A Christmas Carol

Mr. and Mrs. Simple Sense where snuggling around the fire with care,
When a knock at the door disturbed our reverie

With a groan and a grunt I walked to the door
And who should I find but Blagojevich there

He said I know you’ve got money to spare,
And since you have given to the campaign I took extra care

To pay you a personal visit to just let you know
That if you pay to play to DC you might go

He mentioned that the hedge fund times are in trouble
So why not go to DC and make a bundle

He held out his sack and shook it at me
And I tossed in 20 grand you see

Cause going to DC might be some fun
But having the Gov on your ass is absolutely none

I wanted my streets cleaned and garbage picked up
So I gave him his bribe and wished him good luck

He said he would be back for some more
Once the second round of bidding got off with a roar

Seems it’s the season of giving in our Windy City
And giving and giving to our Pols without pity

For governors, mayors and Stronger take their due
In Chicago giving lucre is how business gets waved through

Sleep tight my children the grease is in place
To run and win the 2016 Olympic race

But alas it seems our trip to DC
Has been deep 6ed by Fitzgerald’s investigating glee

Mrs. Claus sends me to the Bermuda Triangle of Big Box Hell

Last night after feeding the little elves and the reindeer, brushing their teeth (elves not reindeer), and doing the dishes I noticed Mrs. Claus had kindly left me a to do list.

Santa please buy the following:

thingy to connect i-pod to stereo
2 strands of white tree lights
1 exterior extension cord
3 interior extension cords
1 pharmacy bulb

A quick look at the list told me all I need to know—I would be taking the sled to Big Box Hell. The first item was clearly a Best Buy purchase, the lighting would be a trip to the Orange nightmare of Home Depot, and in between I would hit Whole Foods for some frozen yogurt for Santa because Mrs. Claus has thrown out all sugar in an attempt to help Mr. Claus keep his weight down in his old age.

So on Dasser on Subru into the ice storm we drive. A quick trip took me to the Best Buy-Whole Foods parking lot. First I went into Best Buy where I discovered almost no shoppers but many sales people. I grabbed the first one I saw and asked where I could buy an RCA-MP3 connector cable. I got a perplexed look. I tried again with Mrs. Claus’s more technical spec—“ya gotta thingy that connects an ipod to a stereo”. That got a “yea I think so.” We turned around to the rack behind us which after 5 minutes of searching did not have the connector thingy. We then went to a different section of the store and looked at some more thingys but did not find the right thingy. We then called two other employees and went to the TV area where we also did not find the right thingy. Finally a 4th employee was able to lead us back to the second location of my trip through Best Buy hell and found the correct thingy –labeled RCA-MP3 connector by the way.

Crossing off the first item on my list cost $15 dollars, took 15 minutes of time, a ¼ mile stroll around the store and the help (??) of 4 employees. Thank Santa they were not busy.

Next a short walk to Whole Foods to buy some frozen yogurt to have as a reward post shopping. I found the frozen yogurt no problem. Went to the check out line. Very long line but the manger was checking folks out at her desk. Snuck over and got in line behind one person who was even mindful enough to reuse a Whole Foods bag for a 10 cent credit. Then came the question—do you want the credit applied to your bill or should we give the money to Pancreatic cancer research? Why should Whole Foods get to determine which charities I support? Just give me the 10 cents and let me decide which charities I want to support. And while you are at it if you really want to support being green don’t give 10 cent credits per bag. Make it a buck. Bet everyone would bring in their own bags. So any how then it was my turn and the manager asked if the frozen yogurt was any good. I said it was. She said maybe she would have to try it, but in general she doesn’t like to eat the healthy food that Whole Foods sells because it doesn’t taste good. In particular she doesn’t like all those fruits and veggies. I wished her good night and promised her Santa would deliver nothing but transfats to her for x-mas. She was relieved.

Ok. I had my reward for successful shopping in hand. Now I just had to survive the deepest darkest corner of the Bermuda Triangle of Big Box Hell—Home Depot.

List in hand I strode in with confidence and went to the lighting area. After much searching I found that they did indeed sell pharmacy bulbs. They only had one choice, but as luck would have it, it was the right one.

Next after searching for 10 minutes I found someone to direct me to X-mas lighting hell. In 1,000 square feet they had everything you could want to light your house. Except for white bulbs. “Sorry sir, sold out of those”. And the smallest outside extension cord they had was 50 feet for 24 dollars. And the smallest inside one was 12 feet for 10 bucks. I took a pass. I almost dropped the pharmacy light bulb and fled but figured checking off one item is better than nothing. So I went to the check out area and waited in line to self check out.

I fled the store $5 and 20 minutes poorer. And upon getting home discovered the bulb didn’t work.

There is another Home Depot about 2 miles away which typically has a poorer selection, but I didn’t want to face Mrs. Claus with an incomplete list. At this point the ice was building up pretty bad on the sleigh, but in a moment of brilliance I remember that the local grocery store had a pretty good hardware isle and carried seasonal stuff. So off I went to Lincoln Park Market. This is not a chain, just a mom and pop grocery store. And there where all the extension cords I could ask for, 4 types of pharmacy lights, and white x-mas lights. All easy to find. And all prices 20—50% less than Home Depot.

Total cost $29 and 6 minutes.

List complete I skidded home in the freezing rain. Chowed some Cookies and Cream frozen yogurt under the disapproving stare of Mrs. Claus and thought---

Big Box stores you wonder why you are in trouble (aside from the economy of course)—maybe you need to employee better people, train people better, price competitively and manage your supply chain better. How can my local grocer charge less than Home Depot? How can it take 4 employees 10 minutes to find an ipod connector thingy? How can a manger at Whole Foods be so honest as to say she doesn’t like healthy food? Why would anyone go to these stores to pay what turns out to be a premium price for crap service from clueless staff, in a cavernous store which likely doesn’t have or can’t locate the item you want? Santa is gonna stick with the Internet and mom and pop stores for any more items that Mrs. Claus sneaks on his list.

Tomorrow Sam Zell gets coal in his stocking (yea he took the Tribune to bankruptcy).

Do 2 Wrongs make a Right?

Do 2 Stupids make a Smart?

I don’t think so.

Stupid—Big 3 CEOs flying on separate private jets to plead to Congress for taxpayer aid.

Stupider—Congress making a big deal out of how the big 3 CEOs get around. Does Congress have no more value to add than to pick on how CEOs get to a meeting.

Stupiderer—Big 3 CEOs driving to Congress for next meeting. Did these guys education stop at Animal House? Things get bad-- road trip (I hope they stopped at a road house for a little Shama lama ding dong on the way). Really with your business in crisis getting in a car for 10 hours should not be the best use of time.

Stupidererer—Congress demanding that they approve a plan for the auto industry. Aside from telling the auto industry to get rid of their jets I have not seen Congress offer any useful insight which would make me think they could tell a good plan from a turd.

Stupiderererer—Paulsons use of Tarp. Totally ham-fisted. Reactive not proactive.

And Stupidest—Dodd and Frank warning Paulson that they may not approve the next $350 billion for Tarp. Yea that’s a good idea. Let’s make sure we have to be totally reactive—let a big bank or two fail, let FDIC become insolvent then approve the money.

Congress if you want to have value, figure out how to add value. Last check you guys make the laws and control the purse strings. That is pretty powerful. Why don’t you try to do something with all that power? Its very easy to sit in the cheap seats and fault everyone else, and its very risky to try to do something proactive; but it should be obvious right now that the only way things are going to get better any time soon is if you take a risk and do something proactive. Yea it might be a failure, but who knows you might actually do some good. Witch hunts only catch witches and aside from reading Harry Potter to my kid I don’t know many witches.

Ironic moment—Car industry retooling all their plants to go green as oil falls to 5 year lows and $1.00 a gallon gasoline is on the horizon.

Fire Prevention

First a disclaimer:

Preparing to fight the past has a long history of failure. Just ask the French at the Maginot Line how well WWI strategy applied to WWII. Still we study history so we can learn from our past mistakes, and making the same mistake over and over again is truly asinine. Still what I propose will only help to avoid the mistakes of the past, not provide a cure for all future troubles and is more than likely to result in other horrible unintended consequences.

How do you prevent financial excess when the human condition naturally causes self reinforcing trends of greed and fear? Automatic stabilizers.

For monetary policy this means the Fed takes the punch bowl away when the party gets going, and turns on the lights and sends everyone home when the party is really rocking. And the next morning when the hangover hits they take you out for Bloody Marys to start your day. I would suggest that the Fed move away from targeting inflation and GDP and focus only on purchasing power. Purchasing power should be based on income and asset growth (savings, and assets including the value of housing) adjusted for inflation of course. While I will leave the exact calculation to those econometrically minded folks I will point out that such a policy means the Fed would not just fight inflation in goods and services but also asset price inflation (i.e. they would raise rates if home prices or stock prices went up too fast). That would obviously be very unpopular.

Below is a chart with the Fed Funds rate in orange and a simple version of purchasing power in white. You will note that if the Fed was focusing on keeping purchasing power growth stable interest rates should have been higher and should have been raised much more in 2001-2003 and cut in Dec 2006. Humm that might have helped.




Monetary policy shouldn’t bear the full burden though. Fiscal policy should also have built in automatic stabilizers. That means when GDP grows above a certain rate government spending should be cut and or taxes raised and visa versa when GDP declines.

One reason for our current mess is that in the past the Fed and the US government have been quick to cut interest rates and taxes when growth and asset prices fall but are slow or unwilling to raise rates and taxes when asset prices rise and GDP growth increases significantly.

Building in serious automatic stabilizers will often mean lower growth, but it will also mean less risk of a deep recession or depression. Slow and steady may win the game, but my bipolar friends tell me they hate taking their meds because they really like the manic times and don’t want to give them up. Of course during the down times they just might jump (course right now joe six pack might just push you).

Who is to blame for the Financial Crisis

The short answer is humanity.

The longer answer is human emotions and group think which run in trends (today we will make good use of my simple sense analysis program by both reducing to the absurd and noticing the power of trends). We have all heard that fear and greed drive investment decisions. Those emotions and others drive silly trends including the high and low fashion of leisure suits http://www.shaunsayre.com/70s/fads/leisuresuit.jpg to 5 button suits (or women’s hemlines up and down).

Why on earth would anyone wear a leisure suit (please see link above)? Well because some famous actors are wearing them, and all the good looking girls at the bar are hanging out with guys wearing them and next thing you know you got a closet full of leisure suits and a pet rock on your dresser.

Why on earth would anyone make a NINJA (no income, no job, no assets) loan? Why would someone agree to take on a monthly mortgage payment that they had no chance of paying off? Same reason; and it’s all totally rational.

Imagine you are CEO of a big financial institution. All your peers are making lots of money making loans to slightly more risky borrowers. If you choose not to pursue a similar strategy your stock price will go down and you with either lose your job and or your company will be bought by someone who is making these loans. Basically it is career and company suicide not to make these loans.

Imagine you live in a world where the stock market goes up 100% a year every year. All your friends are heavily invested in the stock market and making a ton of money, but you think the stock market is overvalued or you don’t have the risk tolerance to join in. With all their profits they are driving up the price of everything (food, education, housing, heath care etc). If you aren’t heavily invested in the stock market you find you can’t buy as much stuff as you used to. You are becoming much poorer relative to everyone else. You can either choose to become poor, or join in with everyone else.

So being human and functioning in a society sometimes results in powerful self reinforcing trends which sometimes result in closets full of leisure suits and other times results in silly lending. For sure other things aid and abet these trends like securitization or P Diddy pimping leisure suits, but let’s call this an ugly aspect of the human condition. So if you want to know who is at fault—we all are. If you want to waste time finding someone to blame—we all are. (And while I am at it Congress please stop with the blame game—if you are telling me you would have loaned the Big 3 money if they had flown to DC on Southwest using rapid reward points but won’t because they flew on their corporate jets (VERY STUPID but still) then you are not really thinking about how best to spend our money or solve a problem you are just looking for a scapegoat). We are humans—we will have good times and bad, accept it.

Tomorrow how to prevent this from happening again—and if you didn’t like today’s post you are really gonna hate how you cure the human economic condition.

Financial Fires

Well figured I might as well start with the Big Question I keep getting. How do we stop the financial crisis?

Its pretty simple actually. Go Big and Go early. What the heck does that mean. Well in general it means when a house is on fire (either yours or your neighbors) you want the fire department to show up fast, you want them to put the fire out fast, and you want them to use more than enough water to get the job done. You don’t want the fire department to tell you they can’t come right now because they are waiting on a new boss, you don’t want them to show up and try to figure out what started the fire, you don’t want to have a conference about how to prevent future fires, and you won’t give them bonus points for using just enough water. You want the fire put out FAST. NOW.

The same thing applies to the current financial crisis. Go Big and Go Early. In the simplest terms that means governments should offer to buy toxic assets 10% above current prices (by sticking a bid in the market for 100s of billions of these assets) and provide massive fiscal stimulus ( tax cuts, aid to states, and infrastructure). One-off reactive measures like saving Citibank help to staunch the obvious flames but they don’t put out the fire hidden between the walls. Successful firefighting is proactive and as a result very messy. And open to second guessing the day after the fire is out, but a minimal, reactive policy risks having the whole neighborhood burn down. (As a Chicagoan I cite The Great Chicago Fire http://en.wikipedia.org/wiki/Great_Chicago_Fire

What’s the risk? Governments either can’t borrow the money or borrow it at a reasonable rate. But given the lowest interest rates on record, it’s a risk worth taking. And only after this fire is put out, can we have a post mortem to figure out how to try to prevent this kind of fire in the future and mop up the extra water. But first things first, all resources must focus on putting the fire out. Nothing fancy. Nothing cute. Just massive monetary and fiscal stimulus globally. Right now. And then wait 2-3 quarters to see the results.

Tomorrow causes and solutions.