Tuesday, April 22, 2014

From the if you're a left wing hammer, everything looks like a nail department - Median Income Competition Edition

The New York Times as is it's wont triumphantly announced that "The American Middle Class Is No Longer the World’s Richest".  Ignoring the fact that the places where the middle class is suffering most are almost all blue paradises, they focus on three left friendly explanations:

1. Slower gains in educational levels than similar countries like Australia and Canada
2. Higher differentials between bosses and workers compensation
3. Less income redistribution from the top downward

I'm not surprised that they focus on 'governmental' reasons - 'inequality', 'education', 'greed'.  Because their answer is of course 'redistribution' and spend more money on sectors that NYT readers disproportionately work in like education.  All of these reasons fit perfectly with the newly regnant Neo Marxist theology that 'inequality' is the key, indeed if you listen to the left, the only issue (funny, it used to be healthcare but I guess that one has been 'solved').

So to get some perspective that isn't so gosh darn theological, I submit the following real reasons for why the US median income growth lags that of the countries most like us:  Canada and Australia.  Reihan Salam gave me some of the ideas for this:

Different stages of the Business Cycle.  First and foremost Canada and Australia are at almost the peak of their business cycle.  Both are just coming off of an at least 15 year long resource boom with economies that are much more reliant on oil and gas extraction, mining and agriculture.  In the US these sectors account for 2.6% of GDP, 12.6% in Canada and 12.22% in Australia .   Australia and Canada have benefited - both from the gain to GDP and the wealth of high paying semi-skilled jobs.

This is reflected in their housing markets.  Canada and Australia are at the peak of a multi-decade housing boom.  The US' boom crashed in 2008.  As was the case in the US, the boom resulted in much more consumer spending on new houses and other durable goods, higher unskilled and semi-skilled employment and overall GDP growth.  As the resources boom busts their housing booms will too and these countries will look a lot poorer relative to the US.


Immigration mix - Take a look at a map.  The nearest third world immigration border to Canada is 1500 miles south through the US.  Australia is surrounded by high seas.  Canada and Australia get the immigration that they want which is disproportionately South and East Asian and educated.  The US, facing a porous southern border that one of the two main parties wants kept open to boost their electoral chances, imports proportionately far fewer educated immigrants.   A Canadian or Australian style 'skim the cream from poor countries' strategy would yield much better results for us.  For the countries we skim:  not so much.  While I don't have the data handy, I hypothesize that the difference in mix of immigrants and immigrant's children constitute the whole of the 'education gap'.  After all we've tripled real lower education and quadrupled real higher education spending per pupil so it's hardly a case of the US not trying hard enough.

Finally, economic freedom - The US has been going backwards on economic freedom.  When compared to Canada and Australia we have fallen further and further behind .  Freedom matters - the security of property, the impartiality of the courts, the level of corruption, the simplicity of regulation and level and complexity of taxes all contribute to economic growth, investment and employment levels.  On the Heritage Foundation freedom rankings, the US has fallen out of the ranks of the 'free' economies and now battles it out with second tier economies with second tier income levels.  Our standard of living suffers accordingly. On the Heritage Index, the US scored a 78 in 2009 and a 75.5 in 2014  this was 4.6 points and 2.4 points behind Australia and Canada respectively in '09 and their lead had grown to 6.5 and 4.7 points respectively as of 2014.  It's hard to generate more wealth when you are discouraging the economic behavior necessary to do so.

If the NYT had its druthers, they would see 'soak the rich' and environmental policies implemented that would drive us even further away from economic freedom and wonder why oh why the economy ended up in the toilet. But we'd feel better because we'd all be more equally poor.

The moral of the story:  when all you have is a hammer you want to hit someone really hard.  Let's just hope the newly styled revolutionary class warriors don't hit our children any more than they already have.  Because it's obvious that they really don't care what the question is so long as the answer is pass more money to the state and it's favored New York Times reading minions.

Income inequality concentrated in heavily blue, democrat districts. Red districts? Much more equal.

No wonder Dems are outraged by inequality.  It's all within their own party.  Most of the equal income districts elect Republicans.  These findings duplicate those found by state and large metro area:  the bluer the place, the more unequal.  Now if income inequality were best fought by government programs and high marginal taxes wouldn't blue places be much more equal and red places much less equal.  Of course the real driver of inequality is diversity.  The most unequal:  Jerry Nadler's Manhattan district is half rich Jew, half Puerto Rican.  By contrast, the least unequal:  Michele Bachman's Minnesota district is no doubt all white, almost all northern European and exurban/rural/small town.

The other thing is that blue and unequal is much more hostile to employment and opportunity than red and equal.  Perhaps better managing immigration and freeing up businesses and people to invest and live where they want would help reduce inequality.  You know, the republican platform in a nutshell.


Salmon pasture restoration: how we could quadruple the output of our 'fished out' fisheries

The largest salmon runs in the pacific northwest's history due to fertilization of the sea with 120 tons of iron oxide.  Hundreds of millions of more fish than ever before.  This done in selected locations could restore species and massively increase the protein supply for poor people.

Naturally the fascist environmental left hates it.  It helps people and they want people dead.

A good example of how human ingenuity can make the planet cleaner, more productive and support more life.

Monday, April 21, 2014

Top of income distribution has huge variation

12% of adults (25-60) will spend at least one year in top 1%. Fully 73 percent will spend at least one year in the top quintile and over half will spend at least one adult year (25 - 60) below the poverty line. Only 0.6% (.0006) will spend ten consecutive years in the top 1%. More at the link

This tendency of most people to cycle through upper and lower income brackets some time in their adult lives might explain "What's the Matter With Kansas" - people at the 43rd income percentile don't think like someone who is always going to be there but bounce around from 22 to 65 to 58 to 91 and so on.  It really screws with the modern Neo Marxist envy model when many of the 'downtrodden' are also at some point 'oppressors'.

Sunday, April 20, 2014

I'll bet you Berkeley grads didn't hear these truths in class

Unless they took Professor Sargent.  Great wisdom in perhaps the shortest commencement speech ever to Cal grads. And judging by the shambles that California is seven years later, utterly ignored. The speech repeated in its entirety:

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.
Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.
1. Many things that are desirable are not feasible.
2. Individuals and communities face trade-offs.
3. Other people have more information about their abilities, their efforts, and their preferences than you do.
4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.
5. There are tradeoffs between equality and efficiency.
6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well-meaning outsiders to change things for better or worse.
7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.
8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.
9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).
10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.
11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).
12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates.
To learn more about Sargent, check out this NYT profile »

Hattip: businessinsider.com

On the meaning of Easter after you've fallen

When you no longer consider yourself to automatically be on 'Team God' - to just assume naturally as a matter of course you will be 'saved' - then Easter takes on a wholly different cast.  All of the triumphalism of "He Lives" and "Eternal Life" don't seem so triumphant if the big "He" uses his regained life to torment you forever or if being given eternal life means eternal agony.  For the damned, Easter is an eternal sentence of ultimate cruelty, isn't it?  And that cruelty is conceived, designed, deployed and delivered by our 'Savior' isn't it?  An eternity of agony promised to us by Him in His words coming from His very own lips.

And of course for the presumably 'saved', it is the sentence of a terrorist.  Because who witnessing the depredations of the Triune God against Saul on behalf of David or against Jericho on behalf of the Israelites or against Israel on behalf of Assyria or, and, or, and so on and so forth can be comfortable that God's act in their favor giving them bliss is eternal?  In the span of a couple thousand years our God changed the 'deal' a number of times, always smearing and damning those who didn't get the 'memo' so to speak.  And anyone witnessing God proudly exercising his salvatory randomness 'so no man may boast' cannot feel secure in God's eternal favor.  And to paraphrase Jonathan Edwards, if you live eternally suspended by a proudly random and very angry God over His fiery pit how can you in all honesty say you are in heaven?  Never mind the need to forget all of God's victims that you once knew. And loved.

No, Easter for this God Fearer is a horror.  A promise that the randomness, cruelty and terror that God unleashed when He made this world shall live on even after it ends, probably forever.  Which is why I mourn His rising as much as Christians cheer it.  I would take certain death over His perpetual Holy Terror any day.

Arresting gun owners passing through New Jersey is Chris Christie's policy. This means that in his eyes the majority of Republican primary voters are criminals. Which is why he will be crushed if he runs.

CHARLES COOKE: Gun owners flying through N.Y and N.J. shouldn’t be arrested when they check their guns. No, they shouldn’t be.

Hattip:  Instapundit.com

And a heavily Christian nation becomes a very powerful one....China to become the most Christian nation in the world

Unlike Islam or Hinduism or even hereditary Orthodoxy or Roman Catholicism, evangelical Christianity, focusing on a personal relationship with Jesus Christ and personal rectitude and piety has been a positive change agent throughout history.  The various 'great awakenings' in the US were essential to both political and economic innovation.  A heavily Christianized China will likely be a freer, more creative and much richer China.

CHANGE: China on course to become ‘world’s most Christian nation’ within 15 years. “By 2030, China’s total Christian population, including Catholics, would exceed 247 million, placing it above Mexico, Brazil and the United States as the largest Christian congregation in the world, he predicted.”

Which is a good thing. A good thing that will piss off bien pensant opinion here in the previous world record holder for most Christian country, a record that they have been busily trying to live down.  Thank you Jesus! For transforming China and pissing off the bien pensants.

Hattip, instapundit.com

Saturday, April 19, 2014

Now on to the Orphans....

O'Care results in widows being thrown off their dead husband's group insurance.

Widder Jones:  "But I can't pay the premium"

Black Barack:  "But you must pay the premium"

Widder Jones:  "But I can't pay the premium"

Black Barack:  "But you must pay the premium or go to the poorhouse with the Medicaid people"

Widder Jones:  "No, anything but that! There are no doctors there"

Black Barack:  "You don't deserve doctors! They are only for people who can pay.  Or are part of an identifiable and leverageable swing voting group!"

Dudly Do-Republican:  "I'll pay the premium!"

Widder Jones:  "Get away from me you homophobic, racist, hater man you! I'm going to Black Barack's poor house!  He loves me because he's progressive"

Black Barack: (twirling his mustache) Bwooohahahahahahahaaaa!

Widows and orphans. My God this is getting ugly. Details at the link.

A revised and improved version of the "We are all doomed" financial perspective

This is a revised and updated version of the "we are all doomed" financial system perspective that eliminates a rather glaring omission that I made - see the part at the bottom referring to Scylla and Charybdis. I have a second post that is now technically prior to this one entitled "How to avoid a 'we are all doomed' financial collapse. You can see it here.

I am not sure whether the economic and monetary situation we face is just lousy due to garden variety social democracy and rampant rent seeking or catastrophic with with wild financial recklessness added to the aforesaid corruption. But in truth, I've never really crystallized in my own mind why the financial system could be in so much trouble that it would result in catastrophe. I think I now get it (I know, I'm slow, so what's your point?) and in the hopes that my simpleton explanation may have value for others I am penning this missive. If you think I've got something wrong and you're smarter than me (no great trick, admittedly) then by all means let me know.

Banks and regulators evaluate the adequacy of capital requirements, the value of incentive compensation and the acceptable level of risk taking using "Value at risk" models. VAR models take each 'position' held by a bank, estimate how much risk that position faces and how much capital is needed to back it and how that risk relates to the bank's overall portfolio of risks. Risks come in two flavors: Interest rate - if interest rates rise ceteris paribus the value of an asset will fall and Default - an asset which is composed of the present value of a stream of future cash flows loses some (but not necessarily all) of its value if the issuer of the asset defaults on his obligation. Each asset class has its own risk levels determined by historical regressions of variations relative to interest rates and credit rating. Critically, VAR can be substantially reduced by 'hedging' an exposed asset. You 'hedge' the risk of a default or interest rate change by paying some other entity to incur that risk on your behalf. AIG famously went bankrupt because it sold so many Credit Default swaps to banks to hedge the default risk of their Mortgage Backed Securities portfolios. Essentially what AIG did was 'rent' it's AAA credit rating to banks so that they could take BBB assets and call them AAA. By doing so, they could reduce the amount of capital that they held in reserve to protect against the possibility that these assets would default. Interest rate swaps achieve the same result for interest rate risk.

Now, there are two questionable assumptions that underly VAR: first, the key relationships between various interest rates, asset classes and credit ratings will not change, either on a secular basis or at different times in the business cycle. This is critical for if something is to be 'hedged' the relationship between the entities and the assets composing both sides of the hedge have to be understood and be roughly constant. If the relationships change, for example, if it turned out that because of heretofore unacknowledged losses, AIG was BBB rather than AAA then hundreds of billions of dollars of CDSs written by AIG would instantly become valueless and the VAR models at the banks would suddenly show a massive capital gap.

Which leads to the second dodgy assumption which is that there won't be a mad scramble for the exits that results in a liquidity crisis which would distort the VAR's conclusions. In our scenario, the massive capital gap would lead the banks to dump mortgage backed securities to retrieve their position which would lead to a collapse in the value of that class of assets as the bankers pile on top of each other at the exit. Which is sort of what happened.

According to the Bank for International Settlement we have a notional volume of derivative contracts in place of $693 Trillion, others estimate it at almost twice that. Now these contracts cancel out - that's their point so that the real net value of derivatives is much smaller. For example, in 2011 it was estimated that a record over 90% of notional exposure for major US banks was 'netted' against other contracts held.



Which is good news so long as nothing untoward - what Nassim Taleb calls a "black swan" - happens to muck up that netting logic. Because a rather small shift in the 'netted' percentage could mean disaster for banks. And crucially, the VAR models assume no net change. And remember, compensation is derived from the VAR models. Which makes sense because you want to pay your bankers on the risk adjusted returns that they generate with the capital they have at their disposal.

But if the VAR systematically underestimate the risk in all of this hedging/derivative activity by ignoring the unpredictable panics and if that risk only shows up periodically during massive market meltdowns and if the big banks are bailed out by the Central Bank then bank profitability is systematically overstated which means banker compensation is too high - they are taking far greater risks than admitted and being compensated as if they were earning returns on lower risks. If the models were truly accurate, they would be taking fewer risks and earning less money all the way across the industry. Now if the biggest banks were simply allowed to collapse and their investors and employees were wiped out then this imbalance of risk would not persist - it would just be tough tacos for those who believed in the flawed models. The surviving banks would then adjust their models to be much more conservative and sales of S class Mercedes would fall.

But as with much else in our society, the baleful influence of the Federal Stupor State ensures that bankers are getting filthy rich at the expense of the rest of us. A situation that is compounded by the Fed's persistence in keeping interest rates extremely low which has been an enormous boon to banks and the individuals who control them. But it isn't surprising given that the Fed is largely controlled by...bankers. Indeed it's a brave President who goes against Wall Street. And with the accession of 'plucked dove' Janet Yellin to the Greenback Throne, President Obama demonstrates that he's not that kind of President.

Incidentally, negative real interest rates also mean that high tech millionaires rapidly become billionaires because the lower the risk free rate of money, the higher the valuation of their various tech businesses and projections. It's of course not surprising that the current President has massive support from both Wall Street and the Tech Oligarchs. They don't call him President Goldman Sachs for nothing.

So how does all this result in catastrophe? Simple but not easy: First, to bail us out of the last few financial crises, the FED has used its powers to radically increase the money supply - both to keep interest rates low and to prop the value of hundreds of billions of dollars of distressed Mortgage Backed Securities by buying them. At some point all of this liquidity injection has to go into reverse to avoid massive inflation. When Bernanke hinted that it would, emerging markets tanked which is why super dove Yellin is clinging to the conn of the USS Quantitative Easing now. So we are stuck between the Scylla of a collapse due to the withdrawal of the excess liquidity and the Charybdis of uncontrolled inflation if we continue to print so much electronic money. And since economic collapse and deflation both frightens politicians and makes their debts seem bigger while uncontrolled inflation reduces government debt as a share of the economy, the politicos are not going to allow Yellin to take away the QE punchbowl.

This means that like it or not, the decision to remove the dollar from world reserve currency status has already been made. It was made in steps - starting with Greenspan and now likely to be completed by a Yellin who - forced by frightened politicos - can't reverse Bernanke's Quantitative Easing to avoid inflation. As a result, the US Dollar's reign as a world reserve currency, a reign that has had great positive economic benefits for the world and particularly for the US is over. Done. Kaalas. Finis. Killed by the bankers and politicians who wanted the gravy train to continue as long as possible, enabled by a FED that is controlled by the selfsame self seeking bankers and politicians.

The result at a minimum will be a financial crisis similar in scale to those that happened in 1914, 1939 and 1971. But back then bankers were not a big part of the economy and the idea of quadrillions of dollars of derivatives had not been conceived. And of course our derivatives exposure are even more concentrated among the eight to big to fail banks today than it was in 2009. And I sincerely doubt that their VAR models or incentives have changed much if at all. And they certainly haven't comprehended the hyperinflation that their regression models have never had the data to analyze. And aside from writing 20,000 pages of regs and flowcharts with up to 300 steps, our 'crack' regulators are no nearer to getting control of the situation than they were before. Mostly because they are trying to manage undefined market risk on an a priori basis using negative regulatory rules which is an approach that makes GOSPLAN's record in the old Soviet Union look good.

Because of this, today the potential crash is an order of magnitude greater than the past as trillions of presumed real value evaporate in a derivative supernova. And the extermination of the dollar as the world reserve currency will not result in a replacement but in a period of confusion and chaos where Yuan, SDR, SFR, Euro, GBP, USD, Yen and most saliently, Gold enter a risk blender that will produce a concoction very unlikely to please the financial palate.

So that's the pessimistic view. And I must admit, I'm becoming more pessimistic by the day. God help us every one

The many ways that Obamacare hurts, the Young, Poor, and Disadvantaged Minorities

"Progressives" believe that they and only they care for the poor, minorities and young and that Republicans and conservatives are malign forces that pursue policies that harm the "other" probably because they "hate" them or at least are "objectively racist". So it's fun for this objectively racist hater to catalog the many ways that this administration's signature social welfare program harms the poor, young and minorities. That being said it is tragic that I'm able to mock the left because of something they are doing that hurts so many weak, vulnerable and most importantly, gullible "believers". But you you can't build a progressive paradise by screwing the rich and powerful now can you?  Eggs and omelets dontchaknow?

How the Patient Protection and Affordable Care Act neither protects nor provides affordable care to the young:
  1. Forces them to buy expensive comprehensive prepaid healthcare insurance policies when on a total, all in basis it is much cheaper for them to buy catastrophic policies.
  2. Mom 'n Dad (50-65) spend 5x on healthcare vs. their kids in their 20s.  By limiting price differentials to 3x, the young are paying roughly twice as much as before. (well except in New York which prior to O'care was the most expensive, most broken individual health insurance market in the country - so much so that no one bought individual insurance - it was too expensive.  Oddly enough, O'care replicates the most lunatic features of the New York market).
  3. Forces single men to buy female care insurance that they cannot possibly use.  Even if they had a sex change. But the guys probably deserve it, the sexist, rapist bastards. 
  4. And this much more expensive insurance does not provide access to the best doctors or facilities.  You get to compete with Medicaid patients for the C level care.
  5. Crushes the young with many trillions of additional unfunded future government liabilities and debts.
  6. All so mom 'n dad who are much wealthier and have much higher incomes (and much more political clout) can get their health care for far, far less than it costs.  Who says fortune doesn't favor the powerful?  "But we promise that when you get old and the country's bankrupt, you'll get to screw your kids and grandkids just like we diddled you. We swear, honest injun, would we lie to you?  After all, we're you're parents, we love you.'"
How the Patient Protection and Affordable Care Act neither protects nor provides affordable care to the poor:
  1. The poor were all on Medicaid before being 'saved', now Medicaid has been 'expanded' to many millions of the 'near poor'.  With expanded meaning "we printed up a shitload of new Medicaid cards with people's names on 'em".
  2. The number of providers accepting Medicaid remains constant.  Constant at a level that was insufficient to provide timely access to the poor, much less the near poor.
  3. To keep the O'care private plans looking at least marginally affordable despite all of the massive cost shifting, mandated benefit expansions and comunity rating and shall issue regs, the Obami encouraged extremely narrow networks that excluded all of the high cost, high quality providers.  All of the providers that participated are likely major Medicaid providers.  Meaning that the poor will now compete with the non-poor middle aged chronic healthcare needs patient for access to the pool of providers that was insufficient when it was just for the poor.  They will lose that battle.  Badly.
How the Patient Protection and Affordable Care Act neither protects nor provides affordable care to 'disadvantaged' minorities:

  1. Blacks, hispanics and native Americans are much younger than the population at large, so they suffer all of the disabilities that the young do.
  2. They are much poorer than average so they will suffer the cruelties that this law imposes on the poor.
  3. They are much more likely to die of violent causes and less likely to die of chronic causes, the result is that even more of the spending will shift to middle aged white and asian recipients and away from them.
  4. They have never  had equal access to the top of the healthcare pyramid.  With the advent of O'care even this limited access will be truncated.

All in all, these three groups have gotten quite a return on their slavish loyalty to the Obami and Dems, haven't they?  Well, we don't call 'em rubes for nothing.

God I love progressives don't you? Their continuing success is an affront to those of us who think that we are good at the racist hating game.  We're pikers compared to the Obami.

Friday, April 18, 2014

Evidently another aspect of academic rigor is gone

I wonder if dashikis, dreadlocks and talking about "niggaz" will become a critical skill in courtrooms or in debating the validity of medical therapies or determining the safety standards for cars.  Higher education is giving its enemies so much rope.

Pathetic joke "higher education" at the link.

http://www.powerlineblog.com/archives/2014/04/the-war-on-standards-comes-to-college-debate.php

Annals of police thuggery: it is now a felony on Illinois to.parody a politician

Though how would you parody an Illinois politician?  By pretending they're honest? Tale at the link.

They arrested five people on this heinous twittercaper.  And remember in today's America to be arrested is to be totally humiliated and is more than sufficient to make you hate and fear our bebadged "saviors " for the rest of your life.

Studs be makin" more friends every day!

http://arstechnica.com/tech-policy/2014/04/twitter-parody-account-holder-sought-in-police-raid/

Antarctic sea ice extent has never been higher in history

Those gosh darn AGW deniers. By delaying the reduction in greenhouse gasses they have increased the earth's temperature which has resulted in the fastest expansion in Antarctic sea ice in recorded history.

Wait.  That can't be right. The uncomfortable truth at the link.

http://iceagenow.info/2014/04/antarctic-sea-ice-demolishing-records/

Hotel Prosecutor: Witnesses can check in but you cannot leave

NY prosecutor admits to illegally detaining (imprisoning) witnesses.

Every time I think I've seen it all in terms of law enforcement's malign behavior I am blind sided by a new abuse. At the link.

http://m.nydailynews.com/1.1760513

Obama 'spikes' football

In banking and insurance the definition of success is getting the right number of the right kind of customers. Exceeding your goals can be good. Or bad. It is an indicator that you may have underpriced your product relative to the risk you are incurring. And since the US govt. is reinsuring all of this business it is John Q Taxpayer that is at risk.

For political reporters to understand this requires that they ask the right questions. And for them to do that they must genuinely want to know the answer. Which in our DC monoculture is the real problem.

Which is why you get football spiking analogies. Because as any drunk cheerleader at a wild party can attest: it's easy to get people to line up to screw you.

Ignorantly inappropriate celebration at the link.

http://www.politico.com/story/2014/04/barack-obama-health-care-takeaways-105806.html?hp=t1

Thursday, April 17, 2014

How to avoid a future of 'we are all doomed' financial collapses

In a previous post I laid out the proposition that we are all already doomed to a financial collapse.  So let's say the pessimists are wrong and we're not all doomed, yet.  So how do we best avoid future financial collapses?

The problem at its core is that from time to time there are runs on critical 'too big to fail' financial institutions.  These runs happen because the market suddenly resets its opinion of the safety and soundness of an institution and holders of short term 'demand' liabilities all demand their money back at the same time.  And if one institution goes down, it frightens investors at other institutions and like dominoes they all fall.  This is why governments have instituted failsafe systems, like deposit insurance or central bank lending of last resort - to bolster banks made wobbly by adversity and stop the panic that leads to runs.  But the problem as we found out so painfully in 2008, is that the prospect of a bailout leads bankers to take more risk and investors less care than they would absent the government's security blanket. And that transfers risk from bankers to taxpayers which allows bankers to make unjustifiably large returns.  And because they're still borrowing short and lending long, all we end up with is richer and richer bankers taking more and more risks leading to bigger and bigger panics. As U Chicago economist John Cochrane observes:

"In the end, if you have a big firehouse, then people start to store gas in the basement and don't keep their fire extinguishers ready. This moral hazard is well known, but it is perhaps not so well appreciated just how much more fragile markets are as a result of a century of crisis management."

In a new paper, Professor Cochrane persuasively argues that if the central problem is the uncontrolled run. And the run is caused by the heavy reliance on short term demand liabilities like deposit accounts that are backed by unmatched long maturity assets. Then why don't we simply get rid of short term demand liabilities unless they are fully covered by liquid risk free assets like government securities? The imbalance between short and redeemable on demand and long and locked in is what makes a run possible.  An institution that was funded by short term demand accounts but held liquid, risk free government securities as assets could not be run on.

Cochrane suggests that if this were done the primary driver of systemic financial system collapse:  the bank run, would cease to be a threat and the great majority of financial regulation that has been built to prevent bank runs and then to prevent banks from taking too much risk because they are protected would no longer be necessary.  Core financial institutions that were funded by much more equity or very long term debt for which payment couldn't be demanded would not be at risk.  He suggests both limits on non-government non-risk free short term liabilities as well as taxes on the same.

One of the salient reasons we can do away with the high risk 'fractional reserve' banking model is advances in technology, including instant trading and position transparency that enable us to pay for our latte by directly debuting our money market account.  The Cochrane proposal is somewhat similar to a proposal that Lowell Bryan, McKinsey's banking head made back around 1990:  make 'cash on demand' institutions fully invest in risk free government securities.

Cochrane makes a compelling case and also provides a nice overview of the current bank regulation and governance environment.  It's rather long but if you're interested in the space it is well worth your while.  Here.


Even in chock full of compassion Austin the cops behave like thugs

I can attest to the fact that you only need to be arrested and humiliated (the two go together) once for a trivial offense to accumulate a lifelong hatred of the police.  I tell my kids that where we live they are far more likely to be hurt and have their futures wrecked by our badged 'saviors' than any criminal. I'm conservative as are most of my friends. We're just not so called 'law and order' conservatives anymore. Because the law is increasingly lawless.
They're not on your side, they're on their side.
The latest thuggish outrage at the link.
http://www.dailytexanonline.com/news/2014/02/20/woman-arrested-on-24th-street-after-crossing-intersection

Wednesday, April 16, 2014

The 'we are all doomed' financial perspective explained

This post has been superseded by a revised version here.  Can't say it's better but it's at least more accurate.

I am not sure whether the economic and monetary situation we face is just lousy due to garden variety social democracy and rampant rent seeking or catastrophic with with wild financial recklessness added to the aforesaid corruption.  But in truth, I've never really crystallized in my own mind why the financial system could be in so much trouble that it would result in catastrophe.  I think I now get it (I know, I'm slow, so what's your point?) and in the hopes that my simpleton explanation may have value for others I am penning this missive.  If you think I've got something wrong and you're smarter than me (no great trick, admittedly) then by all means let me know.

Banks and regulators evaluate the adequacy of capital requirements, the value of incentive compensation and the acceptable level of risk taking using "Value at risk" models.  VAR models take each 'position' held by a bank, estimate how much risk that position faces and how much capital is needed to back it and how that risk relates to the bank's overall portfolio of risks.  Risks come in two flavors:  Interest rate - if interest rates rise ceteris paribus the value of an asset will fall and Default - an asset which is composed of the present value of a stream of future cash flows loses some (but not necessarily all) of its value if the issuer of the asset defaults on his obligation. Each asset class has its own risk levels determined by historical regressions of variations relative to interest rates and credit rating.  Critically, VAR can be substantially reduced by 'hedging' an exposed asset. You 'hedge' the risk of a default or interest rate change by paying some other entity to incur that risk on your behalf.  AIG famously went bankrupt because it sold so many Credit Default swaps to banks to hedge the default risk of their Mortgage Backed Securities portfolios.  Essentially what AIG did was 'rent' it's AAA credit rating to banks so that they could take BBB assets and call them AAA.  By doing so, they could reduce the amount of capital that they held in reserve to protect against the possibility that these assets would default.  Interest rate swaps achieve the same result for interest rate risk.

Now, there are two questionable assumptions that underly VAR: first, the key relationships between various interest rates, asset classes and credit ratings will not change, either on a secular basis or at different times in the business cycle. This is critical for if something is to be 'hedged' the relationship between the entities and the assets composing both sides of the hedge have to be understood and be roughly constant.  If the relationships change, for example, if it turned out that because of heretofore unacknowledged losses, AIG was BBB rather than AAA then hundreds of billions of dollars of CDSs written by AIG would instantly become valueless and the VAR models at the banks would suddenly show a massive capital gap.

Which leads to the second dodgy assumption which is that there won't  be a mad scramble for the exits that results in a liquidity crisis which would distort the VAR's conclusions.  In our scenario, the massive capital gap would lead the banks to dump mortgage backed securities to retrieve their position which would lead to a collapse in the value of that class of assets as the bankers pile on top of each other at the exit.  Which is sort of what happened.

According to the Bank for International Settlement we have a notional volume of derivative contracts in place of $693 Trillion, others estimate it at almost twice that.  Now these contracts cancel out - that's their point so that the real net value of derivatives is much smaller.  For example, in 2011 it was estimated that a record over 90% of notional exposure for major US banks was 'netted' against other contracts held.



Which is good news so long as nothing untoward - what Nassim Taleb calls a "black swan" - happens to muck up that netting logic.  Because a rather small shift in the 'netted' percentage could mean disaster for banks.  And crucially, the VAR models assume no net change.  And remember, compensation is derived from the VAR models.  Which makes sense because you want to pay your bankers on the risk adjusted returns that they generate with the capital they have at their disposal.

But if the VAR systematically underestimate the risk in all of this hedging/derivative activity by ignoring the unpredictable panics and if that risk only shows up periodically during massive market meltdowns and if the big banks are bailed out by the Central Bank then bank profitability is systematically overstated which means banker compensation is too high  - they are taking far greater risks than admitted and being compensated as if they were earning returns on lower risks.  If the models were truly accurate, they would be taking fewer risks and earning less money all the way across the industry.  Now if the biggest banks were simply allowed to collapse and their investors and employees were wiped out then this imbalance of risk would not persist - it would just be tough tacos for those who believed in the flawed models.  The surviving banks would then adjust their models to be much more conservative and sales of S class Mercedes would fall.

But as with much else in our society, the baleful influence of the Federal Stupor State ensures that bankers are getting filthy rich at the expense of the rest of us.  A situation that is compounded by the Fed's persistence in keeping interest rates extremely low which has been an enormous boon to banks and the individuals who control them.  But it isn't surprising given that the Fed is largely controlled by...bankers.  Indeed it's a brave President who goes against Wall Street.  And with the accession of 'plucked dove' Janet Yellin to the Greenback Throne, President Obama demonstrates that he's not that kind of President.

Incidentally, negative real interest rates also mean that high tech millionaires rapidly become billionaires because the lower the risk free rate of money, the higher the valuation of their various tech businesses and projections.  It's of course not surprising that the current President has massive support from both Wall Street and the Tech Oligarchs.  They don't call him President Goldman Sachs for nothing.

So how does all this result in catastrophe?  Simple but not easy:  First, to bail us out of the last few financial crises, the FED has used its powers to radically increase the money supply - both to keep interest rates low and to prop the value of hundreds of billions of dollars of distressed Mortgage Backed Securities by buying them.  At some point all of this liquidity injection has to go into reverse to avoid massive inflation.  When Bernanke hinted that it would, emerging markets tanked which is why super dove Yellin is clinging to the conn of the USS Quantitative Easing now.  So we are stuck between the Scylla of a collapse due to the withdrawal of the excess liquidity and the Charybdis of uncontrolled inflation if we continue to print so much electronic money.  And since economic collapse and deflation both frightens politicians and makes their debts seem bigger while uncontrolled inflation reduces government debt as a share of the economy, the politicos are not going to allow Yellin to take away the QE punchbowl.

This means that like it or not, the decision to remove the dollar from world reserve currency status has already been made.  It was made in steps - starting with Greenspan and now likely to be completed by a Yellin who - forced by frightened politicos - can't reverse Bernanke's Quantitative Easing to avoid inflation.  As a result, the US Dollar's reign as a world reserve currency, a reign that has had great positive economic benefits for the world and particularly for the US is over. Done. Kaalas. Finis.  Killed by the bankers and politicians who wanted the gravy train to continue as long as possible, enabled by a FED that is controlled by the selfsame self seeking bankers and politicians.

The result at a minimum will be a financial crisis similar in scale to those that  happened in 1914, 1939 and 1971.  But back then bankers were not a big part of the economy and the idea of quadrillions of dollars of derivatives had not been conceived.  And of course our derivatives exposure are even more concentrated among the eight to big to fail banks today than it was in 2009.  And I sincerely doubt that their VAR models or incentives have changed much if at all.  And they certainly haven't comprehended the hyperinflation that their regression models have never had the data to analyze.  And aside from writing 20,000 pages of regs and flowcharts with up to 300 steps, our 'crack' regulators are no nearer to getting control of the situation than they were before.  Mostly because they are trying to manage undefined market risk on an a priori basis using negative regulatory rules which is an approach that makes GOSPLAN's record in the old Soviet Union look good.

Because of this, today the potential crash is an order of magnitude greater than the past as trillions of presumed real value evaporate in a derivative supernova.  And the extermination of the dollar as the world reserve currency will not result in a replacement but in a period of confusion and chaos where Yuan, SDR, SFR, Euro, GBP, USD, Yen and most saliently, Gold enter a risk blender that will produce a concoction very unlikely to please the financial palate.

So that's the pessimistic view.  And I must admit, I'm becoming more pessimistic by the day. God help us every one.

With O'care the "Concierge" arbitrage is going vertical

If you read my post about the 'changes' in insured measurement below, you might conclude that the Obami have 'won' - after all, rigging measurement to ensure that the program will 'achieve' the goal of fewer uninsured seems to guarantee it.  Unfortunately for all of us, the flaws of the system aren't primarily in the 'sign up phase'.  The real disaster comes after the so called 'success'.  Indeed, the more 'success' the Obami have in the launch the greater the smash up will be.  Here's one example of what has come to pass:

It costs more in effort, time and resources to practice medicine in a system administered by third parties.  This is because there are administrative costs as well as 'agency' and 'moral hazard' costs.  People don't watch their pennies when a third party is picking up the tab and the agent or doctor has an incentive to over treat because someone else pays.  But the explosion of third party payment and the inevitable ruinous inflation that it drives has led just as inevitably to more and more draconian interventions in the market to limit the consequences of previous manipulations.  For example, Medicaid and Medicare - utterly unable to stop outright fraud the way private insurers routinely do - has turned to Congress to criminalize more and more physician administrative errors.  Obamacare  adds to this coercive trend by adding a thicket of new taxes and administrative requirements to receive reimbursement such as useless but expensive medical record systems, premium taxes and so on.

So the third party 'deal' is getting worse and worse with no prospect of reversing the trend.  So the primary care physicians that serve the affluent find that they can step away from the third parties, gross fewer dollars but net more and sleep better at night.  They call this concierge medicine and it's booming.

This, of course adds more agony to the medical access catastrophe that the poor and working classes already face:  fewer docs, higher demand, more paperwork and punishment and the coerced corporatization of physicians practices all mean fewer doctor hours to meet and treat patients in a rapidly rising 'third party, moral hazard, agency problem' filled market.

Stay tuned for more brutal Federal flailing as the gorgon gets itself more and more enmeshed in the nets of its own making.  Its roars of rage will be deafening.

"I have no idea if my tax return is accurate" means 'I have no idea whether you can accuse me of a crime and destroy me"

Donald Rumsfeld's note to the IRS here.

It must be noted that since it is a crime to evade taxes that the opacity of our tax code is one of the best ways for motivated Federal Prosecutors to 'get' someone they want.  In a world where no one knows whether or not they are breaking the law, the prosecutor is King.  Because only the very rich can stand against the awesome power and wealth of the Federal Super State.  We are betting on the discretion of a bunch of ambitious, politically motivated lawyers who don't make much money to maintain the integrity of our Republic in the face of countless opportunities to get ahead.  It's a bad bet.

Stalin had a what he called a Troika to try 'anti state elements' during the Great Terror and the Great Famine.  It included the Secret Policeman, the Party Boss and the Prosecutor.  With the IRS, the policeman is almost inevitably a Dem and during Dem administrations the Prosecutor serves as both Party Boss and Prosecutor.  The only thing we have standing between us and show trials is a rapidly eroding judiciary.

Census bureau changes critical survey in the year of Obamacare implementation

Usually when confronted with this type of situation I descend quickly in anglo saxonisms and sarcastic rhetoric.  I choose not to do so this time. I will only say that a government that gets to choose how it is measured cannot be held accountable and a nation so deceived cannot be ruled with the people's consent.  An important point to note is that in 2009 the Administration made the unprecedented decision to bring the Census Bureau directly under White House control.  Megan McCardle of Bloomberg is a critic of the ACA but by no means a 'right winger' she explains the tragic situation:

For several months now, whenever the topic of enrollment in the Affordable Care Act came up, I’ve been saying that it was too soon to tell its ultimate effects. We don’t know how many people have paid for their new insurance policies, or how many of those who bought policies were previously uninsured. For that, I said, we will have to wait for Census Bureau data, which offer the best assessment of the insurance status of the whole population. Other surveys are available, but the samples are smaller, so they’re not as good; the census is the gold standard. Unfortunately, as I invariably noted, these data won’t be available until 2015.

I stand corrected: These data won’t be available at all. Ever.

No, I’m not kidding. I wish I was. The New York Times reports that the Barack Obama administration has changed the survey so that we cannot directly compare the numbers on the uninsured over time.
The changes are intended to improve the accuracy of the survey, being conducted this month in interviews with tens of thousands of households around the country. But the new questions are so different that the findings will not be comparable, the officials said.

An internal Census Bureau document said that the new questionnaire included a “total revision to health insurance questions” and, in a test last year, produced lower estimates of the uninsured. Thus, officials said, it will be difficult to say how much of any change is attributable to the Affordable Care Act and how much to the use of a new survey instrument.

“We are expecting much lower numbers just because of the questions and how they are asked,” said Brett J. O’Hara, chief of the health statistics branch at the Census Bureau.

I’m speechless. Shocked. Stunned. Horrified. Befuddled. Aghast, appalled, thunderstruck, perplexed, baffled, bewildered and dumbfounded. It’s not that I am opposed to the changes: Everyone understands that the census reports probably overstate the true number of the uninsured, because the number they report is supposed to be “people who lacked insurance for the entire previous year,” but people tend to answer with their insurance status right now.

But why, dear God, oh, why, would you change it in the one year in the entire history of the republic that it is most important for policy makers, researchers and voters to be able to compare the number of uninsured to those in prior years? The answers would seem to range from “total incompetence on the part of every level of this administration” to something worse.

Yes, that’s right, I said “every level.” Because guess who was involved in this decision, besides the wonks at Census?
The White House is always looking for evidence to show the benefits of the health law, which is an issue in many of this year’s midterm elections. The Department of Health and Human Services and the White House Council of Economic Advisers requested several of the new questions, and the White House Office of Management and Budget approved the new questionnaire. But the decision to make fundamental changes in the survey was driven by technical experts at the Census Bureau, and members of Congress have not focused on it or suggested political motives.

Sarah Kliff of Vox says we shouldn’t freak out, because these are the numbers that the census collects for 2013, so the change is actually giving us a good baseline. But I’m afraid I’m not so sanguine. AsAaron Carroll says: “It’s actually helpful to have a trend to measure, not a pre-post 2013/2014. This still sucks.”

The new numbers will suffer, to some extent, from the same bias that the old questions suffered from: People are better at remembering recent events than later ones. Quick: On what day did you last get your oil changed? What month was the wedding you attended last summer? If it was in the last few months, you probably know. If it was someone you’re not that close to … well, the summer months kind of blend into each other now that you’re a grownup, don’t they?

And what has been happening in the most recent months? A whole lot of change! Policies were canceled, benefits changed, people shifted around their coverage in anticipation of the new law. That doesn’t make for a very good baseline. It will be a very good measure of who has insurance right now, in 2014, but it’s not where I’d want to start my 2013 baseline for our new law. That’s why they should have done this for 2012 -- or waited until 2016 -- to give us actual comparable data for the transition period. So by your leave, I think I’ll continue to freak out for a bit.

I find it completely and totally impossible to believe that this problem didn’t occur to anyone at Census, or in the White House. It would be like arguing that the George W. Bush administration might have inadvertently overlooked the possibility that when the U.S. invaded Iraq, there would be shooting. This is the biggest policy debate of the last 10 years, and these data are at the heart of that debate. It is implausible that everyone involved somehow failed to notice that they were making it much harder to know the effect of this law on the population it was supposed to serve. Especially because the administration seems to have had a ready excuse as soon as people reacted to the news.

Even if the administration genuinely believes this is defensible, why would they give anyone reason to believe that it is cooking the books? Because those charges are being made, and they’re a lot harder to dismiss than the complaints about birth certificates or dark intimations that the administration has simply made up its enrollment figures out of whole cloth.

I just don’t get it.

I mean, I can certainly think of explanations, but I can’t quite bring myself to believe the worst of them. Which leaves me with the only slightly-less-utterly-appalling conclusion: At some point, very early on in the process, folks noticed that asking the new questions would make it difficult to compare Obamacare’s implementation year to prior years, and decided that assessing the effects of the transition wasn’t nearly as important as making urgent changes to … questions we’ve been asking basically the same way for a decade and a half.

No, wait, that doesn’t make any sense, either. Let’s go back to inexplicable, shall we?

If the administration is really serious about transparency and data-driven policy, as I’ve been told for a year now, then it will immediately rectify this appalling mistake and put the old questions back into circulation double-quick. But we’re more likely going to hear the most transparent and data-driven administration in history citing these data -- without an asterisk -- to tout the amazing impact of its policies.


To contact the writer of this article:
Megan McArdle at mmcardle3@bloomberg.net.

To contact the editor responsible for this article:
James Gibney at +1-202-624-1863 or jgibney5@bloomberg.net.