rowyn

I mentioned over a year ago that I'd started listening to podcasts. I only listen to them while I'm exercising, because exercise is boring and I usually exercise outdoors so watching videos is out. (On the occasions where I do exercise at home, I've watched some Netflix, and over the course of a year I've managed to finish two seasons of The Dragon Prince and of She-Ra. That's not a whole lot of videos for someone who usually exercises for several hours a week.)

I still like "#Fsck 'Em All" and "Make No Law", but those have become very irregular, so I don't get to listen to them much. I've been listening to "All the President's Lawyers", which is "Josh Barro (journalist) talks with Ken White (defense attorney and former federal prosecutor) about the current president's many legal problems". I really like it -- Ken White also does "Make No Law", and I enjoy his combination of scholarly knowledge and dry humor. I also listen to "Left, Right and Center", which is Josh Barro talking to political pundits about current hot topics. I do not love LRC nearly as much because I am just not that into political punditry. Both shows are by KCRW, a public* radio station in southern California.

* KCRW's website says they are "a community service of Santa Monica College" but the feel is way more like public radio than college radio and they broadcast NPR shows as well as original programming, so I'm gonna stick with "public radio."

I've tried some other podcasts that haven't stuck: "I'll listen to this writing-themed podcast! I like these writers! ... um ... I do not like this podcast, though."

"Maybe I'll try this food-themed show WAIT NO what was I thinking I hate listening to people eat and this is an audio show entirely composed of people eating."

I have listened to fiction before, but the truth is that my attention tends to wander when I'm listening to a podcast. With long-form fiction, missing a few minutes kind of means that I don't know what's going on anymore and it's very annoying. With a news podcast, it generally means "I missed part of this four-minute bit and they're gonna switch subjects soon anyway, whatever." I feel like I should try fiction again, either as podcasts or audiobooks, but I haven't.

What I did instead was look at NPR podcasts. I found "Planet Money", which I'd heard of before, and my thought process went "It's a show about business and economics! I used to love reading the WSJ, for reasons I have never been able to adequately explain. I will probably like this." I was right. "Planet Money" has a sister show, "The Indicator", and I've been listening to it too.

One old episode of "The Indicator" was about "animal spirits" as an economics concept. No, this has no connection with "spirit animals". Instead, it's a term Keynes used to describe the emotions that affect decision making in the marketplace, and in particular in the stock market. Decisions that cannot be explained by rational factors alone are considered to be motivated by "animal spirits".

Emotions tend to get a bad rap in decision-making, and so do "animal spirits", but one thing that struck me in the show was that one of the hosts pointed out that "animal spirits" are what prevent people from being paralyzed by indecision.

And this struck me because it reminded me of some case studies on brain damage. This article isn't where I first heard about it, but presents a couple of examples: https://www.thecut.com/2016/06/how-only-using-logic-destroyed-a-man.html of the phenomenon. In essence: brain damage can impair a person's ability to feel emotions. And you might think that this would make people better at making decisions: now they will only evaluate things rationally!

But it turns out that it makes people unable to make decisions at all. Without an emotional component -- without a reason to prefer one option over another, or even one outcome over another, people don't bother choosing. They cycle over different alternatives endlessly, unable to decide.

I find that fascinating, and it reminds me that it has always bothered me to put "rational/logical" on one end of a spectrum and "emotional" on the other, because I've always felt that emotion must inform the backbone of all logic. Logic is based upon assumptions, and assumptions in the real world include value judgments. If you take emotional weight out of your assumptions, you won't have premises like "it is better to be happy than miserable" and your logic will produce FREAKISHLY TERRIBLE results Not to mention that, without emotions, what is the point to having assumptions like "life is better than death"? What is a preference, if not an emotion?

So to my mind, "evaluating things rationally" doesn't mean "without emotion" but rather "use reason to determine how to meet your emotional needs." Incidentally, this informed the narrative in A Rational Arrangement, because Wisteria, my extremely rational female protagonist, also had lots of strong emotions: she had likes and dislikes, she fell in love, she got angry, etc. And Wisteria never thought "emotions are irrational; I shouldn't feel this." She used reason to meet her long-term needs for love, satisfaction, contentment, and happiness.

Irrationality is better defined as "short-term emotional states which run counter to your long-term needs." Or "emotional responses which are premised on an irrational assessment of risk." "Irrational assessment of risk" is a serious problem for human beings, because our gut feelings about "risky" vs "safe" are usually terrible. We estimate risk based on "how often have I heard stories about this happening/has it happened to me personally" and so we vastly overestimate the risk of dramatic events that get a lot of attention in the media, like kidnapping, and vastly underestimate the risk of boring hazards, like driving.

Another episode was about "private firefighters", which is an industry mostly funded by insurance companies. They hire private companies to protect houses they've insured during fires. The fact that this is a service funded by insurance companies -- people whose only incentive is economic -- made me feel that local governments -- at least in the areas where private firefighters flourish -- do not have fire departments that are remotely as robust as they ought to be. Why are we not hiring more firefighters? Is firefighting not sexy enough to spend tax dollars on? Do people not realize that more money on firefighters would result in less damage from fire and a net economic gain? I mean, there is obviously a point of diminishing returns on firefighting and I assumed that most areas were already at that point. But if insurance companies think it's worth buying more firefighting, then that strongly suggests they are not.

The podcast was only about California, which (a) catches fire more often in recent years than it used to (b) has always had a problem with fires and (c) has a lot of very expensive real estate in fire-prone areas. So I don't know if this is a case of "it would be a net economic gain if fire departments everywhere were better funded" or if it's a matter of "some areas in California and the Pacific Northwest have disproportionately underfunded fire departments relative to the risk of property damage."

The Indicator didn't talk about the impact on human lives because these were all cases of wildfire, where you had huge fires raging and everyone had been evacuated. They did compare it to education, in that we have a public education system that's not as good as the private education system that rich people can afford for their kids. I think that's a valid comparison, but also that firefighting is much easier to quantify than a public good like healthcare or education. You can measure the good done by firefighting in terms of "lives saved" and "property damage prevented". The "lives saved" part is hard to value, obviously. But the property damage side is easy. You can look at past years and how much it cost to rebuild after the fires in a given area, and analyze how much damage could have been averted by having more firefighters & equipment available. If in an average year, it costs more to rebuild than it would to pay for firefighters and their equipment, you should have more of the latter. There's obviously considerable guesswork involved; you're never going to know for sure what the likelihood of future fires is or how much damage is prevented per dollar spent on firefighting. But it's an area where you can get a lot of data, and it's not nearly as squidgy as the economic value of an education at a private elementary school vs a public one.

I will share one last favorite "indicator" from the show before I go: 3.5%. If 3.5% percent of a country's population participates in a protest, then that protest will effect revolutionary change in the country's government. That would be "the percentage of people who physically show up", obviously, and presumably it means that if your country has 3.5% who are passionate enough to go to a protest, a whole lot more than that support the protest's goals. But that's the statistic based on analysis of protests across the globe for the last hundred years.

3.5% of America's population would be 11.5 million, if you're curious.

Anyway, I'm enjoying the podcast and will stick with it. I still need a few more hours per week worth of podcasts to listen to in order to have something every day, though. So I'll probably catch up on the last few months of The Indicator and maybe Planet Money, and then look for something new.

I need to say one thing at the start, because the silliest rumor on Twitter is "There will be no more Twinkies!" Which is ridiculous: whether Hostess liquidates or not, there will be more Twinkies. Hostess has a number of problems, none of which are "people don't eat Twinkies any more". If Hostess goes into liquidation bankruptcy, then some other bakery will buy the Twinkie brand name and recipe and start making Twinkies. Very likely, some one will buy the Hostess brandname itself and produce Hostess cupcakes and many if not all of their most popular snack cakes. They may not be quite the same, and there may be a delay in production, but they'll go on.

That aside, the Wall Street Journal had an interesting opinion piece by Holman Jenkins on the problems at Hostess, suggesting that the core problem is union vs union. It appears Hostess's distribution costs are excessively high for their product: Jenkins argues this is due to the costs of Teamsters contracts and union rules. The bakers' union, therefore, is betting that their members will be better off under whatever entity buys Hostess out of liquidation -- which won't have the unusually high distribution costs and therefore will be able to pay the bakers a market wage instead of the below-market ones that are all Hostess can afford.

I have not done any research into the situation on my own, but this struck me as pretty interesting and the most rational explanation I'd heard for what's going on, so I figured I'd share.

Whoa.

 

The US Justice department is threatening suit against Apple and five major publishers, alleging collusion to raise book prices.

 

This is a fascinating situation to me. I do find it hard to see the whole agency-model thing as anything other than collusion to force Amazon to stop discounting e-books.  OTOH, it's not exactly clear that letting Amazon discount their way into the position of sole retail outlet for ebooks is the path to less monopoly power.

 

I don't know much about the law in this case, or what outcome I am rooting for.  But I'll be interested to see how it goes.

Obama Administrations Proposes Fannie Mae, Freddie Mac Phaseout

I am very happy about this, as you might expect. The FMs have long enjoyed bipartisan support in federal government, and they played a key role in the housing market boom and subsequent bust in the 2000s. It's awesome to see the Obama administration not only acknowledging that, but acknowledging that the best solution is to get rid of them. Woohoo!

Some of the alternatives offered are not a whole lot better than the FMs, alas -- option number 3 is "we'll make new FMs but guarantee their securities explicitly instead of implicitly" -- an FDIC for mortgage-backed securities. I don't think the mortage market needs federal backing to function, and giving it federal backing makes it more likely that the feds will be called in again for another rescue. I'd prefer the feds got out of the business entirely.

BUT! All of the options are better than the current system, and since reform in this area has always been a political hot potato, I'm just delighted that none of the options are 'keep on doing it exactly the way we have been but with New Improved Tighter Regulations(tm)'. I wish President Obama every success in getting the FMs out of the picture.

A couple of years ago, I posted a rant about Fanny Mae & Freddie Mac's involvement in the economic trainwreck still unfolding today. (Summary: RARGH ALL THEIR FAULT WHY DIDN"T ANYONE STOP THEM?!?)

jurann left a comment on my post last week that reminded me of this, and reminded me that I've never tried to organize all of my thoughts on What Went Wrong. Because of course, it's not all the fault of the FMs, although they helped.

I'm going to try writing about the gestalt now. I'm not sure I'm going to make it through everything, because there's just so much.

Fannie Mae is the Federal National Mortgage Association. It was created as a government entity to create a secondary mortgage market -- that is, to allow banks and mortgage brokers to make loans, and then sell those loans to other investors. Once the loans were sold on the secondary market, banks and mortgage brokers could go make more loans. This was a reasonable idea, as xthread pointed out on my previous rant, because it diversifies risk. If Itty Bitty Bank makes a bunch of loans to people in Small Town, a crisis in Small Town could destroy Itty Bitty Bank. If Itty Bitty Bank sells a portion of those loans instead, and then buys some portion of loans from across the country, they're protected against localized crises. The secondary market also lets more people play in the game.

In 1954, Fannie Mae became a "mixed ownership" corporation (both private investors and the federal government held stock in it). In 1968, Fannie Mae was privatized and officially no longer owned by the government.

The big problem with the 1968 change is that no one has ever believed it. ( Click to read why! And other stuff about the financial collapse )

I feel like this article missed a significant part of why "snacking" is on the rise and "meals" are on the decline. Yes, part of it reflects the general trend towards unhealthy foods. But part of it is an inversion of the "supersize me" trend in restaurant food. 

Here's how I see it. Some decades ago, fast food restaurants are looking for ways to compete. "I know," they think, "consumers love getting more! Let's up-sell them on items that give twice as much food for a 15% price increase. It's a good deal for them and it's good for us because our main costs are fixed (ie, labor, building, equipment, and other things that don't change in price much by selling more food in a single transaction.)"

Or you get trends like candy bars, which back in the 80s started getting bigger without rising in price -- more is better! And once one company starts doing it, all the other companies have to do it to stay competitive. You don't want to be the stingy restaurant who serves tiny portions.

Except that many consumers don't actually want MOAR. And eventually some of them point out to the restaurants that their portions have grown to three times the size that an person of average proportions needs to eat in one sitting, and maybe a smaller portion would be nice?

But a restaurant can't shrink their portion sizes! That's crazy talk. How are you going to advertise "Come to McD's and get LESS for your money?" Yeah, there's a winning campaign. But some consumers really do want less, and you don't want to ignore them ... aha! Let's add a smaller version of our existing menu items, and call it a 'snack'! Okay, so it's the same size and about the same nutritional content as our 'meal' items 30 years ago, but we can't call it a meal because it's not what people are used to seeing called a meal. It looks all scrawny and small on a plate.

It is, however, the right size for a meal and many people realize this. So they start eating the 'snack' sizes instead of the gigantic 'meal' sizes. And they call it 'snacking' because that's what the menu says it is. And thus the trend comes full circle. And only the language suffers. >:)

Yes, I'm sure that's not all of it. But I do think it's a significant contributor.

The Wall Street Journal published this quirky article about a Mayfair city official's job to track down the owners of unoccupied mansions. Two things struck me from it:

Many owners decline to rent the homes due to local council tax rules, which tax properties at a lower rate if they are empty and unfurnished.

It is just like government to create a tax incentive for owners to leave properties vacant, and then, to fix the fact that people are actually leaving the properties vacant, employ someone whose job it is to find owners and force them to sell or occupy the properties. I mean, what else could they do? Stop offering the tax incentive? That's just crazy talk!

But this was my favorite part:

Mr. Palmer often takes a more sympathetic view to squatters than he does toward the owners of an abandoned property. [...] "At the end of the day, they have a similar goal of putting empty properties back into use," he says. "We just go about it in two very different ways."

Which is quite cool, especially since "they attract squatters" is one reason cities dislike vacant properties. OTOH, even squatters will make some effort to maintain the property they're living in.

I've been reading here and there about the economic stimulus bill in Congress, but not very much about it in LJ. Which made me curious what my friends think of it. Hence, a quickie poll!

[Poll #1346426]

Also, if any of you are so inclined, I'd be happy to hear your thoughts in detail. :)

The House Committee on Education and Labor hears testimony on nationalizing* pensions and 401(k) accounts.

Dear Congress:

I do not want a bailout. I do not want to be punished for having chosen to save for my retirement by having my savings taken away from me. I do not want my retirement savings to go bankrupt by the time I'm 65 the way the existing Social Security Administration is going to. In short:

DO NOT WANT.

Please keep your grubby hands off of my investments. K thx.

Love and kisses,
Rowyn

* Edit: shaterri looked at the actual testimony (which I can't do at the moment, so see his comment below), and apparently the article linked above is at the least inflammatory if not outright fabrication: the testifying speaker doesn't advocate "confiscating" existing 401(k)s or pensions. I feel better. Thanks, Shaterri! And I'm sure Congress wouldn't take her seriously even if she had. Really. 99.9% sure, anyway.

I am not an expert on financial matters, but I've been following financial news for the last ten years or so. I read it because I find the workings of the market and businesses ... fun. Some people like to read about politics or international incidents or local crime; me, I like hearing about why companies are succeeding or failing, why they're making the decisions they do. Business, at its root, is all about the things people do every day; maybe that's why it interests me.

It's been an interesting time for business news recently, in the Chinese proverb sense. Some of this raises the kind of passion in me that most people reserve for political issues like abortion.

So just to warn you: this is a rant. I am ranting about mortgage lending, which is very topical if not normally considered the subject of ranting. I will endeavor to give some useful information and not be boring, but my biases will color my presentation. But I do know that Fannie Mae and Freddie Mac didn't really eat babies, kick puppies, cause global warming, or single-handedly destroy the global financial system. Honest.

*

Nine or ten years ago, when I was still new to banking, my boss talked to me about Baby Bank's plan to hire a new loan officer. "He's going to make mortgage loans for us to sell on the secondary market."

"Oh? How's that work?" Baby Bank did very few home loans, and I'd always wondered why not.

"We find borrowers who want loans against homes, and make them loans according to Fannie Mae's standards. Then we sell them to another bank, who pays us a fee. Then that bank sells them to Fannie Mae, who pays a fee to that bank to service the loans, and packages the loan together with other loans and sells them to investors as securitized investments ... bonds, basically."

"Investors ... like ... banks?" I said. "Like us?"

"Yes."

"Doesn't this sound ... unnecessarily complicated to you? Why don't we just lend the borrower the money ourselves and keep the loan?"

"They offer much better rates than we can. Twenty or third points better. We can't match their rates, so the only way for us to do these kinds of loans is to offer their rates and sell them the loans."

"Which are paying fee slices to two other parties and making a profit for Fannie Mae too? How do they do that?"

"I have no idea."

Thus began my distrust of the FMs. I learned more about them over the years, none of which made me like them any better. After we hired the new loan officer, I went to a seminar with him on how to make loans that met their guidelines. This would've been in '98 or '99. They touted products for customers with high credit scores that required downpayments of only 5% of the sale price and waived requirements to provide proof of income and other documentation they deemed superfluous.

Fannie Mae and Freddie Mac are, or rather, were, government-chartered institutions with a mandate to increase home ownership through loans to American home buyers and owners. However, they were not government-owned nor government-guaranteed. They were a private company. ("Private" here in the sense of "not government owned". They're publicly traded on the stock market, like Microsoft or Lehman Brothers.) When they made money, their stockholders benefited. If they lost money, their stockholders, in theory, lost money.

Except that no one ever expected the latter to happen. The FMs offered rock-bottom rates for their loans to consumers. Those who bought the securitized investments received commeasurately low rates for the investments. Because everyone, and I mean everyone, thought that if those investments ever nose-dived the Feds would bail out the FMs.

Meanwhile, the FMs worked at gobbling up the market, which is easy to do when you're offering the best rate in town. They doled out tens of millions of dollars lobbying Congress for less oversight and extensions to their charter. They wanted to raise the cap on the size of loans they could make, and lower their standards for the quality of loans they could make.

They are, as a result, huge. They own or guarantee roughly half the housing market in US. That's about six trillion dollars. Not billion. Trillion. 6,000,000,000,000. Fun comparison: the entire United States debt is a bit under ten trillion. But bear in mind that this six trillion is not money owed *by* the FMs -- it's money owed *to* them or to the investors they've sold it to. The money gets funneled around every which way. Also, $6 trillion is the face value; a substantial fraction of that portfolio is severely devalued as the result of the mortgage market meltdown. How much of it? No one knows yet. That's part of the problem. This isn't because the FMs are evil and trying to hide their losses, incidentally. It's because the market is still melting down and no one knows when it will stabilize or where.

However, the FMs, like everyone other lending institution in the world, is leveraged. The right analogy isn't "I took $10,000 out of my savings account and lent it to Bob, who didn't pay me back and now I'm out the money, wah." The analogy is closer to "I borrowed $10,000 from my bank and lent it to Bob, who didn't pay it back and now I have to file for bankruptcy." But it's more complicated than that, because the investors have varying levels of recourse. So: "I took $100 from my savings account, had Mary chip in $8000 that she'd only get paid back if Bob paid me back in full, had David chip in $1000 on the condition that he'd get paid back by Bob first, and borrowed $900 from a bank myself, and lent $10,000 to Bob" is a little more accurate. I am both simplifying and making up the ratios; I don't know the exact details of Fannie or Freddie's tens of millions of deals.

And of course, having all those extra people involved makes the chain a disaster when it unwinds, because at every step of the way someone will look for someone else to blame. Everyone's looking at the paperwork for loopholes, and if they find anything, they sue. The investors sue FM, FM sues the loan servicer, the loan servicer sues the broker. Also, since every loan is owned by a pool of investors and this complex chain of intervening layers, no one actually has the authority to renegotiate with a struggling borrower. The complexity of the chain forces foreclosure even when foreclosure is a lousy option, because the contract allows no other possibility. This problem is endemic to the mortgage market, not unique to the FMs, but it's still one of their problems.

Now, our problem with the FMs is multifold. Arguably, they never should have been chartered. Having been chartered, they should have been stuck with their original mission of increasing home ownership among low-income citizens, and not allowed to expand in every direction. Having been allowed to expand in every direction, they should have been subject to a whole pile more scrutiny. Congress made this problem, and Congress had a multitude of chances to rein it in and chose not to. Anyone who looked could see that the FMs were a disaster waiting to happen. The Wall Street Journal has been preaching against them for years. But the FMs were allowed to sail on. Their meltdown was their own doing: they're the ones who provided the financing for the run-up in housing prices in the first place.

I hate -- and unless you have been watching these people steal business from your bank for years based on lies and political incest, you cannot understand the depth and passion of my hatred -- I hate that the Feds bailed them out. Because, of course, that's the whole reason they had this giant competitive advantage over the rest of the industry; that's the way they drove the rest of the industry into increasingly risky ventures in a vain effort to compete. Because everyone always knew that they'd get bailed out. The feds wouldn't let them fail.

But, even more depressingly, I know that at this stage of the game it's much too late for the feds to do anything else but bail them out. The FMs can't be allowed to simply fail and force all their stockholders and all those buyers of securitized investments to take a bath. Because that's everyone. Everybody holds those investments. They're considered almost as stable as Treasury bonds (because, you know, everyone "knew" the US gov't would guarantee them in the end -- and look! they were right! *FUME*) As bad as the whole premise of the FMs was and as much as they deserved to fail, their collapse would take down the global market. It wouldn't be quite as bad as the US federal government defaulting on its debt (that would be TEOTWAWKI), but it'd be close.

So the US taxpayer will bail them out, because the US taxpayer was already going to get screwed one way or the other and this way is cheaper than another Great Depression would be.

Not that I'm not bitter.

In conclusion:

The FMs are an example of "private profit, public risk". For decades, the FMs raked in the cash for their shareholders and investors. Now that their bets have finally soured, the US taxpayer is going to pay for their risks. This is not a failure of the free market, because the free market didn't make the FMs: Congress did. The FMs represented the worst aspects of the market and government; it didn't even have the benefit of a nationalized institution where at least the taxpayer makes money when the agency.

I'm not saying that everything driving prices in the market down right now is the fault of the FMs. Lehman Bros. filing for bankruptcy is pretty much the result of normal free market forces. But this rant is long enough already. If I muster up the energy I'll write more about that later.