Monthly Archives: April 2010

Wall Street Is A Casino

Posted on April 29, 2010 | Leave a comment

Two articles came out in the past week comparing Wall Street to a casino, pointing out that much of the activities of the big investment banks – like the synthetic CDO at the heart of the Goldman fraud case – provide no real value to society and are simply ways to bet on the direction of an event. In this case, the event was housing prices, but the articles ask how that bet is really any different than betting on the outcome of a baseball game or a roulette wheel.

What is particularly interesting is the source of these articles. One was an op-ed in the hyper-conservative Wall Street Journal, co-written by Niall Ferguson, a Harvard professor who is generally quite conservative, and Ted Forstmann, an equally conservative private equity financier. The other article was written by Andrew Ross Sorkin in his NY Times Dealbook. The Times is, of course, quite liberal, but Sorkin makes his living (quite lucrative, according to reports) by having great sources on Wall Street, and generally speaking you don’t keep those sources by insulting them in print.

For conservatives to publish against their leanings, and for ambitious journalists to publish against their career prospects, is a pretty big deal. They must have felt very strongly about the casino aspect of Wall Street to write those articles.

Just in! Here is Eliot Spitzer’s take on Wall Street as casino. You may discount him due to his hooker addiction, but he hits the nail on the head (so to speak) here.

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The Role of the Supreme Court

Posted on April 28, 2010 | Leave a comment

Following up on last week’s post regarding the new opening on the Supreme Court, Dahlia Lithwick at Slate wrote a piece more up to her normal standards, discussing how a court that “shows restraint” essentially just perpetuates the political power dynamic currently in force, enabling tyranny of the majority, which is exactly what the founding fathers wanted the judicial branch to be a bulwark against.

Lithwick’s article draws heavily on this awesome NY Times op-ed by Geoffrey Stone, a law professor at University of Chicago. His money quote is here:

Although the framers thought democracy to be the best system of government, they recognized that it was imperfect. One flaw that troubled them was the risk that prejudice or intolerance on the part of the majority might threaten the liberties of a minority. As James Madison observed, in a democratic society “the real power lies in the majority of the community, and the invasion of private rights is chiefly to be apprehended … from acts in which the government is the mere instrument of the major number of the constituents.” It was therefore essential, Madison concluded, for judges, whose life tenure insulates them from the demands of the majority, to serve as the guardians of our liberties and as “an impenetrable bulwark” against every encroachment upon our most cherished freedoms.

Lithwick also refers to this Huffington Post piece discussing how the Democrats have greatly improved their messaging on this matter, linking economic populism with the role of the Court, as in this quote by Vermont senator and Judiciary Committee chairman Pat Leahy:

“Congress has passed laws to protect Americans in these areas, but in many cases, the Supreme Court has ignored the intent of Congress in passing these measures, oftentimes turning these laws on their heads, and making them protections for big business rather than for ordinary citizens.”

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Posted in Philosophy, Politics, Trends, Uncategorized

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Economists: Incredibly Stupid for Smart People

Posted on April 27, 2010 | 1 comment

The New Yorker recently (I am perpetually 4-6 weeks behind in my New Yorker, so I consider the March 1 issue to be recent) profiled Paul Krugman, the Nobel Prize winning economist and NY Times columnist. A section of this article made me realize that economists, despite being generally very smart and well-educated, are just incredibly stupid. And I say this as someone who was an econ major in college and very seriously considered going on for a Ph.D.

Krugman was exploring why there were geographic specialties in business: carpets produced in Georgia, cars in Detroit, technology in Silicon Valley, etc. This was an outgrowth of his work on international trade, for which he won the Nobel. He saw that once a company started in a place, an entire ecosystem built up in that place. Trained workers, relevant support businesses (eg. lawyers), and transportation infrastructure – all this tended to create an economy of scale which drew similar businesses to the area.

To this you undoubtedly say, as I did, “duh.” That theory just describes common sense. Which Krugman admits: he explained this idea to a non-economist friend “who replied in some dismay, ‘Isn’t that pretty obvious?’ And of course it is.” But Krugman was the first to mathematically model this common sense phenomenon. Before that, “because it had not been well modeled, the idea had been disregarded by economists.”

So just to be clear: even if a phenomenon is so obvious that my 16-year old nephew could figure it out, mainstream economists, all with Ph.D.s from Ivy League schools, choose to ignore it because a model for it doesn’t exist. No wonder the country just went through a financial crisis. We all knew there was a housing bubble. It was obvious to me and everyone I talked to that Starbucks baristas and migrant farm workers and cocktail waitresses can’t afford $750,000 homes. But the economists at Treasury and the Fed who were supposed to be watching this? Their models didn’t incorporate these sorts of housing hijinks, and so they ignored the gathering storm.

Economists: smart enough to understand Bayesian math, but too stupid to realize that meth heads can’t afford houses.

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Taxes and Small Business

Posted on April 23, 2010 | 1 comment

With tax day taking place last week, I’ve been thinking about the impact of taxes on the economy, and in particular about the conservative talking point that lowering taxes on small businesses will unleash growth and create jobs.

This is related to, but different than, another classic conservative point: that lower income tax rates will create more tax revenue. Regular readers know well my disdain for this theory (the Laffer Curve), which has never been supported by any research. Read my posts here and here to see more of my laughing at Laffer.

In the case of small business taxes, I decided to build a little model and see what impact reduced taxes would have. You can see the results below:

Reduced taxes on small business

In this case, we have the same small business generating $1,000,000 in annual revenues and $250,000 in annual pre-tax income. Right now, at a 40% tax rate, this business delivers $150,000 to its owner. If taxes were cut in half, to 20%, the business owner would make $200,000 instead. Now, our business owner might be forward thinking, looking to invest in his business, and use the extra $50k to hire a new worker. But more likely, he is going to use that extra $50k to put an addition on his house, or buy a new car, or pay his kid’s college tuition. In short, tons of small business owners are not going to use their tax break to hire people and expand, but rather to buy stuff.

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Supreme Court Nominee is Political, not Legal

Posted on April 22, 2010 | Leave a comment

Dahlia Lithwick has an article in Slate lamenting that the icons of liberal constitutional law are not even in the running to replace Justice Stevens, and are invariably depicted as radicals, while the equivalent judges on the right are likely to be nominated as soon as there is another Republican president.

Lithwick seems to think that this disparity is somehow part of the legal community, but in fact it has nothing to do with lawyers or the law. This disparity exists because Republicans are simply better at playing the game than Democrats are. Republicans are cohesive, all staying on message and using the same talking points, while Democrats tend to be all over the map. In addition, Republicans are far more savage, willing use words like “radical” or “threatening” to describe candidates (mild-mannered law professors, for the most part) whereas Democrats are more likely to use words like “gosh, I’m just not sure I agree with that man.”

Lithwick asks “Why should conservative law students be moved and inspired by their legal rock stars while liberals are sent the message that theirs are outrageous?” as if law schools can somehow fix this problem. I hate to criticize Lithwick, since normally her writing is so good that I practically have a crush on her, but in this case she is missing the point. Law schools can’t solve this problem; voters can.

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Goldman Fraud and John Paulson

Posted on April 21, 2010 | Leave a comment

Finally, more than a year after the financial crisis began, the first legal action took place with the SEC charging Goldman with fraud. I don’t have much to say about the actual fraud charge, except that in prior cases like this, the first charge is rarely the last. Once discovery begins and subpoenas start being issued, all the dirty documents and emails start to come out, and the dominoes begin to fall.

I do want to talk about John Paulson’s role in this affair. Paulson was not charged with fraud, and rightly not: he didn’t misrepresent anything. From a legal standpoint, Paulson didn’t do anything wrong. But what he did – paying Goldman to create a security purely so he could bet against it – just feels wrong. As Daniel Gross of Slate put it, this is like paying a construction company to build a shoddy high-rise so that you can buy insurance that pays off if the high-rise collapses, which you know it will, because you built it out of crappy materials. I was discussing this with my friend Bark for Daddy yesterday, and I fully admit that I can’t logically make a case for why Paulson was wrong. But there is just something unseemly about it.

Although not only do Paulson’s actions feel wrong, but if you take a step back and look at the big picture, a case can be made that they really were wrong. Paulson, as much as anyone on earth, knew that we were in a housing bubble; that’s why he was betting so hard against mortgage securities. So when he paid Goldman to create a $1 billion security made up of mortgages, he was adding to the bubble, and he knew it. He knew investors were going to lose an additional $1 billion, just so he could make more money.

And make money he did: Paulson took home $3.7 billion in pay in 2007. And speaking of feeling wrong, the fact that hedge fund managers – individuals – are regularly making $1 billion per year is also unseemly. Yes, they are doing so by producing big returns for their investors, and working within the system, but then maybe something is wrong with the system. Scoring $1 billion paydays by simply trading stocks, compared to entrepreneurs who get rich by building companies, again, just feels wrong.

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LSD and Human Frailty

Posted on April 19, 2010 | 2 comments

I went to a book reading the other night by Don Lattin, author of The Harvard Psychedelic Club, a new bestseller about the period in the early 1960’s when Timothy Leary and Richard Alpert, professors at Harvard, were conducting free-wheeling experiments using LSD and other psychedelic drugs. It sounds like a great book, and well worth reading.

The book discusses the broad theme of how psychedelic use ushered in the 60’s as we know them, but I want to focus on two of the personality issues that Lattin brought up last night. It turns out that one of the Harvard undergrads who tried to get involved in the experiments was Andrew Weil, who would later become Dr. Andrew Weil, bearded king of holistic medicine. Weil was rebuffed, since Leary and Alpert had promised not to use undergrads in their experiments. He did not take this rebuffery well, and used his position as a reporter for the Harvard Crimson to dig up dirt on Leary and Alpert, lying, cheating and betraying his best friend in the process. So to clarify: Dr. Andrew Weil, who has made millions on “balanced living,” got his start by sliming other people.

After being fired from Harvard, thanks to Weil’s sneaky maneuvers, Richard Alpert traveled to India, found a guru, and came back to the US as Baba Ram Dass, becoming a well-known spiritual teacher who wrote the bestseller Remember, Be Here Now. Since then, Alpert has dedicated himself to living, and helping others live, a spiritual, be in the moment kind of life. Despite that, Lattin described how when he was spending time with Alpert while working on the book, Alpert still got angry at the thought of Andrew Weil, even 40-plus years later. This is not exactly the behavior one expects of a spiritual guru.

My point is not to criticize Weil and Alpert. My point is to note that even the most centered among us is still human, and thus fallible. Actually, Weil may not be centered – he may be an ambitious, money-grubbing jerk – but that is beside the point. Whether centered or not, spiritual or not, LSD-gobbling or not, we are all human, all too human, and with our humanity comes frailty. We would do well to remember that as we observe the behavior of those around us.

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Posted in Philosophy, Pop culture, Religion

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Great Attack on Tea Party

Posted on April 15, 2010 | Leave a comment

Some dude writing for Salon has a very funny article on why he likes tax day, and it features this outstanding quote:

The Tea Partiers represent the aggrandizement of paranoia, rage and self-pity into a political agenda. It is a “movement,” created by for-profit demagogues whose sole mission is to build audience share at the expense of honest debate about our common crises of state.

I think that pretty much sums up the movement in two sentences. For another great article about Tea Party activists who are taking aid from the federal government even whilst they denounce all government aid, click here.

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Mother Nature vs. Capitalism

Posted on April 12, 2010 | Leave a comment

I was recently reading a transcript of a speech that theologian Sallie McFague gave on religion and ecology. In the speech McFague works her usual metaphor magic, discussing how language drives thought, and thought drives actions. Specifically, she called for a reimaging of the Christian worldview, from one in which the world is seen as a thing, a machine in which humans live, to one in which the world and the humans therein are seen as shared parts of a holistic body of God. This view – “that the world is from the beginning loved by God and is a reflection of the divine” – would forefront the inherent value of the environment and the religious importance of its conservation.

Interestingly, McFague claims that this reimaging is not new, but instead a return to a traditional worldview, held by Christians and non-Christians alike. The concept of earth as machine, she claims, “is an anomaly in human history, for until the scientific revolution of the seventeenth century, the earth was assumed to be alive, even as we are.” McFague is not calling for a return to pre-scientific thinking, in which we must appease tree spirits and illnesses are caused by foul humours (although the current use of medicinal leeches is totally cool), but rather a recognition that all of creation is equally part of God.

For McFague, the culprit is less the scientific revolution than the drive toward individualist consumption that the market economy has engendered. Consumption of goods is linked to consumption of the earth’s resources.

“From the time of Aristotle to the eighteenth century, economics was considered a subdivision of ethics; the good life was understood to be based on such values s the common good, justice, and limits. Having substituted the insatiable greed of market capitalism in place of these values, we are now without the means to make the qualitative shift in thinking that is required.”

While I would not be inclined to say “insatiable greed,” there is no question that a market economy is inherently consumptive and that it drives people to focus on the individual rather than the common good. McFague would have us work within the current system, but temper its impact on our behavior by changing how we think and speak about the world.

To McFague’s argument from metaphor I would only add that it’s not nice to fool mother nature.

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Posted in Business, Environment, Philosophy, Religion, Trends

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Less Health Care Will Lower Costs

Posted on April 7, 2010 | Leave a comment

Interesting piece from the NY Times about how if we plan to cut health care costs (which EVERYONE agrees we have to do) it is going to mean changing the general view that more care is always better. The facts indicate that more care is often not better, and is certainly more expensive.

If you want to see a prior post about health care rationing, it’s right here.

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