Sep 16 2008
If I had a Billion Dollars, I’d be Rich
A quick break from the usual topic to comment on the news. Unless you’ve been recently dead for a few years, and miraculously brought back to life in the last few seconds, and even more miraculously decided after all that miracling to read this blog, you’ve probably heard about the “housing crisis”. They were talking about it on NPR this morning as I drove to work. For what it’s worth, I don’t particularly like NPR, but it’s the only radio station that doesn’t yell at me before my morning joe - and that’s a requirement. So NPR it is.
Anyway, there really isn’t a “housing crisis” of course. Nor is there a “financial crisis”. Sure, people are losing their homes because they can’t pay their mortgages. And financial institutions are failing left and right. The latest being Lehman Brothers. That doesn’t mean there’s a “financial crisis”. There is a crisis, although I’m not sure what to call it. I originally was going to call it the “stupidity crisis”, but that sounded too mean. The “greed crisis” might be a better descriptor. Although capitalism is motivated pretty much solely by greed, so it could also be called the “capitalism crisis”.
Rewind to the 1980s. Reagan was the President of the United States of America, and Reaganomics was in full swing. There was a “financial crisis” then too, complete with the failing of a major investment bank.
It was the time of the high-yield bond, lovingly nicknamed the junk bond. Let’s compare the similarities between the two.
Both of the “crisis” start with rich white men in New York. In the 1980s, the lead was taken by Michael Milken. With the collapse of Lehman Brothers, talk may shift to Richard Fuld, although there have been others. Further, they get richer at the expense of others less fortunate than them. The junk bonders sold overvalued bonds to unsuspecting people. Today’s investment bankers sold overvalued mortgages to unsuspecting people.
Milken was the president of the Federal Reserve Bank of Cleveland. Fuld is a board member of the Federal Reserve Bank of New York.
In 1986, Milken gave himself a bonus of $550 million. The SEC sued Drexel, where Milken was CEO, in 1988, and Drexel filed for chapter 11 bankruptcy in early 1990. In 2007, Fuld was awarded a bonus of $22 million. In September of 2008, Lehman Brothers filed for chapter 11 bankruptcy.
Milken pleaded guilty to several charges of violating securities laws, and sentenced to 10 years in prison. He served about 2. His current net worth is over $2 billion (with a ‘B’).
But I have a few questions.
If you were in a position to make a huge amount of money illegally (i.e. billions), knew you were going to get caught and spend a few years in prison, but upon release you’d still have a sizable chunk of your money left, would you do it?
Why are people continually fooled into buying overvalued products?
I understand why people want to own a home, but if you don’t have the money to buy it (qualify for a traditional load), why do they assume that some nifty money-moving by investment bankers is somehow going to change the basic fact that they don’t have the money to buy a home?
Why does the press continue to frame this as a problem created by the small-guys (not the banks), “housing crisis”? And when they don’t, why do they frame it as a problem for the big-guys (banks) “financial crisis”?
How much is the educational system at fault for not teaching proper money management?
Why are the officers of a corporation not financially responsible for the actions of the corporation?
Postscript:
The title of this post stolen from the song by Barenaked Ladies, not unlike how most of the Wikipedia article on glacial mass balance has been stolen from Mauri S. Pelto of Nichols College. Or maybe the other way around; neither “side” admits to be copying.
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7 Responses to “If I had a Billion Dollars, I’d be Rich”
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Am I missing some humor here? Looking at the talk page, Mauri seems to be responsible for most of the content (and is named in 7 out of the 20 cites).
You’re right. Copying someone word for word is okay, as long as you reference other material by the author you’re plagiarizing.
Inspired by WMC to get off my arse, I went ahead and removed the plagiarized content. Only to have it immediately reverted. Hmmm. Any wonder why sane people don’t try to edit Wikipedia?
Look at the article’s revision history. See all the edits by “Peltoms”?
[Reply: Seems relevant.. From Wikipedia no less.]
Of topic but if you have time it would be nice if you had a dig at this “sceptic” .
Your contact form doesn’t work so I’ll try commenting here.
Your towel experiment was quite misleading.
If you look at Earth, the greenhouse gases affect energy transfer of the *warm earth* to the *cold space*. They don’t affect visible light so it’s the same as if the earth was heated by an electrical heater with the wire coming from outside. The source of Earth’s initial energy inflow is out of the picture, it is just a given.
Hence if you want to simulate the greenhouse effect on Earth, you have to use an electrically heated object (warmer than the surrounding room, ie the earth is warmer than cosmic radiation) under a blanket vs one without the blanket. It doesn’t matter in this case if the energy escapes or
returns by radiation, convection or conduction.
This is where the greenhouse effect IS like a blanket.
Now, with the ice cubes, even if you had a super greenhouse, with no light or other energy source the ice cubes would not melt at all. The experiment doesn’t tell us anything about radiation vs convection or the greenhouse effect. The surrounding warmer environment heats the ice cubes and they melt. It’s just a lot slower with the blanket in between.
I think your experiment is thus a red herring. It is not involved with either global warming or the greenhouse effect. Though it demonstrates the effect of insulation.
I enjoy your blog otherwise every now and then.
In a sense, you could demonstrate the greenhouse effect by putting a blanket covered water ice balloon in a big box of dry ice, then add an electrical heater there. There you could balance energy in- and outflow (heater power and blanket thickness) and could change the phase of the water accordingly (ice, water, steam).
This would demonstrate the difference between stock and flow.
“Why are people continually fooled into buying overvalued products?”
You’re asking a variant of the right question, but one which lets you avoid seeing the answer.
The right question is “Why do governments of both right and left produce credit bubbles roughly once every three generations, which in turn fool people into buying overvalued products, lending unwisely, taking out more debt than they can ever repay … etc?”
People are continually fooled (at least, where continually means roughly once every three generations) because they find themselves in the middle of a government sponsored credit bubble. They cannot see it for what it is because it is outside their and their parents experience. So they think it is normal and non-pathological, and act as if it were a long lived permanent and normal phenomenon. If what they saw around them were that, then their reactions would be perfectly rational.
But they are in the middle of a credit bubble, and so it goes pop and wrecks them.
A related question: why are all credit bubbles due to governments? Because they are the only ones with enough money to blow them up. And why do they burst? Because the governments blow them big enough till they no longer have enough money to save them and keep them going.
This is why the current bailout will fail. The US Government does not have enough money.
“Why does the press continue to frame this as a problem created by the small-guys (not the banks), “housing crisis”? And when they don’t, why do they frame it as a problem for the big-guys (banks) “financial crisis”?”
These are two contradictory statements. Let’s take it step by step.
1. If I apply for a loan it is not my problem to assess whether I am a good risk, it is the lenders. My assessment of my ability to pay doesn’t matter diddly - I only apply for 2-3 mortgages covering my residence during my lifetime, so basically I’m an amateur. The lender on the other hand processs dozens or even hundreds a day and should know what they are doing. Their judgement is better than mine.
The borrowers are not to blame (generally), they have been exploited. Remember, everything was hunky-dory until the foreclosures started. Don’t know about you but I don’t regard foreclosure as “getting off scott free”.
2. So what does it mean if a lender approves dozens or hundreds of loans to people who patently can’t afford it? Either the lender is incompetent (and will shortly go broke) or predatory.
Given that the problem is so widespread, and almost no lenders went broke (the investment banks are not the originators of these loans, they just recycle them) let’s go with predatory.
3. So how are so many lenders able to engage in predatory practice?
Well first step is a structure that applies no penalty to writing bad loans (mortgage brokers sell of the loans to retail banks who then sell them to investment banks who bundle them into bonds who sell them to pension funds), while the brokers keep the sales fee for the loan.
Pass the parcel in other words, flip it before it explodes and it’s only the last one in line - the pension fund - who suffers, while everyone else gets to keep their fees.
Second step is a lack of regulation that allows this predatory and immoral structure to exist.
4. What happens when it goes wrong (as it inevitably will)? The regulators step in, bankrupt the culprits or wipe out the owners (shareholders) and then have to prop up the failing pension funds.
Because the alternative is too horrible to contemplate:- bust pension funds and a financial system so filled with toxic junk that no-one is prepared to do any transaction with anyone else. If the government doesn’t do a bailout at this point, then we are all dead, probably sooner rather than later.
Welcome to Sept 2008. Consider it the karma for poor (or no) regulation and prudential control.