It is ironical indeed that in reality, Obama is the ultimate faith-based candidate. Our support of his Presidency is largely based on our faith in his ability, and our much stronger lack of faith in his opponents.
And because our faith is based largely on his oratory, his speeches and words are of much greater importance than those of other Presidents.
Yesterday’s speech was an oratory masterpiece, but it’s now time to get down to business. Obama needs to speak honestly and openly about the following 5 things early on in his presidency:
Stimulus spending (the corner stone of Obama’s economic recovery plan) - does not work. The reason for this is stunningly simple. The money that the government spends as part of a stimulus plan does not come out of a huge idle reservoir of money. Stimulus money is either borrowed or taxed. Hence stimulus spending is just transferring wealth from one group to another, and leads to no net gain.
Federal bailouts of states are inherently unfair - because these bailouts tax taxpayers who live in states that "lived within their means" and essentially transfers their wealth to irresponsible states who made poor budget decisions.
Social security and medicare are by definition ponzi schemes - A smaller workforce cannot support huge benefits for a larger retiring population. Retirees are in for big disappointments no matter what happens next.
The housing bubble was caused due to government intervention, not due to the lack of it. The government push for home ownership caused the housing bubble by forcing Freddie/Fannie to lend to unworthy borrowers. This crisis cannot be resolved by lending to even more unworthy borrowers.
Quick ethical question - whom would you rather bailout - 1) an otherwise honest industry that makes real products that people use or 2) a corrupt business that has confessed to stealing at least $1 billion from investors ?
Well if you chose 1, the Indian Government would beg to differ. Yes, the Indian government is actually considering bailing out Satyam.
Wonderful idea - Lets take taxpayer money collected from hard-working citizens, and put it into a failed and corrupt company so that overpaid senior managers can receive their bonuses.
And - by the time the bailout money trickles down, not much will be left for low/mid-level employees - many of whom will probably be laid off anyway.
Even the Onion couldn’t make satire like this (except this is real):
The governments handing out money to the auto industry,” Francis, producer of the Girls Gone Wild video series, said on the phone from his Santa Monica office. Why shouldn’t it hand some to an industry the nation could not live without?” The request, Francis said, was being made in a letter to Rep. Barney Frank, D-Mass, and Treasury Secretary Henry Paulson. The $5 billion figure, he said, reflects the decline in U.S. adult entertainment - industry revenue from $18 billion three years ago.
Aside from making puns about a stimulus package, I do have one question: If indeed the government is going to spend trillions on rescuing the economy, does it not make sense to have the stimulus as broadly diversified across industries as possible ? After all, the consumers of houses and autos are everywhere - not just on Wall Street or in Detroit.
Predictions are probably the best Rorschach tests for bloggers and investors. Everyone is in the prediction business, because every act of investment (including sitting on cash in the sidelines) is an implicit prediction about the future.
Writing down my predictions for the year has proven itself to be a great tool for me to become explicitly aware of my cognitive biases. Because if there’s one thing I’ve learnt in investing, its this - It’s not what you don’t know that kills you, but instead its what you know that’s wrong. (Can’t seem to find the original source for this quote).
So here’s the top 10 predictions on my mind as of today:
Stock market - The Obamarama stock market rally will be mostly over by Obama’s first quarter as President. By late 2009, it will be obvious that all of the government bailout and spending efforts are like holding an umbrella in a hurricane. The nation will finally resign to the reality of a longer term depression. This realization alongwith a few shocking municipal bankruptcies will cause the stock market to finally bottom in early 2010.
Bond bubble - The treasury bond bubble will continue to inflate, pushing yields to even lower levels than today. Bond bears will get clobbered in 2009 by being too early and too aggressive. The only thing that can burst the treasury bond bubble is a “growth scare”, which will not occur until 2010.
Obama - Barack Obama will not have the courage to give the economy the bitter pill it needs to quickly get rid of the mal-investments and excessive leverage that led to the current crisis. Nor will Obama have the courage to suggest that the government needs to be a referee in the market, rather than the dominant player it has become thanks to Paulson and Bernanke. The high of “Yes we can” will slowly morph into a hangover of “Yes we could have.”
Suburbia - 2008 will be seen in 2009 to have been the last year of the techno-triumphalist era. By the end of 2009, it will be apparent that technology (software, finance, green technology) alone cannot indefinitely sustain the now defunct credit-driven consumerist suburban SUV lifestyle. Austerity will be the new black.
Real estate - Real estate will overcorrect on the way down, and “fortress areas” like Cupertino in the Bay Area will also experience severe price reductions as IPO/options wealth, jumbo mortgage financing and the hope for a quick recovery dries up. It will be finally realized that encouraging excessive home ownership tends to hurt the economy by making it harder for workers to relocate to where the jobs are.
Alternative energy - Alternative energy and OPEC countries will ironically find themselves on the same side, hoping for higher oil prices so that their respective industries and economies become viable. Oil prices will continue to disappoint them by being stagnant, and this will be a silver lining for the middle-class consumers.
Pakistan - The world will again be fashionably outraged for a few days in the Fall of 2009, when it becomes clear that new attacks were being planned against Indian targets even while Pakistan was condemning the recent 26/11 Mumbai attacks. India and Pakistan will again lurch towards war after the next terror attack. The US will once again force India to back down by essentially telling India: “not tonight dear, I have a headache”.
Microsoft - Microsoft will realize (if it has not already) that there is no point going after has-been giants like Yahoo, and will instead (correctly) acquire Facebook and/or Twitter at bargain prices. For the first time in its history Google misses out on the obvious due to the “not built here” syndrome.
Google - Google revenue will surprise to the upside, but it will be at the cost of cutting down on other expenses, including payroll/bonuses, bandwidth bills for Youtube and possibly even Gmail and other Google apps.
Never intended as investment advice. Read my disclaimer.
Today we face the ironic situation of the US government abandoning free market principles to save the free market.
Whether or not the Government will succeed remains to be seen. But in the mean time, there are some fascinating unintended consequences going on (fascinating in a morbid sort of way).
It seems like every generation learns the hard way that central planning does not work, and indeed often worsens the situation that it claims to cure.
So here are just a few examples of how the current US government actions often worsen the situation that they are trying to solve:
1. Lowering interest rates reduces credit to companies
People who invest their money in CDs and money markets are (sometimes unknowingly) lending this money to companies who need the money and are willing to pay interest for short-term loans.
By driving interest rates so low, the Federal Reserve risks a perverse side effect - many money markets will have an expense ratio that’s higher than their interest rate! This means that many money market investors will have a negative return on investment. If this causes investors to withdraw from the money market (and invest into, say treasuries), it lessens the amount of money available for companies to borrow. This is already happening, as evidenced by the huge demand for treasuries (even at near-zero interest rates).
If the government wants more money to be available for lending to companies, it needs to increase interest that people earn on savings. This will provide incentives for people to save, which causes more money to flow into money markets and CDs, and hence increases the pool of money to be lent to companies! Right now the very opposite is happening.
2. Lower interest rates reduces lending to individual borrowers
If you are a bank, here is an easy way for you to get almost free money with virtually no risk:
Borrow nearly unlimited amounts of short-term money from the Fed (at the 0.5% “discount rate”)
Buy longer term treasuries with this money (earn >2%)
Hold to maturity if necessary
Repeat
Note that the above does not include having to lend to flaky retail borrowers! So this rate cut actually has an unintended consequence of making retail borrowers even less attractive to banks!
3. Helping defaulting homeowners encourages more to default
If the government provides relief to homeowners who are behind on their payments, it creates incentives for even more homeowners to fall behind, so that they too can get lower interest rates and hopefully even principal reductions!
Surely not what is intended.
4. Guaranteeing deposits causes money to leave good banks
By providing strong guarantees to money deposited in unhealthy banks, it creates an incentive for people to withdraw their funds from otherwise healthy (but not government-backed) institutions into bad banks that are guaranteed by the government!
5. Lesson learned by bankers - take even bigger risks next time
This is probably the worst of the unintended consequences. An entire generation (and probably more) of bankers and traders have now learned - that if you take risks, make sure you take huge ones. So that if you fail, you are more likely to be bailed out in the long run. The moral hazard being created by this bailout is just staggering.
The financial, mortgage, insurance and auto bailouts almost guarantee that the next bubble will be even bigger and even more disastrous when it bursts.
There is no doubt that the media was totally unrestrained during the Mumbai attacks - they revealed the military actions in real-time, spoke to hostages even before the police in some cases, and also caused several false rumors.
But here is a misguided attempt to "legalize" a good code of conduct:
Just like the rest of the world, from the moment I learnt of the attacks, I stayed up watching television. I saw our local Police try to figure things out, I watched our valiant Officers Karkare, Salaskar and Kamte arrive, and almost immediately, lose their lives. I saw the NSG and Marcos arrive and started to watch each step of their operation, when suddenly, realization dawned! Over the next thirty or forty hours, I watched, helpless and frustrated, as our very own electronic media did things that seemed blatantly wrong to me.
What they were broadcasting in the name of the news, were in fact the exact operational procedures, locations, and actions of our anti-insurgency forces! Minute-by-minute!
Sounds reasonable enough. But then here comes the petition that is being requested:
3. That this Hon’ble Court make and issue such other Writ, Order and Direction as it may deem appropriate directing the Authorities to formulate a model Code-of-Conduct within a fixed time frame; that be made mandatory to the TV News Channels, to regulate the ‘Live’ broadcast of such and similar eventualities and operations.
I share the outrage, but this can never become law because its too vague and impossible to implement. Most importantly, the determination of guilt/penalty will be after the fact, when it is too late.
Instead, here is what was required:
The media should not have been able to get close enough for live TV in the first place! Where were the riot police ?
Cell phone towers needed to be configured so that hotel calls get redirected to a safe number (see next point).
What scares me is not just that hotel guests were calling the media, but that the terrorists could have picked up any cell phone and talked to anyone in the world!
The media and public will always have a gawker mentality (live police car chases in LA/FL come to mind). But rather than an impotent code of conduct, it should be physically impossible for the media to damage the counter-terrorist operation!
Over the last weekend, I was glued to the television and Twitter in horrific despair at the Mumbai blasts.
A lot has already been said about what should be (and should have been) done. I am more interested in forming a descriptive mental model about what is happening, rather than a prescriptive model of what should.
Public and political sentiment sometimes moves like a glacier, and sometimes like a waterfall. Crises create so much panic and so many unscripted moments that they reveal a lot of truth about the world we live in. They are like the glimpse into the real personality of the beauty pageant contestant when she suddenly trips on stage. Crises reveal a rare view of truth in a world full of wish-thinking and make-believe.
This change in public sentiment is not an ephemeral spiritual thing, but rather one that can be measured through the rigors of science and statistics.
And so here is one chillingly revealing statistic from another crisis, the Asian tsunami:
In Ireland, 87 per cent of the population believe in God, a survey by the Market Research Bureau of Ireland found in January. Rather than rocking their faith, 19 per cent said tragedies such as the Asian tsunami, which killed 300,000 people, bolstered their belief.
Lawrence Summers, Obama’s soon-to-be top economic advisor, strikes a pragmatic tone on the crisis. Rather than toe the party line on greed and corruption in Wall Street, he points out that financial crises are not new and are actually rooted in human nature rather than on financial innovation.
He seems to be quite candid in this interview - but it remains to be seen what happens after he enters the Washington jungle.
Those of us in software understand the concept of fragmentation all too well. But can the same concept apply to ownership of resources like real estate, wireless spectrum and patents ? Yes, says Professor Michael Heller of Columbia University.
Heller believes that a common thread in all of these cases is the disappearance of a tight linkage between ownershpi and use. In the past, there was little distance between the patent and the product, the land ownership and the property development. But innovation these days is about assembing resources. You need multiple pieces of protected property to achieve innovation in semiconductors, drug discovery, software or telecoms. It’s true in the arts as well, with the rise of the maship, and illustrated by the difficulty of releasing documentary films. See the difficulties regarding the docmentary Eyes on the Prize, due to copyright issues.
To describe this situation, Heller has coined the phrase, “The Tragedy of the Anticommons”. This is in contrast to the tragedy of the commons: when anyone can use a resource, it’s likely to get overused. With too few owners, overuse is a common outcome, because rational individuals will prioritize their needs over collective goods. This was a critical insight for environmentalists in the 1960s, helping unite a large number of environmental problems into a common phenomenon. Private property was often prescribed as a solution to tragedy of the commons solutions, assuming that a property owner would consider long-term implications of development for her property rather than permitting overuse.
Heller argues that, in many cases, we’ve skated right past private property and into anti-commons, characterized by underuse. If we’ve got too many owners, there can be too little use of a resource. We don’t see the anti-commons tragedy as clearly, as it’s characterized by the absence of innovation. “Where do you go to protest that a drug didn’t come to market or to complain that your cellphone is so poor?” With this new concept, Heller hopes to rope together a set of disparate problems with a similar set of ownership structures.
Laid-Off Foreigners Flee as Dubai Spirals Down - NYTimes.com No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.
Soros: "Bad Bank" for Troubled Assets Is Bad Idea "That (the "bad bank" proposal) will help relieve the situation, but it will not be sufficient to turn it around," Soros said during a live interview at the Davos economic conference in Switzerland. Instead, Soros said he would create a "good bank" and re-capitalize the good assets.
He admitted his alternative plan is not likely to get support because it too closely approaches nationalization. "The political will to do that is not there," he said.
China’s Economy Faces 2009 ‘Hard Landing,’ China faces an economic “hard landing” and the risk of social unrest with growth slowing to 6 percent or less this year, the weakest pace since 1990, Fitch Ratings said.
The Start-Ups We Don’t Need — The American, A Magazine of Ideas It also takes a lot of entrepreneurs to create lasting jobs. To get one business employing at least one person ten years from now, we need 43 entrepreneurs to begin the process of starting a company. And how many jobs will that startup have, on average, ten years after it was founded? The answer is nine. In short, 43 people have to try to start companies so that we can have nine jobs a decade from now. That’s not the spectacular yield that you might expect if you read the press reports about the job creation of start-ups.
Econbrowser: Federal Reserve balance sheet The bottom line is that Bernanke has made a gamble with something approaching 2 trillion. If the gamble wins, taxpayers owe nothing. If the gamble loses, taxpayers are committed to borrow a sum equal to any losses and start making interest payments on it.
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attacks were being planned against Indian targets even while Pakistan was condemning the recent 26/11 Mumbai attacks. India and Pakistan will again lurch towards war after the next terror attack. The US will once again force India to back down by essentially telling India: “not tonight dear, I have a headache”.
there is no point going after has-been giants like Yahoo, and will instead (correctly) acquire 
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e money with virtually no risk:
hy banks, it creates an incentive for people to withdraw their funds from otherwise healthy (but not government-backed) institutions into bad banks that are guaranteed by the government!![2865329444_23e699b3b4_m[1]](http://mungee.org/wp-content/uploads/2008/12/2865329444-23e699b3b4-m1.jpg)
