Modern businesses put a lot of effort into managing risk. They take risks, because that's how they might make big money. But they also work to mitigate the downsides of their risks, because employee stock options don't pay off real well if the CEO, or someone or something else, blows up the business.
Individuals need to manage risk as well. Bankruptcies most often result from unexpected problems, like a medical crisis or job loss. If you don't deal with the ways that life can fall apart, the chances of your life fallling apart increase. The need to manage personal risk may be one of the most under-appreciated aspects of financial planning. While there's no perfect or complete way to analyze personal risk, here are some things to think about.
Age. As you grow older, reduce risk. If anything goes wrong, you will have less time to recover, and less ability to recover as your value in the labor force declines (and it eventually will). There are variety of ways to reduce risk discussed below. The important point is that as time passes and you accumulate more gray hair, reduce personal risk.
Occupation. Your occupation can be a major risk factor. Some types of work can't be performed by older people. This would include construction, law enforcement, military service, fire fighting and other jobs that demand physical strength and endurance. It could also include jobs that don't demand physical strength, but do require certain abilities that deteriorate with age, such as flying, working as an air traffic controller, or performing surgery. If your job has a relatively limited time span, start building wealth at an early age and persist. You may be able to have a second career when the first one ends. But then again, maybe not. Don't count on what's highly uncertain. Assume your first occupation is all that you'll ever have and base your financial planning on it.
Employment stability. If your job security is unstable, build up a large pool of savings to tide you over the rough spots. A year's worth of living expenses, or more, in an emergency fund would be a good idea. If you work in a boom-bust industry, like construction or oil and gas drilling, or an unpredictable job, like entertainment, your savings account is your best friend. If you have to take on debts, or lose a car and/or house, because you didn't prepare for a layoff, your long term financial future may be cloudy.
Health. Factor into your financial planning your health problems, especially any chronic ones you have. There is no way to avoid having health problems, especially as you get older. That's why having health insurance is so important--you will definitely use it. Also have some savings available for health care expenses not covered by insurance--these expenses are one of the leading reasons for personal bankruptcy filings. If your health is good, save plenty because you may need to finance a long life span.
Debts. Debts are one of the most dangerous risks. Jobs may not be secure, but debts, once incurred, are a certainty. If you're poor, but debt free, you won't end up in bankruptcy. Poverty doesn't lead to bankruptcy; unmanageable debts do. But debts are also one of the most controllable risks. Avoid taking on debt unless it's really necessary. Pay off debts as quickly as possible, especially as you get older. A mortgage-free house is better than a sleeping pill. There are some financial planners who will tell you to have a mortgage and invest your cash in stocks. Well, if stocks maintained a nice, steady upward trend all the time, this might well be a smart move. But if stocks are sometimes volatile--well, some people do manage to eat dog food. Avoid debt and you avoid risk.
Moral and voluntary obligations. Lots of people help their kids pay for college--and then help some more when the kids rebound home after graduating. Many help their aged parents. Quite a few help siblings, nieces, nephews, friends and so on when the going gets tough. If you are likely to accept these obligations, manage your finances to be able to meet them. Being nice can be a major financial risk factor.
Riskiness of your assets. This isn't quite the same as asset allocation. This is preparing for things to go wrong with your choice of assets. Don't think your allocation is necessarily right. Almost no one predicted the financial crisis of 2008 and hundreds of millions of savers worldwide got a big tummy ache as a result. If you really think that you and your financial planner have it all figured out, contact me about buying a very nice bridge in Brooklyn, and at a bargain price, too.
But back to the first point. Stress test your investments (see http://blogger.uncleleosden.com/2010/11/stress-test-your-retirement.html). If you are uncomfortable with the potential losses you could incur, change your allocation. Of course, no matter what you do, you'll end up with some kind of allocation. The important thing is to end up with something that you can live with on good days and bad.
Insurance. Only Congress is less popular than insurance companies. But having some insurance coverage is important to mitigating risks. We've already covered health insurance. Have homeowners or renter's coverage. Maintain plenty of liability coverage on your auto policy, and buy an umbrella policy if you have a significant net worth. Get disability coverage (first check to see what your employer offers, and supplement it if appropriate). If you have dependents, like minor children, buy life insurance. Think about long term care coverage if you have significant assets. Granted, writing a check to an insurance company feels like eating sawdust. But if life takes a u-turn, it's comforting to be able to forward the bill to an insurance company.
Boost your benefits. Work as long as possible to build up your Social Security credits and any pension benefits for which you are eligible. Okay, Congress, the White House, City Hall, the boss, or somebody is always threatening to trim or take away these benefits. But they will very likely survive in one form or another, and you benefit from maximizing them because they may offer the best shelter available when cold economic winds blow.
Wednesday, July 24, 2013
Sunday, July 14, 2013
Is the Fed Losing Control?
In the past two weeks, we heard from Chairman Hyde and then Chairman Jekyll. A couple of weeks ago, Ben Bernanke made allusions to gradually winding down the Fed's bond buying program, called quantitative easing. Up to this point, the market had perceived the current round of QE as infinite, a perception that Fed had encouraged by placing no time limts on the program, and offering only the vaguest of guidance as to when QE might end.
But two weeks ago Chairman Hyde frowned and cleared his throat, and the bond bulls began running. In their panic, they gored many an investor who had drank the Kool-aid however reluctantly and bought risk assets like long term Treasuries, corporate bonds and junk bonds.
Within days of Chairman Hyde's hint that the punch bowl might be taken away, the ten year Treasury note was yielding over 2.5% (up from 1.6% in May) and 30-year mortgages popped up about 1% to 4.5%. Stocks quivered, but didn't belly flop like bonds. Alarmed, various governors of the Fed and presidents of Federal Reserve Banks chimed in and suggested that the punch bowl wouldn't be withdrawn any time soon. Stocks perked up, but bonds continued to pout and mortgage rates kept rising. This was emphatically not what the Fed wanted, since the Fed is resorting to its old trick of trying to revive the economy by bubbling up the housing market. Even though this is what got us into trouble in 2007-08 with the mortgage crisis, the Fed evidently has an abiding faith in its old tricks.
With the housing rally now threatened, Chairman Jekyll spoke up this past Wednesday (July 10) and made nice nice. The little toddler of a recovery would need propping up for a long time, he said, before he'd expect it to walk on its own--a very, very long time. He also said he was sending the senior Fed staff out for a late night booze run to stoke up the punch bowl.
Stocks did a cheery little conga and stepped up to new heights. This might produce a bit of a wealth effect to boost the economy. But it will be hardly a smidgen, if the bond market doldrums continue. Bonds barely budged after Chairman Jekyll's attempted love fest. The ten-year Treasury dallied briefly with the 2.53% level, but then went back up to 2.59%. Mortgage rates continue to cloud the skies over the housing market.
Is the Fed losing control? This is really two questions. What message is the Fed trying to send? The most recent minutes it released indicate sharp divisions within the Open Market Committee, and the truth may be that a highly mixed message would be the most accurate. Bernanke's initial statements two weeks ago may have been an attempt to be transparent and let the public know what the Committee really thinks. But the Fed got what it perceived as an over-reaction from the market, and has been trying to cover its tracks ever since.
But did the Fed get an over-reaction, or an accurate reaction? The sharp sell-off in bonds and rise in mortgage rates may have reflected the erstwhile rationality of betting on a continuing rally in fixed income. Central banks worldwide have joined together and danced the most accommodative bunny hop in the history of banking. Anyone who anticipated a reversion to the mean in the money markets has been just about rendered CIA-style. Much of the flash crash in the bond markets may have been hedge funds and other big players unwinding leveraged positions betting on more booze for the punch bowl. Now that the Open Market Committee may be going wobbly on the idea of giving a drunk yet another pitcher of Martinis, bond pros evidently are becoming wary of the hair of the dog that just bit them. If so, the Fed may have lost control of the long end of the yield curve.
If the Fed no longer has a clear message to send, and can't maneuver the long end of the yield curve any more, it may lose control of the economic recovery. But perhaps it never really had that much control. Maybe things looked good for a while because people wanted to believe, and the Fed provided the only federal economic policy they could believe in. With Chairman Bernanke now a short timer, courtesy of President Obama, it's unclear what anyone can believe in. And that won't be good for the market or the economy.
But two weeks ago Chairman Hyde frowned and cleared his throat, and the bond bulls began running. In their panic, they gored many an investor who had drank the Kool-aid however reluctantly and bought risk assets like long term Treasuries, corporate bonds and junk bonds.
Within days of Chairman Hyde's hint that the punch bowl might be taken away, the ten year Treasury note was yielding over 2.5% (up from 1.6% in May) and 30-year mortgages popped up about 1% to 4.5%. Stocks quivered, but didn't belly flop like bonds. Alarmed, various governors of the Fed and presidents of Federal Reserve Banks chimed in and suggested that the punch bowl wouldn't be withdrawn any time soon. Stocks perked up, but bonds continued to pout and mortgage rates kept rising. This was emphatically not what the Fed wanted, since the Fed is resorting to its old trick of trying to revive the economy by bubbling up the housing market. Even though this is what got us into trouble in 2007-08 with the mortgage crisis, the Fed evidently has an abiding faith in its old tricks.
With the housing rally now threatened, Chairman Jekyll spoke up this past Wednesday (July 10) and made nice nice. The little toddler of a recovery would need propping up for a long time, he said, before he'd expect it to walk on its own--a very, very long time. He also said he was sending the senior Fed staff out for a late night booze run to stoke up the punch bowl.
Stocks did a cheery little conga and stepped up to new heights. This might produce a bit of a wealth effect to boost the economy. But it will be hardly a smidgen, if the bond market doldrums continue. Bonds barely budged after Chairman Jekyll's attempted love fest. The ten-year Treasury dallied briefly with the 2.53% level, but then went back up to 2.59%. Mortgage rates continue to cloud the skies over the housing market.
Is the Fed losing control? This is really two questions. What message is the Fed trying to send? The most recent minutes it released indicate sharp divisions within the Open Market Committee, and the truth may be that a highly mixed message would be the most accurate. Bernanke's initial statements two weeks ago may have been an attempt to be transparent and let the public know what the Committee really thinks. But the Fed got what it perceived as an over-reaction from the market, and has been trying to cover its tracks ever since.
But did the Fed get an over-reaction, or an accurate reaction? The sharp sell-off in bonds and rise in mortgage rates may have reflected the erstwhile rationality of betting on a continuing rally in fixed income. Central banks worldwide have joined together and danced the most accommodative bunny hop in the history of banking. Anyone who anticipated a reversion to the mean in the money markets has been just about rendered CIA-style. Much of the flash crash in the bond markets may have been hedge funds and other big players unwinding leveraged positions betting on more booze for the punch bowl. Now that the Open Market Committee may be going wobbly on the idea of giving a drunk yet another pitcher of Martinis, bond pros evidently are becoming wary of the hair of the dog that just bit them. If so, the Fed may have lost control of the long end of the yield curve.
If the Fed no longer has a clear message to send, and can't maneuver the long end of the yield curve any more, it may lose control of the economic recovery. But perhaps it never really had that much control. Maybe things looked good for a while because people wanted to believe, and the Fed provided the only federal economic policy they could believe in. With Chairman Bernanke now a short timer, courtesy of President Obama, it's unclear what anyone can believe in. And that won't be good for the market or the economy.
Wednesday, July 10, 2013
Regulatory Challenges of the Bond Market
The Great 2013 Bond Market Chain Saw Massacre has probably caused trillions of dollars of losses. On May 1, 2013, the yield on the U.S. Treasury 10-year note went as low as 1.61%. Since then, it has vaulted as high as 2.72% and most recently closed at 2.63%. Such a jump in yields is, as kindergartners would put it, ginormous.
The inverse math of the bond market would dictate that when yields jump this much this fast, the principal value of bonds will fall painfully and nasty losses will be incurred. While precise numbers aren't readily available, losses in Treasuries may reach a trillion dollars. And when you add in corporates, munis, junk bonds, and mortgage-backed securities, the losses could be multiple trillions.
The game of musical losses is now in progress. Through short positions, derivatives contracts and other hedges, the losses are flowing through to wherever they will end up. The challenge for regulators is to find out, and quickly, where that end will be. What must be ascertained is whether the losses are spread out and landing in places where they can be absorbed without too much fuss. Or whether the losses are concentrated somewhere and could have secondary and tertiary rippling effects (i.e., cause a run on one or a few major financial institution(s)). Well within living memory (2008, to be exact), sharp losses in the mortgage markets triggered tsunamis in the financial markets that washed over Bear Stearns and Lehman Brothers, and threatened to wipe out AIG, Fannie Mae, Freddie Mac and Merrill Lynch. Bailouts and regulator-encouraged acquisitions barely prevented an abrupt, loud, low-flow flush of the entire financial system.
Regulators should be proactively trying to pin down where the bond market losses will fall. Complicating their task is the likelihood of speculators who used leverage to make derivatives bets on a fall in interest rates. Since there is no prohibition on speculating with derivatives, as opposed to hedging, it is possible (and probable) that some players in the financial markets made such a bet. That wouldn't be intrinsically different from the bet that John Paulson made in mortgages shortly before the mortgage crisis that sweetened his net worth by billions. It's also not intrinsically different from the gold bets that John Paulson's gold fund has likely made, which reportedly has sustained losses in excess of 60% (ouch). Any such speculative bets in the bond markets could exacerbate the game of musical losses, and make the regulators' tasks all the more difficult, since many of the speculators might be trading through entities chartered in off-shore locations that might frustrate U.S. government oversight. But the Feds will have to do their best, because the alternative would be what happened in 2008, when they waited until things blew up and bailouts were just about the only option.
There's more. The yield curve has been steepening during the last two months. The short end remains squashed by the Fed's scorched earth policy on short term interest rates. But the long end, as we noted above, has been rising meteorically. This steepening makes attractive a type of carry trade. It's possible to make a lot of money by borrowing short term and investing long term.
Fed policy makes this carry trade all the more enticing. The Fed's intent, as far as it can be discerned from the entrails currently visible, is to begin cutting down on bond purchases (i.e., QE) within months, but to keep short term rates at zero until unemployment reaches 6.5%. Although employment has been rising, the unemployment rate has been static for several months. While no one really knows when unemployment will reach 6.5%, it's not uncommon to read predictions of mid-2014 or so for that level to be acheived. If so, the carry trade could be profitable for a while, especially if the Fed's reduction of bond purchases push long term yields even higher.
To paraphrase P.T. Barnum, or Mark Twain, or somebody, there's a smarty pants who shows up in the financial markets every minute. Some--and perhaps many-- will surely indulge in this carry trade, most likely on a leveraged basis (because leverage boosts profits, assuming the trade works in your favor). But if the unemployment rate unexpectedly drops quickly to 6.5%, the partakers of this carry trade might wonder if they aren't living in a septic tank.
Either way, the regulators have to keep an eye out for the possibility of mounting risks from this sort of carry trade. It could look like easy money to banks, hedge funds, insurance companies and other important players in the financial markets--after all, with the Federal Reserve at least momentarily anchoring their borrowing costs while pushing up their profits, the government is on their side. But borrowing short to invest long is the E. coli that has poisoned many a would-be financial marvel. Regulators need to be watchful not only for bond market losses from risks that have already materialized, but also for the growth of more risk from the changing landscape of the market.
The inverse math of the bond market would dictate that when yields jump this much this fast, the principal value of bonds will fall painfully and nasty losses will be incurred. While precise numbers aren't readily available, losses in Treasuries may reach a trillion dollars. And when you add in corporates, munis, junk bonds, and mortgage-backed securities, the losses could be multiple trillions.
The game of musical losses is now in progress. Through short positions, derivatives contracts and other hedges, the losses are flowing through to wherever they will end up. The challenge for regulators is to find out, and quickly, where that end will be. What must be ascertained is whether the losses are spread out and landing in places where they can be absorbed without too much fuss. Or whether the losses are concentrated somewhere and could have secondary and tertiary rippling effects (i.e., cause a run on one or a few major financial institution(s)). Well within living memory (2008, to be exact), sharp losses in the mortgage markets triggered tsunamis in the financial markets that washed over Bear Stearns and Lehman Brothers, and threatened to wipe out AIG, Fannie Mae, Freddie Mac and Merrill Lynch. Bailouts and regulator-encouraged acquisitions barely prevented an abrupt, loud, low-flow flush of the entire financial system.
Regulators should be proactively trying to pin down where the bond market losses will fall. Complicating their task is the likelihood of speculators who used leverage to make derivatives bets on a fall in interest rates. Since there is no prohibition on speculating with derivatives, as opposed to hedging, it is possible (and probable) that some players in the financial markets made such a bet. That wouldn't be intrinsically different from the bet that John Paulson made in mortgages shortly before the mortgage crisis that sweetened his net worth by billions. It's also not intrinsically different from the gold bets that John Paulson's gold fund has likely made, which reportedly has sustained losses in excess of 60% (ouch). Any such speculative bets in the bond markets could exacerbate the game of musical losses, and make the regulators' tasks all the more difficult, since many of the speculators might be trading through entities chartered in off-shore locations that might frustrate U.S. government oversight. But the Feds will have to do their best, because the alternative would be what happened in 2008, when they waited until things blew up and bailouts were just about the only option.
There's more. The yield curve has been steepening during the last two months. The short end remains squashed by the Fed's scorched earth policy on short term interest rates. But the long end, as we noted above, has been rising meteorically. This steepening makes attractive a type of carry trade. It's possible to make a lot of money by borrowing short term and investing long term.
Fed policy makes this carry trade all the more enticing. The Fed's intent, as far as it can be discerned from the entrails currently visible, is to begin cutting down on bond purchases (i.e., QE) within months, but to keep short term rates at zero until unemployment reaches 6.5%. Although employment has been rising, the unemployment rate has been static for several months. While no one really knows when unemployment will reach 6.5%, it's not uncommon to read predictions of mid-2014 or so for that level to be acheived. If so, the carry trade could be profitable for a while, especially if the Fed's reduction of bond purchases push long term yields even higher.
To paraphrase P.T. Barnum, or Mark Twain, or somebody, there's a smarty pants who shows up in the financial markets every minute. Some--and perhaps many-- will surely indulge in this carry trade, most likely on a leveraged basis (because leverage boosts profits, assuming the trade works in your favor). But if the unemployment rate unexpectedly drops quickly to 6.5%, the partakers of this carry trade might wonder if they aren't living in a septic tank.
Either way, the regulators have to keep an eye out for the possibility of mounting risks from this sort of carry trade. It could look like easy money to banks, hedge funds, insurance companies and other important players in the financial markets--after all, with the Federal Reserve at least momentarily anchoring their borrowing costs while pushing up their profits, the government is on their side. But borrowing short to invest long is the E. coli that has poisoned many a would-be financial marvel. Regulators need to be watchful not only for bond market losses from risks that have already materialized, but also for the growth of more risk from the changing landscape of the market.
Friday, June 28, 2013
Tale of the Magic Dragon
Betrayal. The Vietnam War was full of betrayals. And they didn't come from the enemy. In Tale of the Magic Dragon, men who knew too much were sold out.
Officially, the patrol never happened and nothing was said about the men left behind.
But former Green Beret Frank McTigue, a struggling private investigator,
learns the truth when he agrees to protect pretty Lia, who had witnessed the
murder of his former commanding officer. A voice from the past dredges up unfinished business from
his tour of duty in Southeast Asia. He can't let it go.
Outnumbered and outgunned, he teams up with his Special Forces comrade at
arms Odell Franklin. They end up in a desperate fight where secrets are dear and lives are cheap--and find a glimmer of hope for redemption.
Rated 5-Stars on Amazon and Barnes & Noble.
Available at
Available on Amazon at https://www.amazon.com/Tale-Magic-Dragon-Leo-Wang-ebook/dp/B00D9I4FRY.
At the iTunes bookstore at https://itunes.apple.com/us/book/tale-of-the-magic-dragon/id661953677?mt=11.
At Barnes and Noble at https://nook.barnesandnoble.com/products/2940044580077/sample?sourceEan=2940044580077.
At Smashwords (for downloads onto laptops, tablets and similar devices) at https://www.smashwords.com/books/view/324189.
Also available at a number of other online booksellers; check your favorite one.
Available on Amazon at https://www.amazon.com/Tale-Magic-Dragon-Leo-Wang-ebook/dp/B00D9I4FRY.
At the iTunes bookstore at https://itunes.apple.com/us/book/tale-of-the-magic-dragon/id661953677?mt=11.
At Barnes and Noble at https://nook.barnesandnoble.com/products/2940044580077/sample?sourceEan=2940044580077.
At Smashwords (for downloads onto laptops, tablets and similar devices) at https://www.smashwords.com/books/view/324189.
Also available at a number of other online booksellers; check your favorite one.
Friday, June 21, 2013
Why Did Obama Fire Bernanke?
Okay, President Obama didn't actually fire Federal Reserve Chairman Ben Bernanke. But it felt like that when the President strongly hinted a couple of days ago that he wouldn't nominate Bernanke for re-appointment. The stock market followed up with a two-day belly flop of almost 560 points. Much of that drop was because the Fed announced that it would indeed, contrary to infantile market expectations, eventually take away the quantitative easing punchbowl. But the backdrop to this announcement was Ben Bernanke's short remaining term as bartender-in-chief. That creates enormous uncertainty. The financial markets love Bernanke, even though not all market players will admit it publicly because he was a policy pragmatist (read heretic in the eyes of many purists). He gave the markets lots of sweets and never let them pout or fuss for long. He never met an asset class he didn't like and tried to puff them all up. (That's why virtually all asset classes are dropping now--Sugar Daddy is leaving town.) With Ben's helicopter thumping away toward the horizon, it gets a lot harder to predict what investments might have actual economic value, so investors renew their love affair with cash.
But why did Obama choose this moment to put Bernanke on the stagecoach going out of town? Obama is no economist, so it couldn't have been for an economic reason. The President is a consummate politician, though, so one has to entertain the sneaking suspicion that he did it for political reasons. A not uncommon reason for pulling the rug out from underneath an incumbent is because you foresee the need to blame him or her for something. Maybe the President was concerned that the eventual end of QE would cause the markets to fall, and he wanted to be able to blame Bernanke and say he didn't re-appoint him. But the very act of leaving Bernanke behind in the dust aggravated into prophecy fulfillment the markets' inclination to swan dive. So, if this was the President's thinking, he may have contributed to the problem he foresaw and could end up taking some of the blame for the market's hissy fit.
The President is having second-term hiccups in a variety of ways--the IRS, NSA, State Dept., and DOJ come to mind. Is he losing his grip? Bernanke was the last man standing when it came to federal officials doing something to boost the economic recovery. Why ax the most highly regarded civil servant in the country?
The financial markets hate uncertainty. And they've gotten a belly full of it recently. That's why the last two days have been bad for 401(k) accounts from sea to shining sea. And the picture probably won't get brighter for months.
But why did Obama choose this moment to put Bernanke on the stagecoach going out of town? Obama is no economist, so it couldn't have been for an economic reason. The President is a consummate politician, though, so one has to entertain the sneaking suspicion that he did it for political reasons. A not uncommon reason for pulling the rug out from underneath an incumbent is because you foresee the need to blame him or her for something. Maybe the President was concerned that the eventual end of QE would cause the markets to fall, and he wanted to be able to blame Bernanke and say he didn't re-appoint him. But the very act of leaving Bernanke behind in the dust aggravated into prophecy fulfillment the markets' inclination to swan dive. So, if this was the President's thinking, he may have contributed to the problem he foresaw and could end up taking some of the blame for the market's hissy fit.
The President is having second-term hiccups in a variety of ways--the IRS, NSA, State Dept., and DOJ come to mind. Is he losing his grip? Bernanke was the last man standing when it came to federal officials doing something to boost the economic recovery. Why ax the most highly regarded civil servant in the country?
The financial markets hate uncertainty. And they've gotten a belly full of it recently. That's why the last two days have been bad for 401(k) accounts from sea to shining sea. And the picture probably won't get brighter for months.
Sunday, June 16, 2013
How to Improve NSA Surveillance
Despite the uproar, there's little chance of changing the scope and extent of NSA surveillance of Americans. No politician wants to be blamed if there's another Boston Marathon-type bombing. So they'll hide behind the usual gridlock and do nothing.
That being the case, we might as well make the most of NSA's surveillance. After all, it's being done on the taxpayer's dime, and taxpayers ought to get their money's worth. Here are some ways NSA can make 'round the clock surveillance a better experience for all of us.
Package Delivery. Since NSA knows where you are at all times, it could run a great delivery service. Let's say you're on the road and forgot to bring your cellphone recharger. An NSA courier could be dispatched with a new recharger in a flash. And they'd want to make this delivery. After all, it's harder to keep track of you if your cell phone battery is dead.
And if you're traveling with a small child and need is a package of disposable diapers and some wipes, NSA could deliver them for a modest fee, even to the highway rest stop where you discovered what you forgot to pack. This would not only please many a distressed parental taxpayer, it would also give NSA a stream of fee revenue that could supplement its multi-billion dollar budget.
Chatline. There are many lonely people, and NSA may be among the few that care to listen in on their phone calls. Perhaps NSA could operate chatlines, to help the lonely find companionship. Maybe NSA will get lucky and a frustrated terrorist will unburden himself on a chatline, confessing to having fantasies about pressure cookers.
Dating Service. If you're single, NSA already knows how bad your personal life is. They know everything about you--and everyone else. Since they know so much, they might as well operate a dating service. With all that they know, they should be able to find the perfect match for you in only three nanoseconds of processing time on their massive supercomputers.
Grocery Shopping. NSA could doing your grocery shopping and bill your bank account, all without you having to do more than tell them your grocery list. You can pick up the phone and say what you need. No need to dial because NSA's monitors will pick up your request anyway, and they can send one of their personnel to the supermarket. Billing your bank account will be a breeze, since they already know the number and track everything that goes on in it. Indeed, there's no reason for NSA to stop with groceries. It could keep you well-stocked with beer and wine, pick up and return your dry cleaning, and arrange for pizza to be delivered in time for dinner. You'd have to pay fees for these services, but think of the convenience.
Concierge Services. There's more. NSA could offer the full range of concierge services. They could get you movie tickets, make dinner reservations, call cabs, send personnel out to be your personal shopper, and so on. They already monitor your credit card and banking activity, so they know what movies you see, where you have dinner, and what your personal shopping consists of. Might as well make the situation a win-win by offering citizens some conveniences now available mostly to the 1%.
Rebranding NSA. NSA has an image problem. It's portrayed by its detractors as an intrusive ogre that laughs derisively while steam rolling over civil liberties. A common strategy in the business world for such a problem is to rebrand oneself. NSA could leverage its massive knowledge of every intimate detail of your life by offering services like those described above, and change its name to, say, NSA Deluxe Lifestyle Services. After all, nothing pleases citizens more than seeing government work for them.
That being the case, we might as well make the most of NSA's surveillance. After all, it's being done on the taxpayer's dime, and taxpayers ought to get their money's worth. Here are some ways NSA can make 'round the clock surveillance a better experience for all of us.
Package Delivery. Since NSA knows where you are at all times, it could run a great delivery service. Let's say you're on the road and forgot to bring your cellphone recharger. An NSA courier could be dispatched with a new recharger in a flash. And they'd want to make this delivery. After all, it's harder to keep track of you if your cell phone battery is dead.
And if you're traveling with a small child and need is a package of disposable diapers and some wipes, NSA could deliver them for a modest fee, even to the highway rest stop where you discovered what you forgot to pack. This would not only please many a distressed parental taxpayer, it would also give NSA a stream of fee revenue that could supplement its multi-billion dollar budget.
Chatline. There are many lonely people, and NSA may be among the few that care to listen in on their phone calls. Perhaps NSA could operate chatlines, to help the lonely find companionship. Maybe NSA will get lucky and a frustrated terrorist will unburden himself on a chatline, confessing to having fantasies about pressure cookers.
Dating Service. If you're single, NSA already knows how bad your personal life is. They know everything about you--and everyone else. Since they know so much, they might as well operate a dating service. With all that they know, they should be able to find the perfect match for you in only three nanoseconds of processing time on their massive supercomputers.
Grocery Shopping. NSA could doing your grocery shopping and bill your bank account, all without you having to do more than tell them your grocery list. You can pick up the phone and say what you need. No need to dial because NSA's monitors will pick up your request anyway, and they can send one of their personnel to the supermarket. Billing your bank account will be a breeze, since they already know the number and track everything that goes on in it. Indeed, there's no reason for NSA to stop with groceries. It could keep you well-stocked with beer and wine, pick up and return your dry cleaning, and arrange for pizza to be delivered in time for dinner. You'd have to pay fees for these services, but think of the convenience.
Concierge Services. There's more. NSA could offer the full range of concierge services. They could get you movie tickets, make dinner reservations, call cabs, send personnel out to be your personal shopper, and so on. They already monitor your credit card and banking activity, so they know what movies you see, where you have dinner, and what your personal shopping consists of. Might as well make the situation a win-win by offering citizens some conveniences now available mostly to the 1%.
Rebranding NSA. NSA has an image problem. It's portrayed by its detractors as an intrusive ogre that laughs derisively while steam rolling over civil liberties. A common strategy in the business world for such a problem is to rebrand oneself. NSA could leverage its massive knowledge of every intimate detail of your life by offering services like those described above, and change its name to, say, NSA Deluxe Lifestyle Services. After all, nothing pleases citizens more than seeing government work for them.
Friday, June 7, 2013
The Good Deficit
You already know we're in Oz. The government manages the federal deficit by making across the board cuts everyone thought would be so extreme that both Democrats and Republicans would work together to find a more rational solution. Ha ha ha. The joke's on us. The government manages the debt ceiling by kicking the can down the road every few months. The can is getting awfully dented. And most tellingly, a surprisingly large number of the members of Congress bear a distinct resemblance to the flying monkeys in the movie.
But even as there were bad witches in the movie, there were also good witches. There are good deficits as well. Government spending for things that government is particularly good at is generally desirable, even if it requires deficit spending. For example, government is good at national defense, education, law enforcement, and building or subsidizing transportation systems. Government is also very good at funding basic research. Deficit spending to pursue these goals is money well spent because it fills gaps that the private sector leaves open. These kinds of spending protect and enhance the national wealth and welfare.
There's another problem that should be tackled, even if it requires deficit spending. The unemployment rate for Gen Y (a/k/a the Millenials) is much too high. It's generally about twice the level for Baby Boomers, and the less educated Millenials have even higher rates of unemployment. Those that are African-American and lack college degrees need not apply, especially if they are male. Large numbers of the better educated Millenials are burdened with heavy educational debts. The ones with debts of $100,000 or more could face decades of 21st Century-style indentured servitude to their creditors, whose claims they cannot oust in bankruptcy proceedings except in extremely distressed circumstances.
Millenials who are unemployed and underemployed represent wasted human capital. Modern economies are knowledge based, and human capital is the most important form of national wealth. A vivid example of the overarching importance of human capital can be found in the aftermath of World War II. Germany and Japan, the devastated losers (who deserved to lose), had only limited industrial capacity and not enough food to feed their populations. But they also retained the advanced industrial knowledge they had acquired in building and supporting their massive and highly capable war machines. Required by Allied occupation authorities to turn that knowledge to peaceful purposes, the two losing nations rebuilt their economies rapidly, and within three decades became industrial powerhouses. Because they still had their human capital after the war, they could rebuild their tangible assets and prosper.
As a nation, we can't afford to let the human capital of Gen Y atrophy. They are starting their working lives now, a crucial time for developing the skills of a self-supporting adult. It's in your twenties and thirties that you learn how to apply all your book learning to the practical needs and purposes of the working world. Learn those lessons well, and you'll be productive for 40 or more years. Failing to learn them can result in permanent stunting of one's career.
Add a heavy load of school debt to the mix, and we can see how unemployed and underemployed Millenials could become a permanent economic underclass, unable to escape a shadow world of part-time jobs and episodic contract work, trailed by the baying of creditors hounding them at every turn.
It's time to revive the Civilian Conservation Corps, 21st Century style. The CCC of the 1930s employed some 3 million young Americans over the course of its decade of existence. They were paid very modest wages, most of which were given to their parents (although the employees also received food and housing in addition to their pay). They did mostly physical labor, as such work was integral to America's 1930s industrial economy. The program was very popular with the American public, as it gave young people a chance to develop work skills and get a start in adult life.
A comparable program today could include jobs requiring manual labor. America's highways, bridges and other infrastructure need a lot of maintenance. America's cities need to be cleaned up, and abandoned buildings torn down, so that redevelopment can begin. But there are many white collar jobs that need to be done as well. Rural areas and inner cities lack physicians and other health care providers. Many school districts are strapped for funding and need more teachers and staff for everything ranging from special education to music and drama. Many jurisdictions have gravely inadequate funding for public defenders. Criminal defendants, whom the law in its majesty presumes innocent until proven guilty, have little means to defend themselves and give their presumption of innocence tangible effect. The poor need legal services for civil matters as well, such as battling indifferent landlords. The list could go on.
CCC-21st Century jobs should be real jobs, not make work. We can't ask taxpayers to pay people to dig holes and fill them up. The pay should be low, because these aren't meant to be career jobs. They are a way to give young people a start. Part of the compensation should include generous provisions for government assistance in repaying school debt. In effect, the government would help young people offload their school debt so they can get a fresh start in life. Yes, yes, yes, there are countervailing considerations about holding people responsible for their debts and not bailing people out, etc., etc. But we let egregious spendthrifts stiff their creditors for non-education debt as a matter of course in bankruptcy. And we bail out really large financial institutions run by millionaire executives. The burden of educational debt is getting to be too much. As some guy put it about 400 years ago, the quality of mercy is not strained. Let's be realistic instead of Puritanically moralistic.
Those CCC-21st Century employees who haven't gone to college could be compensated with the right to educational subsidies, akin to the GI Bill. These young people could then go to college with less need for debt. Their human capital would be enriched.
This isn't a perfect solution, and won't solve all the problems of Gen Y. But it would give many of them a start. And that's what they need. Deficit spending for another CCC would be money well-spent. The private sector isn't helping these people. Government action is the only alternative. We don't need more stimulus in the form of Federal Reserve money printing. We could benefit greatly from stimulus in the form of deficit spending invested in our young adults.
But even as there were bad witches in the movie, there were also good witches. There are good deficits as well. Government spending for things that government is particularly good at is generally desirable, even if it requires deficit spending. For example, government is good at national defense, education, law enforcement, and building or subsidizing transportation systems. Government is also very good at funding basic research. Deficit spending to pursue these goals is money well spent because it fills gaps that the private sector leaves open. These kinds of spending protect and enhance the national wealth and welfare.
There's another problem that should be tackled, even if it requires deficit spending. The unemployment rate for Gen Y (a/k/a the Millenials) is much too high. It's generally about twice the level for Baby Boomers, and the less educated Millenials have even higher rates of unemployment. Those that are African-American and lack college degrees need not apply, especially if they are male. Large numbers of the better educated Millenials are burdened with heavy educational debts. The ones with debts of $100,000 or more could face decades of 21st Century-style indentured servitude to their creditors, whose claims they cannot oust in bankruptcy proceedings except in extremely distressed circumstances.
Millenials who are unemployed and underemployed represent wasted human capital. Modern economies are knowledge based, and human capital is the most important form of national wealth. A vivid example of the overarching importance of human capital can be found in the aftermath of World War II. Germany and Japan, the devastated losers (who deserved to lose), had only limited industrial capacity and not enough food to feed their populations. But they also retained the advanced industrial knowledge they had acquired in building and supporting their massive and highly capable war machines. Required by Allied occupation authorities to turn that knowledge to peaceful purposes, the two losing nations rebuilt their economies rapidly, and within three decades became industrial powerhouses. Because they still had their human capital after the war, they could rebuild their tangible assets and prosper.
As a nation, we can't afford to let the human capital of Gen Y atrophy. They are starting their working lives now, a crucial time for developing the skills of a self-supporting adult. It's in your twenties and thirties that you learn how to apply all your book learning to the practical needs and purposes of the working world. Learn those lessons well, and you'll be productive for 40 or more years. Failing to learn them can result in permanent stunting of one's career.
Add a heavy load of school debt to the mix, and we can see how unemployed and underemployed Millenials could become a permanent economic underclass, unable to escape a shadow world of part-time jobs and episodic contract work, trailed by the baying of creditors hounding them at every turn.
It's time to revive the Civilian Conservation Corps, 21st Century style. The CCC of the 1930s employed some 3 million young Americans over the course of its decade of existence. They were paid very modest wages, most of which were given to their parents (although the employees also received food and housing in addition to their pay). They did mostly physical labor, as such work was integral to America's 1930s industrial economy. The program was very popular with the American public, as it gave young people a chance to develop work skills and get a start in adult life.
A comparable program today could include jobs requiring manual labor. America's highways, bridges and other infrastructure need a lot of maintenance. America's cities need to be cleaned up, and abandoned buildings torn down, so that redevelopment can begin. But there are many white collar jobs that need to be done as well. Rural areas and inner cities lack physicians and other health care providers. Many school districts are strapped for funding and need more teachers and staff for everything ranging from special education to music and drama. Many jurisdictions have gravely inadequate funding for public defenders. Criminal defendants, whom the law in its majesty presumes innocent until proven guilty, have little means to defend themselves and give their presumption of innocence tangible effect. The poor need legal services for civil matters as well, such as battling indifferent landlords. The list could go on.
CCC-21st Century jobs should be real jobs, not make work. We can't ask taxpayers to pay people to dig holes and fill them up. The pay should be low, because these aren't meant to be career jobs. They are a way to give young people a start. Part of the compensation should include generous provisions for government assistance in repaying school debt. In effect, the government would help young people offload their school debt so they can get a fresh start in life. Yes, yes, yes, there are countervailing considerations about holding people responsible for their debts and not bailing people out, etc., etc. But we let egregious spendthrifts stiff their creditors for non-education debt as a matter of course in bankruptcy. And we bail out really large financial institutions run by millionaire executives. The burden of educational debt is getting to be too much. As some guy put it about 400 years ago, the quality of mercy is not strained. Let's be realistic instead of Puritanically moralistic.
Those CCC-21st Century employees who haven't gone to college could be compensated with the right to educational subsidies, akin to the GI Bill. These young people could then go to college with less need for debt. Their human capital would be enriched.
This isn't a perfect solution, and won't solve all the problems of Gen Y. But it would give many of them a start. And that's what they need. Deficit spending for another CCC would be money well-spent. The private sector isn't helping these people. Government action is the only alternative. We don't need more stimulus in the form of Federal Reserve money printing. We could benefit greatly from stimulus in the form of deficit spending invested in our young adults.
Sunday, May 26, 2013
How Government Inflation Policies Would Smack the Middle Class
The federal government proposes to use inflation to smack the middle class. The Federal Reserve has an inflation target of 2%, and some Fed officials, fearing that deflation is around the corner--have recently been openly grousing about how inflation--running just above 1%--is too low. They want to take away your spending power faster. One of their primary tools for fueling inflation is to obliterate positive interest rates--or, stated otherwise, to deprive you of interest income. Your faint memories of the distant past, when interest income actually required you to fill out Schedule B for your tax return, will become entirely ethereal.
Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees. The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI. In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation.
Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation. They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation. Retirees are especially defenseless. Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.
With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes. Reduce incomes and people will consume less. If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%.
The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation. So the worst may not come to pass. But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.
Meanwhile, the Obama administration has proposed to use a less generous inflation adjustment (the Chained CPI) for Social Security recipients and federal and military retirees. The Chained CPI would also be used to adjust tax brackets, with the effect that taxes would be higher than under the currently used CPI. In other words, the Fed wants to increase inflation, while the President wants less protection for retirees and taxpayers from the ravages of inflation.
Those whose incomes are middle class or lower (i.e., $100,000 a year or less) tend to be vulnerable to inflation. They have little discretionary income left after necessary monthly expenses, and consequently, not much of a buffer against increases in inflation. Retirees are especially defenseless. Add the heavier taxes resulting from the Chained CPI, and the federal government's inflation policies could effectively reduce middle class and retiree incomes in real terms.
With the sluggish U.S. economy 70% dependent on consumption, it makes no sense for the federal government to deploy inflation as a weapon against those with middle class or lower incomes. Reduce incomes and people will consume less. If these federal policies somehow stimulate greater economic growth, it isn't hard to figure who will benefit the most from that greater growth, and it ain't gonna be the lowest 80%.
The Chained CPI hasn't become law yet, and not all Fed officials want to ignite inflation. So the worst may not come to pass. But the lowest 80%, already facing uncertain employment prospects and stagnant wages, really don't need to be squeezed by inflation policies that make sense only to those well-to-do people who are insulated from their impacts.
Saturday, May 18, 2013
News Flash: Republicans Don't Like Profiling
Well, it appears that Republicans don't like profiling after all. At least, not when Tea Partiers are profiled by the IRS. When the targets of profiling are black or Muslim, well . . . .
Of course, the IRS should not have profiled Tea Partiers. As liberals have been saying for decades, profiling is unfair and illegal. But the level of outrage emanating from the right is pathetic, at best. Profiling is all too common, and we shouldn't get any more outraged over the IRS's profiling of Tea Partiers than we do over the profiling of blacks, Muslims and other people. Finding a conservative commentator who'd agree with this point would take longer than the IRS took to process Tea Party nonprofit applications. And that's the problem with political discourse these days. The point of view too often taken is "If it hurts me, it's bad. If it hurts people I don't like or don't care about, it's okay." Profiling is unprincipled. But so are way too many participants in today's political mosh pit.
Of course, the IRS should not have profiled Tea Partiers. As liberals have been saying for decades, profiling is unfair and illegal. But the level of outrage emanating from the right is pathetic, at best. Profiling is all too common, and we shouldn't get any more outraged over the IRS's profiling of Tea Partiers than we do over the profiling of blacks, Muslims and other people. Finding a conservative commentator who'd agree with this point would take longer than the IRS took to process Tea Party nonprofit applications. And that's the problem with political discourse these days. The point of view too often taken is "If it hurts me, it's bad. If it hurts people I don't like or don't care about, it's okay." Profiling is unprincipled. But so are way too many participants in today's political mosh pit.
Wednesday, May 15, 2013
Beware of Overpriced Assets
The delirious exuberance of stocks today is reminiscent of the stock market just before its earlier peaks in March and April 2000, and in the fall of 2007. Prices move up in defiance of risks and uncertainties. Stock indices set records every week. Bulls overrun the markets. Bears have become a seriously endangered species.
Even as financial messiahs proclaim a brave new market in spite of the stumbling economic recovery in America and recession in the rest of the industrialized world, let us recall the sources of the last two market busts: highly overpriced assets. In the late 1990s, the bubble was in tech stocks. In 2007-08, housing and real estate mortgages were grossly overpriced. In both instances, the sheer quantity of inflated assets ensured that when the markets turned, losses would be enormous. Given the dazzling rise of stocks over the past few years, it behooves us to ask if there is a comparable risk today?
The answer would appear to be yes. Investors have poured vast amounts of money into bonds of every stripe and variety. Bond valuations, even of junk bonds, have reached highly optimistic levels. Bonds are priced for perfection. If any imperfection appears, losses--and a lot of them--will follow.
The most obvious risk to bondholders is that the Federal Reserve and other central banks will step back from the extremely accommodative policies they have instituted. This will happen sooner or later, probably sooner in America and later in Europe and Japan. When it does, bondholders will incur losses, and those losses will be big simply because of the huge amounts of money that have flowed into bonds.
The Fed seems to think it can manage the process of shifting from quantitative easing to unwinding its $3 trillion plus balance sheet (i.e., quantitative tightening). Perhaps it can do so without causing severe short-term turmoil in the markets. But it can't circumvent a basic problem: when interest rates rise and bond prices fall, a lot of losses will be incurred. These losses must land somewhere. They might be shifted from one investor to another by means of derivatives and other hedges. But someone, ultimately, has to take the loss.
The fact that losses in the financial markets have to land on someone somewhere wreaked havoc on the world's major economies following the real estate crash of 2007-08. Investors around the globe who bought mortgage-backed securities, CDOs, CDOs squared, and other such financial alchemy paid the price for drinking too much of the Kool-Aid du jour. We live with the resulting economic pain even to this day.
The bond markets are like a coiled spring that presents a similar problem. Extremely high prices have been paid for bonds, and bondholders face serious risk of losses when rates rise. The sheer quantity of potential losses is the scary thing. Those losses will have to land on someone, somewhere, and that will be painful. The Fed's quantitative easing program has only exacerbated the risks, and the Fed's near term success in preventing depression has burnished its image of competence, which may have blinded bond investors to the dangers of the market downturn that must take place eventually. As history repeatedly has demonstrated, the Fed is fallible and its fallibility is accompanied by serious consequences for the financial markets and the economy.
By promoting ultra low interest rates for five years, the Fed has allowed a massive build-up of investment in overpriced bonds. While central bank intervention in a crisis is to be applauded, a years-long distortion of market forces will surely do bad things, and bad things have been done. The only question now is when and how we will suffer the consequences.
Even as financial messiahs proclaim a brave new market in spite of the stumbling economic recovery in America and recession in the rest of the industrialized world, let us recall the sources of the last two market busts: highly overpriced assets. In the late 1990s, the bubble was in tech stocks. In 2007-08, housing and real estate mortgages were grossly overpriced. In both instances, the sheer quantity of inflated assets ensured that when the markets turned, losses would be enormous. Given the dazzling rise of stocks over the past few years, it behooves us to ask if there is a comparable risk today?
The answer would appear to be yes. Investors have poured vast amounts of money into bonds of every stripe and variety. Bond valuations, even of junk bonds, have reached highly optimistic levels. Bonds are priced for perfection. If any imperfection appears, losses--and a lot of them--will follow.
The most obvious risk to bondholders is that the Federal Reserve and other central banks will step back from the extremely accommodative policies they have instituted. This will happen sooner or later, probably sooner in America and later in Europe and Japan. When it does, bondholders will incur losses, and those losses will be big simply because of the huge amounts of money that have flowed into bonds.
The Fed seems to think it can manage the process of shifting from quantitative easing to unwinding its $3 trillion plus balance sheet (i.e., quantitative tightening). Perhaps it can do so without causing severe short-term turmoil in the markets. But it can't circumvent a basic problem: when interest rates rise and bond prices fall, a lot of losses will be incurred. These losses must land somewhere. They might be shifted from one investor to another by means of derivatives and other hedges. But someone, ultimately, has to take the loss.
The fact that losses in the financial markets have to land on someone somewhere wreaked havoc on the world's major economies following the real estate crash of 2007-08. Investors around the globe who bought mortgage-backed securities, CDOs, CDOs squared, and other such financial alchemy paid the price for drinking too much of the Kool-Aid du jour. We live with the resulting economic pain even to this day.
The bond markets are like a coiled spring that presents a similar problem. Extremely high prices have been paid for bonds, and bondholders face serious risk of losses when rates rise. The sheer quantity of potential losses is the scary thing. Those losses will have to land on someone, somewhere, and that will be painful. The Fed's quantitative easing program has only exacerbated the risks, and the Fed's near term success in preventing depression has burnished its image of competence, which may have blinded bond investors to the dangers of the market downturn that must take place eventually. As history repeatedly has demonstrated, the Fed is fallible and its fallibility is accompanied by serious consequences for the financial markets and the economy.
By promoting ultra low interest rates for five years, the Fed has allowed a massive build-up of investment in overpriced bonds. While central bank intervention in a crisis is to be applauded, a years-long distortion of market forces will surely do bad things, and bad things have been done. The only question now is when and how we will suffer the consequences.
Subscribe to:
Posts (Atom)
Posts
