Archive for the 'Root Cause' Category

Steve Forbes on the Crisis

December 23, 2009

In his December 10, 2009 Fact and Comment column, In-Credit-Able, in Forbes Magazine, Steve Forbes clearly communicated several points worth capturing.  Here’s on on the mortgage crisis:

Government-sponsored enterprises Fannie Mae ( FNM news people ) and Freddie Mac ( FRE news people), with their implicit government guarantees, were able to totally dominate the mortgage market. They could borrow cheaply and leverage up on a scale no private company could. When they went bingeing on subprime mortgages, they ended up twisting and then destroying the housing market. The private sector was quite capable of generating players that could have performed Fannie’s and Freddie’s roles. And because they wouldn’t have had Uncle Sam’s moral-hazard safety net, they would have been infinitely more cautious, even with the Fed creating floods of liquidity and the credit rating agencies forgetting their raison d’être. Yet Congress is determined to keep these beasts alive and under government sway. Washington is also taking over the student loan market.

This is not a well understood point.  Having the implicit guarantee of the government short-circuited the prudence that would take place in a free market.  All the bright bulbs that condemn free markets for causing the crisis, don’t seem very bright to me because they not only miss the true cause of the crisis, but they blame the very thing that could have prevented it.  Removing prudence from a free market through a government action will always end badly.

Here’s some clear thinking from Steve on health care:

The prospective government de facto takeover of health care will extend Washington’s reach into the credit markets. Health insurers will be reduced to federal vassals by being forced to offer policies at prices and terms dictated by Washington. As a reward they will have first call on the credit markets, with the same sort of implicit guarantees that once so benefited Fannie and Freddie.

It’s easy to forget, businesses like insurance companies are in business to make a profit for their shareholders.  If they don’t make a profit, there’s nothing forcing them to stay in business.

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Walter Williams on Education

December 23, 2009

In his column today, Black Education, Walter Williams touches on some of the same things I touched on last April in my post on how to save education.

They have parents with little interest in their education. These students not only sabotage the education process, but make schools unsafe as well. These students should not be permitted to destroy the education chances of others.

I agree for any student that is disrupting others.  Education is expensive.  We pay $10,000 – $15,000 per student per year of K-12 education.  In return for spending this money, we should expect students to be on their best behavior and problem kids need to be removed from the population so other can learn.

Another issue deemed too delicate to discuss is the overall quality of people teaching our children. Students who have chosen education as their major have the lowest SAT scores of any other major. Students who have an education degree earn lower scores than any other major on graduate school admission tests such as the GRE, MCAT or LSAT. Schools of education, either graduate or undergraduate, represent the academic slums of most any university. They are home to the least able students and professors. Schools of education should be shut down.

This goes along with my belief that we need to remove bad teachers and reward good ones.  Teachers seem to hate the idea of performance measurement.  It’s not hard to see why based on Williams’ paragraph above, they aren’t that good.  Teaching is not an entitlement.

Yet another issue is the academic fraud committed by teachers and administrators. After all, what is it when a student is granted a diploma certifying a 12th grade level of achievement when in fact he can’t perform at the sixth- or seventh-grade level?

Agreed.  In my post, I wrote that teachers need to assess accurate grades that truly reflect the students’ proficiency of the subject matter.  There should be no other criteria when giving a grade.

In summary, public education is not good because it has stifled or simply has wrong-headed ideas on several important levels of feedback.

  1. Student grades.
  2. Student behavior.
  3. Management of teacher quality.
  4. Ultimately, the most important level of feedback that is stifled is funding.  Public education receives funds no matter what.   #4 enables #1 – 3.

George Schultz on PBS

December 17, 2009

Frustrated with Tiger Woods banality on the major networks last night, I switched on PBS and caught a segment on the Lehrer News Hour with George Schultz discussing his belief that the financial crisis was due to the government creating a moral hazard with it’s ‘too big to fail’ bail-out nonsense.  He asks, if they’re too big to fail, why not make them smaller?  Great question.

I highly recommend watching the video.  Click here and it should be the first video listed on the left of the screen.

I nearly fell out of my chair.  Finally, some reason in media.  Good job Lehrer.  Getting warmer.

Moral hazard is the unintuitive lingo economists use to describe the idea that if someone or something is there to bail you out, you do things differently than you would if you didn’t have that backup.

If somebody knows they’ll be bailed out, they take excessive risks because they do it [take risks] on the taxpayers dollar.  The whole system is badly damaged when bailouts occur because it takes accountability out of the system and the market system depends on accountability, so we have to design a system so that anybody in it can fail.

The interviewer, who I hope was playing dumb for his audience (I think he was), asks Shultz if this is something he’s seen in the past or “is this a new phenomenon?”   This isn’t new.

This is everyday human behavior  that’s been around since the dawn of mankind.  If someone tells you they’ll pay for your retirement, you don’t save as much.  If you parents got you out of trouble when you were a kid, you got into more trouble.

Schultz explained two examples from the past to illustrate moral hazard.

First was a strike the longshoreman in 1968.  President Johnson enjoined the strike to prevent national emergency.  When Nixon took office and Schultz became his Secretary of Labor, another strike fired up, why not?  The President is going to help them get what we want to avoid a national emergency.

Schultz said Johnson was wrong and Nixon should stay out of it.  It would teach them “they have to take responsibility for their own actions,” kind of like the parent who finally learns they aren’t helping matters by soothing the temporary pain for the child who made a bad decision.  Nixon listened and the strikes died down.

Another example was with the failure Penn Central railroad.  The railroad grossly managed their affairs.  The Federal Reserve Chairman, Arthur Burns, wanted to give Penn Central a bailout to prevent a massive failure of the financial system.  Sound familiar?

In the end, he didn’t bail them out because they had retained Burns’ former law firm and a bailout would look too suspicious.  Penn Central failed.  There was no ripple effect.  The economy kept chugging.

While Schultz said a lot of good things in the interview, that wasn’t the part that fascinated me.  What fascinated me was that there was no yelling.  He wasn’t chastised for challenging today’s conventional wisdom that markets failed.  He was allowed to state his case and rationale in a calm manner and the interviewer tried to understand his points, rather than stuff him in the face with populist lay-ups.

I could imagine Matt Lauer conducting the same interview.  When Schultz said that staying out of the strikes would teach them they they need to take responsibility for their actions, I could envision Lauer cutting him off and asking him in his condescending tone something like, “but don’t you think the longshoremen need the muscle of the government behind them, because the companies have all the bargaining power?”  Or, “shouldn’t we have bailed out Penn Central?  X thousands lost their jobs.”

Then Lauer wouldn’t have given Schutlz a chance to explain that the end result of the actions that weren’t taken were far away better than what would have happened after the temporary soothing of the government action, much like the parent who finally decides its time for their kids to learn a lesson.

Tick, tick, tick, tick

December 14, 2009

Ricky Gervais, creator of the television show The Office, and Andy Rooney both lamented about how much money they have on this evening’s 60 Minutes.  Ricky said that he doesn’t work harder than a lot of other folks, but earns many multiples of their income.  He said that a large part of his success was due to luck.

I agree.  Nassim Taleb, author of the Black Swan and Fooled by Randomness, educated me on how much luck plays in the success of successful people.  As Taleb says, we always hear about the successful people but never about the just as talented people who aren’t as successful because they just haven’t had their lucky break.  Sometimes it’s as simple as meeting the right person at a party.

But, I will give Ricky something, he does have talent.  He makes me laugh.  I enjoy his humor, acting and writing.  Not to say that others aren’t as deserving, but any dollars Ricky has of mine in his pocket were well earned.

Rooney seemed bothered by having more than his share, but comforted by the fact that he doesn’t have as much as others.  He referenced the Forbes 400 list of the richest 400 people as proof.

What bothered me: C’mon guys.  Rather than feel down about being wealthy, celebrate it.  Encourage others.  Tell us how awesome it is that we live in a world where you can follow your dreams, work hard and be rewarded.  Acknowledge, as Ricky did, that there is some luck to it, but one thing is for certain – they wouldn’t have been successful if they hadn’t tried.

And, if you don’t have a dream but can still live a decent, comfortable life as a nurse, engineer, electrician or some other chosen profession, that’s awesome too.  Compared to how people lived a century ago or how people live in other parts of the world (some within a day’s drive for most of us) – we are all rock stars.  That something that we should feel good about it.

We should be asking ourselves why that is.  What are the root causes that allow each of us live better than royalty in the past in exchange for an honest day’s work?  We should want more of that.

They showed an 80s video of Ricky taking a stab at the music business.  Apparently it didn’t work out.  He wasn’t bothered by it.  He seemed to recognize that all things don’t work out, but trying matters.

Tick, tick, tick

December 14, 2009

In an interview on 60 Minutes this evening, Obama blamed Wall Street bankers for the nation’s financial troubles.  If I remember correctly, the question was asked if banks are repaying TARP funds so they could pay their CEOs big bonuses.  To that, Obama said that he thinks that’s a motivation and that Wall Street still doesn’t get it that everyone is mad at them for causing the financial mess (paraphrased from memory).

What’s sad is that many American accept this explanation and we never hold government accountable for their role in the mess.

A true leader would own up to it.  Wall Street certainly played a role in the financial crisis, but they by no means acted alone.  This is where journalism needs to DO IT’S JOB!

Here are some great questions I would have loved to ask President Obama at that point:

1.  Do you think the government or government agencies had any role in the financial crisis or did Wall Street act alone?

2. Do you believe the Federal Reserve should have acted quicker to remove excess money supply after it seemed that the economy got back on track after 9/11?

3. You don’t believe that government put pressure on banks to make credit easier (i.e. lend to people they would normally consider high credit risks) in order to push this idea of expanding home ownership?

4. Didn’t the government provide implicit guarantees to subprime lending, again to expand home ownership, through Fannie Mae and Freddie Mac?

5. Wasn’t Fannie and Freddie one of the largest, if not largest, provider of these bad loans?  And weren’t they acting under direction from Congress?

6.  Weren’t regulations proposed in 2004 that would have reduced the risk of the housing crisis by making it tougher to get loans, but those regulations were rejected by Congress because they would have interfered with the goal of expanding home ownership?

6.  In order for us to better trust your leadership, shouldn’t we expect you to be honest about government’s role in the financial mess?  Rather, you seem to pretend that government has not blame and we should continue to blindly trust the government as you want to expand regulatory power even further.

7. Please tell me, how are the new financial regulatory powers that your administration is proposing different from those in 2004?  Why didn’t the current regulations not work to prevent the crisis?  Did anyone in government not even recognize that a crisis was about to happen?  If not, how can we trust those in government to recognize the next crisis?

8. What do you think about the people who borrowed well beyond their means?  Shouldn’t they have acted more prudently?  Shouldn’t we expect our citizens, who are provided thirteen years of education with a total valued at $150,000, to make responsible financial choices?  Shouldn’t we expect them to be able to read and understand a loan document and do their homework about the realities and responsibilities that come with home ownership?

9. What personal finance advice would you give Americans?

10.  Some say that people were motivated to borrow beyond their means because they felt that home prices were appreciating so rapidly that they could always sell the house and make a nice profit.  In other words, they were borrowing on future hopes rather than their realistic income.  Don’t you think that the government’s finances are reflecting that same behavior?  We are borrowing beyond our means with the hope that the economy will grow strong and pay for it.  Haven’t we learned our lesson here?  Don’t we know how this story is likely to end?

Winning the Audit Lottery

December 14, 2009

Here’s an interesting story from Forbes magazine.  The authors discuss the merits of the IRS boning up on tax audits because the overall impact will be a substantial return on dollars invested in audits.

I thought there might be simpler way:  simplify the tax code.

A Great Point

December 8, 2009

Thomas Sowell makes a great point in his column today, Jobs or Snow Jobs.

President Obama keeps talking about the jobs his administration is “creating” but there are more people unemployed now than before he took office. How can there be more unemployment after so many jobs have been “created”?

I suggest reading the whole column.  Here’s another nugget:

Minimum wage laws appear to give low-income workers something for nothing– and appearances are what count in politics. Realities can be left to others, so long as appearances get votes.

People with low skills or little experience usually get paid low wages. Passing a minimum wage law does not make them any more valuable. At a higher wage, it can just make them expendable. Raising the minimum wage in the midst of a recession was guaranteed to increase unemployment among the young– and it has.

Constant government experiments with new bright ideas is another common feature of Obama’s “change” and FDR’s New Deal. The uncertainty that this unpredictable experimentation generates makes employers reluctant to hire. Destroying some jobs while creating other jobs does not get you very far, except politically. But politically is what matters to politicians, even if their policies needlessly prolong a recession or depression.

Maybe we need to elect leaders that have the backbone to tell us the truth and inspire us to solve our own problems – rather than politicians that promise a free lunch and sweet nothings in exchange for your vote.

Get Around It

December 4, 2009

In this column, Larry Elder writes about NPR’s treatment of the climategate story.  I enjoyed the column.  I especially enjoyed these two sentences:

One crosses the line from scientist to advocate when, if faced with conflicting or unexpected data, the scientist tries to get around it rather than to understand it. If data causes a re-examination of previously held assumptions, so be it.

Very well said.  We all need someone to keep us honest, even scientists.  Groupthink is a feedback problem that hides the truth.  The problems that led up to the deadly explosion of the space shuttle Challenger in 1986 was a result of groupthink among NASA scientists and engineers.   Hmmm…

What’s Your Voting Privilege Worth?

October 7, 2009

John Stossel’s column, Transfer Machine, is recommended reading.  Rarely do we think of the misaligned incentives created by transferring wealth between citizens using political power.  Stossel sums it up nicely.  First with a quote from George Bernard Shaw:

The government who robs Peter to pay Paul can always depend on the support of Paul,” George Bernard Shaw once said.

The other way to say this is “It’s like two wolves and sheep voting on what’s for dinner.”

Then Stossel adds this startling paragraph:

The theory of government I was taught says that government provides benefits, primarily security, to the entire population. In return we pay taxes. But lately the government has been a distributor of special privileges, taking money from some and giving it to others. America is now about evenly split between those who pay income taxes and those who consume them.

Suddenly, the two-wolves scenario sounds plausible.  What incentive does someone who receives assistance from government have to vote for people who may take that away?  Better yet, what incentive does the sheep have to stay?

It’ll be interesting to see how this plays out.  The U.S. government has been growing over the last century at the hands of special interests.  Perhaps, when taxpayers become a special interest, by being in the minority, they’ll actually have more power.

Another interesting thought, should you lose your privilege to vote if you accept direct government assistance?  In the private sector, having an economic stake in something you can influence politically is called a conflict of interest.

Of course, this would never fly politically (as in correctness) or logistically.  Would government assistance include Social Security and Medicare, for example?  But, I still find it interesting to think about.  The mere suggestion makes one think about how much they value their voting privileges.

Thomas Sowell on Affordable Health Care

October 7, 2009

Thomas Sowell makes an excellent point in his Random Thoughts column today:

After political crusades for “affordable housing” ended up ruining the housing market and much of the economy with it, many of the same politicians are now carrying on a crusade for “affordable health care.” But what you can afford has absolutely nothing to do with the cost of producing anything. Refusing to pay those costs means that you are just not going to continue getting the same quantity and quality– regardless of what any politician says or how well he says it.