Fittingly, the second blog entry on the (defeated?) bailout continues the parenting allusion. The markets, of course, are the children. They are youth replete with raw emotion in need of parental guidance. And oh the painful decisions of parenthood. How to train a child up so you will not be training for life?
Many parents are familiar with Dr. Ferber's famous book on solving sleeping problems. The issue is well known: A young child cries out in the night. Instinct tells the parent to rush in and solve whatever ails. But all that really does is stop the crying - temporarily. Everybody wakes in the night, and several times at that. People simply learn to fall back asleep. They learn it so well that most of the time they do not even realize they have woken up at all. Young children need to be Ferberized.
Ferber's method is generally referred to as letting the child "cry it out", though it is not as cruel as that sounds. It involves a series of gradually increasing wait times before entering a child's room and giving gentle reassurances that everything is okay, thus allowing a return to normal sleep. Over time, and usually it is a matter of days as opposed to weeks or months, the child has learned to go back to sleep solo.
There is no doubt the markets are crying out right now. But like a homeowner in an unaffordable house, coddling is not the answer (especially in the form of $700b of taxpayer cash). The House is seemingly taking a stand for what is right - regardless of the middle of the night wailing.
Monday, September 29, 2008
Tuesday, September 23, 2008
Homeowners Will be Hurt by Bailout
Assume for a brief moment that politicians in Washington genuinely care about homeowners. Is the best way to show affection to lavish cash?
It is a conundrum for the parents out there. You want the best for your child - but at what cost? Most parents try to avoid spoiling their children. In one sense of the term, it is to imbue an appreciation for what they have, possibly with a dash of the concept that hard work is a requirement for rewards. But a more literal definition of "spoil" is to ruin - to flaw. A child that is given too often does not appreciate how to get, and over time becomes impaired.
So it is with the mortgage market and homeownership. It is simply harmful to assist in the retention of an unaffordable home. The result is squeezing more money out of those who can ill afford it to prolong the unsustainable. At it's core, this credit crisis is about a housing boom in which people bought more house than they could afford based on the twin siren songs of a bubbling market and near-zero interest rates. Important pillars of a stable housing market had gone, most notably buying based on monthly income relative to monthly payments.
Housing had simply become unaffordable. The rate of price increase had far outpaced that of income, creating a massive distortion. Instead of allowing this important relationship to normalize, the government proposes to exacerbate the problem. Bailing out a homeowner who simply bought more house than they could afford will end up harming them - in addition to the negative impact on the public in general who is footing the bill.
For all those politicians who are falling over themselves trying to help out, there is one simple method, time-tested and near guaranteed for success: lower taxes.
It is a conundrum for the parents out there. You want the best for your child - but at what cost? Most parents try to avoid spoiling their children. In one sense of the term, it is to imbue an appreciation for what they have, possibly with a dash of the concept that hard work is a requirement for rewards. But a more literal definition of "spoil" is to ruin - to flaw. A child that is given too often does not appreciate how to get, and over time becomes impaired.
So it is with the mortgage market and homeownership. It is simply harmful to assist in the retention of an unaffordable home. The result is squeezing more money out of those who can ill afford it to prolong the unsustainable. At it's core, this credit crisis is about a housing boom in which people bought more house than they could afford based on the twin siren songs of a bubbling market and near-zero interest rates. Important pillars of a stable housing market had gone, most notably buying based on monthly income relative to monthly payments.
Housing had simply become unaffordable. The rate of price increase had far outpaced that of income, creating a massive distortion. Instead of allowing this important relationship to normalize, the government proposes to exacerbate the problem. Bailing out a homeowner who simply bought more house than they could afford will end up harming them - in addition to the negative impact on the public in general who is footing the bill.
For all those politicians who are falling over themselves trying to help out, there is one simple method, time-tested and near guaranteed for success: lower taxes.
Friday, September 12, 2008
Four Weddings and a Friedman's Law
In Free to Choose, Milton Friedman described a simple classification of spending. This led to what can loosely be defined as “Friedman’s Law” - The further away actual consumers are from actual spending the less efficient a market will be.
Friedman placed spending into one of four categories. In essence, he created a matrix. On one side is whose money is being spent (yours or someone else’s), and on the other is on whom the money is spent (you or someone else). Thus, the first category is you spending your money on yourself. The second is you spending your money on someone else. The third is you spending someone else’s money on yourself. And finally, the fourth category is you spending someone else’s money on someone else.
A colleague suggested a stellar real-world example to illustrate the various categories: weddings. Imagine a couple getting married. Spending via the first category provides the most efficient wedding. The couple spends their own money on their own wedding. They will most likely be concerned with how each penny is spent, and spend it on the exact wedding they want. Many times, they might decide not to have a wedding at all. They could choose simply to fly to Las Vegas or go to the local justice of the peace.
The second category is a bit less efficient, but not dramatically so. In this “traditional” category, one (or both) of the couple’s parents decides to make them a wedding. The parents will most likely be frugal with their money, but yet spend it on aspects of the wedding that the couple might not choose themselves. This might simply be having the wedding at all. Whereas the couple on their own might decide it is not worth it, having someone else pay might mean a wedding party takes place. The money might be spent carefully, but the value of the money is not necessarily maximized.
In the third category, the parents simply tell the couple they will pay for the wedding. There might be a specific dollar amount, but the premise is still the same – the incentive to economize is decreased. However, it is not quite a total loss of efficiency as the couple will most likely get good value for the money by spending it on the aspects of the wedding most important to them.
The last category is the least efficient. A wedding planner is hired to make a wedding. Other than a potential total budget number, the wedding planner is not incented to spend wisely. Further, aside from some potential consultations, it is unlikely that the money will be spent to maximize the value to the couple. The wedding planner might be influenced by kickbacks and other external economic drivers. Their ultimate goal is likely to end up on reality television, and the best means is to spend as much money as possible on as lavish a reception as can be conceived.
Friedman’s Law can, of course, be applied to any industry. An industry dominated by category three or four spending is likely to be wrought with inefficiencies and saddled with excessively high prices. Three prime examples are health care, higher education, and auto body repair. In all three, the consumer is rarely directly paying for the goods and services received, and also not necessarily choosing which goods and services are received.
As it applies to government spending…
Friedman placed spending into one of four categories. In essence, he created a matrix. On one side is whose money is being spent (yours or someone else’s), and on the other is on whom the money is spent (you or someone else). Thus, the first category is you spending your money on yourself. The second is you spending your money on someone else. The third is you spending someone else’s money on yourself. And finally, the fourth category is you spending someone else’s money on someone else.
A colleague suggested a stellar real-world example to illustrate the various categories: weddings. Imagine a couple getting married. Spending via the first category provides the most efficient wedding. The couple spends their own money on their own wedding. They will most likely be concerned with how each penny is spent, and spend it on the exact wedding they want. Many times, they might decide not to have a wedding at all. They could choose simply to fly to Las Vegas or go to the local justice of the peace.
The second category is a bit less efficient, but not dramatically so. In this “traditional” category, one (or both) of the couple’s parents decides to make them a wedding. The parents will most likely be frugal with their money, but yet spend it on aspects of the wedding that the couple might not choose themselves. This might simply be having the wedding at all. Whereas the couple on their own might decide it is not worth it, having someone else pay might mean a wedding party takes place. The money might be spent carefully, but the value of the money is not necessarily maximized.
In the third category, the parents simply tell the couple they will pay for the wedding. There might be a specific dollar amount, but the premise is still the same – the incentive to economize is decreased. However, it is not quite a total loss of efficiency as the couple will most likely get good value for the money by spending it on the aspects of the wedding most important to them.
The last category is the least efficient. A wedding planner is hired to make a wedding. Other than a potential total budget number, the wedding planner is not incented to spend wisely. Further, aside from some potential consultations, it is unlikely that the money will be spent to maximize the value to the couple. The wedding planner might be influenced by kickbacks and other external economic drivers. Their ultimate goal is likely to end up on reality television, and the best means is to spend as much money as possible on as lavish a reception as can be conceived.
Friedman’s Law can, of course, be applied to any industry. An industry dominated by category three or four spending is likely to be wrought with inefficiencies and saddled with excessively high prices. Three prime examples are health care, higher education, and auto body repair. In all three, the consumer is rarely directly paying for the goods and services received, and also not necessarily choosing which goods and services are received.
As it applies to government spending…
Michael Corleone to Fan and Fred: My offer is this. Nothing.
Ah, if only Michael Corleone were in charge at the Treasury. Then Fannie and Freddie would be getting exactly what they deserved from the government: Nothing.
Since when did nationalizing any industry, let alone one as significant as housing, make prudent economic sense? It simply is abhorrent to the concept of economic freedom and limited government.
For many years, numerous constituencies have raked in exorbitant sums of money due to the implicit government guarantee of Fannie and Freddie debt. Here is how it worked: Fannie and Freddie bought mortgages from banks. In order to pay for the mortgages, they borrowed money from the marketplace. Because the markets (correctly) assumed that the federal government would back the debt, Fannie and Freddie were able to borrow at extremely favorable terms.
The problem is - the government never charged Fannie and Freddie for this insurance. Well, not explicitly at least. Thus, the taxpayers gave a gift to Fannie and Freddie in the form of theoretical insurance. Fannie and Freddie monetized this to the benefit of private shareholders, executives, and those in Washington who received contributions. Now, taxpayers are picking up the tab.
Of course, the question to ask is - why bail out Fannie and Freddie? Why not simply give them nothing, and let them fend for themselves as virtually every other private enterprise is doing at this very moment? Why give yet another gift to the holders of Fannie and Freddie debt, while so many other holders of credit are getting skewered?
What the public is told is a garbage story about keeping the housing market stable. As far as anyone knows, the housing market has been in a free fall. The bubble has long since burst. What will stabilize the housing market is when prices correct enough such that they reflect the realities of what people can actually afford - not some Fed-induced haze of housing euphoria.
Another excuse being doled out is protecting some large bond holders. No where in the prospectus of Fannie or Freddie debt is the United States Government listed as a guarantor. If the Chinese government assumed that, well - whose fault is that? One might also argue that Goldman Sachs should have read the prospectii, but they probably didn't need to.
The bottom line, though, is that bailing out Fannie and Freddie is simply wrong. It is wrong to put the burden on taxpayers who did not take the excessive risks that two private companies decided to take and profit from.
Michael Corleone concluded the exchange by asking the Senator to put up the money personally. The public should be asking the same of all those in Washington who have been at the receiving end of Fannie and Freddie's largesse, including Paulson himself.
Since when did nationalizing any industry, let alone one as significant as housing, make prudent economic sense? It simply is abhorrent to the concept of economic freedom and limited government.
For many years, numerous constituencies have raked in exorbitant sums of money due to the implicit government guarantee of Fannie and Freddie debt. Here is how it worked: Fannie and Freddie bought mortgages from banks. In order to pay for the mortgages, they borrowed money from the marketplace. Because the markets (correctly) assumed that the federal government would back the debt, Fannie and Freddie were able to borrow at extremely favorable terms.
The problem is - the government never charged Fannie and Freddie for this insurance. Well, not explicitly at least. Thus, the taxpayers gave a gift to Fannie and Freddie in the form of theoretical insurance. Fannie and Freddie monetized this to the benefit of private shareholders, executives, and those in Washington who received contributions. Now, taxpayers are picking up the tab.
Of course, the question to ask is - why bail out Fannie and Freddie? Why not simply give them nothing, and let them fend for themselves as virtually every other private enterprise is doing at this very moment? Why give yet another gift to the holders of Fannie and Freddie debt, while so many other holders of credit are getting skewered?
What the public is told is a garbage story about keeping the housing market stable. As far as anyone knows, the housing market has been in a free fall. The bubble has long since burst. What will stabilize the housing market is when prices correct enough such that they reflect the realities of what people can actually afford - not some Fed-induced haze of housing euphoria.
Another excuse being doled out is protecting some large bond holders. No where in the prospectus of Fannie or Freddie debt is the United States Government listed as a guarantor. If the Chinese government assumed that, well - whose fault is that? One might also argue that Goldman Sachs should have read the prospectii, but they probably didn't need to.
The bottom line, though, is that bailing out Fannie and Freddie is simply wrong. It is wrong to put the burden on taxpayers who did not take the excessive risks that two private companies decided to take and profit from.
Michael Corleone concluded the exchange by asking the Senator to put up the money personally. The public should be asking the same of all those in Washington who have been at the receiving end of Fannie and Freddie's largesse, including Paulson himself.
Thursday, September 4, 2008
Seven Days of Paid Sick Days
Obama favors requiring employers to allow for a minimum of seven paid sick days. There are so many things wrong - where to even being? First of all, under what explanation of the Federal government does it have the right to mandate such a thing (theoretically, practically, logically)? Does Obama look at the European/socialist model and say, "I like that, let's emulate it"? It boggles the mind.
Yes, of course, it's great in theory. Most economic notions on the left have a kind-hearted rationale. But it simply doesn't work. Why not 10 paid sick days, and 30 paid vacation days? Why not 20 and 50? In fact, why not free health care for all? Oh wait, he thinks he can deliver that too.
Yes, of course, it's great in theory. Most economic notions on the left have a kind-hearted rationale. But it simply doesn't work. Why not 10 paid sick days, and 30 paid vacation days? Why not 20 and 50? In fact, why not free health care for all? Oh wait, he thinks he can deliver that too.
Oooo Barracuda! But What About the Economy?
There is no question Governor Palin knocked the cover off the ball last night.
But if there is a bone to be picked it is the lack of discussion of economic issues. By essentially ignoring the economy, one might be left with the impression that she was ceded that ground. Why not talk about healthcare? Obama wants universal healthcare - socialized medicine. She should have attacked that as simply wrong. Why not talk about inflation? Any and all of Obama's policies will only exacerbate the problem. She can show real concern for what is happening to the average American household. These are important issues, and Obama is simply going to make things much worse than they already are. That needs to be addressed.
But if there is a bone to be picked it is the lack of discussion of economic issues. By essentially ignoring the economy, one might be left with the impression that she was ceded that ground. Why not talk about healthcare? Obama wants universal healthcare - socialized medicine. She should have attacked that as simply wrong. Why not talk about inflation? Any and all of Obama's policies will only exacerbate the problem. She can show real concern for what is happening to the average American household. These are important issues, and Obama is simply going to make things much worse than they already are. That needs to be addressed.
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