End of A Year Gone Bad

I am working on my newspaper piece for January. It will have the same title and I am putting off real work, hoping to drum up ideas for the piece.

I personally love New Years and I am looking forward to it. It is the end and the beginning, and only has as much meaning as you want to give to it. Which for most people simply involves staying up late and getting drunk. I admire it for it's simplicity and directness.

This is the perfect opportunity to look back on all the things you wished you had done over the past year, the accomplishments of you and your peers, perhaps finish some loose ends before the opportunity to affect change this year draws to a close forever. This is the time to take an inventory of you life as you lived it and compare it against how you wanted to live it.

There are no fresh starts in life, all the baggage you had in 2008 will carry over to 2009. But for a brief couple of days, the year seems crisp and new and the possibilities endless as if you had been reborn.

I also like tax season. You get to see how you spent your time over the past year, how you earned and spent your money. Everything gets summed up on a few pieces of paper and collected by the government.

Your entire year's work, collected, processed and forgotten.

Here is to looking back on all the crap the last year threw at us, and a wish for better times ahead.

Unemployment and why it is OK

Came across this yesterday: http://www.reason.com/news/show/122019.html

The article talks about some misconceptions "normal" people have of economics. I wanted to talk about the make-work bias and how those people who are unemployed now may be better off in the future. This assumes a very neo-classical view, workers who were laid off are not an essential part of the company they are working for, so they can take the hint and use their time off learning a useful skill, provided they do not starve to death.

Most people believe that having a job is a good thing, as it provides them a means to feed and clothe themselves. This is false.

Not everyone needs and deserves a job, (so unemployment is actually a beneficial thing since it purges the system of useless people).

Nineteenth-century economists believed they had diagnosed enduring economic confusions, not intellectual fads, and they were right. The crudest form of make-work bias is the Luddite fear of the machine. Common sense proclaims that machines make life easier for human beings. The public qualifies this “naive” position by noting that machines also throw people out of work. It forgets that technology also creates new jobs. Without the computer, to give one obvious example, there would be no jobs in computer programming or software development.

But the fundamental defense of labor-saving technology is deeper than that.

Employing more workers than you need wastes valuable labor.

After technology throws people out of work, they have an incentive to find a new use for their talents. The Dallas Fed economist W. Michael Cox and the journalist Richard Alm illustrate this process in their 1999 book Myths of Rich and Poor, citing history’s most striking example, the drastic decline in agricultural employment:

“In 1800, it took nearly 95 of every 100 Americans to feed the country. In 1900, it took 40. Today, it takes just 3. The workers no longer needed on farms have been put to use providing new homes, furniture, clothing, computers, pharmaceuticals, appliances, medical assistance, movies, financial advice, video games, gourmet meals, and an almost dizzying array of other goods and services.”

Many economists advocate government assistance to cushion the displaced workers’ transition to new jobs and to retain public support for a dynamic economy. Other economists disagree. But almost all economists grant that stopping those transitions has a grave cost.

Exasperating as the Luddite mentality is, countries rarely accede to public anxieties and turn back the clock of technology. But you cannot say the same about another controversy infused with make-work bias: hostility to downsizing.
Inside of a household, everyone understands what Cox and Alm call “the upside of downsizing.” You do not worry about how to spend the hours you save when you buy a washing machine.

Make-work confusion can arise only in an exchange economy. If you receive a washing machine as a gift, the benefit is yours; you have more free time and the same income. If you get downsized, the benefit goes to other people; you have more free time, but your income temporarily falls. In both cases, though, society conserves valuable labor.

The danger of the make-work bias is easiest to see in Europe, where labor market regulation to “save jobs” has produced decades of high unemployment. But we can see it in the U.S. as well, especially in our massive employment lawsuit industry. The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

I am not sure I subscribe to this line of thinking, as it seems a little brutal. And it eliminates a certain psychological element that I think is important.

It is a little something I like to call, the Weakest Link Syndrome. (If you don't recall it, "You are the weakest link - Good Bye!", should refresh your memory)

On the show, very rarely did the smartest person win. Usually, the dumb people would be let go first. This follows the above economic theory in that competition will drive out the dead wood.

After about 1/2 way through the game however, the dumb people would start to conspire against the smarter person, voting them off even though they screwed up the least. This was because the dumb people knew they could only win if they eliminated the strongest competition.

If this were to translate into the current workday environment, I believe that the smartest/ hardest working people will not be the ones left standing at the end. They are too busy working to lobby for their jobs.

You can think of it this way, Dilbert would be fired before his idiot manager, not because he is less qualified, but because the idiot manager knows how to throw others under the bus.

While the benefits of a recession and job losses are beneficial according to economic theory (they eliminate a lot of useless positions that were allowed to accumulate during the boom times A.K.A. the excessive layers of upper management) it is less than ideal because the market is not completely efficient.

The people manning the guillotine are not going to chop their own heads off, even if they are the ones causing the most problems.

There are market inefficiencies and information asymmetries that prove that the market (and life in general) is just not fair.

Now may be a good time to stop working so hard, it is not going to save your job in the long run, and take a look around for people you can toss under the bus.

Otherwise: "You are the Weakest Link, Goodbye!"

O Hai! I Can Have Has Bailout 2 PLZ? K THX!

At first I stumbled upon this:

http://www.npr.org/templates/story/story.php?storyId=98610618&ft=1&f=1001

Here is a glimpse:

Grupe and others in the real estate industry have been meeting with officials at the Federal Reserve and asking the government for help.

The government has already announced a $200 billion plan to try to restart the market for credit cards, car loans and other consumer debt. Basically, the government is providing guarantees to get investors to buy up these securities again. So Grupe says the commercial real estate industry wants that program expanded to include these commercial loans.

"In our conversations with the Federal Reserve, I think it's fair to say that the senior staff indicated that they are open to a program like this," he says.
"They recognize the problem." Some economists think the government should take action here.

"This is the next big problem for the financial system and the broader economy," says Mark Zandi, who heads up Moody's Economy.com.

Zandi says the problem is that if all these big real estate loans can't get refinanced, that would mean more losses for the already-staggering banks.

"The banks and financial system broadly don't have enough capital as it is and if they have to take big losses on commercial real estate," he says "It undermines their capital position even more and they can't extend credit to anybody."

Zandi says this is one of the next areas we are likely to see the government trying to intervene to stop the financial crisis from getting worse.

He expects this to be the worst recession in 50 years and so he and other economists think the government should be doing all it can.

And then I found this: http://icanhazbailout.com/

Finally, my love of LOLCats is met with sarcastic pictures with captions!

How to respond to people who like to make parallels to the Great Depression

One of my professors told me that if you want to look smarter than the next guy (which is all this business is about by the way) that it helps to know obscure history and/ or obscure international events.

Everyone can quote what the hype is now, just read the headlines. But if you want to look smarter than the next guy, wait for him to open his big dumb mouth spouting off that:

"These are the worst economic conditions since the Great Depression and that valuable lessons are to be learned if only one knew the parallels that existed" (that tired and played out cliche you will soon poke holes in).

You can look puzzled for a second (as you are fake pondering your reply) and gesture with your hands implying that you are super-deep in though. Take a big breath and say:

"I am not quite following you. I thought the Great Depression was a consequence of over-large factory inventories, a stock-market crash and Germany's inability to repay back its war debts with gold, causing a strain on bank lending in Britain which then caused massive bank closings here in the United States.

It seems to me that none of these factors are an issue now.
We are no longer on a gold standard and we have the FDIC to insure that bank runs are a non-starter.

Plus, over-large factory inventories, which would lead to deflation as suppliers try to adjust their inventory, are not really a problem anymore thanks to advances in the supply chain. We do not have factories churning out tons of product and laying off a bunch of workers, although the recent moves by GM and Ford are a farce of the bygone Depression on which you speak, but it seems like the federal government is taking care of that problem this time around. (Tear it down and now build it back up before he knows what the f*&k just happened).

No, despite all the mainstream talk these days being offered by every T.V. economic pundit, I see more of a parallel between current economic conditions and the Panic of 1873. (inferring that your adversary gets his info from the sell-outs, the herd-followers, the "experts" telling you the obvious)

Unlike the "Great Depression" (Make sure you do the air quotes aggressively in his face) the Panic of 1873 was caused by a building boom in the Austro-Hungarian Empire which was formed in 1867. The emperor supported new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit, using unbuilt or half-built houses as collateral.

But the economic fundamentals were shaky and as continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates.

This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default.

The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke ( the Philadelphia banker who invented the bond drive to finance the Civil War, the most famous and well respected banker of the time) proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.

The only people who made money at this time were self-financed capitalists like Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller who had the capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices thus starting what would later be deemed "The Gilded Age". (Aggressive air quotes needed again as you continue to pummel the schleps ego).

That is how you look smarter than the next guy, destroy the guy's notion that he knew what was going on in the first place and then bring up something he probably knows nothing about. History and international events are the clear choices.

Usually though, my mind works faster than my mouth and I screw the whole processes up or it takes 10 minutes longer to get my point across and the guy has to leave just as I was about to unload on him, or the guy asks me a tangential question and I get off subject.

But if this conversation were to take place in a a movie, and I was some economic know everything bad-ass, this was how it would go down.

San Fransisco Fed Is Not My Type Of Bank

Yesterday I talked about how much I loved the Dallas Fed, because it is concerned with things like manufacturing, transportation and commercial real estate.

Today, I want to talk about the San Fransisco Fed, which is concerned with things such as exchange rates, international trade and policy.

The SF Fed recently published a piece on monetary policy in Korea and Japan. Much like everyone else, there was talk of the Lost Decade.

I'd like to wrap these remarks up with some reflections on what Japan's experience during its "lost decade of growth" which began in the early 1990s may have to tell us about handling the financial crisis and recession here in the U.S. Needless to say, this was a frequent topic of conversation, and, also needless to say, some issues were the subject of debate.

In terms of Japan's past conduct of monetary policy, a major lesson is that, when policy interest rates approach their lower bound and there is fear of deflation, it is important to make clear and strong commitments about the future stance of policy. The Bank of Japan did this by issuing statements that it would maintain its zero interest rate policy until inflation reappeared. The central bank also engaged in quantitative easing from 2001-2006, but it was unclear if that boosted economic activity much.

In terms of the massive fiscal stimulus of the 1990s, people generally seem to agree that it failed to raise real growth and succeeded only in raising public debt to excessive levels. One possible explanation is that spending went to activities that did not yield much "bang for the yen." Another explanation is that Japanese citizens may have believed in the government's long-term commitment to balance its budget; in that case, they would expect any current fiscal stimulus to be undone in the near future through higher taxes, prompting households to save rather than spend.

Regarding the current financial turmoil, our contacts suggested several approaches for resolving it, some of which, of course, we have already implemented. One is to provide a safety net for the financial system during a crisis by extending deposit insurance and to enhance interbank liquidity by guaranteeing debt. Another emphasizes the importance of the government's role in recapitalizing the banks, provided that there are conditions about reducing risky lending and that the government stands to gain from future bank profits.

The SF Fed seems to toe the party line (We love the TARP so much and everyone is going to be OK if they only wish hard enough *hugs*.)

The Dallas Fed (at least to me) is more interested in telling it like it is. Plus they use graphs and math, and I appreciate it.

Dallas Fed Is My Kind Of Bank

Say all you want about Dallas, but the Federal Reserve Bank there is top notch. I have mentioned several times how much I admire the Fed Chairman from there, Richard Fischer, and the letter he had in April was spot on.

The article that they are talking about this month has to do with commercial real estate (I love these guys!).

You can read the whole thing here.

Some things I found useful: Stock of commercial buildings ($3 Trillion Dollars) Stock of residential buildings ($14.5 Trillion Dollars). These were 2007 numbers, the height of the run-up in prices.

Real Prices for Office and Retail (Industrial you are not immune) are declining.

Architectural Billings are lower (these are projects that are in the pipeline). 2009 is not looking so great for architects, and by extension developers, and by extension anybody in the real estate biz.

This will have extensions to the overall economy in two ways. First, construction spending has an incredibly high multiplier and is a huge stimulus to economies. Second, a fall in property values will reult in losses to the banking sector.

Construction is volitile. It is super-cyclical and leads overall GDP. Commercial construction has turned down, in virtually every recession since 1970. In 2001, commercial construction contracted 18 percent.

In the current cycle, things look ok, at least from an investment standpoint.

2001 was worse that the current situation, in regards to CRE investment. The blue line represents deviation from trend, so it can be a little tricky since these reflect the cyclical components of what is going on. (This also assumes that the trend is known and constant.)

This last chart I am going to show is kinda scary. (read the damn article if you want all the charts!) These are delinquency rates for loans. And the loans are deteriorating (nobody cares about loan quality when prices are rising, but as soon as things get bad, people get hurt).

In short, tougher times appear to lie ahead.

Worsening macroeconomic conditions, particularly in the retail and other service sectors, are hurting CRE fundamentals. Meanwhile the intensification of the credit crunch is dampening market activity.

And if commercial property’s situation does grow worse, banks are likely to face further losses.

One factor that might limit these risks is that the commercial real estate sector wasn’t as grossly overbuilt heading into the current economic slowdown as it had been in the early 1990s.

Good News!? ... Maybe?

The Fed lowered the Fed Funds Target rate to the range of 0 to 0.25 percent.

Since real estate depends heavily on borrowed money, this theoretically makes borrowed money cheaper, so this should help buyers and sellers of real estate get deals done.

SRS, the ultrashort real estate fund dropped 25 percent today, meaning that the Dow Jones Real Estate Index (IYR) went up 12.5%, so people assume that this move is a positive one for real estate.

I am mixed on the subject. For starters, where do we go from here? The Fed can only keep the rate at 0, if it lowers the rate to below 0 people will just hold cash instead. This is because people do not want a negative rate of return.

The bank of Japan did this in the early 1990's and we all know how that turned out. The called it the Lost Decade:

The economic miracle ended abruptly at the very start of the 1990s. In the late 1980s, abnormalities within the Japanese economic system had fuelled a massive wave of speculation by Japanese companies, banks and securities companies. Briefly, a combination of incredibly high land values and incredibly low interest rates led to a position in which credit was both easily available and extremely cheap. This led to massive borrowing, the proceeds of which were invested mostly in domestic and foreign stocks and securities.

Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.

Eventually, many become unsustainable, and a wave of consolidation took place (there are now only four national banks in Japan). Critically for the long-term economic situation, it meant many Japanese firms were lumbered with massive debts, affecting their ability for capital investment. It also meant credit became very difficult to obtain, due to the beleaguered situation of the banks; even now the official interest rate is at 0% and have been for several years, and despite this credit is still difficult to obtain.

Overall, this has led to the phenomenon known as the "lost decade"; economic expansion came to a total halt in Japan during the 1990s. The impact on everyday life has been rather muted, however. Unemployment runs reasonably high, but not at crisis levels (the official figure is a little under 5%, but this is a considerable underestimate - the real level is probably around twice that).

This has combined with the traditional Japanese emphasis on frugality and saving (saving money is a cultural habit in Japan) to produce a quite limited impact on the average Japanese family, which continues much as it did in the period of the
miracle.

I am starting to think that the people who are running things, nice people as they may be, have not a clue as to what they are doing. $700 billion for really no reason at all.

I am more than willing to watch events unfold from the safe distance of, say 10 years or so, but unfortunately I, you and we are all stuck here, now.

We must resist the urge to run from one end of this mess to the other, never looking back. There is no safe distance and there is no end, it extends in all directions forever.

The hope that I have is that these changes to the interest rate, the government borrowing to finance the $700 billion, the printing of money, deflation (possibly inflation again), these are not the *real* economy and monetary policy has no effect on the real economy. At least in the long term.

By the real economy I mean jobs, food, real estate, things that money can buy, etc. These things do not go away and are what most people care about when push comes to shove.

So the wealth that you built up over the past 10 years. Yeah, it is gone with diminishing prospects of returning. It was just money, and it is gone now.

Will this be the start of the American "Lost Decade"?

Every new month brings one more ditch and another last ditch effort.