Monthly Archives: November 2008

Social Security Privatization, All The Risks, None Of The Benefits 2

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I just realized that the current financial bailout by our government is tantamount to a forced privatization of Social Security with all the costs going to the Social Security beneficiaries but none of the benefits.

The Social Security Trust Fund is running a current account surplus.  The surplus is being “invested” in special government bonds at low interest rates. The government is taking the proceeds from these bonds and spending them however it wishes.  Some of that spending is on the bailout of our financial institutions.  In the latest bailout plan, the government is taking huge ownership stakes in these institutions by taking warrants for stock options in return for the money given to these institutions.

Chances are very good that after the recovery these warrants will be worth considerably more than what the government has paid for them.  I don’t see any plan to give some of these profits to the Social Security Trust Fund that helped finance the bailout.  After this is all over, the government will still consider that the Social Security Trust Fund will not have enough money in the future to pay all benefits so they will either raise FISA taxes, or cut benefits, or both.

Why not give the Social Security Trust fund some of the proceeds from the investments they helped to finance?  After all, if it was a good idea for Social Security to invest in equities when they were priced very high, it is a much better idea to invest in them when they are priced low.

Admittedly, the Treasury is taking on some risk that supposedly the Social Security Turst Fund is not taking on, so a fair split of profits will require some thought.  This requirement of some thought should not be an excuse to deny Social Security any take in this transaction.

A Conversation with George Soros

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The above video is a recording of George Soros’s recent appearance at MIT. It lasts a little over 80 minutes. You will be well paid for your investment in time if you watch the video.

The discussion revolves around his recent book, The New Paradigm for Financial Markets: The Credit Crash of 2008 and What It Means. The previous link takes you to my all too brief comments about the very valuable experience I had reading the book. Hearing him discuss the ideas and take and answer questions was a tremendous added value to having read the book.

I have referred to the book in several posts on this blog, Why Oil Companies Don’t Drill and Predictably Irrational: The Hidden Forces That Shape Our Decisions.

I was also pleased to hear an audience suggestion of an idea that I had proposed in a previous post, Greenberg et. al. Solution to Real Estate Bubble. It was even more pleasing to hear George Soros say that it was a good idea.

How I wish I could have been present at the meetings Soros had with the MIT economics department following this appearance.  The mathematics for modeling his ideas are all available at MIT, at least in the electrical engineering department, and I am pretty sure in the economics department too. Soros commented that one of the reasons for his great success as an investor is that he corrects his mistakes.  In electrical engineering control theory this is called applying negative feedback.  The cause of bubbles and collapses (oscillations) is what happens when you apply positive feedback according to this control theory. It will be no easy feat, but I have been saying for quite a while that accounting for these feedback mechanisms in economic models is one of the solutions to the failings of the current models.  The interviewer in the video gave some hints during the discussion that MIT has been working on this idea.

The research in behavioral economics at MIT and elsewhere described in the Predictably Irrational: The Hidden Forces That Shape Our Decisions book I mentioned above is also part of improving the economic models.

Boston Dynamics Big Dog – Robotics

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If you ever wondered where some of your tax money is going, take a look at the above video.

Lest you think the above is a criticism, I am actually saying that this kind of investment in research is one of the things that keeps this country in the forefront of technology. If you think that private industry does it all, then you are not understanding how university research is funded. Well, that is how it was funded until recent administrations.

“Obama’s Challenge” A Must Read Book

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You must read the book Obama’s Challenge: America’s Economic Crisis and the Power of a Transformative Presidency by Robert Kuttner.  This book and author were the subjects of the interview mentioned in my previous post, Obama’s Challenge: A Transformative Opportunity.

Since Lyndon Johnson’s administration got mired in the war in Viet Nam in the late 1960s, a fog has descended over politics in the United States. In this fog we have forgotten what a positive force government can be. Not since Robert Kennedy quoted George Bernard Shaw, “You see things as they are and ask, ‘Why?’ I dream things as they never were and ask, ‘Why not?'” have I been lifted from this fog the way this book lifts me. This book reminds me why I want to be a Progressive Democrat.

This book starts off by putting into words all the reasons why I have been an Obama supporter from nearly the beginning of his presidential candidacy. It explains what qualities I saw in Obama that made me think he could be the transformative president of the book’s title. There was no other candidate who came any where near having these qualities to the degree that Obama did.

The book goes on to explain why even the Clinton administration did a disservice to the ideals of progressive politics. If I were tempted to think that Clinton’s tenure might have represented the best that could be, this book lifts my sights higher. Kuttner further explains how Obama’s differences from Clinton could lead to a much better outcome.

Kuttner devotes a large portion of the book to describing a set of steps that Obama should take to lift the country out of  the predicament in which it finds itself.

Read the interview of Doris Kearns Goodwin by Robert Kuttner that furthered the inspiration to write this book.

A search of this blog will show you a number of posts that refer to the ideas in the book.

See also my review of The Audacity of Hope: Thoughts on Reclaiming the American Dream by Barack Obama

How The US Auto Companies Got Into This Mess 2

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The following story is my own conjecture based on observations made during the time this all was happening. Call this part of Greenbergonomics.

I believe that the big three auto companies agreed to the retirement benefits that the UAW wanted because times were good. There was really no economic excuse that seemed plausible enough to deny these benefits in order to head off a prolonged strike.

Any fiscally responsible Chief Financial Officer would look at this future retirement obligation and manage it by building up the proper funding for it. A CFO knows that there will be economic slowdowns in the future, so cash needs to be set aside and invested so that the company won’t have to use current earnings to pay then current retiree benefits.

Well there was one problem that crept up with this scenario at the advent of unregulated Reagonomics. (Maybe it even started with Carteronomics or Nixinomics.)  If there was a lot of money set aside to fund future retirement obligations, a corporate raider could make a hostile takeover of the company and use the retirement money that had been set aside to instead pay off the debt the raider incurred to take over the company.

There were enough examples of these hostile takeovers that no sane CEO would dare to fully fund the company’s future retirement obligations. All they could manage was to fund the obligation to the government mandated minimum that no raider would be able to use to fund a takeover.

Given this unregulated, free market environment, you end up with a company that must continually grow in order to fund its growing current retirement obligations on a pay-as-you-go basis. (Sort of like what people think Social Security is now. Bush has even tried a hostile takeover of Social Security because it has not yet fallen to the pay-as-you-go basis.)

When competition starts to eat into your market share, perhaps the only strategy that you can think of is to move upscale to large, gas guzzling SUVs. These vehicles are very profitable on a per unit basis if you can sell enough of them. For many years this strategy worked.

If Detroit had based its fleet on small, fuel efficient cars, it could not have made enough money to pay for its growing current retirement obligations. It would have had to sell many more units of these than it had to sell of trucks and SUVs. The foreign competition did not have the magnitude of future retirement obligations and did not live under the hostile takeover threat.

If the government had changed the rules on funding retirement obligations, Detroit would not have found itself in this situation. Maybe they would not have fought more stringent fuel efficiency requirements if they could have thought of a business model where they didn’t have to grow or die. As we can see downsizing only leads to the inability to pay for current and future retirement benefits. Downsizing a Detroit auto company does not help to weather an economic storm anymore.

With a slight change in rules, we could have avoided the energy crisis, international terrorism, the war in Iraq, and this economic mess. It’s amazing what a little foresight could have accomplished.

Senator Shelby Opposes GM Bailout on Principle

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The principle being, “I’ve got mine. You can go pound sand.”

Read the real reason in the article Sen. Shelby: How Sweet Is the Auto Business in Alabama? Not Very

In case you have missed the news, Senator Shelby is one of the most vocal opponents of a federal bailout of the big three American auto companies.

Maybe the other principle is that the (federal) government should not bail out the American auto companies, let Alabama bail out only foreign auto companies.

This must be how the Republican’s put country first.  Maybe this is the second round of the Civil war where the South fights the industrial North again. We forgot to ask, which country are they putting first.

Maybe this just proves the point about Obama’s call to sit down and talk to your adversaries without preconditions.  If you know where your adversary is coming from, maybe you can work out a mutually agreeable solution.  If the Southern congress people felt that the bailout had been going too lopsidedly to northern industrial and financial concerns, it would have been nice if we had had an atmosphere in Washington where they could have just come out and honestly said what their concerns were.  Then all the congress people might have been able to get together to work out a deal that saved the entire country.

We could then leave behind the phony idea that government should not interfere with business and pick winners and losers.  The article shows how much Alabama has been doing just that while they protest other people doing that. Maybe Shelby is just using his seat in the Senate to try to kill the competition to the winner that he has chosen.

How I wish Charlie Rose had been armed with all this iinformation when he did the piece about the auto bailout.

Japan economists call for ‘Obama bonds’

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One way to lessen the impact of borrowing from foreign countries is to foster a weak dollar.  In essence we borrow today with a strong dollar and pay back in the future with a weak dollar.

The first queston that comes to mind is why any sane foreign country would put up with a plan like this?

The answer appears in the above named article in the Asia Times.

Ok, the butler did it.

Faced with the unprecedented growth of the US budget deficit and the prospect of an increasingly weaker dollar compared with the yen reducing the value of Treasury debt held by Japan, economists in Tokyo are calling for the administration of president-elect Barack Obama to issue US Treasuries denominated in yen and other currencies. The issuance of foreign currency-denominated US Treasures would reduce the perceived risk of holding the debt.