Looking a Whole Lot Like Warsaw, 1982

For those who do not know or are not aware, the gas situation here in Atlanta, Georgia is getting pretty crazy. You can pass 5, 10, 15 gas stations without finding one that has gas. If you do happen to find one that actually has gasoline, you will recognize it quickly, because it will be the one that has 20 cars lined up in the street outside waiting.

I have never seen anything like it.

But I have read something like it. What I have seen reminds me of the stories about the failures of supply in Eastern European countries just before the general collapse of Soviet-style Communism. The queues for vital supplies, like bread, milk, eggs, and... gas. (The reason supposedly being because all of these countries were spending their national wealth on the military to keep up with the West. The reason more likely actually being simply the failure of Communism to allocate and distribute resources efficiently).

This has gone on for two weeks now and shows no signs of abating any time soon. If anything, it’s gotten worse.

It seems to me that this should be big news, since if people cannot drive to work, we could be facing a severe economic collapse here before long. Somehow, even in the local media, the story is not on the front page. This is a real life issue, and, if not corrected soon, could be a bigger story at least locally than the federal bailout of Wall Street.

How We Got Here

Considering the fact that the government is debating throwing almost a trillion dollars at a bailout plan, I thought it would be a good idea to sort of review how we find ourselves backed against the wall.

How did we get into this financial mess? It is actually pretty easy to explain and track. As population increased over the last couple of decades, wealth increased, and desirable property grew scarcer throughout most of our major cities. Real estate prices heaved upwards. Sensing opportunity, speculators began to buy properties solely with the intention of “flipping” them; that is, re-selling them at a substantial profit to someone else. At the same time, appreciating real estate created wealth, allowing selling home-owners to buy bigger and more expensive houses. The combination of these two factors led to increased price pressure in the real estate market and a real estate “bubble.” The market prices were artificially inflated above where supply actually met demand.

Why am I talking about the real estate bubble? Because the money to feed the bubble had to come from somewhere, and it could not come from cash, because the savings of your average American simply could not support it. So, it came from financial institutions—banks. Increasingly ambitious and innovative financial tools were pushed by specialty lenders and mortgage brokers. As long as prices kept going up, this was a self-feeding cycle. Of course, eventually, someone needs to make actual payments towards principal and interest rather than selling and borrowing money. When it came time to pay, many people couldn’t. Many residential developers, piggy-backing on this housing frenzy, also had over-extended—built out property that no one could buy. Once the bottom fell out, prices collapsed.

BOOM. It crashed.

Now, many banks who jumped on the bandwagon and offered these heretofore highly profitable (and complicated) adjustable loans have foreclosed or are foreclosing on a bunch of real estate that is worth far less than the loan secured on it. What happens on the balance sheet? Well, after reviewing the market and realizing that property that the bank loaned someone $400,000 to buy is actually worth about $150,000, the bank’s books suddenly look not so good. The high-performing commercial paper with a principal value of X is converted into non-performing real estate with a principal value of .2X. What do you tell your investors and shareholders? Whoops? (As an aside, you could make the argument that the banks deserve even more blame than I am about to heap upon them below by seemingly introducing a credit card technique into mortgage loans—get your debtor to run up debt and get in over his head with 0% interest over a period of time and when they miss a payment, jack up the rate to prime plus 10% or whatever. Problem is, when you’re talking about hundreds of thousands of dollars, these folks just can’t service the payments).

Okay, so who is to blame for all of this? Here is your list, which I will call the Usual Suspects because... well, because they always are in some form or another—the consumer (home-buyer), deal-maker (mortgage broker), and bank (bank). (The list is also named in honor of one of the best movies of all time). In increasing order of culpability:

THE USUAL SUSPECTS

1) Home-buyers. Specifically, those persons who just could not hold back from getting that extra bedroom or dedicated wine-tasting cellar in that house that they could not afford by any reasonable financial calculation without absolutely relying on (a) massive appreciation of the property, (b) a gimmicky loan allowing lower payments initially, and/or (c) increased prospects for income in the future. Dumb and irresponsible decision-making.

2) Mortgage brokers. That guy who set up your loan who exuded trust and confidence? Who probably told you that you could do it, you could trust him, etc.? That guy was plain fibbing, ya’ll. Truth is, he doesn’t care. A mortgage broker has no fiduciary duty to the borrower—he has obligations to the lender to make loans within various programs, but really no duty to protect the lender, either. His goal is singular: to make lots of money. That is not really bad in and of itself except for the fact that sometimes the mortgage broker is the only one who is really consulting with the borrower. Remember, the mortgage broker gets paid at the loan closing—it is not in his interest to consider the long-term health of the loan, only that a borrower is able to get a loan of some kind, because then he gets paid. If banks were asleep at the wheel, mortgage brokers were stripping everything they could from the car.

3) Banks. Look, if you have the pot of money, and you do not do your research and due diligence and lend it out to a bunch of bad debtors... do I have to finish stating the obvious? A fool and his money are soon parted, okay? Having myself been involved on the legal side of lending more than a few times, I have been shocked at how some of these guys just hand cash out like candy with little investigation and little attention paid to agreements the lender and borrower are actually signing. Some banks do a really good, responsible job, but others—it’s just like there is no one there in that position—like no one wanted to take the job or something. And unfortunately, in my experience, the fraction of “asleep at the wheel” banks is something like 1/3 of the total. That’s a lot.

I’ll have a post later (if someone else does not beat me to it) about what I think about the proposed bail-out plan(s). Setting aside the whole collapse of our financial system as we know it issue for now; specifically, how do we fix the (primarily residential) real estate lending system that led to this disaster? Here are a couple of quick suggestions:

* Ban certain kinds of loans from banks. No more BS loans (how about the zero interest for six months adjustable rate mortgage with 3 rate-leveling points? Got that?), particularly zero interest loans or extremely short-term fixed rate period loans, which simply encourage speculation. They get too confusing and are quasi-predatory. Proviso: if you can clearly afford it, allow it. We do not want to put the kabosh on simple financial maneuvering and handy retirement tools like reverse mortgages.

* Make sure the mortgage broker has skin in the game over the life of the loan (or a period of years, say, 5 or 10). That way, the mortgage broker is also concerned about the borrower defaulting, because if the borrower does default, he doesn’t get paid in full.

* How about some required financial planning classes prior to someone qualifying for a lender’s program? A one-day 3-hour class should do it.

This is really not rocket science. We can fix it and should act to prevent this kind of disaster from occurring again. And to those who say the above ideas (or other proposed regulatory fixes) would constitute undue regulation of free enterprise: I think taking $5,000 from every taxpayer to bail out a bunch of banks is a bit more intrusive to our way of life than more regulation of the banking industry.

The Missing Metrics of Clean Energy

The title to this post might be obscure, but it sums up something that has bothered me for a while now. We all hear a lot about various kinds of “alternative” or “clean” energy, including biodiesel (and ethanol supplemented) fuels, electric cars, “clean” coal, wind, and solar power. But clearly they are all not created equal and come with different costs and benefits. While it seems clear that solar and wind power technology would be a complete positive influx to the electricity grid, because wind passes through blades which power turbines generating electricity, and photons are absorbed by photo-electric cells and converted into electricity (less the energy expense of building and maintaining the wind or solar power plants), other technologies are a mixed bag.

Take electric cars for instance. You would plug your electric car into a power outlet overnight to re-charge the battery. When you drive it around, you are not emitting any pollutants, merely de-charging the battery. But where does the power come from? Power plants which are currently mostly powered by coal, which are mostly very dirty.

The metrics are missing. Metrics are simply statistics or numbers that measure performance or efficiency. Here, the relevant metrics would be: (1) Which method, burning coal to produce electricity, or burning gasoline in internal combustion engines (combined with whatever power is consumed to refine oil into gasoline) is most efficient at producing energy? (2) Which pollutes more? I have never seen the metrics, and it is extremely disturbing to me, because how can we make intelligent decisions if we do not have real or at least approximate numbers? They have got to be out there or be able to be calculated.

The missing metrics for biodiesel fuels and using ethanol to supplement gasoline for trucks and cars is probably most troublesome to me. Most of our biodiesel fuels and ethanol come from corn and other agricultural products. Well, how are those products grown? We use an awful lot of gas and electricity to power farm equipment and to produce, transport, and refine all of these grains into fuel. What is the net effect here? Also, I am highly suspicious of this particular “green” fuel, because a vested interest—big agriculture and its big subsidies—is implicated.

In the case of electric cars, I have read interviews with manufacturers of electric cars who acknowledge the “long tailpipe” dilemma described above and declare that the solution is a next step of marketing solar panels to owners to power their own cars at home. The idea is that the individual consumer, with his solar panel (photo-voltaic electronic device and battery) generates his own power. That would be great—but it is clearly deceptive to say that electric cars move us anywhere closer to a greener, less polluting outcome alone. Unless the metrics tell us something different; i.e., that it really is more efficient to produce power in electrical power plants rather than internal combustion engines.

There are two very obvious factors at play here: efficiency and pollution. Which source of energy is most efficient (i.e., produces the most energy for the least cost)? Which is least polluting?

Until we have solid answers to those questions, we cannot make intelligent decisions about green alternatives, other than the strict “zero sum” technologies, like solar and wind power.

Closing Thoughts on Sarah Palin

I am calling this my closing thoughts, because I am frankly kind of tired of the debate about McCain’s VP pick. I oppose her candidacy purely on the issues, viz:

* She favors Bible study and like programs in public schools. I think that is an inappropriate insertion of religion in a public institution.

* She does not recognize global warming and, while John McCain has said he would institute some kind of controls over CO2 and other global warming emissions, presumably she would oppose such measures if she ever became president. I think in order for us to counteract or limit the devastating effects of global warming, controls need to be introduced to internalize the common costs to our environment to those businesses contributing to global warming. I.e., spouting global warming-causing pollutants into the environment should carry a cost to those who do it.

* She opposes abortion in all cases except when the mother’s life is in jeopardy (including in cases of rape or incest). I believe that the government should only intrude on a person’s private decision when there is a life-in-being entitled to rights under our laws. I believe that, in the case of abortion, that begins at viability (roughly).

* Economic policies—I am not entirely sure what her economic philosophy is, but if she agrees with John McCain about cutting taxes for the “middle class” as he defines it (earning less than $5 million per year), eliminating the estate tax, and cutting corporate taxes, then I don’t agree with her.

And I close with a few observations about the zaniness surrounding her selection as a VP candidate and the Republican strategy:

* SHE HAS ZERO FOREIGN POLICY EXPERIENCE, PEOPLE! PLEASE STOP THE MADNESS! Despite the fact that “you can see Russia from certain islands in Alaska” and that the governor of Alaska is technically the “commander of the Alaska National Guard”—doing what exactly? Leading them in Iraq? Or is it just waiving handkerchiefs and wrapping yourself in the American flag—that does not mean you know the first thing about diplomacy and how the world functions. It is also not helpful to have a candidate for the backup president who has so rarely left the country and known anything about other people in the world (she made one visit to troops on an official visit to Iraq last year—that’s it.)— AGAIN (W was the other). I am still astounded at the Republican strategy of... really not another way to put it... lying about this. It actually is fair to say, okay, hey, she doesn’t have much, if any, foreign policy experience—but that’s okay, because John McCain does, and she can pick up a lot as the VP. Why insist on making this garbage up???

* HER SCANDALS WILL CONTINUE. Seems like every day there is more news about “Troopergate,” the many bodies she left on the side of the road in Wasilla in her pursuit of political power, questionable personnel management (capricious firings), possibly unethical and maybe illegal spending of public funds for personal purposes, the odd role of her husband as an unofficial voice in the Alaskan government, etc. My prediction is that as the scandals mount, her attractiveness to moderates and Democrats—she actually has lost Democrats over the last week due to the news coming out—will increasingly diminish.

* TINA FEY IS BETTER LOOKING. I heard one description of Sarah Palin as “Tina Fey’s prettier sister.” Can’t disagree more. Just look at the SNL skit, then look at Sarah. Tina Fey might not be a knockout, but she edges out Palin. (Notsostayathomemom—feel free to call me sexist for including this item, but this is objective truth).

Sorry for the lack of posts recently. I have been out of town and also not near my computer when the desire to post has come upon me. I will try to do better as we run up to 11/4.

I am offended.

So, over the past few days, I have watched the Republican Convention. I'm not a Republican, but I wanted to see how the Evil Empire ... ahem ... other party does its business. Initially, the only thing that struck me was the politics as usual scene -- not much different from the Democratic Convention -- with one party striking out at another, boosting its own candidate, touting the party platform.

Then I watched the speech by Sarah Palin. And I saw the buttons. Here is a woman -- only the second woman in history to be nominated to a major party presidential ticket -- who seems to be smart, put together, and articulate. And what do the buttons of her party mates read? I'll quote from an article on the Indianapolis WTHR news website (http://www.wthr.com/Global/story.asp?S=8946005):

"The Alaskan button reads, 'From the coldest state comes the hottest vice president." But Sen. Sue Landske and some fellow Hoosiers came up with a button of their own: 'Hoosiers for the hot chick'."

I'm pretty much rendered speechless.

A Few Thoughts About Sarah Palin

The pick of Alaska Governor Sarah Palin by John McCain has certainly created a buzz, undoubtedly one of the main reasons the McCain campaign selected her as the Republican nominee for vice president. Unfortunately, not all of the buzz has been positive. Amid all the revelations about Ms. Palin’s background—“Troopergate” (why does every potential scandal HAVE to have the word “gate” attached to it? Is it now a required suffix like “ism” is to political and social movements???) and Palin’s teen-age daughter’s pregancy—I offer a few thoughts about Ms. Palin’s positive and negative impacts for the McCain campaign:

POSITIVES:
* She shores up the Republican social conservative base. There has been a lot of moaning and crying from the “Base” for many months now. Pastors like James Dobson and right-wing radio talk show hosts, including the likes of Rush Limbaugh and Ann Coulter, at various times over the year vowed to sooner vote for Hillary Clinton or Barack Obama than McCain, or not vote at all. McCain’s nomination was the destruction of the Republican Party to hear the conservative pundits tell it. However, with Ms. Palin’s selection—and in the background of the shrieking banshees of socially interfering “conservatism” essentially backing off of their fatalistic prophecies and generally coming around to supporting McCain over the last month or two—the social conservatives are mollified. This is a woman who believes that abortion should be illegal even in cases of rape or incest, who does not believe that global warming is due to human activity (and may believe that it is not occurring—this is unclear), believes creationism should be taught alongside evolution in public schools, and feels that the only form of sex education should be abstinence, not birth control (do you think she has changed her opinion in light of her daughter’s failure to abstain?). Hardcore social conservatives love her. They’ve got their person on the ticket.

* She’s a woman. The McCain campaign felt it had to do something to combat the historic nature of Barack Obama’s candidacy, as the first mixed heritage / African American on a major political party’s ticket for president. So they selected a woman for the veep spot, and a very photogenic one at that.

NEGATIVES:

* She’s a woman. Clearly, this is a pick that was motivated in substantial part to gun for disaffected Hillary Clinton supporters. I may be proven wrong by the exit polls, but I think that the reverse will occur. I think that female Hillary Clinton supporters will be insulted that the McCain campaign thinks that just by nominating a woman, it—he—sews up their votes, even though she is diametrically opposed to just about every position Hillary Clinton has taken and stands for.

* She’s so obviously unqualified to be “ready on day one.” McCain’s mantra leading up to his selection for the VP spot was that he would pick the most qualified person to be president in the event of his incapacity or death. Then he picked Palin. Now his campaign’s mantra is that she really “complements the ticket.” Republican claims to the contrary—she’s governor, uh, of the state, uh, closest to Russia (seriously, this is something I have heard)—she has no foreign policy experience and is completely unready to be commander-in-chief. Her selection deprives McCain of any semblance of an argument that Barack Obama is unready to be president, since Palin has less experience with foreign affairs and far less time in public office than Obama. The experience argument could have been a good one.

* She’s got baggage. As the whole Troopergate controversy and unwed teen-age daughter revelations demonstrate, picking someone whom no one knows anything about results in intense media investigation and unwanted and unforeseen revelations. Additionally, because most people (other than people in Alaska, an electorally insignificant state) have no idea who she is, she risks being defined by salacious, scandalous stories, because they’re good news copy. We’re not going to hear a lot from the mainstream media about how she is adored in Alaska or led some tough negotiations with BP.

In sum, I think Ms. Palin was kind of a mixed bag for McCain. He was definitely going for shock value, and he got it. But he has to take the good with the bad. On balance, I’d say he could have done better (I was terrified he would pick Kay Bailey Hutchison), but the election will still be about McCain and Obama.

And... at least we don’t have to listen to Mitt Romney for the next 2 months.