Monday, December 24, 2012

“It's a Wonderful Life” is truly a gift that doesn't stop giving.

It says something about the issue of investment selection. 

The posting entitled “Wall Street doesn’t run the world” used a Goldman Sachs (GS) “sell” recommendation for Kimberly Clark (KMB) to illustrate how Wall Street chatter creates opportunities for investors.  Kimberly-Clark was trading in the low 60’s at the time.  It's now trading in the mid 80’s, and it has paid a consistent and growing dividend.  Lest that comment be misinterpreted, the point of posting on Wall Street was that the advice for Wall Street was right for Wall Street.  By contrast, because it was right for Wall Street, it was wrong for many individual investors.  Investors could view the chatter from Wall Street as providing them with an excellent opportunity.  Washington chatter does the same thing.
A major plot line in “It's a Wonderful Life” is the conflict between Potter and two generations of Baileys.  

Potter wants to eliminate the competition that Bailey Building and Loan creates.  Eventually he ends up in concealing the fact that he has the Bailey’s deposit.  George Bailey, on the other hand, displays nothing but honesty even in the face of substantial adversity. 

In the end, one doesn't need to wonder who experiences the wonderful life.  Clearly, the movie’s theme is that leading an honest and trustworthy life yields results.  In the end, money comes pouring in from friends and associates to salvage George Bailey's organization and his reputation.  So, it isn't just nonmonetary rewards that George enjoys.  Sure, security, friends, family, and personal integrity are presented as more important than financial rewards; but, clearly, the movie implies a relationship between financial and nonfinancial rewards.
Trust is an important component in good investment decisions.  As will be explained, it is particularly important when it comes to investing in banks.  In that regard, the sort of Washington chatter that grabs my eye is illustrated by the excerpt from a WALL STREET JOURNAL Opinion piece quoted below:

“A persistent media-liberal lament—make that a cliché—is that too few financiers have been prosecuted for the financial crisis. But maybe that's because when the Obama Administration tries to prosecute a specific individual for a specific crime, it turns out there was no crime.
The government's latest embarrassments came this month, as one high-profile case collapsed and another was downsized by a federal judge. On November 16, the Securities and Exchange Commission dropped a civil lawsuit against Edward Steffelin. As an employee at GSC Capital, he helped create a synthetic collateralized debt obligation called Squared CDO 2007-1 that was offered by J.P. Morgan Chase (JPM).  It was synthetic because although it allowed investors to bet on the subprime housing market, it involved very little ownership of actual mortgages. Anyone investing in this deal knew he was simply gambling on a continued housing boom.

The government accused Mr. Steffelin of not informing Squared purchasers that another investor in the deal, a hedge fund called Magnetar, had helped select the mortgage pools to be wagered upon while it was simultaneously shorting some of them. Mr. Steffelin argued that Magnetar did not control which assets were in the deal. He also said he had done his job by accurately describing these assets to J.P. Morgan, which as far as he knew had accurately described them to investors. These would be sophisticated institutional investors who were eager to profit from the housing mania but are now cast as victims by prosecutors.
Since the Steffelin prosecution wasn't a criminal case but a civil suit, it presented a much lower bar for prosecutors to clear. But apparently not low enough. Last year U.S. District Judge Miriam Goldman Cedarbaum threw out the SEC's fraud charges, saying that it was a "big stretch" to say that Mr. Steffelin had a fiduciary duty to investors. That left only the accusation of negligence, and Judge Cedarbaum has now allowed the SEC to dismiss its case entirely.

It's true that J.P. Morgan Chase paid $153.6 million of its shareholders' money to settle a related SEC suit for its role in this transaction. But the bank admitted no wrongdoing and sees great value in avoiding adverse publicity. The problem for the government occurs whenever it has to prove that an actual human being has done something wrong.”
The interesting thing about this little excerpt is that the author completely misses the point of the government's accusations.  Often the government isn't interested in winning the cases.  They don't even care whether the accusations have a shred of truth.  They're interested in shaking down the employers for large amounts of money.  In this case, they were totally successful.  They got over $153 million out of J.P. Morgan Chase (JPM) despite the fact that nothing was ever proven. 

What isn't being reported in the general press is that the government's cases are often being disproven.  That would require the reporter do a little work and analyze the actual proceedings.  Besides, like the song says, “we like dirty laundry.”  So, the press has concluded that covering facts wouldn't help circulation, which one suspects is the real reason for not reporting factual information.
There is a nice thing about the press’s abandonment of any story when it starts to deviate from the planned storyline.  It creates wonderful investment opportunities.  For example, the article laments that the money J.P. Morgan Chase paid was “shareholders' money.”   But, the payment of that extortion with shareholder money is far from the most important aspect of the story. 

Investing is about character and trustworthiness. Not every charge results in a government failure to provide accurate evidence.  Thus, when individuals or organizations prove their honesty, it's a significant event.  Disproving charges that are supported by the tremendous resources of the government isn’t easy. 
When the scandal-hunting press loses interest, the opportunities abound.  The loss of interest doesn't eliminate the need for due diligence, but when one is not dealing with corporate representatives face-to-face, the government's failure to prove guilt provides a viable substitute for first-hand familiarity with the organization.  It's especially valuable when the defendant demonstrates honesty in their disclosures. That seems to be exactly what the article is reporting.  If anything, it should be taken as positive information by anyone considering investing in J.P. Morgan Chase or J.P. Morgan Chase offerings.  It makes due diligence somewhat easier when the nonsense coming out of Washington indicates that information J.P. Morgan Chase provides is probably reliable.

That all sounds nice in theory, but what does it imply?  When the government decides to embark on a shakedown effort, the first step is a “Wells notification.”  Unfortunately, Wells notifications are also the first step in a serious investigation.  So, the thing to look for is when the follow-up to a Wells notification is an announcement of a decision not to file charges.  Basically, that's an admission on the government's part that they couldn't even find enough damaging material to pull off a decent shakedown.  For example, the government recently announced that one of their investigations of Wells Fargo (WFC) was not going to result in charges. 
Now, admittedly, the government's approach to pursuing shakedowns is to undertake a raft of investigations in order to intimidate their opposition.  Nevertheless, when they admit that they could not find any damaging information on one investigation, it often has implications regarding what they will find on other witch hunts.  

Wells notifications usually have a negative effect on a stock’s value.  When an organization like Wells Fargo or J.P. Morgan Chase have previously shown that the government is wasting money on many of its witch hunts, the resulting dip in the stock’s value often represents an opportunity to buy.  It's also worth noting the recovery in the stock of the company when a case is dropped or disproven, or when a Wells notification results in no charges.  The recovery is often slower and initially smaller than the drop in the stock that occurred when the investigation or charges were announced or the Wells notification was filed.  There is time to take advantage of the end of the witch hunt. 
So, one could do worse than starting 2013 owning Wells Fargo or J.P. Morgan Chase stock.  A series of witch hunts have probably depressed their stock.  The dropping of charges, notification that no charges will result from an investigation, and findings of not guilty would indicate that Washington has been barking up the wrong tree.

Both Wells Fargo and J.P. Morgan Chase are often viewed as best in class.  Their profiles are different, but as investments, both are subject to some of the same risks.  One common risk is implied by this whole discussion.  Specifically, filing charges against banks has become a very profitable endeavor for Washington.  Thus, both Wells Fargo and J.P. Morgan Chase are subject to considerable headline risk.  That headline risk could create more advantageous times to purchase either stock.  So, investors with some experience might consider selling cash covered puts on Wells Fargo or J.P. Morgan Chase.
The Hedged Economist already owns Wells Fargo stock acquired at a much lower basis during the financial crisis.  However, selling cash covered puts on banks is a strategy that seems particularly appropriate currently.  If one wants to take advantage of the witch hunts while they are still in progress, there is another name to consider.  There are ongoing investigations of The Bank of New York Mellon Corporation (BK).  Selling cash covered puts on Mellon would be a way to directly take on exposure to the headline risk. 

For those investors who like to avoid headline risk and recognize the destructive behavior that often emanates from Washington, The Hedged Economist would also recommend looking at financial institutions outside of the US.  Canadian banks represent a totally viable substitute for investors who want exposure to major financial institutions.
It's also worth keeping in mind that it is Potter, not George Bailey, who gets a phone call from the Senator.   Perhaps, the implication of “It's a Wonderful Life” is that investors are best served by avoiding organizations with high profile Washington ties regardless of whether those ties are currently considered positive or negative. 

Given that comment, one might logically ask: why consider any of the large banks in the US?  There are actually three components to the answer. 
First, consider this comment from the WALL STREET JOURNAL published on December 18, 2012.  The article is entitled “U.S. to Sell Bulk of TARP Banks.” It reports that:

“The Treasury in 2013 hopes to clear out its portfolio of banks that took bailout funds during the financial crisis, including scores of institutions that have missed dividend payments owed to the government.
Four years after TARP's launch, the government still owns stakes in 218 banks. Most are smaller institutions, and some are struggling financially—more than half have missed payments they agreed to make when they took bailout funds. Collectively, they owe taxpayers about $7.5 billion.

The Treasury invested more than $245 billion in 707 institutions under TARP's banking programs, most to companies like Bank of America Corp., Citigroup and others with assets of at least $10 billion. Overall, the government has recovered about $268 billion through repayments, dividends, interest and other income.
While big banks quickly exited, smaller ones have been slower to repay.”

What should be obvious from the quote is that large banks, for all their problems, have a risk profile that is markedly different from smaller banks.
Second, consider an article (“FICC or Treat for BankProfits?”) in the Heard on the Street section published the same day.  It notes “Big banks aren't just black boxes. They are black boxes within black boxes….That has always been the challenge for investors—exactly what their assets are worth isn't always clear, and just how they make their money is sometimes hard to discern.”

That is true of all banks and most financial service firms.  Investing in a bank is turning over the decision on the specific investments that will be made to someone else.  Anyone who has been following this blog is undoubtedly aware that The Hedged Economist is extremely reluctant to turn over investment decisions to a third-party.  It does not matter whether the third-party is a bank, a mutual fund, the investment committee of an insurance company, or a pension fund manager.  One could do worse than manage one's own money.
Third, the posting on January 9, 2011 entitled “Investing PART 9: One version of the ‘Unfinished symphony” introduced the concept of the widows’ and orphans’ stock portfolio.  It included large-cap names.  The rationale for the selections and why they were all large-cap stocks was explained in the introduction to the actual portfolio.  It noted that such a portfolio would be remiss in industry coverage and stock market coverage if it did not include a large-cap financial services company. 

So, to summarize the three reasons, 1) any large-cap bank is opaque, but no more opaque than other financial services firms, 2) large-cap financial services firms have a unique risk profile based upon their basic business activity, and 3) that risk profile is a desirable feature of a long run, minimal management portfolio. 
Consequently, one should seek out institutions where there is some basis for believing the company is trustworthy.  That's true of all investments, but particularly true of financial services firms.  Thus, when a financial services firm demonstrates integrity under the close scrutiny of a government’s effort to find an excuse to extort fines, it is important information and justifies considering them for investment.  In fact, the very opacity of the financial service industry makes it even more important to have an independent determination that the organization is trustworthy. 

Wednesday, December 19, 2012

“It's a Wonderful Life,” but It's the 21st Century

Some things don't change. Some do.

The last two postings discussed a number of timeless financial management lessons one can learn from “It's a Wonderful Life.”  However, some things change.  Generally, what changes is how to accomplish things that make sense rather than the things one should try to accomplish.   
What hasn't changed is the first rule of investing: “don't lose the capital.”  For banks loans are investments.  The most important thing in lending is to get paid back.  Now, all investments have risk, and some loans will default.  Yet, starting with a loan that one expects will default makes no sense.  That hasn't changed.

In the November 19, 2012, WALL STREET JOURNAL, there was an article entitled “For 'Credit Invisibles,' A Market Takes Shape: FirmsDevising New Methods to Score the Previously Shut-Out.”  It addressed a topic that is highly visible in “It's a Wonderful Life.”  Specifically, the issue it addresses is that without debt it is hard to get a loan.  Nothing demonstrates that one will pay back the loan better than paying back loans.
In the movie “It's a Wonderful Life” the solution is implied rather than explicitly stated.  One should recall that many of the customers to whom Bailey Building and Loan lends aren’t strangers.  As George explains to his customers during the run on Bailey Building and Loan, their money has been lent to their neighbors. 

In fact, a loan to a friend of George’s, Ernie the cab driver, plays an important role in the movie.  Potter uses it as an example of why Bailey Building and Loan should be closed down.  It results in George responding with one of the most memorable parts of the movie, a speech that is often quoted. He points out that the majority of people at that point in time had no credit histories.

Experian Information Solutions Inc., the large credit bureau, estimates there are 64 million credit invisibles in the U.S.  The term “credit invisibles” refers to those who can't access loans based upon their credit score.  The credit score has become the replacement for George’s firsthand familiarity with the borrower.  That there is a segment of the population that does not have access to credit is not new.  What is new is that it is no longer the majority of the people referenced by George in “It's a Wonderful Life.”  The estimate of 64 million is a lot of people, but it doesn't represent the majority referenced in George's speech.
So while the portion of the population may have changed, the issue is the same.  As is pointed out in “It's a Wonderful Life,” more important than that firsthand familiarity with the borrower is “character.”  George makes explicit reference to it at one point.  

The issue for a lender isn't whether the borrower is a friend (or whether they're in the majority).  The issue is whether the borrower has the character to pay back the loan.  As the WALL STREET JOURNAL article points out, “some of those consumers [the credit invisible] are worth the risk.”  In a world that is fair, people with the character to pay back their loan should have access to credit.  The article goes on to describe some of the steps being taken to try to identify those consumers who have the character to pay back the loan.
It's interesting that some of the proposals to address this issue involve looking at things like rent and utility payments.  Of course those would have been known to Bailey Building and Loan.  But, to harken back to the theme of this year’s first postings on “It's a Wonderful Life,” one finds that there always advocates for bad financial management.  For example, the WALL STREET JOURNAL article states: “Consumer advocates have objected to the proposal, saying it may penalize low-income customers who occasionally skip payments.”  One has to wonder how people can consider themselves a consumer advocate when they are advancing the notion that people who are having trouble paying their rent and utilities should get into debt. 

A substantial portion of the “credit invisible” has gotten there because of previous experience not being able to manage credit.  That's a major difference between the issue currently faced by financial institutions trying to make lending decisions and Bailey Building and Loan.  Bailey Building and Loan was mainly dealing with people who never had credit.  By contrast, the article in the WALL STREET JOURNAL highlights a very different issue.  It notes that many of the people who are credit invisible have tarnished, incomplete or nonexistent credit files."  As one of the people interviewed for the article says, “when you have bad credit, it's hard to ever get credit again.”
Lest the difference be misunderstood, George makes explicit reference to the fact that one of his customers experienced financial difficulties.  He uses it as an example of why they should want to keep Bailey Building and Loan going.  He points out that Potter would have evicted the customer.  So, the difference is partially quantitative, but one should doubt that George is referring to problems that resulted from previous use of credit.  In the 1920s and 30s, such problems were not common among much of the population.

So, let's inventory.  Both in the “It's a Wonderful Life” and now, banks have to deal with the issue of how to identify those with the character to repay a loan.  Now banks have access to extensive records on previous debt payment that weren't available in the 1920s and 30s.  But those records only go so far in identifying creditworthy customers.  There is still a substantial portion of the population that should be able to manage credit but who do not have access to credit.  It's currently a much smaller portion than it was 20s and 30s, but it is, nevertheless, a substantial number of people. 
The reason why credit is denied to many people is no longer just lack of previous credit experience.  An issue that is much more important now than it was in the 20s or 30s is how to address the people who have previously failed in their credit management experience.  Further, there is now a substantial group of “consumer advocates” who seem more interested in getting people into debt than in the well-being of consumers.

While many things have changed, one thing remains important.  As the WALL STREET JOURNAL article states about efforts to address the issue: “Those efforts could offer a reprieve to millions of Americans who have been denied credit, not to mention deliver a windfall to banks scrambling to find new sources of revenue.”  Improvements in the ability to identify individuals with the character to repay their loans have tremendous benefits both to the individuals involved and to banks.  What is often overlooked is that missteps in identifying the individuals with that character have tremendous cost.
Comparing “It's a Wonderful Life” to current issues surrounding how to identify individuals who will repay their loans highlights one aspect of the issue.  It makes it quite obvious that the issue is timeless: it has always existed.  It also isn't unique to developed economies. 

Much of the world experiences the difficulty of identifying individuals with the ability and character to repay their loans in a way that is similar to “It's a Wonderful Life.”  Consumer credit markets are new in many parts of the world, and credit bureaus, and the associated credit files, don't exist.  When it comes to access to consumer credit, a substantial portion of the world's population exists in a state similar to George Bailey's customers.
In many respects in the developing world the situation is the inverse of the US.  The US is trying to figure out how to identify those worthy of credit after a period of excessive ability of credit.  In the developing, world the problem arises from the total absence of consumer credit.

Given the difference in the issues being addressed, it isn't too surprising that lenders in the developing world are seeking approaches that avoid the reliance on credit history.  For example, is developing analytic techniques that focus on measuring the financial responsibility of a consumer from information other than his or her previous credit history.  In developing economies where consumer credit markets don't exist, such techniques are vital.
If there is any doubt that the problem is the same (i.e., judging the character of the borrower) it should have been eliminated by the founder’s presentation at TEDxWallStreet.  The presentation, entitled “How Facebook, Twitter, Google+ and LinkedIn will change Finance” is quite explicit about the nature of the problem.

A good deal of The Hedged Economist’s career focused on how to use information in lending decisions.’s approach is intriguing and represents a significant effort to return to character lending.  It has the potential to provide tremendous benefit to consumers in developing economies. So, a disclosure that The Hedged Economist is an Angel investor in should not be surprising.

Sunday, December 16, 2012

“It's a Wonderful Life,” and the “Fiscal Cliff.”

Addressing the fiscal cliff without politics.

Continuing with the theme of the last posting “It's a Wonderful Life’ and It's Good Financial Advice,” it's worth looking at the fiscal cliff from the perspective of the financial management wisdom of “It's a Wonderful Life.”
On November 3, 2012, the WALL STREET JOURNAL had a piece entitled “Tackling Investor Ignorance.  It was an interesting effort to try to point out a major financial problem.  They deserve to be congratulated for addressing the issue.  As they stated: “The financial crisis exposed greed, reckless decisions and regulatory failures. Now we can add another shortcoming to the list: the ignorance of too many small investors.”  It's about time someone pointed that out.  

To me, it seems obvious from the start.  You can’t have a financial crisis like we had if only one side participates.  It took all players, which seems fairly obvious given that the problems uncovered were systemic.
There are many key pieces of information relevant to financial management that the fiscal cliff discussions indicate the public lacks; enough to justify a separate posting.  For now, however, let's focus on one not mentioned in the WALL STREET JOURNAL article.  It's one that's much in the news.  It has to do with tax rates, and in particular the Bush tax cuts.  For readers who just can't live without politics, I'd recommend a WALL STREET JOURNAL opinion piece entitled “Obama'sMiddle-Class Tax Flip: After a decade of bashing by Democrats, the Bush tax cutsget strange new respect.”

It points out the new orthodoxy being advanced by many analysts of the fiscal cliff.  Much of the fear of the fiscal cliff originates from the belief that the middle class benefits mightily from the Bush tax cuts and cannot afford to see them expire, thus, the insistence on preserving “middle-class tax breaks.”  This is a stark contrast to the original complaint that Mr. Bush's tax cuts favored the rich over the middle class.  That original complaint morphed into the orthodoxy we know today: Tax cuts for the rich came at the expense of the middle class.
What's clear is that a large number of people don't understand the tax rates they pay.  There are undoubtedly many people who know more about the rate paid by Warren Buffett than their own rate.  That ignorance may facilitate politicians’ demagoguing tax rates, but creating the opportunity to demagogue the issue is done at the expense of the public's ability to manage their own finances.

The WALL STREET JOURNAL article on financial ignorance lists budgeting as one of the areas where the public's financial management skills are weak.  Two years ago this blog pointed out the crucial role of budgeting in the movie “It's a Wonderful Life.”  Specifically, in a posting entitled “Investing Part 3: Setting the volume,” it noted that “…George avoids the clutches of the evil banker, Mr. Potter, due to the astute financial management of Miss Davis who only withdraws $17.50 rather than the $20 withdrawals of the customers before her….she knew she could get by for $2.50 less than the previous customers. That she leaves that $2.50 in the Bailey Building and Loan is crucial. George squeaks by with $2 left at the end of the day.”
Now, the logical question is: how can the public be expected to be able to project their cash flow and budget if they don't know how much of their cash flow will be taken for taxes?  One can't know what his or her taxes will be without knowing how taxes work. 

One can't just blame the public for their ignorance if there is a concerted effort to create misinformation on the part of many spokespeople on the topic of taxes.  Further, one can't blame the public if in late December the government still has not decided what income tax will be due in the current year.  That is exactly the situation many people in the middle class are facing. How the Alternative Minimum Tax (ATM) will be applied this year is undecided, and the ATM could apply to a substantial portion of the middle-class.  A public which understood how their taxes work wouldn't tolerate such deception and mismanagement.
Reaching a reasonable compromise about how revenue should be raised is impossible among people who don't know how revenue is currently being raised.  In a public which knows more about others’ taxes than how their own taxes work is in no position to address the issue.  Not knowing what your tax rate is or how your taxes work is a significant deficiency in the public's financial skills.  It's one that the public as portrayed in “It's a Wonderful Life” would find unacceptable.

Thursday, December 13, 2012

“It's a Wonderful Life” and It's Good Financial Advice.

Wisdom for the season.

Back on March 30, 2010, this blog posted “WallStreet doesn’t run the world.”  It discussed an important point.  It stated, “Consumers and investors, as in the general public, have an immense advantage over many institutional investors….”  The subtitle of the posting, “Time, liquidity and control,” pretty much summarized the reasons.  The posting went on to discuss how the chatter and behavior of Wall Street created advantages for the individual investor.  This posting focuses on how the chatter from Washington creates advantages for individual investors.
The chatter out of Washington is often very right for Washington, but can actually spell disaster for the general public.  More often than not, the chatter contains or implies terrible financial advice. At this time of year, one need go no further than the classic Christmas movie “It's a Wonderful Life” for much better sources for financial education. 

It's good to start with the basics.  In that regard, it's worth noting the financial behavior of the customers of Bailey Building and Loan.  It's a stark contrast with the chatter from Washington.  The customers of Bailey Building and Loan all have a savings account.  As one customer says, all of their money is in the savings account.  The emphasis should be on “all.”  Their first venture into finance is to set up a rainy day fund, a reserve, or whatever you want to call it.  The point isn't that you should have a savings account at a savings bank.  The point is you should have a reserve.  It could be with the savings bank, a regular bank, a brokerage firm, money market fund, a short-term bond fund, or just some money in a safe deposit box.
Contrast that to the Washington chatter reported in the WALL STREET JOURNAL in a report entitled “Bank of America Backs Down On NewFees.”  The new fees referenced in the title are “the fees that were under consideration for year's end would have applied to the bank's base of 50 million customers, but most of them would have been able to avoid additional charges because of their higher average balances and use of other products.”  So, customers who had set up a rainy day fund or a reserve at Bank of America wouldn't be charged a fee.

Let's consider the absurd response to the very consideration of the fees.  The article reports “the fees are unpopular with customers, regulators and many legislators…. Levying new charges opens banks up to criticism that they are punishing lower-income customers with policies that encourage users to hold larger balances and use multiple products.”  One might logically ask: “How in the world can it be considered “punishing” customers to encourage them to have a rainy day fund in the form of “larger balances?”  It would be far more logical to argue that Bank of America is only encouraging them to avoid financial practices that are characteristic of many peoples’ financial mismanagement.
Most financial planners, and certainly any financial planner worth listening to, would emphasize that setting up a rainy day fund is the first step in financial management.  That's true across a range from the simplest plans designed to help those with no financial planning experience to the most sophisticated financial management discussions.  So, the Washington chatter clearly encourages poor financial management.

Unfortunately, a substantial number of people haven't realized how stupid the posture out of Washington is. Most Americans lack a sufficient cushion.  Almost half of Americans lack a three-month stash of cash to cover emergencies, according to a survey conducted in June by  However, perhaps people are starting to wise up: the current figure is an improvement from 2006, when a similar poll found that 61% of Americans lacked such a cushion.  Nevertheless, it still shows that not enough Americans are prepared for the unexpected.
So, right out of the gate, Washington is encouraging financial mismanagement among consumers.  Now, let's look at it from Bank of America’s perspective.  Remember, they were not just encouraging the consumer to have a rainy day fund.  They were also willing to waive the fee if the consumer used other Bank of America services.

Again, let's look at the experience from “It's a Wonderful Life.”  Keep in mind that the customers of Bailey Building and Loan are not just customers for savings accounts.  George Bailey makes explicit reference to the fact that some of those customers, perhaps all, have mortgages with Bailey Building and Loan. 
Bailey Building and Loan, as those familiar with the story may recall, survives the depression and the associated bank runs.  So perhaps, the better advice from Washington would be for banks to encourage customers to develop multiple relations with the banks.  It certainly would make for a more stable financial system.  It's not a stretch to argue that a substantial amount of the financial crisis was due to lending to individuals without having adequate familiarity with the customer.

It is not just Bailey Building and Loan that benefits from the practice of having multiple relationships with a customer.  No one outside of the ownership of Bailey Building and Loan bails out Bailey Building and Loan.  No one loses their deposits, and the run does not necessitate massive foreclosures.  The wizards in Wall Street and Washington could learn something from this simple parable.  Perhaps, Bank of America did.
So, let's inventory.  There is advice there for you and me as consumers: start with a rainy day fund.  There is advice there for you and me as borrowers: deal the financial institution that takes a holistic view of your finances.  There's advice there for banks: taking a holistic view of consumers will result in financial stability.  There is advice there for bank regulators: recognize the stability of financial institutions with multiple relationships to their customers and reward them. 

Thursday, December 6, 2012

It's Not Ideology.It's Waste.

Would you spend your money this way?

One has to shake their head in disbelief.  There is no way that the government can pretend that this is other than wasted resources.  However, note that this is from one day’s news coverage. Both of the items discussed in this posting refer to material from the WALL STREET JOURNAL dated December 6, 2012.  Is it any wonder that the public stops reading newspapers and following current events when this sort of stupidity is routinely displayed?

The first item concerns a report entitled “U.S. Gas Exports Clear Hurdle,” and subtitled “Study Citing Benefits Could Hasten Approvals From Obama Administration.”  The article reports that “Shipping some of the newly abundant U.S. natural gas overseas would benefit the nation's economy more than keeping it all at home, according to a long-awaited government study that has the potential to reshape the global energy market.”
Think about that for a minute.  We are using sanctions against energy exports from Iran in order to punish them and force them into submission.  Yet, we need to do a study to find out that we shouldn't do the same to ourselves? 

But one doesn't have to look to our current foreign policy to realize the insanity of requiring the study.  Anyone who is the least bit familiar with American history realizes that we have done tremendous damage to the US economy in the past when we embargoed our own exports.
If current foreign policy and American history are not your strengths, try current trade discussions.  Populists and even some economists bemoan our lack of exports and criticize foreign governments for protective actions.  We criticize foreign nations for exporting too much to us, and in some cases insist that they put quotas on the amount they can export, not for their own benefit, but for our benefit.

The money spent on that study represents waste, but the waste doesn't end with the money spent on the study.  One has to wonder about the lost opportunities associated with the fact that this study was “long-awaited.”  Why would it take so long to reach an obvious conclusion, unless there were opportunities for the government to shake down energy producers and consumers for campaign contributions in the interim period. 
So, we've got the waste of the study, the waste of the delay, and the wasted resources used in lobbying.

The disclosure is in order.  The Hedged Economist is not a particular advocate of natural gas exports.  In fact, although highly skeptical of natural gas exporting, it isn't rocket science to see that this whole article reflects nothing but waste.
The second item is a little more subtle and could be subject to misinterpretation.  That isn't surprising since it's taken from the opinion page.  The particular item is entitled “Playing Chicken in Oil-Patch Politics,” with a subtitle “Another green gambit by the Obama crowd to stop the energy boom.”  So, it might be good to begin with the blanket statement that these comments are not in any way associated with an advocacy position.  One doesn't need to take a position on the issue to see the stupidity of what's being reported.

A little background is in order.  The piece points out that “The U.S. Fish and Wildlife Service recently announced that it will formally consider listing the Lesser Prairie Chicken—whose habitat includes some of the nation's major energy fields—as a threatened species under the Endangered Species Act.”
It goes on to report that “This summer, after months of research, Fish and Wildlife conceded that listing the Dunes Sagebrush Lizard as threatened or endangered wasn't warranted….As it happens, the habitat of the Lesser Prairie Chicken largely overlaps that of the Dunes Sagebrush Lizard.”

Understand, The Hedged Economist is all for leaping lizards and lesser chickens.  In fact, one could say that the author is even favorably disposed toward greater chickens.  That's not the issue.
Here is the issue.  The piece goes on to report that “… another issue of concern is the funding behind these efforts to list certain animals as endangered. Texas Land Commissioner Jerry Patterson testified to Congress in June that taxpayer money is being spent in litigation over these listings. For instance, the petition to list the Dunes Sagebrush Lizard was originally filed by a radical environmental group, the Wild Earth Guardians. Interestingly, this group collected $680,492 in tax money (as grants and the like) from Fish and Wildlife between 2007 and 2011. During that time the group sued the federal agency 76 times over alleged environmental violations.”

It goes on to express the opinion that “By filing an outlandish number of lawsuits, groups like the Wild Earth Guardians are trying to overwhelm Fish and Wildlife resources and force settlements that the groups can dictate, instead of letting the courts decide.”  One might surmise from the fact that the article was written by a member of the Texas Railroad Commission (which is the state's primary regulator of energy production and exploration) that the opinion isn't pulled out of thin air.  However, the motives of the author of the opinion piece, Fish and Wildlife, and the Wild Earth Guardians are not the issue.
The issue is: Why in the world is Fish and Wildlife giving grants with taxpayers’ money to advocacy groups?  The Hedged Economist is clearly an advocate.  A review of posts on this blog should demonstrate a strong advocacy for economic rationality.  Why doesn't the government subsidize The Hedged Economist?  Certainly, economic rationality should rank high in the government's objectives.  But, The Hedged Economist would be quick to point out that subsidizing advocacy, even for rationality, is not a rational behavior.

The point is that government subsidies to advocates are essentially a waste.  If an action makes sense, the rational behavior is to take the action, not to provide subsidies to somebody to advocate the action.  That seems particularly obvious if the advocate’s approach to achieving his or her objectives is to screw up the workings of a government agency, as the piece contends is the case in this instance.
This posting is written with a full understanding that we just elected a president who has displayed considerable hostility toward fossil fuels.  Therefore, one can't object to the president pursuing his objective of inhibiting energy production.  That isn't the point of the posting.  The point is that if making fossil fuels scarce and expensive is the president's policy; let him pursue it in a rational, less wasteful manner.