Economics on the small scale

2006-05-19T10:47:00.000-07:00

The Efficient Markets Myth

There is a Myth that all available information that could affect The value of a given stock is instantly reflected in the price of shares for that stock and therefore the Stock Market is a efficient means of determining the correct price for stocks.

The idea is that Wall Street (and to a lesser extent: Main Street) has lots of really smart people paying attention to these companies and competing in trying to figure out how to make money buying and selling shares of these public companies.

The instant new information became available, the theory goes, one or more of these really smart people would figure out how this new information will affect the company's financial future and buy or sell shares until the price is back in balance with the company's actual value.

Now, this makes a lot sense, and I've no doubt that this scenario actually occurs on a daily basis on Wall Street. But does that mean that this makes the Stock Market as a whole an efficient means of determining the price of any given share of any company ?

I don't think so.

Figuring out the future is hard; a gamble really. What happens if the smartest analysts mis-interpret the data and buy when they should be selling ? Or end up buying at too high a price, or sell when they should have been holding ?

(the best case scenario for them is that they make less money than they could have, but they still make money).

The not-as-smart analysts are going to make worse errors in how they interpret the data, though through sheer dumb luck some might stumble onto the correct price [range?] occasionally.

Now let's back up a little bit. The not-as-smart analysts are still in the game to make money and if their own analysis isn't cutting it, maybe they can ride the coattails of the smartest analysts by mirroring all of their transactions.

Now, if you're one of the smartest analysts, those not-as-smart analysts acting as parasites on your work could be another potential source of profit if you can get them to take positions that you can cash in on. Figuring out how to con the greedy and the lazy is easier than figuring out the financial future of some very complicated companies or even simple companies whose financial future hinges on fortune's favor.

If the smartest analysts engage in that game, who can glean whose gains were got from where ?

Are there actually really smart analysts paying attention to all the data that could affect the financial future of each and every single major publicly traded company ? There are probably thousands of professional analysts for each of the Fortune 500, but how many are there for each company in the next 5000 major companies ? Are they all as high in quality? Are they watching all the relevant data ? All of the time ? Are they all in a position to act on their analysis in a profitable way ?

What about non-professionals who buy and sell with only the most cursory of analyses (if any) and laxest of discipline (if any)?

But even the smartest analysts aren't constantly alert to information that may change the future, they won't be able to always correctly predict the data when they get it, and if they had the incredibly vast resources necessary to play the stock market in this way, they wouldn't need to put in the necessary effort at analysis to make serious money, they could just skim it off of the top.

The bottom line is that Stock Markets aren't all that efficient for determining the value of a given company. Some companies, particularly the Fortune 500, maybe, since that's where the money is. But maybe not even then as it's hard to figure out what the future may hold.

The Moral is that if you let the Efficient Markets hokum theory deter you from doing your own analysis of what the value of a company is, and therefore what its stock price should be, you're likely to get taken to the cleaners.

2006-04-25T09:06:00.000-07:00

45-year mortgages

Via Daniel Gross, comes this snippet from the WSJ:

Neil Garfinkel, partner and real-estate specialist with law firm Abrams Garfinkel Margolis Bergson in New York and Los Angeles, says borrowers pay much more in interest with longer amortization mortgages than they save.

For a $300,000 loan at 7%, he said, the monthly payment for a 30-year schedule would be $1,995.91, and for a 45-year would be $1,829.10, for a savings of about $166.81 a month or a little over $2,000 a year. But the interest paid over the full term would be $418,526.69 for a 30-year loan and $687,714.82 for the 45-year loan.

"Will it help consumers get into bigger houses? I don't really know," Mr. Garfinkel said.

To answer Mr Garfinkel's question, let's start with this Amortization Calculator and recalculate the $1,995 monthly payment by plugging in the principal and interest rate. Now, let's reduce the principal until we get $1829 as the monthly payment.

The number I got was $275,000. So for the opportunity to buy less than 10% more house, would you pay more than 50% more in interest ?

2006-04-20T14:27:00.000-07:00

Broadcast Television is Dead, long live Publishing

In this discussion of where Disney Television is heading,
Grant calls the new Disney Business model "multiplicity", and maybe that's the industry buzz word for it.

But to me, it sounds like Disney is positioning itself as a 'Publishing House' for video shows rather than as a 'broadcaster' of video.

Goodbye TV Guide, hello NYTimes Best-Seller list.

2006-04-20T12:04:00.000-07:00

Housing is not an investment that appreciates

Want to know the reasonable upper limit of the value of a house ?
Figure out who is likely to buy such a house to actually live in it and figure out the maximum mortgage payment they can afford to pay, then figure out how much principal that currently buys them.

The big factors are going to be the likely buyer's income and current mortgage interest rates.

Now given that real median family income has been declining somewhat in the past few years, Income gains have not pushing up housing prices except perhaps at the high end.

That means that the housing appreciation of the past few years has largely been due to lower interest rates, and consumers pushing the envelope of what they can afford.
The former is coming to an end, and will likely take a bite from the latter.

Housing is an important investment to own, but it's one where -absent a housing bubble- you'll be lucky if you break even when you sell, if you take into account inflation.

That doesn't mean you can't get lucky. But you're better off planning for disaster than planning on being lucky.

2006-04-18T10:32:00.000-07:00

Medical Care In America

Let's compare and contrast:

From Dr Brewer:

It took me a while to conclude that a single-payer health system was the best approach. My fear had been that government would screw up medicine to the detriment of my patients and my practice. If done poorly, the result might be worse than what I'm dealing with now.
[...]
Doctors in private practice fear a loss of autonomy with a single-payer system. After being in the private practice of family medicine for 8 1/2 years, I see that autonomy is largely an illusion. Through Medicare and Medicaid, the government is already writing its own rules for 45% of the patients I see.

The rest are privately insured under 301 different insurance products (my staff and I counted). The companies set the fees and the contracts are largely non-negotiable by individual doctors.

The amount of time, staff costs and IT overhead associated with keeping track of all those plans eats up most of the money we make above Medicare rates. As it is now, I see patients and wait between 30 and 90 days to get paid.
[...]
There are powerful forces that oppose a single-payer system -- the health insurance industry for one. The insurance industry got its share of the Medicare drug benefit pie, as did the pharma industry. It would have been better and simpler for the government to design one plan with a standard drug fee schedule that everyone could understand, as the government does with care that doctors provide to Medicare patients. But that's not the way it happened.

Doctors have been supportive of the idea of universal access to care, but not necessarily a single-payer system. Some fear delays in obtaining necessary testing and surgeries. What I suspect they fear most is a loss of income and the fear of the unknown.

A single-payer system would admittedly lower fees for subspecialty care, such as radiology and cardiology. But if more doctors went into family medicine or obstetrics and fewer into subspecialties like plastic surgery, that shift might help correct the physician manpower imbalances that exist now. That wouldn't necessarily break my heart.

I suspect doctors would be more likely to support a single-payer system if national malpractice reform was part of the package -- which it should be.

I used to think a single-payer system would keep my income down and inject bureaucracy into my medical decision-making. But with the efficiency it could bring, it would at worst be an economic wash; more likely, the trimmed costs would more than make up for any foregone revenue. As for autonomy, I'm already struggling to maintain it amid the interference of insurers.

Melanie suggested a comparison with Costa Rica:

For a country not usually thought of as a fully developed nation, Costa Rica's lack of a standing army and its historical commitment to the social and educational welfare of its citizens have provided the foundation for a "highly developed medical system, internationally speaking" asserted plastic surgeon Dr. Arnoldo Fournier. He continued, "It's not the surgeons who have provided this, but the entire history of our country that gives us this advantage."

Dr. Logino Soto Pacheco, Chief of Surgery at Hospital Mexico, premier cardiac surgeon in Costa Rica and one of the foremost in the world, claims that Costa Rica is unique in its world position in health care. "I have studied every health care system in the Americas, and I can assure you that nowhere else can compare to what Costa Rica offers its citizens," he stated emphatically. Who would doubt these words from the man who assembled the Costa Rican surgical team which performed the first successful heart transplant in Latin America.

With a government-sponsored network of 29 hospitals and more than 250 clinics throughout the country, the Caja Costarricense de Seguro Social (CCSS) has primary responsibility for providing low cost health services to the Costa Rican populace. Though presently somewhat overburdened, like most of the Costa Rican infrastructure, this system has worked well for Costa Ricans for the past 50 or so years. Open not just to Ticos, the CCSS provides affordable medical service to any foreign resident or visitor. Foreigners living in Costa Rica can join the CCSS by paying a small monthly fee--based on their income-- or they can buy health insurance from the State monopoly Instituto de Seguro Nacional (INS) valid with over 200 affiliated doctors, hospitals, labs and pharmacies in the private sector.

Now, I don't really trust her link, so let's cross-compare using World Health Organization data

Costa Rica

USA

Statistics:

Total population: 4,173,000

GDP per capita (Intl $, 2002): 7,966

Life expectancy at birth m/f (years): 75.0/80.0

Healthy life expectancy at birth m/f (years, 2002): 65.2/69.3

Child mortality m/f (per 1000): 11/9

Adult mortality m/f (per 1000): 129/76

Total health expenditure per capita (Intl $, 2002): 743

Total health expenditure as % of GDP (2002): 9.3

Figures are for 2003 unless indicated. Source: The world health report 2005

Statistics:

Total population: 294,043,000

GDP per capita (Intl $, 2002): 36,056

Life expectancy at birth m/f (years): 75.0/80.0

Healthy life expectancy at birth m/f (years, 2002): 67.2/71.3

Child mortality m/f (per 1000): 9/7

Adult mortality m/f (per 1000): 139/82

Total health expenditure per capita (Intl $, 2002): 5,274

Total health expenditure as % of GDP (2002): 14.6

Figures are for 2003 unless indicated. Source: The world health report 2005

To summarize: a tropical country that is not typically considered fully developped has a health care system that's measurably nearly as good as the U.S.A's hodge-podge health-care, and they're doing to it using a third less GDP per capita.

2006-04-14T11:17:00.000-07:00

Observations on America

Observations From a female financial banker from North Africa, courtesy of Lounsbury:

1. Americans are loud, and tend to speak yet louder when your English is imperfect.
2. Americans are fat, eat at strange hours and serve individual portions large enough to feed whole families.
3. The idea that everything has to be big for the sheer sake of being big has taken over.
4. There are an amazing number of Spanish. (Latinos)
5. American insularity is almost like racism. Americans only listen to and watch American things. We [Maghrebines] grow up with French, Spanish, English, Arabic, Berber. Americans grow up with hamburgers.
6. The current crisis over immigration is strange as all Americans are immigrants.
7. The energy in the country is amazing, incredible.
8. The cars in the country are far too big. And they look fat.
9. American [cable] TV selection is strange; there are many channels but they show the same thing. With Euro and Arab Sats, we have too much variety, in America it is amazing how little variety there is. I always imagined in America there would be more variety [on TV, radio].
10. US Advertising is ridiculous. Too much, everywhere.
11. American children are too fat, and this is very dangerous.
12. The public libraries are excellent and amazing. If we had this in the Maghreb, poor children would be able to do so much more.
13. Public schools look like fortresses. [Ahem, the area in question was NYC]
14. It is criminal that The Lounsbury’s cousin [by marriage I do protest] Carol is allowed to teach children.

I'll comment later.

2006-04-14T07:55:00.000-07:00

The Internet Makes You Richer (and Television ?)

Via Brad Delong comes this little tidbit from this abstract:

Only about 0.2% of consumer spending in the U.S. ... went for Internet access in 2004 yet time use data indicates that people spend around 10% of their entire leisure time going online... Based on expenditure and time use data and our elasticity estimate, we calculate that consumer surplus from the Internet may be around 2% of full-income, or several thousand dollars per user.

Yes Indeed, people get a lot of value out of the Internets.

However, I'd love to see how it compares against Broadcast TV and Cable TV.
The big reason I fled from TV after my College Freshman year was because TV had the ability to capture my attention for (much too) long periods of time with shows (and commercials) that were not worthwhile to watch. Actually, this was probably true when I was younger too, but College is when it became problematic.

Which brings up a different point; Broadcast TV is "free" (besides the cost the equipment and electricity, just like home Internet access) except for a 27% tax on your leisure time in the form of commercials. And the reason that companies buy expensive Television advertisement is that they believe it makes them richer by inducing you to spend on things that you would not otherwise buy.

So my personal belief is that watching TV makes you poorer. I'd love to see if what I believe is measurable doing the same sort of study(PDF) as Austan Goolsbee and Peter J. Klenow have put together.

2006-04-11T10:52:00.000-07:00

Intersection of Anthropology and Economics?

I'm not sure yet about this Intersection of Anthropology and Economics blog.
For instance, take this post about Lifestyle design:

The problem: many millions of people in First World societies will live entire lifetimes without "gainful employment."

The assignment: Create a lifestyle that makes possible gainful unemployment. Build a lifestyle that will involve, express, and otherwise engage someone who will never work.

I'm actually involved in something similar on a small-scale: figuring out how to make a weekly Soup Kitchen volunteer effort into an on-going concern. Volunteering is a lifestyle choice, so if you want to use the talent, skill and work ethic of volunteers, you have to figure out how to make it a productive and worthwhile effort for them. It can't be too much or too little. So (some of) the considerations given are actually on-topic for putting gainfully employed people to work for free for you.

On the other hand, I am violently allergic to the premise:

We are running out of jobs. So says David Heuther in BusinessWeek.

Mr. Huether says manufacturing jobs are at their lowest level in the U.S. in 50 years. (This despite the fact that productivity is at an all time high.) And this is not only an American problem. The loss of manufacturing jobs is happening in 9 of 10 of the top economies (U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada and Mexico). Yes, even China is losing jobs, 4.5 million of them since 2000! I know. Surely, some of the jobs have migrated to the non-manufacturing sectors. We would expect this in a service/knowledge/innovation economy. We would expect this in a marketplace where consumer tastes and preferences are fragmenting and long tail markets are expanding. But I would be very surprised if nonmanufacturing jobs were making up the difference. I suspect we're still a couple of million jobs shy. Structural unemployment is a fact of our world, and it is a problem that will get steadily worse.

Bunk.
It's true that Manufacturing is decreasing in importance as an employment source, in a similar manner to that of Farming; due to productivity gains more than anything. And structural unemployment is unavoidable. But chronic unemployment is not unavoidable, and it is very dangerous to society.

People need to be able to meaningfully trade their labor for the ability to survive and prosper. that's essentially the definition of 'gainful employment'. A balanced exchange is symbiotic, an imbalanced exchange is parasitic. gainful unemployment is parasitic. gainful unemployment, something for nothing, is practically the definition of parasitic behavior.

Back to the Soup Kitchen example, so long as the volunteers can see a reasonable benefit (e.g., a social safety net) for a reasonable amount of effort, it is not a parasitic use of their labor even though they are not being paid.

2006-04-11T08:20:00.000-07:00

Dean Baker weighs in on the CPE

Dean Baker weighs in on the CPE:

The reporting on the battle over a new law in France, that would make it easier to fire young workers, has been especially weak. The coverage has included numerous assertions that making it easier to fire workers will reduce the unemployment rate. (The story goes that firms will more readily hire new workers, if they know that they can fire them later, if they find it necessary.)
In fact, the evidence on this point is extremely weak.

As I was discussing this recently, this isn't about firing workers who aren't performing as they should. This law would allow --even encourage-- employers to fire young workers without cause every two years lest they lose their 'temp' status. Essentially, anyone under 26 years of age would be 'guest workers' in their own country, without the labor force protections that they are otherwise entitled to.

This is labor reform in the same vein as Mr. Bush's Social Security reform.

2006-04-07T08:29:00.000-07:00

Today's Money Quote

courtesy of Dan Gross in Slate:

The dissatisfaction with Snow [by the Republican leadership] stems from the fact that he doesn't seem to convince enough Americans that it's raining when they're getting pissed on. Sure, the headline figures on gross domestic product, inflation, and the unemployment rate look fine. But median income hasn't budged in several years, and the tax cuts aren't trickling down. The richest of the rich are getting richer. As David Cay Johnston reported yesterday in the New York Times, "more than 70 percent of the tax savings on investment income went to the top 2 percent, about 2.6 million taxpayers." The Federal Reserve Consumer Finance Survey found that between 2001 and 2004, the top 1 percent increased their share of the country's net worth, from 32.7 percent to 33.4 percent. As people who rely on wage income are subject to the slow-motion wage and benefits cram down, Snow—and the Bush administration—have had nothing to offer except health savings accounts, income inequality, and capital gains tax cuts.

2006-04-06T14:00:00.000-07:00

Mexican-American Deportation

(via Melanie) Dave Niewart responds to unconvicted Felon Rush Limbaugh's question:

I mean if -- if you had a -- a -- a renegade, potential criminal element that was poor and unwilling to work, and you had a chance to get rid of 500,000 every year, would you do it?

Not only were they the hardest-working people I ever met, they also had the best work ethic I ever saw. That is, not only did they work hard, they worked smart. [...] Within a couple of years after I left that farm, [my old boss] went to an all-Latino crew, and he admitted to me that they were mostly illegals. But, he said, they worked harder and better and far more reliably than any crew of teenagers ever had for him. Having been one of those teenagers, I knew exactly what he meant.

compare and contrast with what Jeanne D'arc found in this article on Mexican-american deportations in the 30s:

By 1930, the U.S. Census counted 1.42 million people of Mexican ancestry, and 805,535 of them were U.S. born, up from 700,541 in 1920. Change came in 1929, as the stock market and U.S. economy crashed. That year, U.S. officials tightened visa rules, reducing legal immigration from Mexico to a trickle. They also discussed what to do with those already in the USA."The government undertook a program that coerced people to leave," says Layla Razavi, policy analyst for the Mexican American Legal Defense and Education Fund (MALDEF). "It was really a hostile environment." She says federal officials in the Hoover administration, like local-level officials, made no distinction between people of Mexican ancestry who were in the USA legally and those who weren't.

The more I think about this, the angrier I get.

2006-04-05T13:40:00.000-07:00

Get your University Credentials here

Fred Clark has an interesting Micro-economic observation about our Educational System:

Which brings us [...] to the most revealing fact about American higher education: the cost of auditing a class. It varies slightly from school to school, but the general rule of thumb is that the cost of auditing a class is about a third the cost of taking that class for credit. This tells you everything you need to know about how these schools perceive what it is they're selling. You can learn everything they have to teach for 1/3 the price because education isn't the main product. The main product is credit. That's what you're paying for when you go to college.

This shouldn't be a world-altering revelation to most people who have come into contact with our Educational System, though the game seems to be to pretend otherwise.

Still, if you were to graph the change over time in the cost of auditing a college education versus the cost of 'earning' that degree (both adjusted for inflation), you might be able to see whether the ever-increasing cost of a sheepskin is due to an increase in the cost of education, or due to the cost of burnishing universities' own credentials.

2006-04-05T11:12:00.000-07:00

Population Growth, part II

Michael O'Hare's rebuttal is more in depth in mine, though some of his arguments need tweaking.

Malthusiastic extrapolations are not appropriate because people adapt their reproductive strategy based on their situation. The two main strategies are known as K-selection (few offspring) and r-selection (many offspring). K-selection implies a high investment in individual offspring, r-selection implies low to minimal investment in individual offspring.

As hunter-gatherers, humans are naturally K-selectors. As manual-labor farmers, we are r-selectors. As city-dwellers, we are naturally K-selectors. But if you are a city-dweller with no resources to invest in your offspring, then r-selection is your best shot at genetic survival.

With this additional wrinkle, there is no contradiction between high-density rich cities having a low population growth rate and a high-density poor city having a high-population growth rate.

2006-04-05T10:31:00.000-07:00

Stock Picking Strategies, Part II

From Barry's post on stock-picking contests, I'm reminded that I once participated in one such contest when I was in JA.

I believe we ended up doing pretty well in that contest. The meetings were at night, so prior to the meeting, I'd watch NBR to find out who the day's major movers were. The advantage was that at the meeting, we used the stock quotes from that morning's paper.

While this was mildly unethical use of publicly-available information, if you were to do stock-picking for real money, you should take into account that no matter how much homework you do, there are going to be risks. One of those risks is that other people have access to information you either don't have or have overlooked, and their information trumps yours. Alternately, you could have the same information, but your understanding of that information may be flawed.

2006-04-04T11:06:00.000-07:00

I don't watch TV, but...

I think I'd watch this.

2006-04-04T09:55:00.000-07:00

Population Growth

I've argued something along this from Andrew Sabl, some time past.

The big issue, however, is that many of our institutions are built on an axiom of slow but indefinite growth;e.g. Social Security, the economy. An aging society declining in population takes away that assumption. And the worry is that population-decline-induced economic decline could be self-reinforcing in a way that can't be corrected using Keneysian stimulus.

The other thing is that reproduction is a fundamental directive of life. It's very much biologically driven. If society pressures are not just balancing but actually negating biological directive across all of society, that doesn't sound like a healthy society.

2006-04-04T09:23:00.000-07:00

Healthcare in the U.S. of A.

What Melanie said:

Health insurance is through the roof because the insurance companies play the market with their overages. When they lose money on equities, they jack up premiums, just like they do with medical malpractice. Hubbard's solution to the fact that the US has the highest per person health care cost of any first world nation? Jack up deductibles. I don't know anyone who can afford an additional $3,000/year in deductible.

What this is about is punishing the sick. The idea that Americans are too quick to use healthcare is laughable. We are way down the list of industrial nations in life expectency and our infant mortality is the highest. As with most of what passes for "social policy" with the Right, this isn't about solving problems. It's about apportioning blame and punishment. Blame the victim when you don't know what else to do.

Besides 'Health Insurance', the same logic applies to Medical Malpractice Insurance, but even worse. Medical Malpractice Insurance costs get passed on from doctors to patients or rather to their insurance companies (if lucky), From 'Health Insurance' companies to employers, and from employers to employees.

This is a situation that just screams for disintermediation. I want a healthcare system whose purpose is Public health, not an extortion side gig for that pays for their stock market addiction.

2006-04-04T07:59:00.000-07:00

Professor Black brings our attention to this USAToday Article:

For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. One of their four children was even born there. But for the past eight months, the couple have been locked in a sleep-wrecking race to keep up with their rising mortgage bills. They've switched to cheaper phone service, cut back on groceries and sometimes put off ordering medicine.

When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.

"We were having a hard time meeting bills at the time we refinanced. It seems once you get behind, you do desperate things to catch up, and you never do," says Lorraine, trying to hold back tears. "At the time of the loan, they tell you, 'Well, it may go up, but it's probably going to go down.' You want it to be so, so you believe it."

The article ended with:

The Browns in Missouri also have had a happy ending. The lender, Saxon Mortgage Services in Texas, declined to discuss the Browns' case with USA TODAY last week. But within 24 hours of a call from a reporter, Saxon agreed to give the couple a fixed-rate loan at 7%. "I'm so elated," Lorraine said.

If I did this chart correctly, I'm not seeing much of a reason to go with an ARM in Missouri either now or two years ago; a 7% rate seems on the high side now, more so two years ago, and 10.5% in between seems downright predatory.

Having a USAToday reporter investigating this situation and causing the Mortgage company to backtrack is a stroke of luck equivalent to and as improbable as hitting the lottery.

And they're not out of the woods yet. In their shoes, I think I would investigate Reverse Mortgages, or the possibility of selling their house to move to a smaller condo.

2006-04-03T09:50:00.000-07:00

On Cheating and Cheaters

I just want to focus on one bit from Jane Smiley's, uhm, vivisection (via Brad DeLong):

The unregulated free market has operated to produce a government in its own image. In an unregulated free market, for example, cheating is merely another sort of advantage that, supposedly, market forces might eventually "shake out" of the system. Of course, anyone with common sense understands that cheaters do damage that sometimes cannot be repaired before they are "shaken out", but according to the principles of the unregulated free market, the victims of that sort of damage are just out of luck and the damage that happens to them is just a sort of "culling".

There are just two norms of interaction whether you're the lowest form of worm, or a human being like George W. Bush (sorry, I repeat myself): cooperate or compete.

For any particular interaction, no matter what the details, that's what it boils down to. But when you have multiple individuals with multiple goals, there will be conflict between cooperating and competing to achieve those goals. To the extent that we are not able to resolve those conflicts; we are all, in some way, cheaters.

If the conflict is known, it can be taken into account. But Cheating occurs as competition under the guise of cooperation, or as cooperation under the guise of competition.

Laws and Regulation are all about minimizing Cheating. Regulation is not a panacea, because regulators and legislators can be corrupted into Cheating.

It's often useful to analyze who is cooperating, who is competing, who seems to be cheating, and why ? Who benefits, and why ? Are any of the parties supposed to be regulators, and are they Cheating ?

Applying this analysis to Today's Politics would be like shooting fish in a barrel, but the focus of this blog is Economics on the Small Scale rather than Politics. Not to worry, even just looking at economic matters, you'll be left thinking 'who let Dick Cheney loose on the catfish farm ?'

2006-04-01T13:25:00.000-08:00

banks and mortgages, separation of powers

My bank keeps trying to get me to take out a (second ?) mortgage through them, or sign up for one of their credit cards. Conversely, my mortgage company wants me to sign up for one of their checking acounts.

They're wasting their time (and money). I would never open a credit account with the same bank as I have a debit account because I would never want to hand them the ability to "settle" a dispute in their favor by raiding my checking account.

Such a raid would be completely aboveboard. If you read the fine print of your checking account rules and regulations, you might find that they reserve for themselves that right.

That's fine, I just reserve the right to give them only half of my banking business.

2006-03-31T12:34:00.000-08:00

Coupons are for suckers

Via Kevin Drum, from an LATimes article:

[...]Kathy Makowski, an Irvine grocery maven whose children roll their eyes when she starts talking about coupons. Coupons slice more than $100 a week from the family of four's grocery bill. On one recent shopping expedition, Makowski saved $199.09 through coupons and store promotions.

No wonder the kids roll their eyes: She's probably lying.

Let's assume that Mrs. Makowski, via the magic of coupon doubling saves an average of $1.78 per coupon. To reach $100 savings per week, she would have to buy on average 55 items with coupons (and an unknown number of items for which there are no coupons available), for 21 meals during the week. That means that her family of four is completely consuming at least 2.6 couponed items per meal, with no leftovers. Ever.

Also keep in mind:

Companies are offering more coupons that require a shopper to purchase two or more of the same item to achieve savings

Still, this might possibly be plausible if this woman does no cooking beyond reheating her pre-packaged food, but I don't think it would be a good bargain nutritionally, never mind financially.

The foods which you actually cook with, you might have noticed, don't tend to have coupon offers.

Now, let's be very generous and assume that she's achieving a 20% discount over her entire grocery bill. That means she's buying at least $500 worth of groceries every week. If her discount is less than 20%, then she's spending even more. At (minimum) $17.85 per person per day, that doesn't seem like much of a savings compared to fast food restaurants.

I think she might actually save more money if she put down her coupon-clipping scissors and learned how to cook.

2006-03-31T06:54:00.000-08:00

Energy Prices and Personal Finances, then and now

Via The Big Picture, Floyd Norris wrote:

[T]he share for energy use climbed to 6.2 percent of personal consumption expenses. That is the highest in 15 years, but it is far below the peak of 9.3 percent reached in the first quarter of 1981, during the second oil-price shock.

The difference between 1981 and 2006 is that in 1981, the savings rate for the country as a whole was near 11%, while today it is 0%.

Real Income levels have also fallen slightly over the past few years.

Which means that we're in a zero-sum-game type situation: Energy companies can capture more income from consumers, ...but not without some other part of the economy taking a hit.

Also, wasn't 1981 the start of a fairly severe recession ?

2006-03-30T18:20:00.000-08:00

speaking of ARMs

What Calculated Risk said.

2006-03-30T16:51:00.000-08:00

How to give yourself an economic depression

I'm not sure I completely agree with Professor Black:

CNN's doing a little bit about the impact of rising interest rates on adjustable rate mortgages. I'm guessing we're hitting the point where a fairly big wave of ARMs are becoming untethered from their initial loocked-in rates. Also, interest rates on variable rate home equity loans are heading up...

Somewhat related, the real danger to the economy going forward is the softening construction market.

I think home builders can afford a temporary slow down in their business while their inventory reduces itself. It's the marginal buyers who loaded up on cheap ARMs who might find themselves needing to unload their ~~money-pits~~homes as quickly as possible.

There doesn't need to be many of them, just sufficiently many to cause the Real Estate virtuous cycle to reverse itself a bit. A fire-sale induced price drop in other words. A sufficiently serious price drop could trap a significant number of serial refinancers in their homes; now that the easy refinancing is gone, their only course of action would be selling out and taking a loss (that they can't afford) or staying put and bearing it out until they can break even.

If they can break even. If they give up on breaking even, they may just abandon their homes, as happened in Houston in the 80s. Lather, Rinse, and repeat if banks repossess and hold their own fire sales.

Of course, in this sort of environment new home builders aren't going to be able to reduce their inventory unless they too hold their own fire sales.

That would be an awful lot of new and used home inventory chasing a, hmmm, much diminished group of potential home buyers. Pipeline stuffing will do that to you.

Lather, Rinse, and repeat since as loans start defaulting in earnest, banks are most likely to prop up their revenues from new loans to offset old loan losses. That means higher rates and/or stricter requirements for loans, and that means a smaller potential pool of home buyers.

And, yes, while this is going on the construction and banking industries will be contracting and shedding jobs like mad. And it's not clear into what industries those people should switch to. If there was an up and coming industry people could switch to, our labor force participation rate would have recovered a bit better.

With all this happening, the consumer-~~driven~~starved economy is not going do well either. which doesn't bode well for the stock market and its companies.

The question is how bad is it gonna get, how quickly?

2006-03-29T12:44:00.000-08:00

Phishing...

If you're not sure if that Email from your financial institution is legit or not,
then wait a day or so. If you then get the same Email a dozen more times, it probably isn't legitimate.

actually, a better way to detect phishing is by putting your mouse cursor over the link without clicking. If the URL displayed below the horizontal scroll bar shows the name of the financial institution at the end of the URL rather than at the beginning of the URL, then it's probably Phishing. For example, this URL:

http://192.168.144.120/1q/wa/ea78?www.citibank.com/rebate-offer/

isn't really from Citibank.
But the link below should take you to an actual Citibank Website.

http://www.citibank.com/citigroup/

See the difference ?

Note: I have no affiliation with Citibank, this is strictly an example.

2006-03-29T10:08:00.000-08:00

How to Save For an Emergency:

Jonathan [Pond] via Andrew Tobias writes:

“Worst advice from your parents: ‘The first thing you should do when you start your first job is to put a year’s worth of income in a savings account in case of a financial emergency.’ An obedient child then spent the next 14 years adding savings to the emergency account, all the while earning 2%. Best advice from your parents (probably given when you were an adolescent): ‘For one moment’s pleasure, you could end up paying for the rest of your life.’ While at the time you may have thought they were talking about something else, they were actually talking about credit cards.”

I like the 'Best advice' quip, but I don't think he's entirely correct about savings accounts.

It's much easier to save when you can put money in a separate account from your main bill-paying account.

And while I ditched my savings account a long time ago in favor of a Money Market Account, a Money Market Account requires a substantial minimum balance. A savings account's minimum balance is usually a magnitude smaller if there's one at all.

A Savings account is really just a staging place to accumulate enough money to buy 3 month CDs (Certificates of Deposit). CDs are where you should park your Emergency money.

I have three 3 month CDs; each maturing one month after the other. If I have a financial emergency, I'm likely to have one that I can withdraw penalty-free. If I need to tap all three, the penalty (forfeiting interest earned since last maturity) isn't all that large.

You're not going to get rich stashing Emergency Money in CDs; but the slightly higher interest you earn on CDs helps keep your Emergency fund constant on an after-inflation basis.

As to the amount you stash away -forever, hopefully- A year's worth of income is ridiculous. Base it on your likely emergency expenses such as replacing your car or paying your bills while out of work for a few months.

2006-03-29T07:27:00.000-08:00

From Jeanne D'arc:

While we were talking, Fox News was running on a tv bolted to the wall. It was too noisy to hear anything, but we saw pictures of crowds waving Mexican and American flags. A man sitting across from us grumbled at the television -- something about people breaking the law and now demanding rights.

My neighbor, who I have heard make innumberable negative comments about unions, illegal immigrants, and liberals, looked up at the tv. Oh damn. I was about to ask how his granddaughter was doing, quick, before the subject could turn to politics, when he said, quietly, almost the way my mother spoke the uncomfortable truth about people who didn't like Roosevelt, "I can't blame them. They just want to work."

I swiped the finish of a very fine essay; read the whole thing.

2006-03-27T20:20:00.000-08:00

You are not as Financially secure as you think you are, Part III

From Professor Warren:

Many in the middle class are the future poor. Careful analysis of the PSID by Professors Mark Rank and Thomas Hirschl show that, from ages 25 to 75, 51% of all Americans have spent at least a year in poverty. The data from Professor Jacob Hacker on the increase in income volatility and my work on the growing risks facing families suggest that the number plunging into poverty may rise in the future.

2006-03-27T17:55:00.000-08:00

Economic migration and citizenship

Thanks to circumstances beyond my control I am a citizen of two countries. I have two passports and the right to work in 26 countries. My Wife has the right to three passports. My 3month-old Niece has the right to 4 passports and presumably the right to work on three continents.

Citizenship is a meaningless concept in a world where studying abroad is a middle-class rite of passage and foreign vacations a part of the middle-class lifestyle, not just in the U.S., but Europe, Japan, Canada, even Mexico (the girlfriends).

Citizenship should have no bearing on one's right to work. Your employers should not be given a holiday from labor protection laws just because of where you happen to have been born.

Everybody of European descent in the United States- bar none- is the product of economic migration. To deny that right, that necessity, to others is simply contemptuous and loathesome.

2006-03-27T16:51:00.000-08:00

Archetypes of the Rich and Famous

Daniel Gross wrote a fluffy but amusing article at Slate about the different flavors of Rich Folk you might come across.

But you don't have to be a millionaire to be "generally insecure [..] thirsting for privacy and exclusivity, and [...] a lifestyle [which serves as] a constant reminder of status and success.", or to be a "Practical, unassuming type [...] Who hate[s] to spend money unnecessarily, but 'willing to splurge for things that matter to [you]'" or "[someone who] view[s] life in holistic terms[;] willing to splurge to make sure [you] look good, feel healthy, and stay in good shape", or any of the 5 Archetypes.

And you certainly don't have to be a billionaire to have more than one of these archetypes as part of your personality.

2006-03-26T18:36:00.000-08:00

I just did my in-laws income taxes this weekend. My dear but financially illiterate Mother-in-Law was a bit in shock about the money owed and complained about that 'they take out too much'.

Well, thanks to my Father-in-Law's attempt to itemize everything, I have a good picture of their total tax picture. Between sales tax, property tax, state tax, and federal taxes, the total is...under 30% of their income. (Income comfortably above the median, I might add. )

I believe that 30% of income going to taxes is actually on the low side compared to other industrialized countries.

2006-03-26T15:49:00.000-08:00

You are not as financially secure as you think you are, Parts I and II

From Just a Bump in the Beltway, quoting Louise Uchitelle:

JO GOODRUM, a thin, energetic woman older than her audience of aircraft mechanics — old enough, perhaps, to be their mother — got their attention with a single, unexpected sentence, which she inserted early in her presentation. Her husband, she said, had been laid off six times since the late 1980's. And yet here she was, standing before them, in one piece, cheerful, apparently O.K., giving survival instructions to the mechanics, who would be laid off themselves in 10 days.

Melanie adds:

Nearly all of the pernicious myths about the meaning of work are deconstructed in this column. The idea that a job which offers a reasonable amount of dignity at a living wage is somehow a gift that has to be earned by personal virtue is quintessentially American and perverse. It should be seen as a human right.

I think Melanie does not go far enough. The purpose of civilization is to ensure mutual survival by co-operation. If you are denied the ability to work to provide for yourself and your family, then society is corrupt and it has no legitimacy for you. Instead of benefiting from society, you are in competition with it for your survival.

If you want a modern parable, think about the movie Office Space. The company's (upper-class) management is obviously exploiting its workers. Facing lay-off pressure, the cocky (middle-class) programmers finally act on their frustration and try to steal back from the company but are soon guilt-racked and panicky. In the end, the company gets torched by someone the management held in such complete contempt they moved his cubicle to an unlit basement with the mice and cockroaches and then simply stopped paying him.

Don't look now, but our government may finally be pushing our Miltons too far:

(spotted via Steve's News Blog)

2006-03-25T08:34:00.000-08:00

You may already be a millionaire...
Well, not really, but if you have a job paying at least $30,000 a year you essentially have the same income as someone with a million dollars in a bank account earning 3%.

Another way to think of it is: A good job is worth a million dollars as long as it lasts.

But back to the million dollars in a bank paying a safe 3%. A million dollars does not make you rich unless you're willing to eat into your capital (or put it at risk), in which case you may not stay rich for very long.

So which would you rather have: a million dollars in the bank or a good job ?

2006-03-24T11:58:00.000-08:00

Stock Picking strategies

Other than a dozen shares in my employer, I don't own stock outright, so take this with a grain of salt. But If I were to start, the first batch of companies that I would look to invest in are those to whom I regularly fork over money.

Or you could try this strategy that I gleaned from a Peter Lynch book: Markets are the most efficient mechanism for allocating economic resources, but if you want to above-market returns, invest in monopolies.

2006-03-24T11:22:00.000-08:00

Speaking of financial Disaster prevention...

Barry has a couple of cautionary tales.

2006-03-24T09:36:00.000-08:00

The secret for financial success, I'm convinced, is to prepare for financial failure.

Worried about your car breaking down ? Start socking away money for car repairs.
Worried about your Christmas credit card bill ? save for it over the rest of the year.
Worried about losing your Job ? save, save, save until you have a 3-6 month deep rainy-day fund.

If you anticipate the worst that can happen to you financially and prepare for it ahead of time, you'll be better able to cope because of it. Even if you're still building your rainy-day fund, you'll be much better off than if you didn't have one.

And if the worst doesn't come to pass, you'll have the resources at hand to take advantage of financial opportunities when they occur.

2006-03-24T08:34:00.000-08:00

I'm usually the pays-bill-in-full type of deadbeat customer rather than the doesn't-pay deadbeat. But last month, I missed a payment. So my Credit Card company sent me this month's statement with this little love note:

We did not receive your payment by the payment due date. As a result, the promotional rate will no longer be in effect after the closing date show on this statement for Category A.

Category A is for Balance Transfers and Checks. I don't have another credit card to transfer a balance from, and the last time I used one of their checks was a dozen years ago. So I generally don't care what my Category A rate is, but this note was the first I'd heard of a promotional rate.

My Category A rate had been 18.24% (APR) last month, and they hadn't mentioned anything about a promotional rate. This month it's now 0.99%. Next month, it will presumably be back up to usurious levels.

So what exactly was the point here? Where they trying to scare me into making a balance transfer before the rate went back up?