Archive for the ‘Uncategorized’ Category

A Three Point Plan to Get Us Back on Track

October 16, 2008

Before we embark on another round of stimulating our economy by reducing taxes or printing more money and giving it away, we should get our economic system back on track. The instability in our system that manifested so dramatically a few months ago with the collapse of Bear Sterns has caused our banking system, our money system, to freeze with indecision, fright, and paralysis. The issue now seems to be somewhat understood: there are too many worthless or bankrupting assets in the hands of the institutions that control our money. The problem must be fixed before we can hope to stimulate the general economy into prosperity. If the problem is not fixed, no amount of stimulation will help.

I would like to propose a simple three point plan to get us back on track:

  1. In the short term, the government should pay the mortgages for foreclosed properties to get them our of arrears. This might seem like welfare but I’m looking at it from another perspective. If we invest $1 into a bank it can only get $9 from the Federal Reserve Bank. That is 10:1 leverage. If we pay $10,000 to get a house out of foreclosure, then the whole original value of the house is available for the bank to borrow against. That is perhaps a 100:1 leverage, at least in the short term. 100:1 leverage means that we would have to put up $70B instead of $700B to get the same effect. What happens to the money we put in? We get equity in the properly in proportion to the owner of that property. So, for example, if the owner of a foreclosed property had $100K equity in that home, and we put in $10K, we would get 9.1% equity in the home.
  2. Go to court and establish that so-called “default swap” derivative contracts, and other derivatives are illegal gambling and therefore unenforceable. This might set off a bunch of lawsuits and accusations of fraud, etc. but that might be good in the long term. Eliminating the cloud that a default swap might come due and kill a bank or insurance company (the “fuckle finger of fate”) would bring confidence in lending, a crucial step in restoring faith to our money system. I had proposed a more complex system for the long term that would allow gambling for financial institutions, but in the short term, let’s just get off the juice.
  3. Since paying the mortgages of foreclosed properties would be prohibitively expensive in the long term, the government must set up a system to sell these properties (we all have an interest in these properties). If the real-estate market recovers, then this will result in good yield, but if that growth is slow, which it will be, then we need to find investors to take on the challenge. The easiest way to encourage new investment into real-estate (or any business) is to offer a tax incentive. Perhaps if the capital gains tax is eliminated for any gains in any foreclosed property, whether one lives in it or just uses it for investment, that would be incentive enough.

Eliminating the current credit crunch by using the most leveraging methods, eliminating gambling masquerading as securities, and providing tax incentives for long term investors that step up to help solve our current problems is the best solution to our money crisis. Relying on the government to invest $700B or more of our dollars and simultaneous attempt to stimulate the economy will add even more instability to the system, something that none of us need.

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A Solution to the Financial Crisis

October 11, 2008

Let me preface this post by saying that I have no idea what I am talking about. That said, I think I understand the root cause of our current financial crisis and I would like to propose a solution, or a class of solutions, to the problem.

First, let me explain my view of the problem: gambling masquerading as investment. The financial universe has become two separate worlds, one that is used to finance economic activity and the other used to gamble large amounts of money on a global scale. The second world has become much larger than the first and has leaked into the first. When you have a huge pot of crap that drips onto a much smaller cup of soup, everyone ends up eating shit. That is what we have now. The ultimate solution to this problem requires separating the gambling from the investment and putting different lending standards on these two activities. For example, a bank should be able to loan money for investment purposes but not for gambling purposes.

Even separating what is investment from what is gambling can be difficult for some. For example, is a mortgage on a house to someone who will never be able to pay it back an investment or a gamble? I would call this mainly a really bad investment. Why? because you always have the underlying house which is a real property with real value. Now, if I insure a mortgage on a house to someone who will never be able to pay it back, that is a gamble because either I get my money back or I get nothing depending on what someone else does. Sounds like gambling to me. Does that make the entire insurance industry gambling? Maybe, but perhaps one could say that something like life insurance or car insurance or fire insurance isn’t a gamble because of the history of probabilities involved. Still, covering one gamble with another gamble is really just gambling. How about options trading? I would call that 100% gambling. I am not against gambling, but I wouldn’t loan money to someone to do it. Gamblers all have the same underlying drive, when things are hot they can’t quit. Eventually they get cold and lose it all and then some.

One general rule for differentiating between an investment and a gamble is that an investment will have an influence on the outcome of that investment, while a gamble will not. For example, if I were to invest $1B in Cisco, the odds that I will get a good return (because they can use the money to grow the company) are much better than if were to invest $1. On the other hand if I were to gamble a $1B on a coin toss the odds of winning are no better than 50/50, same as if I were to gamble $1. This is not the sole distinction between gambling and investment, but I think it is a start.

So here is my solution: all public companies should be reviewed by an accounting firm that assigns a new class of shares for that company. We can call that class the “I” class for investment. Everyone owning shares in a company would be able to trade so many regular shares for so many “I” shares depending on the “gambling index” for the company. A company that has no gambling assets would have 100% “I” shares. An investment house or other company that has 50% regular assets and 50% gambling assets would split its shares 50 I and 50 regular. The “I” shares would then trade on a separate basis. The margin requirements for the “I” shares would be higher than for the regular shares just to make sure that banks don’t get too much into gambling.

I don’t think that evaluating the risk of an investment is anything new to the financial world. That is what rating agencies like Moody’s do for a living. In fact much of the current mortgage problems have been caused by rating agencies assigning AAA ratings to complete crap. Before my scheme could work these companies would have to abandon their current rating schemes and adopt a new one based on the gambling index.

I realize that any real solution is probably 1000 times more complex than what I have proposed, but the principle is there. Let people gamble if they like, but let’s not let gambling leak into our economic system.

Reliving the 1970’s

September 28, 2008

I noticed at the beginning of this year how the times we are living today compare to the 1970’s. The “energy crisis,” the dependency on middle east oil, smaller cars, the war in Afghanistan (in the 1970’s Russia was in Afghanistan), the plan to get out of Vietnam (now Iraq), the Arab-Israeli wars, the total discrediting of a President, and finally the general economic funk. In the 1970’s the economy was in a state of “stagflation,” something that the economists of their day couldn’t explain. Today we have the “credit crisis,” again something that economists cannot explain.

The 1970’s ushered in Democratic President Jimmy Carter to save the day. There are a lot of similarities between Obama and Carter. Both have no experience and had to find a Washington old-timer as the V.P. to get credibility. Both were considered to be great intellects by their adoring fans. I remember a skit on SNL where Carter was taking questions on the phone from viewers and a guy who had O.D.’d on LSD called in and the SNL Carter talked him down. Carter’s knowledge was so vast! Carter ended his presidency a failure. He was clueless, and still is. He is good friends with the Saudi royal family. He told a story on Jay Leno about how the King of Saudi let him use his place in Aspen one winter and how Carter’s daughter was so impressed with the opulence of it. It was clear Carter was too.

The Carter campaign message was the same as the Obama campaign, a message of an honest guy coming to Washington to kick those horrible Republicans out of power. Carter offered a large number of programs to “fix” the economy, raise taxes on the evil rich, and bring fairness and competence to the federal government. Sound familiar? The story turned out to be that of a corrupt incompetent politician. Carter had only one success in his career, getting Anwar Sadat and Menachem Begin to negotiate peace between their two countries. Sadat got a bullet in his head for his efforts.

The Carter years were not a good time for this country, and we are still paying for it. The last year of the Carter administration made Iran what it is today, a menace to worldwide Democracies and perhaps a real threat to the existence of not only Israel, but all of us. Carter was clueless about how bad the Shah’s alternative would be. To contain fundamentalist Iran we propped up secular Iraq. Now we are in a war in Iraq to clean up the mess that Carter brought us, if we can.

But the biggest single burden that Carter put on us today is his killing of the nuclear power industry. Carter was so worried about a strong Soviet Union that he killed our domestic nuclear power. Does that make sense? It did to Carter. He felt is was better to negotiate with the Saudi’s for more foreign oil (and killing most domestic oil production at the same time) and negotiate with the Soviets to reduce nuclear proliferation. Negotiating with one’s enemies isn’t always the best approach.

For those who don’t know how Carter’s 1970’s ended, think 10% annual inflation and 9% unemployment. Listening to Obama today you would think that our 4% inflation and 6% unemployment are the world coming to an end. During the Carter years Obama was stoned (according to his own autobiography), he probably doesn’t remember any of it. Those who don’t remember history are doomed to relive it.

Press To McCain: Don’t Make Us Work!

September 2, 2008

When McCain picked Gov. Palin to be his running mate he made one mistake: he thought he was running against Sen. Obama, but in fact he is running against the press too. Gov. Palin is a complete unknown to those of us not living in Alaska, and she a complete unknown to the press. You would think that the press would welcome the opportunity to do their job and teach us about Gov. Palin. Instead they are making stuff up and challenging the whole process that chose Palin, claiming that she was not thoroughly vetted.

I have already seen CNN’s Wolf Blitzer show his ignorance by implying over and over that the Governor is a slut and a vengeful bitch. I have also seen Newsweek “Senior Editor” Jonathan Alter make up a story that nobody in the McCain camp went to Alaska to check out Palin. Last night I heard a Time magazine writer wonder out loud if McCain knew that Palin’s daughter was, God forbid, p-r-e-g-n-a-n-t, or that her husband had a DUI 20 years ago. If having a drunk relative or a teenage pregnancy in the family were a disqualifier, then the only qualified person running for office this year would be Ralph Nader.

Why is the press doing this sort of stuff? It might be because the press wasn’t involved in the decision making process. In fact, the press had no clue whatsoever. It might be because they are all in the tank for Obama and this looks like a good way to just generally attack McCain without showing policy bias. But I think the real reason is simpler: McCain is making the press do their job, and they don’t like it.

The press are a lazy bunch of parrots and trained dogs. Journalists feel that their job is not to inform the public but to inflame it. They grab onto one little thing and, like a rabid pitbulls, they flail it about until either it gets everyone’s attention or they drop dead, not caring if they hurt any innocent bystanders along the way. We see this with these long drama’s like Caylee something in Florida, or Anna Nicole, or O.J. The press has become a tabloid, and we know that sex and drugs are the main fodder of the tabloids.

McCain should have known that the press was going to fight, tooth and nail, against Gov. Palin and he should have prepared some material for them to consume. In the gap between now and Gov. Palin’s first national speech, the press will continue to fill their ignorance with their prejudice. We see the “liberal” press view Palin as a cheap political ploy, a female politician from po-dunk-ville. Paint her hair blue and you have Marge Simpson. They know everything about her even though they know nothing. She has never been on any of their chat shows, so she isn’t credible.

There is a lot of pressure on Palin to show that she can play with the big boys. Based on her record of kicking entrenched big boy’s butts out of office, I’m sure she can. But can she kiss the ass of the press? I’m not sure about that.

The Mother of All Blog Posts

August 31, 2008

I hear the expression “Mother of all …” a lot on the TV these days. Today, Geraldo referred to hurricane Gustav as the “Mother of all Hurricanes.” I guess people don’t get the joke, in this case Geraldo doesn’t (unless he knows something we don’t). The phrase “Mother of all …” originally came from the lips of Saddam Hussein during the first Gulf War in 1991. Let me review the war (at least what I can remember, I’m sure there is a “fair and balanced” view of the war on Wikipedia): the U.S. (called the coalition) started the war by bombing Iraqi military forces for one month to “soften them up”. Then the U.S. rolled armored tanks into Iraq and destroyed the entire Iraqi Army in about 3 days. Then the U.S. stopped. A few hours after the bombs started to fall on Iraq, Saddam broadcast a message declaring that “The Mother of all battles has begun.” The expression, therefore, means something thought be big and important that turns out to be nothing. Let’s hope Geraldo is right and Gustav turns into the Mother of all Hurricanes

National Enquirer Only Journalists Left

August 12, 2008

The National Enquirer has shown that mainstream journalism is indeed dead. When your local tabloid has a better editorial policy (i.e. not politically biased), a better staff of reporters, and is actual capable of publishing a story based on its own research, all things that the mainstream media CANNOT do, then tabloids have become news, and news has become tabloid. Watching the Edwards mistress story unfold shows that the news networks are STILL incapable of doing their own research, they are just re-reporting the Enquirer’s story.

My two favorite tidbits from the story so far: Edwards claim that he did not love her, he just fucked her; and the claim that his “supporter” that has shelled out two houses and $15K a month is doing it “because he really cares for people who are down on their luck.” Edwards and his cronies sound like a real nice bunch of guys.

It is obvious that Edwards has been deeply involved with his mistress for at least two years, maybe three. He is still sleeping with her (not that I care) and has been all through his campaign. The kid is obviously his. All of this is interesting but only shows that Edwards is a liar and a philanderer, nothing new for politicians.

What is new here is the unreported headline: “Presidential Candidate Edwards’s Mistress a Kook.” According to the REAL journalists on the story (the Enquirer), Edwards spends hours and hours with this woman even lately. Why? Maybe he is just spending it with his kid. Maybe he can last that long in bed. Or maybe he likes hanging around with kooks. That would be my guess. I hope Edwards wrote down every second of their conversations, because I would actually read that book (note: I don’t read). I now understand his campaign about two Americas: the normal rational America and the kooky America. I think we know which America Edwards lives in.

Warning: Cancer Warnings May Cause Cancer

July 30, 2008

Today there was another “X may cause cancer” scare. This time the culprit was cell phones, or more accurately the use of cell phones. There have been many attempts to find a correlation between cell phone use and cancer, especially brain cancer. The legal profession would love cell phones to be a cancer cause, can you imagine the lawsuit possibilities?

Let me start with a simple to read rebuttal to the cell phone cancer scare found here: LiveScience

All “X might cause cancer” stories end in the same way: better to be safe than sorry. Well, that’s not really correct. For example, in an effort to reduce the effect of radio waves on the brain people are using Bluetooth headsets. Well guess what, Bluetooth is also a radio, but now instead of being an inch from your head they are inside your head. On top of it, Bluetooth uses the same radio frequencies used by microwave ovens, known to actually cook food. Scientifically speaking, however, Bluetooth’s output power is about one-millionth the power level of a microwave oven.

When scared, people often move to eliminate the scary thing even if the alternative is completely unknown. People and governments will even replace a generally known but mild problem with an esoteric and completely unknown potential problem. A good example of that was the replacement of lead in gasoline with MTBE. Turns out MTBE is a lot worse than lead ever was.

We think we live in an age of enlightenment where Science trumps Sorcery, but we do not. Four hundred years ago people might have said that “evil spirits cause cancer”, today it is cell phones.

60 Minutes of Propaganda

July 21, 2008

I watched 60 minutes (at least some of it) this evening for the first time in years and now I know why I haven’t watched it in years. The first story was about Darfur, a situation that is indeed terrible. After the piece I realized that I knew less about the situation than before I watched. It wasn’t that they opened my mind to the issue so that I saw how ignorant I was, but more that their mangled propaganda filled logic left me confused. Why is this going on? No answer. There was an implication that somehow it is the U.S.’s fault, but I’m not sure exactly how. What is happening? People are getting killed, women are being raped, villages are being destroyed. I knew that. What should the world do about it? The only answer they seem to offer is that we should feel guilty about it, and that is pretty much all that piece did, make me feel guilty. I wish journalists would stick with the who, what, when, where, and how and let me decide for myself. Here is a good question for this political season: should the U.S. send troop to Darfur? Obama? McCain?

The second story was something that I knew a bit more about. It was about “radio waves” and how they can kill cancer. The story, again, was very much propaganda about a “technology” promoter. Curing cancer by killing cancer cells preferentially over normal cells has been a well known technique for many years. Chemo-therapy does just that. So does radiation therapy. What has been missing from these “cancer seeking bullet” techniques is not the bullet part, cells are relatively easy to kill. The hard part is the cancer seeking part, which so far has not, and according to 60 Minutes still has not, been found. I hope that someone does find a cure for cancer, but this story had nothing to do with that.

I remember seeing other stories about this same promoter and his claims that researchers were interested in using his “radio waves” to burn water as a source of unlimited energy. I saw the video on YouTube and laughed when I saw a small flame coming from a test tube full of water being irradiated by his “radio waves”. Accidentally, he also showed the power consumed by his “radio wave” generator: about 2000 Watts. So he was taking 2000 Watts and generating a small amount of hydrogen through hydrolysis and then burning the hydrogen producing perhaps 10W (my estimate). I think it would have been more efficient to just stick a couple of wires into the water, no need for those “radio waves”.

BTW, let me offer my definition of propaganda: if you see or read something and afterwards you feel more than you know, that was propaganda.

What does “may” mean?

June 13, 2008

I saw an AP news story today the starts: “Silver dental fillings contain mercury, and the government for the first time is warning that they may pose a safety concern for pregnant women and young children.” What does “may” mean in this case? Does it mean that for some people there is a safety risk? that there some weak scientific evidence that everyone is at risk? No and No.

These sort of news stories are very popular: coffee may increase risk of cancer, breast implants may cause autoimmune disease, Clinton may drop out of race this week, … Is this news? News today not about facts or things that actually happen but more about things that might happen or might be happening but we don’t know or cannot know. The list of such things is infinite, but the truth of them is never shown. In fact, in most cases, these “may” statements turn out to be false.

So what is the real story about silver fillings? It turns out that someone sued the FDA and to settle the lawsuit the FDA put a warning on its website. My headline: FDA declarations now decided in court not in laboratory.

Can Corporations Pay Taxes?

June 11, 2008

Today the Senate voted against a special new tax on oil companies. What was the purpose of this tax? I guess it would have raised many billions of dollars in the short term, but the real reason was to get even with the evil oil companies. Let’s take their money. That will show them! But take money from whom? Who pays taxes? Can corporations pay taxes?

I guess it all boils down to this: what is a tax? I would define a tax as a burden, a pain, a unavoidable force to make you work – a slavery of sorts. While it is true that you can put a burden on a corporation, will it feel the pain? Can you enslave a corporation? The answer is a simple NO. A corporation cannot feel pain. It is not human. Corporations are born, and can die, but they feel no pain.

So what is a corporate tax then? Who really pays that tax? There is no one answer to that question, there are many people who pay the tax:

The eventual payers are the owners of the corporation, which for almost all corporations, are the PUBLIC. So a big tax on oil companies is really a tax on the public. Most people don’t realize that they own interests in lots of companies. You might buy shares of the company, of course, but you might have a retirement account. Work for the State of California, you own stakes in almost every corporation on the face of the planet, even some that are private. Of course, some corporations are owned by a few small number of people, but most of those corporations are thought of a “good” corporations: like google, microsoft, yahoo, etc. The majority of corporations today are owned by large funds, especially retirement funds, and small shareholders. How many people own shares in Chevron? lots, perhaps as many who buy gas from their pumps.

The second payers, often the first to pay the real “pain” of corporate taxation, are its lowest level employees- the ones that are easiest to hire and more importantly, easiest to fire. If a company needs a bottom line to look better the answer is usually to fire people (payroll is normally the biggest liability a company has). Occasionally a corporation might fire the highest paid people, but usually those people make the decisions and deciding to fire yourself is a difficult thing to do. Along with low level employees, suppliers may be forced to carry better financial terms when profits drop. One can hope that oil companies might be able to convince their OPEC suppliers accept delayed payments, but I doubt it. On the other hand local suppliers are not so powerful and would feel the pinch.

Generally the effect of corporate taxation has only a small effect on the users of the product (or service) the corporation produces. Why is this? You always hear that a company will just pass on the price increase to the consumer, right? Well if a single corporation could just raise its prices without losing business then it would have done so a long time ago. In a free market, if one company raises its prices then people will buy from a different company.

That said, the windfall profits tax will increase prices at the pump, again hurting those least able to pay for gas. How could that be, I just said the free market would prevent this. Well, in this case the tax applies to ALL oil sold in the U.S. adding the effect of collusion to the “free market”. We normally think of collusion as bad because it allows companies to fix prices. Well the Government is the ultimate collusive force. Unless some other replacement of oil is offered as an alternative, oil companies would be able to raise their rates in unison. The consumer has no alternative. Oil companies would not be able to recover all of their profits however, because as prices go up, demand would go down, pushing prices back down. That is the law of supply and demand.

So, those that want oil companies to “pay” for the increase in gas prices using a “windfall profits tax” would really just be taxing the public and causing some unemployment for the lowest paid employees of the oil companies and jacking up prices for those least able to pay.

There is a better way to take revenge on oil companies – build hundreds of nuclear power plants, but that is another post.