countries and undermining Western efforts to spread democracy and prosperity. America and Europe, the shrillest voices say, are “losing” Africa and Latin America.

I read this paragraph and immediately thought “How is this different from what the US has been doing for the past 100+ years? ” I might include the Europeans as well, after they had to relinquish their empires – coddling dictators indeed, setting them up in the first place, that’s what they were doing.