The Long View

Accounting standards and corporate health.

I was listening to NPR this evening on my way home from work, and a fellow named Alistair Barnes was on talking about Wells Fargo's stunning report of a $3 bn. profit for the first quarter. He said that a large part of why Wells was able to pull this off is because when it bought Wachovia, it took on a large amount of bad loans, but the first thing it did was just write down every bad loan it picked up.

Now, recently, the FASB decided, largely with a gun held to its head by Congress, to change the accounting standards in order to let banks hold assets at assumed sale prices, instead of market prices. The logic behind this is that if a bank has to write down assets to market prices, then its balance sheet suffers, and it has to raise more capital. This generally weakens the economy further, stocks fall, etc, and as a result, the values of the assets fall further, causing further write-downs, etc.

Originally, I was quite in agreement with the new FASB standards. However, after hearing the Wells Fargo story, I'm questioning my original opinion. Largely, the banks fight and fight and fight the write-down process, until finally they're forced to, perhaps when assets have been pushed lower than they would have originally. Wells, rather than fight this fight and lose anyways, seems to have looked towards the future and said, "We're going to have to write these down anyways, might as well get it over with." The bank ripped off the Band-Aid, so to speak.

Is this the path all banks should be following? 

I think, with a little context...

...we can give Barack Obama a break.

From The Economist:

Worse, some are wondering how well the relatively inexperienced Mr Obama would fare with a full-blown crisis given his wobbles over a minor issue such as bonuses.

Because, you know, the Financial Crisis isn't a full-blown crisis. He certainly didn't enter into office in the middle of a full-blown crisis. Noooo. From their article on his inauguration:

The American presidency is always the world’s hardest and most consequential job, but it seems particularly so this month. A global recession of a severity not seen for perhaps 80 years; a new war in the Middle East and old ones in Africa; missions very far from accomplished in Iraq and Afghanistan; a prickly Russia and a rising China. These international challenges must jostle for the president’s attention alongside noisy domestic concerns like rocketing unemployment, the desperate need for a better health-care system, exploding deficits and failing cities. The burdens, surely, are too many for one man to bear.

It's absolutely amazing to me how fast most analysts have gone from "We must give Obama the benefit of the doubt, because these is one of the toughest environments for an entering president in recent history," to "Oh man this guy has NO idea what he's doing, holy crap."

I don't agree with every policy that is being enacted right now, but I have a feeling that even if we had an experienced hand like McCain or Clinton or Romney in office right now, stuff would still probably be bad. I think this has more to do with the fact that it's hard to run a country involved in two wars during a global economic crisis with an almost completely polarized Congress than the fact that Obama is inexperienced.

It's always nice to be doing something on your own volition, and then have an expert in the field say "No, I can't find any problems."

Long-term Investment

There's an interesting article over at the Economist on the wisdom of investing in gold right now over equities. You can find it here.

The graph is disarmingly simple. It simply shows the ratio of the Dow to the gold price since 1920. As can be seen, there have been three clear peaks in this ratio: in 1929, in the mid-1960s and in 2000. And it also shows three lows: in the early 1920s, in the 1930s after the crash and around the time of gold’s record high (in real terms) in 1979-1980. At those lows, the Dow and gold were almost equal.

My other favorite quote:

Enthusiasts will say that, unlike financial assets, gold is nobody else’s liability. But the same is true for any commodity. Indeed, most other commodities are a lot more useful. If a real dystopia appears (think “Mad Max” or “I Am Legend”), most of us would rather have oil to power our generators or cars than gold.

Gold, and commodities in general, are refuges for people who get nervous in times of economic trouble, because they seem more "real" than equities. But it's important to remember that the while commodities are more real, unless you're going to take delivery of 100 gold bars or 100 barrels of oil, their value is just as much a product of speculation as equities. The price of gold is dependent on just as many factors as the price of a stock, including how much of it is being used in manufacturing (of jewelry, say), and how much of its being newly mined; and how much people think it's worth.

As the article points out, commodities are only truly useful if you expect your paper money to become worthless, and you need some form of standardized value. The article mentions the Weimar Republic, but I think an even more timely example is Zimbabwe. In Zimbabwe, financial literacy charities teach children to buy pencils and other endurable commodities to hedge against inflation. So looking at the above quote, why is gold a good investment? In the case of a full financial meltdown, any commodity would be valuable, because we essentially fall back to a barter system. And in that case, I would rather have pencils than gold, because they're useful, not just shiny.

Why is gold a good investment right now? Well it's a good investment because right now the price keeps going up. But you know what else's price kept going up? Housing, and we all see how well that turned out.

A bubble is a bubble is a bubble, and over the long run everything reaches an equilibrium, even if that equilibrium is hard to see on the time line that we as humans can easily comprehend.

A viewpoint on history.

I wrote the following this evening as a discussion post for my "History of the United States before 1877" class. Our reading this week was primarily on Columbus, and more broadly on the early, pre-British European colonization of the Americas.

	The most interesting point made in the reading for me was how the clash of cultures 
caused certain interactions. This is a partial answer to [another student's] question of how the 
Europeans could act so callously towards the Indians. Particularly, I found the cultural 
change that occurred between the Spanish rule and the French and Dutch colonization.

The discussion of freedom in Foner's work is really what caught my attention and interest 
this week. I've been having discussions in other venues recently about what symbols are, 
and what they mean to people, depending on their cultural values. "Freedom" as a 
concept is an important symbol, particularly in today's world. We went to war based on 
bringing freedom to another people in recent years. Countless products offer us freedom 
of choice and lifestyle. In a sense, we are trying to achieve a concept of freedom that is 
closer to the Indians' concept of freedom; the freedom to do what you wish, with whom, 
when you want to.

The explanation given by Foner, that the Europeans view of freedom was colored by a 
social hierarchy, that essentially the Indians had too much freedom, is a very important 
concept from this week. The Europeans essentially said "Well, it's ok to enslave them, 
because slavery is way better than freedom! Why, if you're completely free, how do you 
know your place? And if you don't know your place, how can you go from day to day with 
certainty? We're doing them a favor, by providing them with a stable, dependable social 
environment!" Their entire social system was constructed around a lack of mobility just as 
much as the East Indian caste system.

That system pervaded American culture for a long time, probably longer than many care 
to admit. Until recently, if you weren't a white man, you never had a chance of 
permeating the upper echelons of society, or having a dynasty. It's only been in probably 
the last 40 years that that has truly started to change.

The most profound thing to me this week was that it has taken 500 years for us to come 
back around to a value system that was nearly eradicated by our forebears.

On Daschle.

There's been a lot of dissection, recently, of the whole Geithner/Killefer/Daschle...thing.

Here's my quick opinion.

In any other administration, these would have been no-brainer confirmations. The tax thing wouldn't even be on the radar.

Some people are accusing Obama of being inexperienced and naive for nominating potentially the most go-to guy on healthcare in America today for a healthcare post, an experienced efficiency executive to clean up government waste, and the guy who handled the New York financial crisis to take on the national one.

Daschle made a mistake, for sure. But I think he did what he did because he wasn't really expecting it to cost him the job. In any other administration, you would have had something way bigger than some unpaid taxes distracting Congress and the electorate. Killefer missed $900 in taxes. She only had to step down because Geithner and Daschle came first, and one more would have looked bad.

But really, how bad does this look in comparison to previous administrations? I think this whole "scandal" speaks more to the cleanliness of this transition than its naivete.

Really, what Obama is paying for here is his own dedication to high standards, and I think that the transition team has probably been caught off guard, because they underestimated what an effect they had on the expectations of the electorate. People actually believe him when he says he's going to have a cabinet that is squeaky clean.

But c'mon folks, Washington D.C. is a place where everyone has to compromise on something.That's what politics is. To expect the man to find a whole cabinet of people who have never compromised on anything or made any mistakes is just dumb.

A follow up on symbols.

Heh.

I was reading my Consumer Behavior textbook today, and low and behold, look what I came across in the chapter on culture:

A symbol is something (a word, image, or object) that stands for or signifies something
else (the desired cultural meaning). We tend to think about symbols as having
an inherent meaning that resides in the symbol, forgetting that people in a culture
imbue symbols with meaning through their collective actions. For example,
the swastika is most commonly thought of as a symbol of Nazi Germany, but many
people in Southeast Asia treat the same image as a symbol of good luck and happiness.

Just one of those interesting life coincidences.

Awesome analogy

So, I came up with a wonderful analogy on the fly tonight about our economic situation.

I was talking about weather derivatives, and how they're pretty much like gambling, and my friend noted how the investment banks taking the profits and building skyscrapers was kind of like bookies taking the profits and building a brothel. To which I said:

"Yeah, but it's more like the bookie took your money and built the brothel with it. And then you said 'But, if you built the brothel with my money...how are you placing my bets?' and he responded 'Easy, I put the bets on my credit card." To which you say 'But, what if the bets don't work out and you lose money?' To which he responds 'Easy, I'll make up the difference with the equity loan I have on the brothel.' Of course, nobody can patronize the brothel, because all of your money was tied up in building it, so it starts to go under. Then the bookie comes to you and says 'Hey, buddy, can I borrow some money, short-term, just until the brothel starts performing?" But of course, nobody has any money to lend, because it's all tied up in the brothel. But you can't let the brothel go under, because everybody's money is tied up in the brothel. So you call the bank in the next town, we'll call it Beijing, and ask for a loan, based on the the fact that you buy all of their stuff, and if your town goes under, so will they."

Grateful #3

• How I Met Your Mother Season 3
• A clean apartment
• Trader Joe’s
• Sleeping in clean sheets and blankets
• The look my cat Punk gets when he sees a bird on the fence outside

On Protectionism

This is an interesting article about how the Democrats are shoving into the stimulus bill a couple of protectionist items, like only buying steel from American steel companies, and only using American tech firms for the conversion of medical records to a fully digital system. Find me an IT firm that's big enough to handle that job that is purely American.

I largely support the stimulus package. I think it's kind of senseless to argue, at this point, how many cents on the dollar we're going to get for our money, whether through tax cuts or spending. I'm not in support of a huge deficit, but that's going to happen either way, and I'm even less in support of a heavy recession or even a depression. I understand the move of the House Republicans, even though I think it was a bit immature.

However, I'm really rooting for the Senate Republicans to do what they can to remove the bad parts of this package, even though I know they'll remove the parts they think are bad, not the parts I think are bad.

I'm a pragmatist. I think we ought to do what works, which is why I vote across party lines (as a registered Independent). I like Obama, because he's a pragmatist as well. He may have ideals that are pretty far to the left, but I think he also has an understanding that his ideals are ideals, and not policy. He's made it pretty clear that his policy will come from the middle. 

So I'm really disappointed in the Democrats for pulling this lame stuff. But I think I'm going to be even more disappointed when the Republicans ignore it, and leave it in, because they're just as protectionist, except they want more tax cuts, too.