Monday, September 29, 2008

The over-leveraged home owner

FT writes of policymakers and bankers at the World Economic Forum, calling for more scrutiny and greater co-operation between national regulators.

In particular, I note:

Liu Mingkang, chairman of the China Banking Regulatory Commission, lambasted as “ridiculous” the approach of US regulators to permit 100 per cent-plus mortgages, which he identified as a major cause of the crisis.

You heard nothing about this in today's Pelosi/Reid/Frank/Dodd press conference. The Democrats have their fingers deep into Fannie Mae and Freddie Mac, and are doing everything they can to deflect blame onto the Bush adminstration during this newly-tumultuous election cycle.

Sunday, September 28, 2008


This blog will return in 2.5 weeks, following a much-needed European vacation.

China (and India?) absent from debate

Daniel Drezner noticed the same thing I did about the first presidential debate: Lehrer asked no question about China, and the candidates themselves barely mentioned China at all.

The sum total of all mentions of China:

  • Obama mentions China in space, noting America must remain competitive in math and science
  • McCain soundbite: "We owe China $500 billion", in a discussion about spending restraint
  • Obama, later, mentions we are borrowing billions from China.
  • Obama refers to China (and Russia) as required partners in any meaningful sanctions on Iran
  • McCain mentions Nixon's trip to China, and how Kissinger preceded him, while attempting to lecture Obama on the finer points of diplomacy with dictatorships.

That's it, as far as I can tell from the transcript.

India is not mentioned at all.

As this blog often notes, China and India — one third of our entire planet — are growing and industrializing at light speed, which will have a major impact on geopolitics, the environment, and many other aspects of life as we know it.

Tuesday, September 23, 2008

A home: to own, or not to own

Taken from a comment at FP Passport blog.

A key aspect of the ongoing debate about the US economic meltdown is an open question: was it wrong to make home ownership more affordable, by relaxing the standard "20% cash downpayment" rule bankers normally apply? This is really a political question with no easy answers.

If you support increased home ownership, as Dodd and Frank did for decades, you pushed for Fannie and Freddie (and by extension, other banks, because Fan & Fred set the standards) to accept mortgage packages which would finance the downpayment, such as an "80-15-5": 80% first mortgage, 15% second mortgage, 5% cash downpayment. You pushed for Fannie and Freddie to accept borrowers with less than stellar credit.

Proponents would argue that home ownership brings society many benefits, such as stability and investment in the country's future.

But policies that encourage home ownership have flaws that are obvious to us today: Lending standards decline. Increased foreclosures. Owners have far smaller stakes in their property, which means little or no cushion if asset prices decrease. Increased numbers of mortgage-related businesses to sell to, and take advantage of, marginal (read: poor or less-educated) peoples.

Not to mention the obvious environmental cost of increased home ownership, and suburban sprawl.

One of the reasons why the Hong Kong property market is attractive is the traditional "20% cash" downpayment is enforced by banks far more strictly than in the United States. Hong Kong is certainly not immune to asset price bubbles, and property is insanely expensive a la Manhattan, but one can argue that it is a bit more sane in the mortgage loan department than the United States.

Friday, September 19, 2008


Megan McArdle, closing an excellent post on the repeal of Glass-Steagall:

Most importantly, commercial banks are not the main problems. If Glass-Steagall's repeal had meaningfully contributed to this crisis, we should see the failures concentrated among megabanks where speculation put deposits at risk. Instead we see the exact opposite: the failures are among either commercial banks with no significant investment arm (Washington Mutual, Countrywide), or standalone investment banks. It is the diversified financial institutions that are riding to the rescue.

Forbes, and mark-to-market

Steve Forbes' prescription:

Gold standard: Tying a premier world currency to a commodity is too constraining, an inflexible policy. It is a physical asset and much be stored, secured, and is subject to theft. The asset price is potentially vulnerable to market manipulation. It also presumes that science will never produce a method of creating mass quantities of gold, something I would not necessarily bet on. Alchemy is silly; nanotech, on the other hand...

Naked shorting is an awful practice. In this age of computers, we have the technology sufficient to guarantee that shares are truly being borrowed.

Going further, this blog feels that the T+3 settlement practice should be scrapped in favor of instant settlement. Major Wall Street trading platforms already compete for speed on the millisecond time scale, executing thousands (millions?) of trades per second. Why wait for settlement when we have instant execution?.

Mark-to-market is coming under increasing fire, for reasons made obvious by recent events. The value of an illiquid asset is often zero (cannot be determined) or far below "real" value at various points in time. Forcing assets to be booked at current market price can potentially require recording the value at far below "real" value due to the nature of the market rather than the nature of the underlying asset.

On the flip side, failing to mark-to-market implies government and business accountants must agree on a valuation other than the current market price — a slippery slope fraught with moral hazard.

Mark-to-market will continue to be an issue to watch. Yesterday's WSJ article on AIG and government regulation touched on mark-to-market, as did several other commentators.

Update, since it is presently being debated: Banning short selling seems unwise. However, this blog was specifically and only referring to naked shorting, above, not short selling in general.

Thursday, September 18, 2008

Rice on Russia

BBC reports on Secretary Rice's speech regarding Russia.

Kudos to the German Marshall Fund for providing an MP3 version of Dr. Rice's speech. See the bottom of GMF's summary for the podcast link.

Update: Full text of her speech.

A false dichotomy

In a WSJ article about how bad accounting rules helped sink AIG, comes this quote from Zachary Karabell:

The idea that there is this thing called "the free market" that governments tame or muck up with regulation is a fiction. Governments create the legal conditions for markets; markets shape what governments can do or are willing to do. Regulation versus free-market is a false dichotomy. Maybe in some theoretical universe, if we could start with a blank slate and construct society anew, it wouldn't be. But we exist in a web of markets and regulations, and the challenge is to respond to problems in such a way so that we decrease the odds of future crises.

Wednesday, September 17, 2008

Links gives you the hard number overview of today's action. This caught my eye: SEC took additional steps to curb equity short-selling. Bloomberg has details. CEO Patrick Byrne, who has ranted long and loud on this subject in the past, responds to the SEC's press release. Useful analysis, but do read it with a grain of salt.

From McClatchy's China Rises: An analysis of McCain and Obama's positions on China, summarizing an Asia Foundation report.

Marginal Revolution continues to provide useful insight. Robert Reich weighs in as well.

Turn to Warren

In times of financial woe, smart money apparently turns to US Treasuries and... Warren Buffett (5-day chart). Because, as right-leaning American Spectator points out, Warren warned us about derivatives many times in his shareholder letters and forums.

Update: More Warren from SeekingAlpha. A must read.

Update2: Buffett buys a US power company whose shares are down due to liquidity fears.

Setting expectations

Honestly, I think both Republicans and Democrats mislead the population, by overstating the effect any president has on the overall economic cycle.

Policy can certainly have a major effect, but blaming any one president for all economic woes is so simplistic that it is wrong. Likewise, it is misleading to imply that any one president can "fix" the economy.

Lower the corporate tax

Wanna give Wall Street a pep talk? Lower the corporate tax rate to something competitive with other countries. Talk about offshoring jobs; a higher-than-average corporate tax offshores entire companies. We need to win back IPOs from the London exchange.

(Googling around, I found this NYT piece from Gregory Mankiw that was a good starting point)

Elsewhere, Jonathan Koppell proposes government too big to fail insurance, calling it "tricky but doable".

Monday, September 15, 2008

On armageddon

As it relates to the current financial meltdown, and the notion that bankers sold and invested in securities too complex to fully comprehend the risks, here is a quote from famous software engineer Brian Kernighan:

Debugging is twice as hard as writing the code in the first place. Therefore, if you write the code as cleverly as possible, you are, by definition, not smart enough to debug it.

I am also reminded of a story from July that wonders aloud: are bankers hurting most of all? In previous downturns, industrial workers, "Main Street" felt the crunch most of all. Certainly average Americans are under increased pressure, but damage does seem to be centered largely in the financial services sector. Taxpayers foot the bill for Bear Stearns, but is that really having a major impact outside of Wall Street? Americans still have access to food, shelter, health care, and a job to pay for it all. Unemployment, while rising, remains at historic lows. Recession seems likely, but doom! seems unlikely...

Saturday, September 13, 2008

Weekend links

As this blog continues to predict, UAVs on the battlefield enable a wide range of new tactical possibilities. Recently, Woodward has been dropping hints about a new secret weapon in Iraq. Today, The L.A. Times describes higher-tech Predators having a major impact in Iraq.

This is only the beginning. Drones have strategic as well as tactical attributes.

Other links:

Far Eastern Economic Review suggests several ways to collaborate with China, during the next presidency.

And the Washington Post agrees with this blog: A civilian nuclear technology deal between India and the United States is a positive step, even though it makes plain what Iran and North Korea have already demonstrated: the Non-Proliferation Treaty is not worth the paper it is printed upon.

Tuesday, September 9, 2008

Ponce, Puerto Rico

On the lighter side of things: Just returned from vacationing in Ponce, Puerto Rico. I attended a friend's wedding, held at Castillo Serrall├ęs. This picture is taken from the hill on which the castle sits (castle is just to the right of frame), overlooking Ponce:

Hundreds of years ago, this hill was used for monitoring Ponce's Caribbean harbor. Today, the overlook is the site of iconic Catholic imagery:

Like many areas with colonial Spanish influence, the spoken language is Spanish, even though Puerto Rico is a US territory, its currency is US dollars, and there are no customs when flying to/from the United States. That led me to wonder idly, what would be a good set of languages for a "person of the world" to learn these days?

Looking a this chart, I can see that I'm already ahead of the game with English (the international language of business), a smattering of Spanish, and a tiny bit of Mandarin. I also tend to think that your average multi-lingual person can only command a good conversational grasp of five to six languages, and a good written grasp of 3-4 languages.

So, the list I came up with, for myself: English, Spanish, French, Mandarin (and written) Chinese. That covers huge swaths of each continent. I discounted Hindi because English is often known in areas that speak Hindi. I remain unsure whether I should add Arabic to my personal list of languages. Chinese will take a long time to master, and lumping Arabic on top of that is a lofty goal. It seems like learning right-to-left reading would scramble my brain, too...

Tuesday, September 2, 2008

McCain: foreign policy radical

Gideon Rachman, FT's chief foreign affairs correspondent, speculates about McCain's foreign policy. His analysis rings true to me.

Opinion polls consistently show that the American public has more faith in Mr McCain as commander-in-chief. He looks like the safe choice for dangerous times.

But this is wrong. Mr McCain will not run a “safe” foreign policy. He adores rolling the dice. [...]

The Obama camp argue that Mr McCain will simply continue with the policies of President George W. Bush. The comparison is certainly interesting. In some ways, Mr McCain is a more reassuring figure – because he is curious and has thought hard about foreign policy for many years. But in other respects, Mr McCain might make Mr Bush look like a cautious softie. [...]

Mr McCain’s policies on Iran, Russia and China are more hawkish even than those of the Bush administration.

That matches this blog's opinion of McCain. This blog also agrees that Iran and Russia should be confronted, and that Obama's campaign is wrongly painting McCain as similar to Bush. But I must strongly disagree on the issue of China.

In an earlier blog post "Just the Facts", we see how China (and India) are simply going to be impossible to ignore. Engagement (rather than confrontation) with China is critical for the United States, as China industrializes and grows, and experiences growing pains.

The futures of China and the United States are intertwined, and I hope McCain is wise enough to see that. Foreign Affairs' piece echoes this, suggesting a "G-2" partnership of equals with China. The past seven US presidents have followed a policy of engagement with China, and we should continue to do so.