Category Archives: Know Your History

Unmoored Part III

[continuation of the Unmoored series]

What value did the CDO bond add to the economy?  The argument was it allowed lower interest rates to more people so they could afford to by homes and iPods (turns out CDO’s also often had credit card debt bundled in them). And that may have some truth to it.  But I believe the cost, the tradeoff — in breaking the risk-reward relationship outweighs it. And that breakage was the incentive for their creation – the credit extension to more people was just the justification.  I don’t think Wall Street sits around thinking “how can we help out the less well off by offering them more credit?”.  Partially because human (and animal) nature has a force that draws us for the most reward for the least effort or risk. There’s nothing inherently wrong with that.  It’s the way all life works.

But the CDO did not really create a new value sink.  As I alluded, it isn’t that they are valueless to the economy, it’s that they come with social and economic consequences that outweigh the value they may add.

What they effectively create is a value sinkhole.

And some investment firms and bankers stood at the edge of this sinkhole and like filter-feeders and tried to skim as much of the accompanying abstract cash flow as they could as it spilled into the growing pit.

They had these subprime loans that loan clearinghouses created by this bond market wouldn’t buy.  How to sell them off, too?

I remember when a standard bag of sugar was 5 lbs.  Now it’s 4.  It was done to sell us less for more without raising the price of “standard” unit (by changing the standard size).  You’re hard pressed to find a 16 oz can of anything in the grocery store. 15 and a half. Packs of gum have 5 sticks in them instead of 7.  I even notice that the 12-pack bubble-packs of gum we usually buy now have 11 pieces.

So how do you get people to buy subprime loans on the bond market?

Well, someone came up with the grand idea of packaging them with prime loans and get the package rated higher than the original loans.  Watered down CDO’s. Since subprime loans historically get paid off, just not at as high a rate as prime ones … the argument was made that it the risk was still good (even though, by definition, that couldn’t be the case) and the rating companies agreed that they were still good enough to rate AAA, rated them so, and so they sold.

So now we’re not only further unmoored from economic reality (value transactions where the value remains close to the individual) … we’re being slightly dishonest.  It always starts with the white lies.

With this milestone behind them, packagers argued that the biggest risk in the subprime market was that housing prices would fall.  While that sometimes happened in this region or that, the argument was that the chances of housing prices falling all over the country at the same time was small, so they packaged disparate subprime loans from different regions and again got the packages rated higher than the individual loans were rated, and sold those.

There was an absurd assumption that housing prices would always go up.  Historically, though, that’s not true. In a little longer view of history, they tanked about 50% in the Great Depression.  That ain’t hay.

Depressions and recessions happen, and they do affect entire nations, and often other parts of the world.

The market for these bonds was good, and people were making money selling the bonds.  So they wanted more bonds to sell. So they needed more people to take out loans.  They baited hooks to entice people with less and less money into taking loans that the banks at some level probably knew they couldn’t pay back.  But they didn’t care.  They were selling the loans and making money off the bundles.  It would be someone else’s problem.

Now in a sane society, this would not work very often.  People should be brought up knowing how loans and interest work, and they should learn how to budget and learn how much they can afford to spend on a house and still do the things they want to do.  I always figure out, for every car loan I’ve taken out, my student loans, my house loan… how much the payments would be per month, added them up, and structured the term of my loan so that it fit my budget with plenty of wiggle room.

But in our affluence we’ve spoiled a few generations by not teaching them basic economics growing up, and shielding them from the consequences (risks) of their ill-advised behavior.  They don’t know the meaning of the word “responsible” (No, contrary to that stupid insurance ad campaign it doesn’t mean helping a lady across the street. That’s courtesy, not responsibility.  See, they don’t even know what it means.)  We bail them out, they get something for nothing, and they think this is the way the world at large should work.

So when somebody presents them an offer that would sound too good to be true to a responsible person — they just see it as more candy from a new daddy.  And they bite.  And then go screaming that the evil bankers took their homes away when they couldn’t afford the payments.  I’m not letting these consumers off the hook.  It’s a big problem with our culture, and it needs to be fixed.

All of this was bad enough.  But what happened next truly boggles the mind, and turned what would have been some bad private investment losses into a catastrophe that reached into the wallets of unsuspecting Main Street America.

[to be continued]

Loading Likes...

Unmoored Part II

[continuation of the Unmoored series.]

I had a discussion a few years back with a friend where he incredulously explained that bankers created money “out of thin air”.  I had never really thought about it.  And while I utlimately realized that this was technically true, I also knew there had to be some relationship to reality.   Money is, at the bottom of it all, an exchangeable value store.  It makes it so that I don’t have to trade a plumber two chickens to fix my kitchen drain. In a very crude but useful illustration, say I fix a computer problem for a farmer, and he gives me the money he made from selling two chickens to a distributor, I take that money and give it to a plumber to fix my kitchen sink, and he uses it to buy two chickens from the grocery store.  I never touched a chicken and the grocery store doesn’t really care if my kitchen sink is working or not.

Now … if there were a static amount of money in the world, an increasing population alone would cause a problem.  The price of everything would be astronomical by now.  So clearly money needs to be created in order for all of this to work without me getting chicken feathers all over my hands.  (Chickens don’t fit in your wallet very well, either, and the feathers jam up the cash registers.)

The objection was that a banker, say with $100, makes loans for $1000 and he gets to say he has $1000 in assets. He “created” $900 “out of thin air”.

I had to think about that for a while before I found the connection to reality.  No, he didn’t create $900 of value.  He created a value sink to collect value from the people who took out the loans in the first place.  People create value, almost out of thin air, by doing things for others.  We typically call it “work”.  It turns out that most of the value in most products is not wrapped up in the raw materials so much as in the work that was done with those raw materials to make, say, a tire or an iPhone.  So people who take out loans make tires and iPhones and give some of the money they get from making tires and iPhones back to the bank to pay off their loans.

Of course, some of them might not manage their cash flow well, or get fired or whatnot, and they may not actually end up paying back that loan. Which introduces risk on the part of the lender.  So the lender charges a fee to help offset that risk, which we call “interest”.  All of this is old stuff, but we don’t usually stop to think about how it all really works.  It’s kind of strange, because money is an abstraction of value and so requires abstract thought to understand … but … at least you can see how money generally ties back to reality without too much headache.

So the pool of money expands so that a million of us aren’t fighting over the same fixed amount of money 100 of our ancestors had.  This works. There’s no perfect way to abstract value, as people value things differently. Yes, the moneychangers have an advantage and yes, they often abuse it. Life is not fair. But it’s pretty much how it’s worked for quite some time now. Banking itself is very regulated for these reasons.

Oh, but people are clever. When one lacks moral fortitude, any regulation can be thwarted by a technicality.  I’m not suggesting specific regulation upon specific regulation to try to patch up the problems with it, either. That road, after a point, tends spawn more unintended problems that the original problem caused. It is the way it is.  There are no solutions. Only trade offs.

The banking market got tightly regulated over the years, but the bond market, not so much.  So brokerages started creating packages of loans to sell as bonds, and structured them in such a way that the person buying the bond was insulated, in large part, from the risks of default.

Money is an abstraction of reality.  A loan is an abstraction of an abstraction  with a risk-reward balance. We’ve seen how they relate back to reality.  It functions as a value sink.  But now we have an abstraction of an abstraction of an abstraction in these bonds.

This is where academia goes wrong, and it is also, IMHO, where the financial industry went off the tracks.

At this level of abstraction, the risk-reward balance is eroded if not completely broken … and that is its intent.  To me, this is the departing point, the unmooring — which while I don’t like I can understand the justification.  I just don’t agree with it. But that’s not the end of it. It gets worse.

[to be continued]

Loading Likes...

Unmoored Part I

We took a road trip recently with some friends I’d met on the bus on the way to DC in 2010. Good people. Aunt and uncle of Chris Loesch, it turns out. It was a pleasure trip to go see a concert 450 miles away, so there was plenty of time for talking about other things, and we did talk books.

The big “Bush’s Fault” 2008 crash came up, and he asked if I’d read “The Big Short” or “Boomerang”. They were about what was going on inside Wall Street and the second — around a few other countries in the Western World … in the early 2000’s up to 2008.

Now people ask me to read and watch all sorts of crazy things that I won’t. Anything that starts out telling me about how Jews are controlling the world from a bunker in London, 9/11 truther crap … not buying it.

My interest piqued when he told me it was the same author that wrote “Moneyball” … which I had recently watched (good movie) and “The Blind Side” … another good movie that I think did rather well in the theaters. I think Sandra Bullock was in it. So I thought hey, even if he turn’s out to be a crackpot he’s not your average anonymous crackpot, and I liked the material and treatment in those two movies so the odds were against.

Thanks to the evil corporations of Barnes and Noble and Amazon, and Intel and AMD and all the corps involved in running the internet … I had a copy on my nook tablet within 10 minutes of checking into the motel.

I read “Boomerang” and am most of the way through “The Big Short”.

I’m titling this series “Unmoored”. Hopefully you’ll see why.

I frankly knew few of the actual inside details of the crash. I knew AIG was involved big, as well as Goldman Sach’s. I knew it had to do with banks making loans to people who couldn’t afford to pay them back (I would like to point out the flip side of this — people who couldn’t afford to pay them back were TAKING loans from banks). And it was mostly these big banks. The quasi-government alinstitutions Freddie Mac and Fannie Mae were connected to it. Government anti-red-lining policies contributed. I knew it was triggered by overextensions (I thought of banks) and defaults by real estate loan holders. All true, but far from the whole story.

I’d heard the terms “CDO” and “Default Credit Swap” tossed around, but really didn’t know what they were exactly. I basically knew what it was to “short” a sale, but I couldn’t wrap my head around how it pertained to home loans.

So here’s my general understanding of it now:

In the real-estate loan market, there are good risks and bad risks. People with higher credit ratings are good risks and get the best interest rates, and people with poor credit ratings are bad risks and get higher interest rates to cover the risk. Yes, it seems “unfair” to charge people with less money more money — but it’s a loan, not charity, and the lender needs to cover the cost of the people who won’t pay theirs back to make it worthwhile. All basic stuff we already knew. Those last loans are called “subprime”. The borrowers don’t meet normal credit rating standards for a prime rate.

The Community Reinvestment Act of 1977 opened this market up quite a bit and probably contributed to the problem … but I’m finding out it really was a (relatively small core group of) bankers and people some big investment houses that spun this whole thing out of control. It’s very hard to wrap your head around the mechanisms, not so much because they were THAT complicated — it’s just — you can’t make any sense of what relation to actual economic reality they bore. In other words, “who even dreamed this stuff up????” Most of the management at the banks didn’t even understand them – and they didn’t care – as long as their portfolios looked better every year. This was as much of the problem as the core group’s wild schemes.

This core group, actually, weren’t a “group” in the sense that they got together and colluded. They would just as soon have stabbed each other in the back, I think. But there were a few people doing the same kinds of things, studying and copying each other and extending the ideas to more and more absurd mechanisms further and further unmoored from economic reality.

[to be continued.  I’m making this a series both to make it easier to read and easier to write.  I am going somewhere with this.  I think.  It’s a little fuzzy right now, but I’m going somewhere as long as I keep the word “unmoored” in mind.]

Loading Likes...

An Open Letter to Both Houses of Congress

Please vote “no” on any so called “assault weapons” ban.

Anti-gun advocates are pushing hard in the heat of the moment to rush through legislation that violates the intent of the Second Amendment.  In their zeal to take advantage of any crisis, they seek to consolidate ever more power in Washington and eliminate perhaps the most important check on Federal abuse in the Constitution — that being private citizens retaining the power to abolish a government that becomes too tyrannical.  The Federal Government was not formed to grant and revoke rights, it was formed to protect our God-Given rights.

“… to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.”

The Second Amendment is, as are all of the standing amendments, a part of the Constitution.  It can be revoked, but only by the Constitutional Amendment process.  I don’t see anybody moving in that direction.  The movement is in the direction of what the Constitution, via the second amendment, specifically prohibits.

“A well regulated Militia, being necessary to the security of a free State, the right of the people to keep and bear Arms, shall not be infringed.”

It does have an introductory clause, but that clause does not change the meaning of the declarative portion of the wording, which is ” the right of the people to keep and bear arms shall not be infringed.”

It doesn’t just protect our right to keep them.  It protects our right to carry (bear) them.  And that right — protected as a directive to the Federal Government as to what it specifically cannot do … SHALL NOT BE INFRINGED.

What part of SHALL NOT BE INFRINGED do these people not understand?

1.Actively break the terms of (a law, agreement, etc.)
2.Act so as to limit or undermine (something); encroach on

The first definition applies in that to actively break the Natural Law that gives us the right would be an infringement.  But the second definition is the definition that most people think of … to “act so as to limit or undermine”.  So the Federal Government cannot act so as to limit or undermine the right of the people to keep and bear arms.  That’s what it says.

It doesn’t say it “shall not be infringed” “unless”, or “until”, or “as long as”, or “but only if”…

It doesn’t mention hunting.  It doesn’t mention sport shooting.  It mentions security of a free state, though.  That bit was apparently far more important.

If we want to address mass murders, let’s address mass murderers.  Let’s also address the gun-free zones that enable them.   Let’s not break the Constitution by infringing on the right of millions of law abiding citizens.

Your job in Washington is an important one.  It is not, primarily, to make laws.  It is to protect and defend the Constitution of the United States of America.

Loading Likes...

Missing Something

A friend posted a quote and a link to a Jack Shakley opinion piece in the LA Times.

In February 2003, 450 economists, including 10 of the 24 living Nobel laureates in economics, made a public plea to President George W. Bush not to enact the recent tax cuts passed by Congress. [..]

In the nearly 10 years that have elapsed since that plea, the budget deficit has ballooned, the gap between the wealthy and the middle class has expanded, and the American economy has spiraled into the greatest decline since the Depression. History has proved the 450 economists were correct. On Dec. 31, these same Bush-era tax cuts are set to expire. This, we are told in hushed or hysterical tones, could push the American economy off a “fiscal cliff.”

Am I missing something here? Can letting a failed tax policy die be such a bad thing?

Ignoring the huge non sequitur that 1) the tax cuts were implemented and 2) all this bad stuff happened, that 3) the bad stuff happened because the tax cuts were implemented, because a big sounding number of economists including 10/24 sooper smart people said it would (does anyone wonder what the other 14/24 thought?), I said … yeah, you are missing something.

Something like any sort of balancing opinion.

So I linked that day’s Thomas Sowell column on the subject, in which he directs us to look at the Obama Administration’s own economic report as well as a New York Times headline from after the tax cuts were passed expressing surprise at increased tax revenue from corporations and “the rich”.

To which a friend of that friend thoughtfully countered Sowell’s argument and evidence with the brilliant argument, and I quote, “Thomas Sowell is a shill”.

He followed that with something very close to (I later embarrassed him into deleting his own comments, so I’m not sure how word-for-word this is …) “and before you go spouting off about the founders, let’s remember they crapped in buckets, owned slaves, and wore satin pants and powdered wigs. But times change, don’t they?”

I did politely hit him back exposing his puffery knee-jerk stink bomb throwing, which apparently eventually embarrassed him into deleting those comments. Hey. Progress. They CAN be made to feel sheepish about their rude and thoughtless puffery.

Sowell is a shill, eh? There’s a deep and thoughtful assessment, Jim. So, can you tell me exactly where you think the “shill’s” argument ran off the rails and why, or, as I suspect is more likely true, that it is your attempt to pre-empt any sort of thoughtful discussion by dismissing an opinion you don’t like with a quick ad hominem?

The Republicans who lost “big time” still hold a solid majority in the House, and they are there to represent the people who voted for them. I’m pretty sure no Republicans ran on increasing taxes or increasing spending, so I’m going to assume people didn’t vote for them to do that. By pushing back, they are doing their jobs. And I’m pretty sure none of them own slaves (since they are of the party that was formed specifically in opposition to it, ended it, got the 14th amendment passed, elected the first several black congressmen, and got the civil rights legislation through the 1950’s and 1960’s passed, all on the principles of equal treatment under the law that those bucket-crapping, slave owners framed in the Constitution) …. and I’m also pretty sure none of them crap in buckets or wear powdered wigs.

Now, I told you that story to tell you this one.

The “founders were slave-owners” tack is a common one. The bucket crapping, satin-pantsed powdered-wig wearers … well, I gotta admit that was a new one on me. But this was clearly shut-uppery, which thanks to Andrew Klavan, I don’t fall for anymore. I really do think this guy thought had the last “sane” word on the subject, and that if I did pick up the mantle of the founders, it would be met by the ridicule of all onlookers.

Don’t back down, and don’t let them have their red meat. What I did was mock his shallow attack. I called him out on it and exposed his attack for what it was. I did limit it, though, and I’m going to go on a bit here with some thoughts for future trips down the road this guy tried to take it.

As far as times changing … yes, they indeed do. But human nature does not. We still have the same basic weaknesses. We want to get the most for the least amount of effort. It’s the basis of all economics, and anything that doesn’t recognize this as a central fact to be dealt with is doomed to failure, and doomed to cause more problems than it seeks to overcome.

We want a better life for our kids. We want to share our happiness with our families and our friends. The more noble of us also want to share it with strangers, and we do through our churches, community aid centers, our pet charities … and sometimes on our own, person to person.

If you read the arguments surrounding the birth of our Constitution — and I recommend it highly — for without them the Constitution is indeed vague in places if you don’t understand the frame of mind they were in — it is very clear that the Founders understood human nature and its fundamental weaknesses from wanting something for nothing to it’s ultimate manifestation in those who gain power … power corrupts. The government was limited not because they wanted people to do  whatever the hell they wanted, but because they knew what happens when you give people the power to dictate to others what they will and won’t do. It’s far worse than allowing sinners to sin outside of basic, natural law. These guys, though they may have crapped in buckets, knew their sh*t. They were far more well-read than your average mouthy pundit or blogger (on the left or the right, sadly, though I do think the right probably has a bit of a lead in at least reading the Constitution and maybe the Federalist Papers). I’ll still go ahead and say it. They were far better read than I am, though I have read a lot in the past 9 years.

So here’s a rule we need to try to live up to as best we can when we go to Stop Echoes — expose rotten chestnuts for what they are — know your sh*t. Don’t wander into unfamiliar territory and spout things you think are facts as facts. But when you have your facts, I’ll tell you those Alinsky rules for radicals are very easy to turn on these people.

These three are particularly useful to turn on them

#1) “Power is not only what you have, but what the enemy thinks you have.”

The thing here is, the enemy thinks you’re an uniformed idiot, and that they have a monopoly on truth. When you show that you are not, it shakes them up. What they’ll likely do at this point is dismiss with an ad hominem on your source, or they’ll move the goal posts … shift the argument to a new subject. It’s good to bring them back to the point that made them uncomfortable in the first place and make them sweat a little bit more before you decide whether or not you want to aim at their new goalposts.

#2 “Never go outside the expertise of your people.” It results in confusion, fear and retreat. Feeling secure adds to the backbone of anyone.

In this case, “your people” is you. Don’t spout off stuff as fact things you only think you know and can’t back up. This is good advice for anyone from Mr. Alinsky.

#3 “Whenever possible, go outside the expertise of the enemy.” Look for ways to increase insecurity, anxiety and uncertainty.

Oh yes. Well there are some better-read leftists, and you do have to size up your opponent. But chances are, at our level, they’re just spouting off opinion and misinformation they read on HuffPo or in the MSM somewhere. They don’t know jack about the Constitution or the principles that produced it, and what’s good about it. And most of them have never read Alinsky, either 😉 At this point, we know our sh*t better than they do, even about some of their own people.

Easily verifiable facts make them squirm. And while that can be fun when arguing with a real a**, remember the main objective of Stop an Echo … you’re really not trying to change their mind. You’re publicly challenging the leftist point of view in front of bystanders. If they’re watching this guy squirm, his words will carry much less weight.

I recommend not getting nasty in public, either. When you do, unless everyone can see the guy is a real a**, your words carry much less weight.

And finally, on to that slave-owner thing.

It’s not like the Founders invented slavery. Many were abolitionists. The slave-owners themselves were born into being slave owners. They didn’t just wake up one day and say “hey, I think I’ll import some slaves”. Jefferson himself tried at least three times during his political career to try to restrict or abolish it. In his original draft of the Declaration of Independence, he pretty much let the King have it on the whole institution of slavery — and they created the Constitution that put the country directly at odds with the whole idea.

They even tried to restrict it, with an eye toward abolition, TWICE, in the Constitution. One is the oft-cited 3/5ths clause, which leftists love to bring up when trying to discredit the Constitution. They only considered blacks to be 3/5ths of a person, man!!!!!

The slave states wanted to count their slaves as 5/5ths, or one — person — oh yes, they did. Why was this? Not because they thought their slaves were people. They wanted them counted as a part of the population, because representation in Congress was determined in proportion to population. That’s right. They wanted the additional weight of the slave population to increase their representation in Congress … and do you think that representation was going to be used in the interests of the slaves?

Absolutely not.

The 3/5ths compromise was put in … by the abolitionists … to water down this effect. The abolitionists didn’t want slaves to count as a part of the population being represented, because their interests wouldn’t be represented.

Incidentally, the only race mentioned in the Constitution is American Indians, and even that was not brought up in a racial context, but a national context — the Indian Nations. Slave was a legal status. Africans were not the only people enslaved by others over the course of history. There were some free blacks (who could vote!) and there were probably even a few white slaves in America at various points. Slavery had been around for far longer than written history. Our country was created less than 100 years before its ultimate demise, and the ideas the Constitution was based upon had a lot to do with that.

But hey, man, they crapped in buckets and wore powdered wigs. So we can dismiss anything they had to say.

The other is that in the Constitution, it was written that the importation of slaves was to cease. Now this wasn’t abolition. But it was done in the hope that slavery would eventually die as an institution. Like I said, they were born into a slave-owning society. As they put together documents outlining a philosophy that said that “all men are created equal” … it dawned on them that the institution of slavery was diametrically opposed to these ideals. It is very easy for us to sit back and criticize these men, and they certainly deserve some for that. But I think that only underscores the fact that men are weak, and that power corrupts. These men were imperfect, but they had high principles that in their time they were not living up to. What they poured into the documents that founded the Republic.

That stuff is gold.

Read it. Know it. Love it. Teach it.

Loading Likes...