The further to the left or the right you move, the more your lens on life distorts.

Monday, March 30, 2009

Chicken in, Sirloin Out

Michael Osinski writes a fascinating article in New York Magazine in which he describes the role of software in the global economic collapse. His discussion is instructive, and you should read the whole thing.

About halfway through his piece, Osinski writes:
The aim of software is, in a sense, to create an alternative reality. After all, when you use your cell phone, you simply want to push the fewest buttons possible and call, text, purchase, listen, download, e-mail, or browse. The power we all hold in our hands is shocking, yet it’s controlled by a few swipes of a finger. The drive to simplify the user’s contact with the machine has an inherent side effect of disguising the complexity of a given task. Over time, the users of any software are inured to the intricate nature of what they are doing. Also, as the software does more of the “thinking,” the user does less.

The problem, of course, is that as software masks the complexities of any activity, humans understand less and less about the activity, or the constraints and bounding conditions that limit the accuracy or precision of the result. And too often, it’s the result we look for, not the details that got us there.

In many cases, that’s perfectly fine. But it wasn’t when Wall Street applied software to package and repackage CMOs, CDOs, and a wide range of debt obligations that ultimately exploded in their face. If the explosion maimed only the masters of the universe on Wall Street, that would have been okay. But the collateral damage injured all of us who were innocent bystanders.

Osinski’s computer programs were the basis for slicing and dicing mortgage and other debt obligations. In the words of one of his bosses, “You put chicken into the grinder and out comes sirloin.” Later, less and less chicken and more and more waste products went into the grinder, but to the outside world, the grinder still produced sirloin.

But my point is not to rehash the underlying causes of the collapse. I’ve discussed that in earlier posts.

Rather, it to pose a warning about the ability of software “to create an alternative reality.” Over the next decade, petaflop computers (google it!) will allow the creation of sophisticated models that become a substitute for reality. An ongoing example of such models are those that predict climate change. Like the Wall Street hotshots who used the software that Osinski built, climate alarmists never question (or understand) the complexities of climatic modeling, or the constraints and bounding conditions that limit the accuracy or precision of the result. “You put chicken into the grinder and out comes sirloin.”

No matter, software-based models helped Wall Street traders create one debacle. I fear that those who blindly believe Al Gore’s models may be setting the stage for policy decisions that create still another debacle. Can’t happen? Nobody thought it would happen on Wall Street either.

Tuesday, March 24, 2009

A Retractable Roof

There’s a major league baseball team—the Florida Marlins— located just south of where I live. Over the past five years, the average attendance at home games has been about 18,500 fans. Last year their attendance was the lowest in MLB and less than 30 percent of the attendance of the top 5 teams.

The solution? A new half a billion dollar baseball stadium with a retractable roof. Using best case projections (that are laughably unrealistic) and spurred on by the fat cat owner of the Marlins, the political class in Miami-Dade county has decided that if the taxpayers build it, fans will come.

Dave Hyde, a sports writer for the South Florida Sun-Sentinel writes:
Over and over, I watched Miami-Dade's commissioners debate Monday on this obscenely expensive, geographically challenged, contractually leaky, wholly unnecessary new baseball stadium.

It was all a show. The stadium passed by a 9 – 4 vote.

When you frame this new and unnecessary stadium project in the context of the nation’s current economic collapse, the passage by county commissioners and the Miami city council does little to reinforce confidence in politicians at any level—city, county, state or federal.

It appears that regardless of the governmental level, the political class is populated by far too many incompetent or outright corrupt people. The politicians who are honest see it as their duty to do what’s right, rather than what is politically expedient or partisan. But they are often not reelected or are drowned out by the clowns who think that taxpayer money is theirs to spend without control.

A half a billion dollars is a lot of money at the municipal/county level and it buys a lot of supporters. The commissioners who voted in favor of the new Marlins stadium now have an opportunity to award hundreds of millions of dollars in construction contracts, concessions, and the like. Reciprocal political contributions will flow like Niagara Falls.

The taxpayers? Oh, not to worry. They’ll just be saddled with debt for a generation or more. Business as usual in 21st century American politics.

Saturday, March 21, 2009

Job Killer

I suspect I’m in a relatively small percentage of white-collar professionals with advanced academic degrees who at one point in their lives were card carrying members of the UAW. My UAW membership, albeit short-lived and transitional, gave me insight into the union ethic that cannot be achieved by those who prefer to believe the Nancy Pelosi meme that unions are the solution to improved American productivity and competitiveness. She and her Democratic colleagues in the Congress are so enamored of the meme that they intend to pass the Employee Free Choice Act (a.k.a. “card check”)—an inappropriately named piece of legislation that will do more for labor unions than Jimmy Hoffa. But more on card check later.

First, a brief anecdote from my personal union experience.

I got a summer job as a sheet metal fabricator in a turbine engine manufacturing plant during the summers of my Junior and Senior years in college. I needed the money because I was putting myself through school and a factory job paid reasonably well, thanks, no doubt, to the UAW. The turbine engines made at the company were all purchased by the U.S. Government on a cost plus contract, so high labor rates were just passed along to taxpayers in the form of higher engine costs.

As the lowest of the low in my job classifiation, I was given scut work, deburring spot welds on a turbine engine stator. Each stator—picture a ring of turbine blades held in place by two concentric rings made of stainless steel—was placed in a holding fixture. My job was to use pneumatic metal working tools to polish spot welds to specification.

During my second week on the job, I was working away contentedly at my workbench when the department union rep and the shop steward approached me.

“How’s it going,” asked the union rep. I don’t think he knew my name.

Thinking that they were just greeting the new guy, I smiled and told them everything was going just fine.

“How many of these have you deburred today?” asked the steward, pointing to the stator currently sitting in my fixture.

“Uh, I think I’ve done six of ‘em.” I answered, proud that I mastered the job so quickly and hoping they might recommend to the supervisor that I be given something a bit more challenging.

“Six?” reiterated the rep, looking at the steward.

I nodded, beginning to realize that this wasn’t a social call.

You gotta slow down,” said the steward, “you don’t want to be a job killer.

I must have looked puzzled. I had never worked at a job where a person in a position of authority told me to slow down, implying that I do less work.

“Look," said the rep, mildly exasperated, “work rules say that your job class should complete 4 stators per day. It’s what, 1:00, two hours to quitting and you’ve already finished six. You’re killing the job … you understand.

I didn’t understand, actually, but I got it. I nodded slowly, not meeting his eyes.

The steward and the rep turned, and as they walked away, I sat there wondering what I was going to do for the next two hours.

Maybe things have changed dramatically over the many summers that have passed since those events took place, but my instinct tells me they have not. Labor unions are a 20th century artifact that my not be viable in a global, 21st century economy. But the Democratic leadership in Congress thinks otherwise.

Michael Barone comments as he discusses the President’s many high cost items in the proposed federal budget:
…the most grievous threat to future prosperity may be off-budget -- the inaptly named Employee Free Choice Act. Also known as card check, the legislation would effectively abolish secret ballots in unionization elections. It provides that once a majority of employees had filled out sign-up cards circulated by union organizers, the employer would have to recognize and bargain with the union. And if the two sides didn't reach agreement in a short term, federal arbitrators would impose one. Wages, fringe benefits and work rules would all be imposed by the federal government.

It's not difficult to see why union leaders want this. Union membership has fallen from more than 30 percent of the private-sector workforce in the 1950s to about 8 percent today. Union leaders would like to see that go up. So would most Democratic politicians, since some portion of union dues -- unions try to conceal how much -- goes directly or indirectly to support Democratic candidates. The unions and the Democrats want to put up a tollgate on as much of the private sector as they can, to extract money from consumers of goods and services.

In a way, "card check” will be nothing more than another form of tax paid by consumers on the goods and services they purchase. Worse, in many industries it will drive jobs off-shore, because whether Nancy Pelosi and her friends like it or not, labor markets tend to be cost sensitive, with jobs flowing to the lowest labor rate locale.

But market demand and global competition be damned. "Card check" will force employers to pay a union wages no matter what. At the same time, companies will be forced to agree to uneconomic entitlements and other benefits, not to mention work rules, that often damp productivity and competitiveness rather than enhance it. It will be the ultimate job killer in our country.

You don’t have to believe me, just take a look at GM—a long time “partner” of the UAW.

Thursday, March 19, 2009

A Ponzi Parade

As I listened to the sanctimonious hypocrites in Congress express mock outrage at the $195 million in AIG bonuses, I kept thinking: Where were these self-serving “legislators” over the past 10 years? Many were accepting campaign contributions from AIG and every other culprit in this drama, and few were doing anything to stop the Ponzi scheme that has overtaken the USA (and the rest of the industrialized world) during the first decade of the 21st century.

Nouriel Roubini of Forbes has it just about right when he writes:
Americans lived in a "Made-off" and Ponzi bubble economy for a decade or even longer. Madoff is the mirror of the American economy and of its over-leveraged agents: a house of cards of leverage over leverage by households, financial firms and corporations that has now collapsed in a heap.

When you put zero down on your home, and you thus have no equity in your home, your leverage is literally infinite and you are playing a Ponzi game.

And the bank that lent you, with zero down, a NINJA (no income, no jobs and assets) liar loan that was interest-only for a while, with negative amortization and an initial teaser rate, was also playing a Ponzi game.

And private equity firms that did over a $1 trillion of leveraged buyouts (LBOs) in the last few years with a debt-to-earnings ratio of 10 or above were also Ponzi firms playing a Ponzi game.

A government that will issue trillions of dollars of new debt to pay for this severe recession and socialize private losses may risk becoming a Ponzi government if--in the medium term--it does not return to fiscal discipline and debt sustainability.

Should any of us really be surprised that Bernie Madoff, king of the Ponzi scam artists, surfaced during these times. He’s just leading the parade.

For the first eight years, the grand marshall of the parade was George W. Bush and his marching band administration. They failed miserably to recognize the game and did nothing to stop it.

Now, the grand marshall is Barack Obama. The majorette is Nancy Pelosi and the marching band is the democratically controlled congress. Rather than stopping the Ponzi parade, they’re doubling down, using trillions of dollars we don’t have to pay off a wide array of constituents who put them in the parade in the first place.

And so, we see hundreds of billions flowing to save dishonest and irresponsible NINJA home owners and real estate speculators, more hundreds of billions flow to prop up banks who never should have loaned them money in the first place, and more hundreds of billions to bail out the Wall Street firms who left fiduciary responsibility at the door.

As long as Obama, Pelosi, Reid and company can print money, the Ponzi parade will continue. But unlike Bernie Madoff, who is now in jail, the marchers in this parade will sit in congressional chambers and criticize others while never taking a hard look at their own venal incompetence and self-serving dishonesty.

Wednesday, March 18, 2009

Three Simple Things

It appears that the Obama administration and our Democratic congress believe that the only three elements in their efforts to resurrect our broken economy are: (1) to spend trillions (as in $1,000,000,000,000) of taxpayer dollars on stimulus programs that are more about generic spending than economic recovery; (2) to spend addition trillions propping up the financial companies, banks, and insurance companies that got us into this mess in the first place, and (3) expressing mock outrage when these same culprits pay obscene bonuses to the masters of the universe who were directly responsible for designing and implementing CDOs and related toxic instruments.

Yet as trillions in debt are heaped on our children and grandchildren, it’s rather odd that Obama and company haven’t done three simple things that would cost almost nothing and, in the end, might have considerably more impact than their big government solutions.

1. Eliminate the “mark-to-market” rules that restricts banks from making loans right now. Steve Forbes comments on this when he writes:
…mark-to-market has been demolishing financial balance sheets with book losses. Banks have more cash than ever before, but their regulatory capital (the amount of capital required by regulators for industries like banks and life insurance) is continually being eviscerated by lawsuit-fearful auditors and stupidly aggressive bank regulators. As Brian Wesbury and Robert Stein said on, "The accounting rules force banks to take artificial hits to capital without reference to the actual performance of loans."

The cost of eliminating “mark to market is almost zero, yet the impact could free up capital and reinvigorate the credit markets. Why hasn’t it been done?

2. Reimposing the “up-tick” rule on short selling and abolishing naked short selling. Again Forbes comments:
Previously short-sellers had to wait for a stock to go up in price before trying to hammer it. Now the uptick road bump is gone, thanks to the SEC's repeal (based on faulty research) in July 2007. It's no coincidence that since the repeal market volatility has gone berserk. Why is Schapiro reluctant to crack down on naked short-selling? After all, short-sellers, including exchange-traded funds, are supposed to borrow the shares before they sell them.

Hedge fund managers are notorious for shorting stocks (betting that stocks prices will go down) and in doing so, fueling precipitous stock market declines. Given the seriousness of this crisis, why haven’t simple and effective rules to control short selling been put into place?

3. Quietly suggesting that the Federal Reserve loosen the money supply. Forbes comments:
Contrary to impression, the Fed has been tightening, shrinking its balance sheet by nearly $400 billion since December. In the face of the most severe banking/insurance crisis since the 1930s, the squeeze absolutely defies belief. This would be like a fire department deciding to roll up some of its hoses when a big house is a flaming inferno. Bernanke says he fears future inflation, but that's like those firefighters being afraid to cause water damage to the furniture. Right now we're in a bone-crunching deflation.

We will face future inflation, but that’s more about the administration trillion dollar spending spree that about the Fed’s interest rate and internal anti-inflationary policies. Why hasn’t the Fed acted more decisively?

Over the next few weeks, it’s likely that the President and Congress will ask the taxpayers to spend another trillion dollars to buy up the toxic assets that the master of the universe have created. That’s right, to date, the trillions spent haven’t done that. Surprised?

Many of my left of center friends have remarked repeatedly how happy they are that the new administration is, in the words of David Brooks, a “valedictocracy”— a white house “run by onetime high school valedictorians and Ivy Leaguers.”

Hmmm. If these guys are so smart, you’d think they would have tried the three no cost options noted earlier before they spent trillions upon trillions of dollars. Especially when there's virtually no down side to doing so. I wonder why the validictocracy haven't tried the simple before choosing the complex? I guess it's because they're just so darn smart. Aren't they?

Tuesday, March 17, 2009

Nothing to See Here

Ed Koch , a past Mayor of New York City and one of the very few politicians with a national profile who has some semblance of both intelligence and integrity, comments on the continuing debacle that is TARP and our collective econonmic collapse:
The average citizen is terrified about the future and does not fully comprehend the implications of all of the bailout money - trillions of dollars - that is being handed out to the business institutions. Those in charge of the carnage are telling the American people that we do not have the right to know how or where those trillions will end up. Because of public outrage over A.I.G., which has received $170 billion in bailout funds, this week A.I.G. released a partial list of the companies receiving TARP money, a list that includes Goldman Sachs, Merrill Lynch, Citigroup, Bank of America and Wachovia. While the payments are apparently legitimate, the attempted cover-up was infuriating.

When Koch suggests that “The average citizen is terrified about the future and does not fully comprehend the implications of all of the bailout money,” he has it only half right. It appears that no one, from Barack Obama to Tim Geithner to our “leaders” in Congress have the slightest idea of what’s going on. Their mantra, it seems, is to throw gargantuan sums of money at a problem that is ill-defined in the hope that it will somehow get better. Irresponsible, greedy executives are rewarded for their incompetence while future generations of Americans are being saddled with crushing debt. It is, to be blunt, a travesty. And it’s incredible that the MSM and the general public is as sanguine about it as they are.

The Obama administration is moving in far too many different directions (vectors) to be effective with solutions for any single problem. Heck, I’m beginning to think they don’t even understand the problems, relying instead on ideological memes that have little basis in reality.

The President’s adoring supporters seem oblivious to the dangers of printing trillions of dollars in an effort to fix the economy, fix health care, and fix education, to name only a few. No matter that trillions have been frittered away over the past six months. Spend trillions more! Why not?

Koch has it exactly right when he states:
Where are all the blowhards in Congress who tell us they are protecting the public? Why don't we have a committee comparable to the committee that examined and publicly reported on 9-11? The devastation to the U.S. economy and individual Americans is enormous. Surely this self-inflicted debacle requires an honest reporting on how it happened and who was and is responsible in public office and in the private sector.

A non-Congressional blue ribbon panel should be appointed by the president forthwith while memories are fresh. TIME magazine recently identified 25 people who the magazine believes bear culpability. I have no doubt there are many times that number who, at the very least, deserve public identification and some who should end up in prison. Let's hold the thieves and their enablers accountable.

The answer to Koch’s question, I think, is that too many members of Congress are culpable in this disaster. Too much political money was funneled to the heads of banking and other oversight committees in the years before the crash. So our “leaders” prefer not to investigate, There’s nothing to see here, they imply, just move on.

It’s time for the public to get angry—really angry—and to let the “blowhards in Congress” know it. Its time for the public to recognize that even an intelligent, charismatic President must expected exhibit more fiduciary responsibility than the executives who mismanaged AIG, CitiGroup, Goldman Sachs, Merrill Lynch, Bank of America and Wachovia. So far, he has not done so.

Addendum (3/17/09):
Those of us who expressed some reservations about candidate Barack Obama suggested that he was, at his core, a proponent of big government and a believer that government was the solution to most, if not all, of our problems. As the months pass it, the President has done little to dispel that concern.

Barack Obama likes to conjure the words and images of Abraham Lincoln in his speeches. He might be well served to heed the words of another great president, Thomas Jefferson: “My reading of history convinces me that most bad government results from too much government.”

Wednesday, March 11, 2009


I’ve been giving change a lot of thought lately. After all, we’re witnessing profound changes in our economic structure, monumental changes in the technologies that will drive an economy that will emerge at the end of our troubles, and political change that is emanating from the Obama administration.

In my view, change is like a vector. It has a direction and a magnitude. If you try to apply two or more changes with differing directions and magnitudes, the end result is a vector summation (if you’re not an technologist, I’d suggest a Google search for more information on vector sums). In fact, the summation of the change vectors may result in little if any forward progress if they work in opposition to one another.

President Obama campaigned on change, and it appears that he does not want to disappoint his supporters. So he works to change the way the federal government intervenes in a severe recession; he suggests that we need massive education reform (change) at significant cost; he is committed to changing our health care system in profound ways, and he has suggested that we need to change our energy architecture significantly. And he wants to do it all—right now.

Each of these changes has a direction and an magnitude (in terms of societal impact, implementation costs, and unforeseen consequences). It appears that the Obama administration wants to apply all of them at the same time. And that, I think, is a major mistake.

It can be argued that each of the changes the President wants to make has some justification. But it is reasonable to question whether it is wise and economically responsible to apply them to a country with a battered economy. As a society, we have been pummeled a bit and what we need now is stability and slow recovery. Not roiled markets, business upheaval (with the resultant lack of job creation), and general uncertainty fostered by change itself.

Wretchard of the Belmont Club comments:
Maybe part of the reason the White House is frazzling itself into the ground is that they’re trying to remake everything. Everything has now become part of the delta. Everything is changing. Now they are facing the revenge of the second derivative: the rate of the rate of change. They are trying to restructure the government so it is run with Czars instead of cabinet secretaries; “engaging” hostile nations with little or no preconditions and getting blown off; changing the basis of the economy to conform to their untried vision of the future; creating the single greatest expansion of government since FDR; redesigning health care; holding consultations on everything and planning to save the world from Climate Change. They’re busy because crisis creates an “opportunity” for their own vague revolution.

The cumulative consequence of these actions is a vast increase in the amount of risk the entire system has to endure because variables are being added faster than they are being solved. The margins are gone — removed by design. The margins are in the way. But while things might hold together for so long as the road ahead is smooth, what happens if things hit a bump? What happens in the Obama administration, too preoccupied to “even fake an interest in foreign policy meets a sudden challenge?”

Even active supporters of the President are expressing unease with an unfocused “stimulus” that is only one of a number of transformative “initiatives” suggested by the White House. Tom Friedman
It’s always great to see the stock market come back from the dead. But I am deeply worried that our political system doesn’t grasp how much our financial crisis can still undermine everything we want to be as a country. Friends, this is not a test. Economically, this is the big one. This is August 1914. This is the morning after Pearl Harbor. This is 9/12. Yet, in too many ways, we seem to be playing politics as usual.

He later suggests that “Great and difficult crises are what produce great presidents, so one thing we know for sure: Mr. Obama’s going to have his shot at greatness.”

But if the President is not careful, patient, and controlled, if he refuses to understand that too much change applied all at once increases the risk of recovery and the stability of our economy, he just might crash and burn. He can blame the past administration for a while, but if things are not better in 2010, even his most ardent admirers will begin to grumble. That’s how one-term presidents are made.

Obama is a lawyer and his understanding of politics is impressive. It appears, however, that he would be well-served to take an elementary engineering course, where he’d learn a bit about vector sums. In the end, too much change, too soon, may be his undoing.