Archive for January, 2009

Fix It First

January 29, 2009

I know that it is easy to criticize what Obama and Congress are doing to try to recover jobs and value in the economy, so today I am here to make a suggestion: before you throw another $1T into the economy. fix the problems that got us here!

As I recall, things started to head south as real estate prices fell. Lots of people, including most of Congress, regulators, banks, insurance companies, etc. thought that housing prices would never go down. Massive financial instruments were developed based on this one assumption. They were all wrong. We can’t fix the fact that real estate prices fell, but we can fix the institutions that collapsed because of it. Before we go try to fix the entire economy, let’s fix the government and its regulatory institutions. More regulations? No, Just fix what we have. If you don’t fix it, it is still broken.

Let’s start with the institution designed specifically to let the government interfere/regulate home mortgages, Fannie Mae and her cousin Freddy Mac. I haven’t heard one word about the “New Fannie Mae” because there is no new Fannie Mae. Is Fannie Mae operating the same way it did 4 years ago? I don’t know but I would guess yes, since I haven’t heard anything to the contrary. Will Fannie Mae still underwrite loans to people that everyone knows will never be able to pay them back. Probably. Banks aren’t loaning the money now, but if they did, I’m sure Fannie Mae would rubber stamp the transaction.

Then we have $70T in default credit swaps, a secret system of alliances designed to spread the risk. These financial instruments remind me of pre World War I Europe, where the risk of one country gaining military domination over all others was spread with a complex and often secret set of alliances and mutual support treaties. One Serbian kills one Austrian and before you know it everyone is fighting everyone. Four years later half of Europe is in such a deep depression that a wheelbarrow full of cash isn’t enough to buy a loaf of bread. Default credit swaps should be illegal.

Next we have new accounting rules for valuing homes and real estate. The rules were updated a few years ago, an act to increase transparency, to force banks to value property at resale value instead of book value. Like most rules with good intentions, this rule turned a bad real-estate market into bankrupt banks and insurance companies. Maybe not the best regulation.

There are also those quasi-regulators who misrated the risk in commoditized mortgages. Business as usual there too. These so called independent evaluators of risk are not so independent since the company doing the assessment profits more or less by the assessment they give. I think this is called corruption.

Until all these problems are fixed, who would invest in this known broken system? Who would trust that a seamingly strong company might, the day after you put in your life saving, go belly up because a bank on the other side of the country made one too many bad loans?

The public is smarter than Obama or the Congress. We don’t want to throw our good money after bad. But the government knows better and is going to spend our money, whether we like it or not, on the same of things that got us here in the first place. More than half of the “stimulus” bill gives money to programs and people that “need” the money. Why do they need it? For the most part, because they didn’t manage their money well. This goes for bank CEOs, for state governments, and for the chronically unemployed. I would give a break to those people that are recently unemployed due to the failures of their management, but for others, sometimes it is better to fail and let someone else figure out how to succeed than to stay in power and repeat your failure.

We tried the money giveaway thing nine months ago and that predicably went nowhere. Most of that money went into our gas tanks. Now we are trying it again. What is it that Einstein said about insanity? it is doing the same thing over and over and expecting a different result.

Obama’s Billions

January 26, 2009

The stimulus package proposed by Congress reminds me of an old Richard Pryor movie, “Brewster’s Millions”. In that movie Pryor could inherit $300M if only he spent $30M in 30 days. Sound familiar. Hand it to Paulson. He managed to spend $350B in about that time. The catch for Pryor was the he had to get value for that money but end up with nothing at the end. We don’t know yet if Paulson would pass or fail that test because while we all own a bunch of stock in various banks, we won’t know what it’s worth for a while.

The stimulus package follows much of Pryor’s solution – hire overpriced employees to do meanial and useless tasks. That is what the lion’s share of the stimulus will do. For $825B spent we will get at best $100B in infrastructure improvements, the rest will just go straight to various people’s pockets. I support those Democrats who want to remove all the tax cuts from the stimulus bill. I would remove all of the block grants for education, unemployment, and health too. While we are at it, remove all spending for things more than 2 years out. Doing all that would leave maybe $100B, if that, of infrastructure stimulus. I bet they won’t be able to spend most of that either.

Last month the Conference of Mayors put out a list of “shovel ready” transportation projects that don’t have funding. They came up with $90B worth. I can tell you that they just made up those number. $825B on the line and all that the mayors of all the cities in this country could come up with is $90B? The stimulus bill is giving them $30B. So much for infrastructure.

Why can’t the govement spend more than $30B on transporation infrastructure over the next 18 months? Too much government interference. In order to spend money this fast the government will have to suspend most of the “protections” that it places on spending. Environmental impact reports? forgot it. Multiple bid contracts, only superficial ones. It is not like there are millions and millions of skilled freeway, bridge, or road workers out there. Contractor managment will get rich, but jobs for the masses? I doubt it.

One interesting protection that must be waived is the idea of state matching funds. Normally when the feds spend on a project they require state or local governments to put up 10% or 20% of the cost. Given the state of states, this protection is going out the window for sure. Since the states are broke, maybe the federal government can instead extend its matching funds policy to the public. I heard an interesting suggestion for helping car companies: let people deduct up to $10K from their taxes for any car purchase this year, especially for a domestic car purchase. That sort of stimulus would help car companies pay us back for the last $700B bailout.

Calling this stimulus package an investment in infrastructure is a lie. Blaming the Republicans for the “tax cut” portion of the package is a further lie, but that is another post. In “Brewster’s Millions” Pryor managed to spend the $30M ending up with nothing in return. His fans who adored him when he was giving away money abandoned him when the well ran dry. Obama seems locked in the same plot.

The Big Pig

January 19, 2009

I just read the official press release for the big stimulus package. The federal government has obviously hired a really good marketing firm because I have never seen so much pork masquerading as “stimulus”. There is no underlying theme to the spending except to spread the money around. Let me offer some interesting tidbits:

The overall summary states that there will be unprecedented accountability in the spending because of the RAAT (Recovery Act Accountability and Transparency) Board. Maybe their first act should be to figure out where the $31B is missing from their Executive Summary. I added up all of the spending in the executive summary and got $518.7B, about $31B short of the $550B mentioned in the summary. I guess that $31B already went down the RAAT hole.

I also performed a simple classification analysis of spending. Turns out most spending will not go to new stuff (i.e. stimulus) but instead will go to just doing things the way we currently do them. All of the fighting in the California legislature, for example, will be moot because $328B (of which California will get maybe $30B) of the stimulus goes directly to states to keep their entitlement programs and government employees employed. California, problem solved! Of course I’m sure that they will raise a whole bunch of taxes before “discover” this aspect of the stimulus package.

I was interested in the $11B “Smart Grid Investment Program”, which is supposed to be used to modernize the electricity grid. I looked it up on Yahoo and got 54 hits, all of which were copies of the press release in one form or another. We are going spend $11B on something that nobody knows what it is? If this is an honest thing it will take 4 years just to define it. $11B on paperwork. That is the change I expected.

Another piece spends $2B on battery technology. $2B? I can’t imagine how to spend $2B on battery technology. How many battery researcher are out there? I can’t imagine spending this in a year or two years or even four years.

Overall, the stimulus package will spend $825B, of which 4% is unaccounted for, 40% is doing business as usual, 33% is for “tax cuts” (actually just giving money to some people for nothing), and finally 23% for new stuff. Among that new stuff, most is going to rebuilding things to make them more energy efficient. That is probably a good idea, but my guess is that if they were to spend that money on building nuclear power plants we would all be better off.