Thursday, May 31, 2012

Facebook Fatuousness


I'm knee deep in self-help books and thus, a kindler, gentler me is emerging. I've been keeping up with the bloviator's commentary on the Facebook IPO and sigh (reminiscent of Ronald Reagan responding to Jimmy Carter) "there they go again."

Your friend Joe Nocera wrote in his column how bankers set the price of Facebook. Sorry Joe. The Market sets the price. Buyers submit bids, sellers (Facebook) submit its offers and the bankers try to determine where the market will clear. And yes. It does work that way. So next time you read the bankers messed up by setting the price wrong, remember, the Market, not bankers set the price. And it matters. Most of the columnist who assert the bankers set the price are implying there is some sort of market manipulation that is taking place that can be solved with smart regulation. But if you've characterized the "problem" incorrectly, you are less likely to come up with a smart solution.

There has been some gnashing of teeth that analysts didn't inform all of their clients about changes to estimates. This is rich. After the Internet bubble Eliott Spitzer, at the time Attorney General for the State of New York entered into a "global settlement" with the major investment banks that changed among other things analyst's involvement in an IPO. Spitzer, and others, characterized the problem of the Internet bubble as one caused by exuberant analysts hocking worthless IPOs. Their solution was to remove the analyst from the process. Part of that removal was restricting analyst's communications with investors during the marketing of the IPO. Analysts can't make outbound calls to investors. So if an analyst has a piece of information that is germane to the pricing of the IPO, the Spitzer rules virtually ensure information will not flow to investors. The analyst is now very careful about giving out information for fear of running afoul of the law. And yes, that is how it works.

I read someone, in the Wall Street Journal, of all places, complaining analysts were calling clients on the phone in order to relay information. The phone call was portrayed as a nefarious way to transmit information. See the above paragraph. Analysts can't make outbound calls. It's considered marketing the deal. And the Spitzer rules were promulgated to prevent analysts from marketing deals. The characterization that analysts were making calls to client, is one, wrong. Secondly the Securities Act of 1933 prevents ANY written document, other than the prospectus, to be used to market the deal. An analyst, broker, banker that works for the bank underwriting the deal can only send the prospectus to the investor. Anything else is illegal. Oral communication is the only way to communicate changes. The Securities Act and Spitzer determined information is bad, so they restricted information. Some investors getting information and others not is a direct result of the laws that were explicitly designed to prevent the free flow of information. The laws have succedded.

The little guy was again screwed over by the Fat Cat Wall Street Banker. I love this one. All of the complaints I've seen on this issue come from clients of Schwab, eTrade, T.D. Ameritrade and the other discount brokers. Here is the value proposition of the discount broker: "Customer doesn't need useless things like research, so trading costs less." Nothing wrong with that. But if you don't pay for research, don't complain you aren't getting it.

We've written a few times about unintended consequences. Some of the problems with the Facebook IPO are unintended consequences of prior laws. But politicians are too craven to admit that. Instead they'll look for scapegoats, come up the wrong problem, pass the wrong law and 5, 10 or 20 years later go through the whole process again. Can you say Dodd-Frank? Affordable Care Act?


Bloomberg Proposes Banning Big Slurps


In his never-ending quest to re-make the world in his own image, NY mayor Bloomberg proposes a ban on the sale of a variety of large-size drinks. The purported reason is to reduce obesity.

There are so many ludicrous aspects to this proposal, but the one that struck me is this: according to the NY Times, the "measure would not apply to diet sodas, fruit juices, dairy-based drinks like milkshakes, or alcoholic beverages."

I know, when emotions are in play facts don't matter. But consider the number of calories per ounce of the following:

Minute Maid orange juice 11.8 calories/fluid ounce

Budweiser 12 calories/fluid ounce

McDonald's chocolate milkshake 44.4 calories/fluid ounce

Whole milk 17 calories/fluid ounce

Coca-Cola 9.3 calories/fluid ounce

Bloomberg wants to restrict, for the sake of preventing obesity, the drink that has the LEAST caloric content, relative to the drinks that are exempted.




Wednesday, May 23, 2012

Just How Bad is this Recovery?


Given the sluggish growth of the past three years, what is amazing to me is how strong Obama is in the polls.

I was listening to the Sunday talk shows where it seemed the Democrats were trying on the one hand to describe how awful the economy is and on the other hand how much more awful it would be with Romney and the Republicans holding power. The Republicans had an easier argument. They only had to say the economy was awful. Today the Wall Street Journal had an op-ed characterizing this as a particularly weak recovery.

Enough is a enough I said. I'm tired of the hacks on both sides just saying things. How slow is this recovery? I wanted data that broadly described the economy, was available since 1947 and was accessible via the FRED (Federal Reserve Bank of St. Louis) database. I looked at the growth, from the trough, of three items: employment, real GDP and corporate profits.

There have been eleven recessions and recoveries since the end of WWII. The start and end dates are determined by the National Bureau of Economic Research at

This first graph is the employment for each of the eleven recoveries NBER has classified since the end of WWII. There was a very short-lived recovery under Jimmy Carter, that started in 1980, and it's in the graph but truncated, so I didn't label it, but if you look closely, you'll see it.

This recovery, as you can see is not just one of the weakest, it is THE weakest on record since WWII. The numbers are really bad. 35 months after the recovery began, the number of workers is 1.3% higher than the trough value. 

Interestingly, the four best recoveries are under Republican Presidents. Some of the liberal gas bags like to draw correlations between Democrat Presidents and the stock market's performance. Kind of a silly game, but I can play. This chart shows Democrats are bad for workers in a recovery.

One of the Republican talking points is the severity of a recession is correlated with the strength of the recovery. It sounds good, but I don't think the facts support this assertion. As measured by the drop in real GDP the Bush II recession was the worst of the 11 post-war recessions. There doesn't seem to be a rank correlation between severity of downturn and subsequent growth of the recovery. The black bars are the peak to trough decline in real GDP. The white bars are the subsequent 11 quarters of cumulative growth in real GDP. 

The Obama recovery, again, is the weakest on record, with a cumulative growth of 6.81%. Even George Bush II is better at 7.64%.

But there is good news. Here is the cumulative change in corporate profits, for the eleven quarters after a recovery began for each of the recoveries in the US since WWII. On this measure, the Obama recovery looks above average.

So why is Obama so close to Romney in the polls? Romney should be way ahead. Maybe a sign the election is still too far in the future? Maybe a deep distrust of Romney and Republicans? 


Saturday, May 19, 2012

My Stump Speech


My fellow Americans

It's with the greatest pleasure that I come before you today to present my ideas for moving us  out of the path of sure fiscal destruction that we're headed down, and back to the ideals that have made us a great nation since our founding. Ideals of initiative, hard work, equality of opportunity independence of spirit, and faith in family and each other. Ideals of fairness, and justice.

But to do that, we need to come to some basic agreement about the role of government in our our lives as both a vehicle for change and a guarantor of stability.

Here's what government can and should do to promote those ideals we so dearly share. It should promote  initiative by rewarding hard work and forbidding the exploitation of the vulnerable among us  It should provide a basic template for national progress. It should promote reasonable safety and quality of life, in the air we breath, the water we drink, and the bridges we cross.  It should insure our safety inside and outside of our own borders, and demand and enforce equal justice under law.

But, my fellow Americans, here is what government cannot and should not do. It cannot guarantee equality of outcomes. or a good life for all. It cannot invigorate the lazy, redeem the irresponsible or purify the corrupt. It can set a standard for national character but it cannot determine the individual characters of its citizens. That's up to each one of us, when we get up in the morning kiss our loved ones goodbye and head out to whatever small place in the larger mechanism that we occupy.

We can, and we will argue in this election season about what to spend our hard earned national treasure on. We can debate priorities, argue outcomes, and promote values. But no matter what we decide,  we simply must no longer accept the insanity of relentlessly spending more than we take in. We can find a solution that requires painful compromise on all sides. Or can we let events overtake us, or react belatedly and ineffectively to avoidable the the inevitable crisis if we go on doing what we're doing now, which is to blame blame everyone but ourselves.


The Frontal Lobe And The Plasticity of Youth


The emergence of functional magnetic resonance imaging has opened an unprecedented window into the mechanics of how the brain works by determining which functions are assigned to which locations and how different sections interconnect to accomplish tasks as simple as crossing the street (not so simple actually) or as complex as writing our blog (some might dispute this point but we'll choose to ignore them).

The technique lets the investigator see what's happening in various areas of the brain during a particular intellectual or emotional process, such as solving a math problem or recalling an angry thought. Such mapping allows for real time localization of an ever increasing variety of normal brain functions, mental disorders such as schizopherenia, bipolar disorder, psychopathy, and predisposition to drug addiction.

The frontal lobe participates in a wide variety of functions including language, judgement, impulse control, and sexual and social behavior. Patients afflicted with frontal lobe injury often demonstrate inattention, poor memory, disinhibiton, and lack of affect. It is also the last area of the brain to mature, and its late development explains much of the behavior that parents of adolescence find so bewildering. The young are the chief risk takers in most societies because they consistently underestimate the magnitude of the risks they take, and they lack the full capacity to appreciate the consequences of their actions. Combining such a deficit with peak physical powers makes for great athletes, criminals and soldiers. It may also explain their amazing capacity capacity for change, and why we should never give up on them


Friday, May 18, 2012

Red vs Blue. Now What Does that Mean Again?


I can honestly say whenever Red State vs Blue State is mentioned I have to turn to Mrs. Knabe and ask, "What does that mean again? One is Republican the other Democrat? One is Conservative the other Liberal? One clings to their guns and religion the other are the Quaker atheists?"

And thus I approached your, "Rich States, Poor States, Red States, Blue States," with a certain amount of dread because I would have to endure the sigh and rolling of the eyes from the Mrs. as I asked again for a tutorial on Red versus Blue. And guess what? 30 seconds after being reminded for the umpteenth time which was which, I STILL wouldn't remember.

This kind of data shown in could actually be interesting and I did start to look at it, but couldn't decide what, if anything, I would gain by playing with the numbers.

You ask some interesting questions about cause and effect of government policies but I'm not sure you'll get an answer here, particularly from the HDI (Human Development Index). It purports to measure something more important than income but it looks to me that's exactly what it measures. Income is driven by education. Income drives life expectancy. Adding the three together, I don't think, adds much new information. Or statistically, it has some serious auto-correlation issues.

But I do like the idea of exploring what results from different government and market policies. For that we actually have had some pretty interesting real life experiments. East vs West Berlin. North v South Korea. China vs Hong Kong. China vs Taiwan. Malaysia vs Singapore. And so on.

Are those applicable to Red vs Blue, (whatever that means?) I'd say somewhat, certainly not perfectly. But it would be interesting to see for instance, a comparison of New Jersey suburbs of New York vs Connecticut suburbs of New York over the past few years, as state policies have diverged, I would say sharply. I am sure there are other real-life test cases to examine.


Tuesday, May 15, 2012

Rich States, Poor States, Red States, Blue States


This is an interesting site that graphically displays the well known fact that left leaning areas of the country tend to be richer and prodice higher quality of life indices than more conservative areas. The cause-and-effect conundrum applies fully here, since even  in my most partisan moments (who me?), I would not claim that robust government spending and liberal social policies by themselves are guarantors of a better life for those who live under them. It's entirely possible that public largess is merely a reflection of what was possible when the the blue state's economic engines were roaring along, and that as those engines sputter and stall such spending will be remembered wistfully as the high water mark of a bygone halcyon economic era. I suppose one could argue with equal conviction that the liberal policies espoused by the rich states aren't the reason for their success and the conservative policies embraced by the poor states aren't the reason for their failure. The inference of such an argument however, is that public policy, economic success, and quality of life have no relation to each other at all.


Sunday, May 13, 2012

Student Loan Nonsense


The NY Times has a ridiculous story on student loans this morning. , "A Generation Hobbled by the Soaring Cost of College." It starts with these lines, "Kelsey Griffith graduates on Sunday from Ohio Northern University. To start paying off her $120,000 in student debt, she is already working two restaurant jobs and will soon give up her apartment here to live with her parents."

Why is it ridiculous? Because it is  the archetype of the overwrought, mis-leading attempt to justify a policy masquerading as reporting.

I'm not going to comment (here) on whether I think the Federal Government should make loans to students. Nor will I comment (here) on whether the Federal Government should guarantee private loans. I will say, in my opinion, it is more than a coincidence the three major areas of massive inflation we have seen over the past fifty years, in higher education, housing and health care, are areas where federal government involvement has increased.

A Federal Reserve Bank of New York study, "Grading Student Loans," looks at student loans as of Q3 2011. According to this study, there are 37 million student borrowers in the US. Of this, 14.6 million are under 30 years old. That's a little over one-third of the total number of people in the US between the ages of 20-29, according the 2010 US Census.  So even if a generation is "hobbled," it would be more correct to say one-third of a generation is "hobbled."

But are they hobbled? Hardly.

The same Federal Reserve Bank of New York study shows 14.6 million borrowers with student loans under the age of 30. The total balance owed by these borrowers is $294 billion. This is about $20,000 per borrower.

Let's put this in perspective. A Honda Accord starts at about $23,000. We don't gnash our teeth over young people borrowing $23,000 to buy an entry level car, even though the car will last about 10 years and depreciate in value, while a college education lasts forever and appreciates in value.

And it's still worth it to take on those loans. The Census Bureau's Current Population Survey details earnings by level of educational attainment. The high school graduate's median earnings is $17,037. The median earnings for a college graduate (with a BA) is $47,973. The difference in median earnings between a college graduate and a high school graduate is over $30,000 per year, or 1.5x the average loan balance. Hobbled?

Why are we wringing our hands over student loans?


What It Means To Be Poor


My father knew. He was born in Coney Island in 1915 to a frequently out-of-work  tailor and his 20 year old emigrant wife who walked across Russia at the age of 6 to the port of Odessa. After skipping 3 grades and graduating high school at age 15 (an apparently common practice at the time) my Dad got a job with the local sanitation department and went to Brooklyn College at night. My grandmother walked door -to-door in their Italian Jewish neighborhood to beg the $17 he needed for books. It took him eight years to graduate. Then came the war, a chance to get out of New York and build a small business (which he hated) and the apex of his life's achievements, a house on Buzzard's Bay. Despite his financial success the Depression left him with a permanent gnawing anxiety about money that inserted itself into our lives in intermittent, unpredictable ways, like deciding one year that we could no longer afford pizza on Sunday nights.

So what I know about being poor I learned from his stories around the dinner table and from books. I grew up in a fancy house (at least by the local standard), ate well, wore clothes bought from the town's best haberdashery, went to overnight summer camp, graduated from private college and public medical school on cheap loans provided entirely by the government, and took my happy place among the 1%. In my professional life I take care of a lot of poor people, but I know almost nothing, I'm ashamed to say, about their hopes, dreams, aspirations or frustrations.

So when you talk about helping the poor, I say certainly, but how?  No one seems to agree on how to do it. One school of thought (mostly from the left) argues that poverty is simply a lack of money, and that good jobs would be enough. Others believe that the poor are so by choice, or indifference, and so should be left to fend for themselves. The former notion seems to me well meaning but fatally incomplete, and the later reprehensibly savage.

Here, for what it's worth, are 5 ideas that make sense to me.

1) A year of compulsory national service for everyone sometime between the ages of 18-25. This was John McCain's idea. Absolutely no exceptions except disqualifying physical or mental disability. Military service would only be one option. Why do I see this as antipoverty program? For one, it would bind together a country that feels increasingly fragmented, as it would produce a shared experience and common sense of purpose for all. For poor kids it could offer opportunities in training or remediation at a point in their lives when such steps would still matter, and provide a notion that things can be different. You and I did better economically than our parents in no small part because they instilled in us the notion that it was possible.

2) Engage and support the encouraging decline in teenage birth rates by any practical, morally defensible means. From the little reading I've done, the single greatest indicator of lifelong poverty for a child is the age of the mother at the birth of her 1st child. The succeeding children in such families turn out to be equally condemned.

3) Grow the economy

4) Grow the economy

5) Grow the economy

How to accomplish tasks  4,5 and 6 I leave to you.


When did the NY Times Start Following Us?


You saw the NY Times this morning? "The Amygdala Made Me Do It," by James Atlas.

Of course, it's all derivative of your piece, "Blame the Amygdala,"


Thursday, May 10, 2012

Stop Your Speculative Madness


You asked me, in "Unstable Coalitions And The Question Of Pain," if I knew anywhere you could, "place a bet on Greece leaving the Euro by September?"

Eli, Eli, Eli. I'm disappointed. Why, that's just blatant speculation. SPECULATION Gosh Darn it. Speculation caused the financial crisis. Speculation caused oil prices to go up. Speculation has no useful purpose in our society. Surely you aren't asking me to aid and abet you? I have no intention of helping you drag the Greek economy into the mud.

Take your nefarious plans elsewhere please; this is a family web site.


Bipartisanship is Overrated


More and more I prefer the extremists. The latest reason?

"WASHINGTON (MarketWatch) — In a rare display of election-year bipartisanship, House lawmakers acted Wednesday to renew the charter of the Export-Import Bank of the United States following a deal between a top Republican and Democrat."

According to the Ex-Im Bank's 2011 Annual Report, the Bank made $30 billion of loan guarantees and $12.6 billion of direct loans. Of the $30 billion in guarantees, $11 billion were to countries buying Boeing aircraft. For instance, $375 million was guaranteed to KLM Royal Dutch Airlines so it can compete better against US airlines trying to compete against KLM. The US Government subsidizes loans to foreign governments and companies who then have an advantage in competing against US companies.

The Ex-Im Bank is an wholly-owned financing subsidiary of Boeing and an atrocity of crony capitalism. Only a bipartisan Congress could approve this anathema.

Bring on the extremists.


Wednesday, May 9, 2012

Descent Into Mediocity


Meanwhile, I face the prospect of the 1st summer in many years without meaningful baseball

American League  East W L Pct
Baltimore Orioles       19 11  .633 
Tampa Bay Rays       19 11  .633
New York Yankees  16 13  .552 
Toronto Blue Jays     16 14 .533 
Boston Red Sox        12 17 .414

In retrospect the hideous September collapse of the once proud and resilient Boston 9 was not an aberration, but a harbinger of the reality to come. The current group, and more critically, the leadershop that constructed them, violates evey principle necessary for competitive success. They forgot what got them here; integrity, hard work, innovation, demand for value, and most vitally, accepting the the inevitablity of change. Hmmn, that sounds like another former champion now on the hot seat


Unstable Coalitions And The Question Of Pain


I ordered Throes of Democracy but haven't started it yet. You are onto something quite important about the disparate strains holding the two dominant parties of the eary18th century together, and the fact that most of those strains exist today. What's remarkable is how the vehicle of the two parties endures even as their constituents rearrange themselves. Once the party of slavery and the white working class, Democrats are now the party of college educated professionals and technocrats, single women and minority Americans. Republicans combine businessmen, fiscal conservatives, religious traditionalists, married women, and high school educated men. Go figure.
But the enduring irony of this rearrangement is that at the top of both parties sit elites that share more similaritiy with each other than with the other members of their political alliances They may be divided  by ideology but not by status. You and I are an archtypal example.

As far as the pain required to restore the nation to fiscal integrity, there's no question of that. The question is how that pain, whenever it inevitably arrives, will be distributed. Many argue that the economy will be harmed by increasing marginal tax rates for top earners. Since I have decided henceforth to remain agnostic on all matters economic, I won't ventrue an opinion about that argument. What I do know is that the quality of my life will not be affected one whit by the decline in my household income that would result if we returned to Clinton era tax rates. Could the millions of Americans affected by the budget cuts in Rep Ryan's proposal say the same?

BTW, know anywhere I can place a bet on Greece leaving the Euro by September?


Tuesday, May 8, 2012



How do you fix an economy that's in recession and deeply in debt you ask? I think you are leaving out the part of the question that is troubling our current leaders and the electorate. I'll rephrase it: "How you do fix an economy that's in recession and deeply in debt without causing any pain?" I'm not sure there is a positive answer to that question.

When Obama saved the auto industry he did it by inflicting pain. The companies were put into bankruptcy, jobs were lost, contracts restructured, shareholders were diluted. Although I think the market would have done a better job, at least the job was done.

But we, the collective we, don't want to endure that fix in the mortgage market. Instead we seek ways to avoid the restructuring that is inevitable. We seek to avoid the restructuring that is inevitable in Medicare and Social Security. We look for a scapegoat and a sugar daddy. Fat Cat Wall Street Bankers happen to fill both roles for Obama and the Democrats. Greece and France want to avoid reality too. That's their choice.

I think we, the collective we, Republicans and Democrats, rich, poor, free marketers (all five of us) and the rest of the population, suffer from the delusional belief we can "fix the system," by tweaking this, and revving that. The monetarists want QE3. Others want massive fiscal stimulus. Some want both. There seems to be this belief if only we did, "fill in the blank," we would solve this problem. Hubris.

Maybe the way we solve the problem is let the economy heal because the fixes sometimes make me think this is more like the ancient cure of bloodletting. The doctors did "something," but it was all for show.


Ps. You'll ask, what do we do with those who need help? I'll give you the same answer I gave many months ago when we started this conversation. We help them.

How Do You Fix an Economy That's In Recession And Deeply In Debt?


Isn't the central question/controversy here? Or, if I may take the liberty of asking the question as you might, how does such an economy fix itself? As usual, one can find a reputable economist to support either side of the argument. And while an elitist like me can believe that voters don't always know what 's best for them, the electorates in France and Greece spoke pretty clearly yesterday about what they think of current economic policy in their countries. Greece may be a place that doesn't work properly, but regardless of who's at fault, the current economic program does not appear to be particularly pleasant for most Greeks. The UK's descent back into recession is hardly an endorsement for the Tory program either.

Where's a good old fashioned devaluation of one's currency when you really need one? The common cuurency of course prevents such easy solutions.

My daughter goes to Spain for a semester in September. I'm nervous about sending her to a place with 50% youth unemployment. The young have a habit of erupting, doing a lot of damage to themselves and others.


How savage has European austerity (spending cuts) been? — Marginal Revolution

How savage has European austerity (spending cuts) been?

To be sure, there are particular small countries which have made serious spending cuts, in the Baltics most of all.  But sometimes one hears it said that an anti-austerity strategy must be EU-wide as a whole, or that austerity is "a failed strategy for the eurozone," or something similar.  So perhaps it is worth looking at some numbers for the larger picture.  Here is a graph which puts the matter in some perspective:

Veronique de Rugy, who compiled this data, writes:

First, I wish we would stop being surprised by what's happening in Europe right now. Second, I wish anti-austerity critics would start acknowledging that taxes have gone up too–in most cases more than the spending has been cut. Third, I wish that we would stop assuming that gigantic "savage" cuts are the source of the EU's problems. Some spending cuts have been implemented in a few countries. Also, if this data were adjusted for inflation (which I would prefer but the data isn't available) it would possibly show a slight decrease and certainly a flatter line for all countries. However, the overwhelming take away from the European experience is that a majority of governments haven't really implemented spending cuts, large or small, and some have even continued to grow.

There is further discussion at the link.  Via Pat Lynch, here you will find OECD data, no country is spending below its 2004 level.

Addendum: My response from the comments section:

The real question addressed by this post is how bad spending cuts have been in nominal terms, keeping in mind in the short run it is supposedly nominal which matters (that said, gdp and population [and inflation] are not skyrocketing in these countries for the most part).  It is fine to argue "due to automatic stabilizers, spending should have increased more than it did."  That is not how people phrase it, rather they are complaining rather vociferously about "spending cuts," many of which are either imaginary or extremely small.

From the shrillness of responses, and by the frequency of frame switching, one can see how this post and this data have hit a raw nerve.