Moneyectomy

Part One: A man’s home used to be his castle; now it’s somebody else’s bond portfolio

I’ve been critical of Fannie Mae (and by extension, Freddie Mac) before. Here’s the quick and dirty version of what they are, as condensed by Bloomberg:

“Fannie Mae and… Freddie Mac were chartered by the government to spur homeownership by purchasing mortgages from banks with the proceeds from bond sales. They own or guarantee almost half the $7.3 trillion mortgage market. Until 2002, the two companies were exempt from filing financial statements with the SEC…. Fannie Mae is the second-largest debtor in the U.S. after the government, with $942 billion as of July 31.”

So, Joe and Jane Average get a house/mortgage combo pack, their mortgage holder sells the mortgage to a quasi-government entity, which gives their mortgage holder money to lend for somebody else’s mortgage, racking up another set of origination fees in the process. There are several potential pitfalls. First, since the original lender doesn’t plan on holding the mortgage, there is the risk that they won’t screen applicants as well as might be desirable. After all, if the homeowner defaults, it’s Fannie Mae’s problem. Second, we are in the beginnings of a rising interest rate environment. This means that mortgage companies get to sell all their below-market-rate junk, which again becomes Fannie Mae’s problem. Finally, if you have any reason to believe there is a real estate bubble, you must believe it will someday be — you guessed it — Fannie Mae’s problem.

Sounds like somebody else’s problem? When one company — worse yet, backed by government money — has their fingers in almost half of all American mortgages, their problems can quickly be an issue for everyone.

So, as if Fannie Mae doesn’t have enough problems, it has an accounting mess, including “clear instances in which management sought to misapply and ignore accounting principles….” Furthermore, they may not be the only folks in the mortgage industry with such problems. The results of an 8 month investigation by a government agency found little things like $200 Million in expenses nobody bothered to mention until months after the fact. The feds are unhappy. Congress wants hearings. Investors are unhappy. People who need mortgages will be unhappy as rates rise to reflect the fact that mortgage holders may actually have to hold the mortgage to maturity.

If you think the Savings and Loan scandal of the 80s was a big deal, better fasten your seat-belt.

Part Two: Oily to bed and oily to rise makes a man smell like $2 per gallon unleaded.

Crude oil hit record intraday prices today, and may well hit $50 a barrel Real Soon Now. As the Taipei Times reports, that’s a rise of 73% over the last year. Less than 24 hours ago, the Administration was still filling the Strategic Oil Reserves (buy high and sell goodness knows where) and saying this stockpile must not be used to manipulate oil prices. Flip-Flop! Today it turns out maybe some of it can be lent out. Oh, and if you are really interested in more than the soundbite, the folks at Reuters have done this nice item on Why Are Oil Prices So High.

Of course, the price of oil effects the price of gasoline, which is already high priced and supply constrained due to hurricanes. Unless you are a self-sufficient hermit — in which case, why are you reading this? — this effects you.

It’s a Small World

Let’s start from a point where we can all agree. We all live on planet Earth. It is the only place where our species lives, the only place we know for absolute certain can support our species, and at this point the only planet we know of with sentient life.

These things being the case, it makes sense to take care of our planet. Unless of course you are planning for Armageddon or some other End Of The World. I think I speak for most people when I say I have no desire for the world to end in my lifetime. People who look forward to the End Of The World scare me.

Far from “putting some endangered rodent ahead of the needs of real people,” responsible environmentalism is about making sure we all have clean and safe food, water, air, and land. Far from taking jobs from people and stifling the economy, environmentally friendly industries have the potential to make a lot of money and help the planet. Think about it this way: if we use alternative energy, somebody has to build and maintain the windmills and solar cells just like we would have to do with a coal power plant. There is no inherent reason that “green” technology cannot provide jobs and make money.

There’s trouble outside. There’s chemicals that can make our food unsafe and food sources that might no longer exist if we don’t do something about it and junk in the air making kids sick and fast melting glaciers that might put your favorite beach-side resort underwater. There’s an unusually large number of hurricanes — yes hurricanes! — hitting one fairly small area in a fairly small period of time, and only time will tell if this is the start of a trend. Debate why it might be happening all you like, they are noticing signs of possible global warming in rural America and even in what used to be Tibet. Don’t forget that even the Pentagon has done some projections of what might happen in the event of global warming, and they are not in the habit of spending lots of time and money on completely unlikely events. No, you won’t find a Pentagon report about what to do if Luxembourg falls to Communist religious fanatics and tries to invade the United States.

Keeping this planet in good repair has got to be cheaper than colonizing a new one. Remember that as we count down to Election Day. In fact, this is a darn good time to remind your elected officials that this is the only planet we’ve got.

Airport Strip Club

Alrighty folks, this is more important than whether or not Dan Rather got sucked in by some forgeries. It effects more American citizens than the fact that 1035 and still counting American soldiers have died in a war based on a faulty premise. In fact it falls somewhere between what will happen when Alan Greenspan announces an interest increase today and the current fear-mongering regarding terrorism and the upcoming elections.

Bruce Schneier has been a busy fellow, having a commentary on the Trusted Traveller system in The Boston Globe and this brilliant piece on the No-Fly List over at Newsday. If you only remember one thing from either of these items, let it be this quote:

Imagine a list of suspected terrorists so dangerous that we can’t ever let them fly, yet so innocent that we can’t arrest them – even under the draconian provisions of the Patriot Act. This is the federal government’s “no-fly” list.

There it is. If they are terrorists, arrest them and charge them with something. If they are not, get them off the list. But don’t pretend this list makes you safer. Not only does it assume that terrorists will fly under their real names, it shifts TSA attention from people acting suspiciously to people who happen to have a particular name. That’s right, it makes you less secure.

The Trusted Traveller system has similar fatal flaws. It assumes that only good guys can get the bit of paper. It forgets how many people live perfectly normal lives before turning to violence.

Of course, the idea that a bit of paper makes you Not-A-Terrorist is under assault from others as well. Take the case of John Gilmore, who not only wants to know why the airline wants to see his identification, he wants to know why he’s not allowed to see the law that allegedly requires him to show it. The Justice Department still wants to keep the whole case secret. But how can ordinary citizens follow secret laws? Indeed, one editorial asks “Are we even to be arrested for violating ‘secret’ laws, which we couldn’t possibly know existed?”

In the meantime, anybody who needs to fly had better have their bits of paper in order and be prepared to remove their shoes and jackets, and be prepared for a pat-down. Strangely, this particular story, which effects millions of air travelers, is being covered primarily by local tv news teams, rather than the big news sources. By way of comparison, CNN’s top news stories as I write include details of a murder trial, a man falling at the Grand Canyon, and Bill Gates getting a raise. With no disrespect to the people involved, odds are very good none of these stories has any impact on you whatsoever.

Even more bothersome to me is the public reaction to this treatment: “It’s alright, as long as it makes us all safer.” I fail to see any way that removing jackets makes anyone safer. As for pat-downs, I would be very interested in seeing the guidelines deciding who must be physically searched in this manner. I would also be curious to see how the rules are applied, as there is plenty of room for abuse of this opportunity to feel up random strangers.

Finally, do you remember when a series of bad storms or other disasters would have been considered a Sign From God? This guy does.

But Doesn’t the Free Market Do Everything Better?

We are told again and again that the free market does an inherently better job than the government on just about anything that the private sector can legitimately do. This being the case, I am puzzled by charter schools. No, not by the conflicting research on whether public schools do a better job than charter schools (commentaries that disagree here, here, a particularly obnoxious one here, and the best one here, showing that charter schools might be 2-4% better, and commentaries that agree or at least find the data comparable here and here).

No, what has me puzzled is the fact that charter schools seem to be more costly to run than expected. Whether we are talking about $15 Million dollar grants in Minnesota or fundraisers to build facilities in Chicago, more than one person thinks it is time to have a critical look at what charter schools cost. Maybe this kind of questioning is why Edison Schools became a privately held company. Yeah, they’ve got problems.

These foibles are nothing compared to the collapse of a 60 campus charter school system in California. This system closed suddenly in the late summer, leaving parents to scramble finding new schools for children, leaving teachers to scramble for new jobs, leaving student records and other valuable assets to rot in abandoned facilities. Granted, there appears to have been some “misunderstanding” of the law — and I have no patience for businessmen who do not know the laws that pertain to their businesses — but this situation is absurd. This system received about $5000 per student, some systems receive as much as $9000 per student. Nevertheless we are still talking about charter schools going bankrupt, having massive fundraisers, and pulling down multi-million dollar government grants. Is too much money being put in corporate pockets instead of educating students?

That’s a whole lot more than the average per pupil spending of about $7500, let alone what the Cato Institute thinks* private schools cost on average.

Charter schools cost more money, and do not appear to do a statistically significantly better job than public schools. Let’s stop wasting taxpayers’ and parents’ money.

* I have discussed this more in-depth elsewhere. To be brief, the Cato Instutute includes schools that provide partially subsidized education, non-accredited schools, and schools with very low enrollment. This drives average cost down.

“Economic Agenda”

Today, I saw for the first time a Bush campaign ad titled “Economic Agenda.” It is viewable on their website, if you have not already seen it. The substance of the ad was broken into convenient, numbered bullet points. If I may, I would like to address the specific issues listed. I promise to do this with a minimum of snark, in an attempt to raise the overall level of political discourse.

1. Lifelong Learning. That sounds great. Really. I am one of those people who would really love to follow the old maxim of “Learn something new every day.” Unfortunately, people who are paid to pay attention to such stuff say there’s no program to go with these words. In fact, a search for “Bush lifelong learning” reveals mostly comments from First Lady and former Librarian Laura Bush. What does lifelong learning mean, anyway? Does it mean continually training for the jobs of the future, whatever they may be? Until we have some idea what we are talking about, there is very little to say.

2. Invest in Education. Another “how can you disagree” sort of statement. Everyone except the most diehard Libertarians agrees that it is important to have adequate investment in education if we are to have workers who can do what needs to be done in the coming decades. And the President actually has something he can brag about in the realm of education, “No Child Left Behind.” Unfortunately, that’s one of those things that sounds better than it has worked out. Now, it has reached the point where high performing schools are finding themselves “Failing” under the federal standard of “better,” and are facing sanctions. It sure feels like the ultimate goal is to make schools ineligible for federal funds. I’ve spoken on education before.

3. New Skills for Better Jobs. That ties in nicely with the “lifelong learning” thing, doesn’t it? Unfortunately, training for a job does not guarantee that you will get a job doing what you have trained to do. What job training does, however, is get people temporarily out of the labor pool, and benefit publicly traded schools such as Corinthian Colleges, ITT, and DeVry. Remember, the official Department of Labor standard for being Unemployed is very, very narrow. I am not saying that there is no point in training for a new job, just that job training programs will not fix the fact that not enough jobs are being created. I have spoken on this far too many times to list them all.

4. Fairer and Simpler Tax Code. Actions speak louder than words. And so far the Bush Administration has said that complicated taxes are just fine (thank you, The Daily Mis-lead). Oh yeah, and he made sure that big SUVs are tax deductible for businesses. That brings us very nicely to his next bullet point….

5. Reduce Foreign Energy Dependance. Drilling holes in the Arctic isn’t going to fix the fact that we use too much oil, and burn too much coal. And frankly, the current administration has not done a whole lot to change that for the better. Clean air rules that were meant to phase out older, more polluting plants have been relaxed. Car milage standards have not been raised to levels that would reduce our need for foreign oil. There’s talk about alternative energy, but what about action? And the time for action is now, since at least one major oil company has announced that they just don’t have as much oil in the ground as they thought they did.

6. Fairer Trade. Another one of those phrases you would have to be some kind of nut-job to disagree with. Even John Kerry thinks fair trade is a good idea. President Bush clearly means “free and fair,” which might be different. Unfortunately, the price of the dollar is being used as a weapon in this quest for free, fair trade. And this has not had a positive effect on the American economy. It will be interesting to see what the two candidates have to say in their debates, and more interesting to see what the assorted columnists and other experts have to say about it.

7. Job Incentives. Um, the economy has lost a net 915,000 jobs during the Bush Administration. If there’s a brilliant idea, in the works, we could sure stand to hear it, maybe even do it. Better yet, let’s do it two years ago, since the administration has missed it’s own job creation targets for the last two years.

8. Comp/Flex Time. It is a bad idea. I have said this until I am blue in the face. It means your boss gets to work you as hard as he wants, pay you nothing extra, and promise to give you some time off someday, at his whim.

9. Strengthen Social Security. It seems like I just talked about this last week.

10. Legal Reform. President Bush talks about ending frivolous lawsuits. But what he means is capping damages. Damage caps would tell big businesses exactly how much money it will cost to break the law, harm people, and pollute the environment we all live in. If you think Big Chemical Co doesn’t dump dangerous carcinogens in your backyard because they are such good people, go ahead and lobby for damage caps. If you suspect that they follow the law because it’s cheaper than lawsuits, then caps are a bad idea. Of particular note, Vice-President Cheney’s former company, Halliburton, stands to gain quite a bit should damage caps be enacted.

11. Tax Relief. Again, that tired bit of political framing. Tax “relief” implies that taxes are onerous, that President Bush wants to rescue you from the IRS. He’s had 3 years to work on this. Are you better off? Have you benefitted from the rise in Estate Tax exemption from half a million dollars to a million and a half? Maybe you have benefitted from some of the other tax breaks? Don’t bet on it.

In closing, I love this chart of commonly used words at the two conventions. It sure looks like the Republicans think John Kerry is more important than Health Care.

Cantor Fitzgerald, the Movie

It sounds like a moderately compelling political thriller: the Government agency that was supposed to figure out what happened to your dead colleagues dropped the ball. Nobody will give you a straight answer about why. So you take matters into your own hands: you research; you examine documents; you figure it out and decide to make things right.

But this isn’t a movie. It’s the real life story of Wall Street firm Cantor Fitzgerald, a company that lost 658 of its 1050 employees in the World Trade Center. Delving into the murky depths of Al Qaida’s financial affairs — where the 9-11 Commission feared to tread — they have filed suit against a variety of Al Qaida financiers. The most notable of these is the nation of Saudi Arabia.

Cantor Fitzgerald is just big enough, just influential enough, and has just enough accountants in house to actually follow the money trail and make this stick. They are also big enough and have enough lawyers to push things to a higher court should the Department of Justice once again claim that the Alien Tort Claims Act is a relic and have the case thrown out.

This company knows how important it is to follow the money, a lesson that a young Senator named John Kerrry learned while investigating and closing down a corrupt bank and, incidentally, uncovering useful information on a wide range of drug dealers, terrorists, and other criminals. As Cantor Fitzgerald’s case unfolds in the courtroom, expect impeccable detective work and stunning revelations. This could tell us more about how and why September 11 happened than is currently known. It could also have disastrous consequences for the United States’ diplomatic ties with Saudi Arabia.

Speaking of raw figures and money, if you haven’t seen this list of Bush Administration accomplishments, it’s worth a read.

Everything You Need To Know About Social Security “Reform”

The parade of Republicans has begun on CNBC, and one of the bells they were ringing was “Social Security Reform” dogma. Before things get too deep in New York City, there are important things you need to know.

Social Security is not now, nor has it ever been, a savings plan. Remind yourself of this anytime anybody starts talking about the “return” on your payroll taxes. There is no return, because the dollars you pay in today go directly to your grandparents, who in turn paid years ago to support their elders. Yes, there is currently a surplus, but that will vanish in a few years (the exact number of years depends on which analyst is speaking and the nature of his/her agenda).

Social Security has worked for this long because more people are working than are retired, but that is changing. Before, say, 1964 this was always true. There were always more able-bodied working people than retired people. The baby boom and subsequent advances in contraception changed this. Now experts say there will come a time when Social Security taxes collected from Generation X and younger will simply not cover Social Security payments to the Baby Boomers and The Greatest Generation.

When somebody like Alan Greenspan talks about Social Security Reform he means raising the retirement age, raising the Social Security tax paid by younger workers, and/or lowering benefits to be paid to retirees. Greenspan has been singing this tune on and off for over 20 years now, and many people either agree with him, or think he’s painting the picture as too rosy.

When today’s Conservatives talk about Social Security Reform they are talking about something completely different. They are talking about allowing Personal Retirement Accounts which would allow workers to “control” and “own” their retirement funds. The idea is that workers would be able to take some of the money that would have gone into the Social Security Trust Fund, put it into a special brokerage account, and invest in stocks and bonds.

When Conservatives say “own” and “control” they mean “pay for” and “be responsible for.” Of course “owning” and “paying for” have always gone together, but it is important to remember this point. Simply put, this system will mean that any returns you generate on your PRA will be yours and yours alone, a sort of “eat what you kill” system.

There are at least two problems with this approach.

Most people are really lousy at investing. That’s one of the reasons Social Security was put together the way it was in the first place. People didn’t have much in the way of savings, let alone investments, and what investments there were blew up in the Great Depression. As for the modern day, look real closely at your IRA and 401k statements and be honest with yourself. If you are like the overwhelming majority of Americans, you haven’t done as well as you would like. Even if you invested in nice, well managed mutual funds. Even if you took the Motley Fool’s long term advice of using index funds. Frankly, I can’t understand how anybody can look at a 5 year chart of the S&P 500 or the NASDAQ and really think investing in stocks is going to save Social Security.

If the problem is that there will not be enough money for retirees, taking in less money does not solve the problem. There is no way around this. If people are investing their money instead of sending it to the Social Security Trust Fund, there will be no money whatsoever for existing retirees. You can’t have it both ways. That is why we are hearing very few specifics about this program. If we were to hear the specifics, everyone would recognize that things do not add up at all.

Leave 12.9 Million Children Behind

Poverty isn’t new. But it is new for 1.3 million Americans — including 800,000 children — that entered the ranks of the poor in 2003. Here’s coverage from The Associated Press, CNN, and Reuters. Oh, and here’s the Official Census Bureau Highlights, and the Census Bureau Press Release.

The short version: there are 35.9 million poor people in the United States, 12.9 million of them children; that works out to 12.5% of the general population and 17.6% of children; it is the third annual increase in a row and the highest level since 1998; even more people — 45 million, or 15.6% — had no health insurance. Although this data is usually not released until September, it has been put out a little earlier. Some people already see this as part of a political agenda to bury the data, as the last week of August is typically a slow news, Wall-Street-on-vacation, Congress out of session sort of time.

I realize some of you are saying “Tell me something I don’t know,” and others are saying “So what? There’s been poverty as long as there’s been civilization.” This is more serious than you might think. And not merely because it is evidence that “Compassionate Conservative” measures are not working. Believe it or not, this is a public health issue.

When more than one out of every 8 Americans does not have health insurance — and by extension does not have adequate access to timely medical care — that is a public health issue. Particularly if you throw communicable diseases into the mix. Or maybe the possibility of a flu pandemic, three of which have occurred in the last century.

For a variety of reasons, poor people and people without health insurance have a tendency to use Hospital Emergency Departments. This is particularly true when there are not public health clinics — and such clinics have long been squeezed between a rising population that needs them and shrinking funds with which to provide treatment. The result is that Emergency Departments are under great pressure, causing some to close, which in turn creates pressure on other hospitals (Here’s the No Registration Required version).

The answer to “What does this have to do with me?” is provided by a county official: “Whether you have insurance or not, if there’s not a bed for you, you’re not going to get in.” If the ER is clogged with people for whatever reason, if the hospital is full of people whose upper respiratory infection turned into pneumonia, your medical emergency is going to have to wait. And if those people can’t pay, you will eventually pay in the form of higher taxes, higher insurance premiums, or fewer hospitals.

Give it a few weeks

I have done everything I could. I wrote my Congressional Representatives.* I wrote essays. I posted to online forums. I told anybody who would listen to me. It is now officially too late to prevent new overtime rules from going into effect.

There is a lot of disagreement over the number of people who would gain or lose overtime eligibility. The Labor Department and the Bush Administration both insist that more people would gain than lose, and that as pure bonus there would be fewer lawsuits. Pretty much everybody else says the opposite. Some states already have laws which supersede the Department of Labor guidelines.

Most regular readers know my opinion: that such rules will mean fewer people get overtime because the administration is unashamedly pro-business (there is no reason to suppose this proposal is a departure); that under these rules there is disincentive to create new jobs because it is cheaper to work existing employees harder than to hire more people; and that most people are not in a financial position to protest beyond a letter to Congress or a passive-aggressive “sick day”.

One thing is for sure. In a few weeks everyone will get paychecks reflecting implementation of the new rules. Look at your pay-stubs carefully before voting on November 2, 2004. Better yet, send away for your absentee ballot today. Not only will your vote have a paper trail, but you won’t have to worry about getting out of the office early enough to make it to your polling place.

One reply:

Thank you for contacting me regarding the Bush Administration’s overtime proposal. I am pleased to inform you that on Tuesday, May 4, the Senate approved an amendment by Senator Harkin that would block the Department of Labor from implementing any rule that would disqualify workers from overtime pay who are currently eligible under current law. At the same time, the amendment allows the implementation of new rules that would increase the number of low-wage workers who would be eligible for overtime pay.

Another reply:

I am strongly opposed to the Department of Labor’s roposed rule changes. These rules will drastically reduce the number of workers who are eligible for overtime and compensatory time. I am outraged that the Administration is willing to cut overtime pay for nearly 8 million Americans, many of whom depend on it to make ends meet. This includes nurses, emergency medical technicians, police officers, firefighters, secretaries, sales representatives, surveyors, journalists, paralegals, retail managers, dental hygienists, and many others. I am leading the fight in the Senate against these mean-spirited changes.

The Case of Action Jackson and the Framed Scientist

In a story already making international headlines, United States District Court Judge Thomas Penfield Jackson has held five reporters in contempt of court for refusing to reveal sources in the news coverage of now-cleared scientist Wen Ho Lee. Here’s the Associated Press version, here’s Reuters. If that’s not enough, here’s Washington Post, L. A. Times, The International Herald Times as adapted from the New York Times, and Reporters Without Borders. Nor is this the first time this month that a judge has ordered reporters to cough up the names of sources. This is a bigger story than the fact that, as I write, Google has begun trading, and is around $100 per share.

Does the judge’s name sound familiar to you? You probably remember him as the Judge in the Microsoft Trial, where his Findings of Fact included the “Fact” that Microsoft is a monopoly, and web clients are not operating systems. Alright, the guy is already controversial.

Pro: these reporters did — we must assume inadvertently — contribute to a media storm of inaccurate, libelous information being disseminated against one scientist. Wen Ho Lee is going to have to explain himself on every job interview he gets for the rest of his life. He spent time in a jail cell in solitary confinement despite the fact that he had been convicted of nothing. He did plead guilty to one count of “improper handling” of data. His case was so egregious that he got an apology from the President of the United States. You cannot blame Mr. Lee for being unhappy. Frankly, these reporters should be unhappy they were told lies and manipulated into regurgitating them.

Con: these reporters gave their solemn word that sources would be confidential. If they go back on that, they can kiss credibility and future confidential sources goodbye. This is true both personally and for reporters in general. That means fewer whistle-blowers will come forward in general, which in turn will make it harder to get information out of any company or government entity beyond the prepared press statements. This is bad for democracy, and bad for free markets.

Make your own opinion.