Thursday, December 25, 2008

Snow in Seattle

It snowed this week in Seattle. Nestled, as we are, between two sets of snowy mountains it is probably hard for non-Seattlites to believe that this is a rare event. Nonetheless, snow itself is unusual in the city; for snow to fall and stay on the ground past noon is almost unheard of.

The last time there was a significant snow dump here, the storm gave us 31 inches in 1996. This time around we were blessed with about 9 inches, and it disrupted the city quite a bit. The disruptions lasted about a week.

I'm all for shutting things down at times like this, but I admit to be being a little tired of walking slowly over ice to get anywhere. And 4 inches of slush and compact snow on some main arterials doesn't make me so happy either. When people complain about the inconvenience the day it snows I think they need to lighten up; when people are mad at slippery roads a week later I'm a touch more sympathetic.

Thus has arisen a debate in the city as to whether our government should have done more to mitigate the effects of the storm.

One irate caller to a radio show explained that he has lived in Rochester, Concord, and Milwaukee; and that those cities remove snow from the roads immediately. The Seattle response, he said, was grossly incompetent.

But one of these things is not like the others. Rochester, Concord, and Milwaukee receive yearly average snowfall (in inches) of 92.3, 63.8, and 47. In Seattle our average is 7.3. I'll give this guy the benefit of doubt and assume he has not lived here long enough to understand that snow is unusual.

So this is not a question of whether roads should be plowed or not; it is a question about the role of government. It makes perfect sense for a citizen of Rochester, NY to expect his government to do a good job at snow removal. But in Seattle we do not elect people, at any level of government, to be competent snow removers. Nor should we. To do so would be to sacrifice some other, more relevant issue.

The average cost of removing snow in Rochester is much lower than it is in Seattle. Since the cost is high we choose to forego the service.

Saturday, December 20, 2008

So Says The Dictator

Yesterday, George W. Bush lent 13.4 billion dollars to GM and Cerberus Capital Management, whose board is chaired by Bush's old pal John Snow.

First, that money was not Bush's to lend. Eight days earlier, the Congress of the United States rejected a proposal that would lend taxpayer money to GM and Cerberus.

George Bush is the executive, meaning that his job is to execute the will of the people as expressed democratically through their elected representatives in Congress. He has no authority to take unilateral action such as this.

In order to "justify" his action, Bush had to pretend that the auto industry is made up of banks. Of course, I guess it is possible that he actually believes that General Motors is a bank.

In explaining the action, Bush said this:

"If we were to allow the free market to take its course now, it would almost certainly lead to disorderly bankruptcy and liquidation for the automakers. Under ordinary economic circumstances, I would say this is the price that failed companies must pay -- and I would not favor intervening to prevent the automakers from going out of business.

But these are not ordinary circumstances. In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action."

Apparently, Bush supports free market principles in good times, but not in bad. But either one supports a free market or not, and it is clear, regardless of the rhetoric he uses, that George Bush and the Republican party are not supporters of a free market.

The financial crisis is not the cause of the automaker failures. They have been dying for years. The demise actually started decades ago. They are a drain on our economy, sucking valuable resources onto showroom lots to waste away with barely a test drive.

Recession is the perfect time for automakers to go out of business. It is the liquidation of failed businesses that propels an economy out of recession. Recession and credit contraction are the mechanisms by which unproductive endeavors lose out to those which efficiently create products that people are willing to pay for.

General Motors has survived the last few years on reputation alone. Private interests have been willing to turn excess capital over to them in the mistaken belief that there would be a turnaround. Now, those private interests have finally had enough. They have given up on the U.S. auto industry and set their minds, and their capital, to other pursuits.

It is not the role of government to prop up businesses that every right-minded investor has given up on.

As for the idea that this action "saves jobs," think again. The terms of the loans are onerous. The U.S. taxpayer is getting screwed, but employees at GM and Chrysler are right on our heels (Those who bought GM stock on the news are the biggest losers, but hey, they made their own bed). Many of them will be fired regardless; those are the lucky ones. The ones who stay will endure months or years of wage cuts, benefit cuts, increasing union dues, interminable worry, and depressing work environments.

It is no fun spending your days inside a dying beast.

Thursday, December 18, 2008

Another great headline

MarketWatch gives us this after Morgan Stanley reported their quarterly results: "Morgan Stanley posts loss, but books are stronger."

Now, to me a "stronger" book means a higher book value. It is, however, impossible, to lose money over a 3-month period and have a higher book value at the end than at the beginning of that period. The net loss was 2.2 billion dollars.

Part of their income for the quarter was a decline of $2 billion in the value of some of their liabilities. That is, their own debt. A decline in the market price of a company's debt occurs because the market believes them to be a greater default risk.

Sunday, December 14, 2008

3 Million Lost Jobs. Not So Fast

General Motors employs 123,000 people. Every day I hear or read the claim that a "failure" of GM would result in the loss of over 3 million jobs.

The analysis that leads to this result relies critically on each of 2 assumptions:

1) Consumers are unwilling to purchase any American cars, at any price.

2) Those whose wages and salaries flow from revenue from car sales are incapable of providing valuable labor to any other economic sector.

The reality is that, through General Motors, our society transforms resources into a product that is less valuable than the raw resources. In other words, GM cannot sell its cars at prices that are greater than the average cost of production.

Raw resources (things like people's time, factories, steel, copper, land, energy, etc.) have value because they can be used to produce goods and services that people will pay to consume.

The fact that the inputs that GM uses command prices that exceed GM's ability to earn revenue means precisely that those resources can produce more value elsewhere. Yet we pretend that GM is vital and that those inputs would sit idle rather than be shifted to other pursuits.

It is time to recognize that, far from being a disaster for the economy, the downfall of the auto industry is a massive opportunity for growth. It will free up resources that have been stagnant or poor performers, and allow them to migrate elsewhere.

Can the automakers survive? Probably. But they likely need to make fewer cars, re-organize management, re-negotiate contracts, and make other changes.

There is absolutely no chance that the necessary changes can be managed well by Congressmen and other government officials. Neither I nor anybody else knows exactly how to fix the automakers. Certainly the people running the companies right now do not know the solution.

These businesses have already failed. The individuals who have managed them (at all levels) should be dismissed with no further compensation. The resources that the companies control should be auctioned to the highest bidders and those bidders should then be free to do with them what they will.

If they want to make cars, so be it. If not, we'll get our cars one way or another.

Saturday, December 6, 2008

Life at the Top of the Big 12

The Big 12 football conference holds its championship game today. The game features 5-3 North champion Missouri against 7-1 Oklahoma from the South.

There has been much discussion in the college football world, though, as to whether Oklahoma "should" be the South representative. After all, Texas and Texas Tech are also 7-1.

The Big 12 uses tiebreakers to determine which team goes to the game, and Oklahoma had the edge on tiebreaker b-5: "The highest ranked team in the first Bowl Championship Series Poll following the completion of Big 12 regular season conference play shall be the representative."

First, note that the Big 12 has employed an outside entity* to determine its divisional champion. Second, the use of the 6th tiebreaker implies that these teams must be pretty even.

Indeed the accomplishment's of Texas, Texas Tech, and Oklahoma, inside the Big 12, are remarkably similar. Texas beat Oklahoma; Oklahoma beat Texas Tech; Texas Tech beat Texas. Thus the 1st 3-team tiebreaker solves nothing.

In 4 of the other 6 games, both Oklahoma, Texas Tech, and Texas have victories against Kansas, Oklahoma State, Baylor and Texas A&M.

Texas beat Missouri (5-3) while Oklahoma and Texas Tech both beat Nebraska (5-3) so those victories are of equal value; Texas beat Colorado (2-6) while Oklahoma and Texas Tech both beat Kansas State (2-6) so those victories are of equal value.

Based on these simple facts, the Big 12 has a predicament. Nothing sets any team apart from the other 2 and all meaningful tiebreakers have been exhausted. At this point, it is very difficult to find a fair way to choose a team. But the conference's problem is not one of fairness but of practicality. A game is scheduled and there must be exactly 2 teams to play in it. Fair or not, they need some way to distinctly choose 1 team to play Missouri.

For some reason, they chose BCS standings. The thing about the BCS standings is that it accounts for non-conference games as well as Big 12 games. Without going into detail, the BCS has a human opinion component, which favors Texas by a very slim margin, and a computer component, which favors Oklahoma by a larger margin. Thus the tiebreaker yields Oklahoma and they play today while Texas sits idle.

Almost all commentators that I have seen or read describe this as an injustice to Texas. Life At The Margin disagrees**.

To come to their conclusion, these commentators rely on one piece of data, the Texas win over Oklahoma. But as Bob Stoops correctly points out, that logic runs into an intransitivity problem. That is, if you claim that Texas deserves it over Oklahoma, you must then conclude that Texas Tech deserves it over Texas, and that Oklahoma deserves it over Texas Tech. We must get out of this infinite loop, and they use the BCS.

Many BCS voters seem to agree with the commentators. We think the evidence clearly favors Oklahoma. Quite simply, Oklahoma accomplished more in its non-conference games.

Texas Tech's non-conference schedule is so weak that even Notre Dame would likely beat all 4 teams (Eastern Washington, Nevada, SMU, and Massachusetts). Texas beat one mediocre team (Rice) and three bad teams (Arkansas, UTEP, and Florida Atlantic); Oklahoma beat 2 really bad teams (Washington and Chattanooga), but also beat 2 really good teams (Cincinnati and TCU). TCU and Cincinnati are ranked as the 11th and 13th best teams in the country. Victories over those teams clearly set Oklahoma apart.

It is puzzling that voters and commentators ignore this comparison. they seem to ignore quite a few facts in favor of opinions that can be backed up by cherry-picking data points.

Last week, Oklahoma played Oklahoma State. This argument was in full swing even before that game, with most people assuming that Oklahoma would win. Again, those same people were dismissing Texas Tech. The interesting point here is that, since Oklahoma appears to be the nemesis of Texas, an Oklahoma loss should have been good for Texas. After all it would clearly move Texas ahead of Oklahoma. In fact, had that happened (it didn't) the argument would have been clearly resolved. Not in favor of Texas but in favor of Texas Tech. Texas Tech beat Texas head-to-head so an Oklahoma loss would have destroyed any claim that Texas thought it had.

Life At The Margin's national rankings:
1. Utah
2. Alabama (If Alabama beats Florida, Alabama would move to #1, Florida would drop out)
3. Oklahoma
4. Florida (If Florida beats Alabama, Florida would move to #2, Alabama would move to 8 or 9)
5. Penn State
6. USC
7. Texas
8. Boise State
9. Texas Tech

*Life At The Margin finds it distasteful that the Big 12 would allow their championship to be decided in this manner. They should only use criteria from inside the conference, even if it means drawing a name from a hat. The reliance on the BCS standings can create degenerate conditions. For example, in theory the Texas coach could vote (or convince other people to vote) his own team #1 and leave Oklahoma off his ballot in an attempt to influence the outcome. This did not happen, we know, but something like it can happen under this system. Indeed a less extreme version of this did happen last week: While Oklahoma easily defeated a quality team (Oklahoma State) and Texas easily beat a bad team (Texas A&M), Texas actually gained on Oklahoma in the human opinion polls. The only new piece of information clearly favored Oklahoma over Texas yet some voters switched their ranking in favor of Texas.

**Life At The Margin does not have a preference for either Oklahoma or Texas, but does prefer that the team that accomplishes more be rewarded for those accomplishments. We also find the behavior of voters and commentators more interesting than the football argument itself.

Thursday, December 4, 2008

Market Failure? Not Quite.

Ben Bernanke wants more taxpayer funds to help reduce foreclosures. Bloomberg reports:

"He called for addressing the 'apparent market failure' where lenders aren’t modifying mortgages even in cases where it’s in their own economic interest to do so."

But this is not a market failure; it is a failure of Ben Bernanke and the rest of the Federal government.

The reason lenders are not modifying mortgages is that they perceive that it is NOT in their best interest to do so. The reason they perceive that it is not in their best interest is that Bernanke and his ilk keep talking about (and in some cases, acting) throwing taxpayer funds at the mortgages.

The banks, instead of making smart business decisions, are trying to position themselves to get pieces of the bailout pie.

Think about it: If someone owes you $500,000 but cannot afford to pay, are you going to rework the mortgage to $400,000 or are you going to wait for the government to give you the whole $500,000? Or wait for the government to provide some "incentive" to rework.

You would do what is in your best interest. If you think government help is forthcoming, you try to get it. Even spend resources lobbying for it.

Evidence That No Crisis Exists

Downtown Bellevue is residue from the boom years of the 1990's and early 2000's, one of the 365-day Christmas towns that have taken over American suburbia. It lies an easy drive across the lake from Seattle, WA.

Forgetting what day it was, I trekked over to Bellevue on the Friday after Thanksgiving to see a few of John Grade's creations. While looking for coffee, I came across "The Container Store." The Container Store uses 3200 square feet of space to sell containers. The place is full of them. In fact, their primary product appears to be a large red and green plastic box, selling for $49.99, advertised as storage for Christmas decorations.

Now, back when people like Henry Paulson were telling us that the economy is strong, most of us stored our Christmas stuff in medium to large cardboard boxes. Those boxes were free.

If this store's marketing people are correct, and they actually sell hundreds, thousands of red-green monstrosities, then we have pretty strong evidence that we are going to be just fine.

Think about it. You buy food. You buy some shelter. You pay the heating bill. You down 3 or 4 chai lattes per day. Christmas time comes around so you buy some nice things for friends and family. After all that you have $50 left over to buy a container.

That last paragraph certainly doesn't apply to everybody, but our society has found it worthwhile to devote 3200 square feet of prime retail space to a container store. This is not something one expects to see in a depressionary world.

Of course, I call this bit of data evidence, not proof. Maybe hard times and container stores can coexist. Maybe, just maybe, our economic priorities are a little hard for me to grasp.