Libertarians and Responsibilities

From the WQ (Summer 2008, page 28):

When government takes over the responsibility from citizens, the citizens can't develop their own values anymore. So when you want people to develop their own values in how to cope with social interactions between people, you have to give them freedom.
-- Hans Monderman, Netherlands traffic engineer

This concept is so simple, even a European government worker can understand it. At least the Europeans offer benefits to all citizens, not just government workers, which creates less resistance to increased taxation. These generous benefits, however, create opposition to immigration, because more people entering a country sap the benefits from existing persons, assuming a stable and finite tax base. America, thus far, has been more open to immigrants, which is responsible for much of its success.

Housing's Real Issue: Bigger Ain't Always Better

The Wilson Quarterly (WQ, Summer 2008, Vol. 32, No. 3) published an article by Witold Rybczynski about affordable homes.

What's driving the high cost of houses today is not increased construction costs or higher profits...but the cost of serviced land.

The author refers to "serviced land" in two ways: one, the passing of costs from the government to developers for infrastructure; and two, NIMBY (Not In My BackYard).

Prior to Prop 13, the government would increase taxes on local communities for services that followed increased population growth, such as new roads, new parks, sewers, and general maintenance. Now, many local governments cannot increase property taxes to make up for the increased need for services, so they force developers to pay these costs if they want to build. The developers take the financial infrastructure hit up front and pass those costs onto the homebuyer at the end in the form of higher home prices.

NIMBY is easy to understand in this case. There is "widespread resistance to growth," so locals pass zoning laws and restrict building permits to prevent more houses from being built. These legally mandated slow growth policies lead to pent-up demand and not enough supply of houses, causing artificially inflated values. Anyone who's lived in Northern California and New York knows there isn't a problem with overpopulation and population density in California to justify California's slow growth policies--at least not yet. Rybczynski says,

According to the research of economists Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, since 1970 the difficulty of getting regulatory approval to build new homes is the chief cause of increases in new house prices. In other words, while demand for houses has been growing, the number of new houses that can actually be built has been shrinking.

One tactic cities use to stall new homes is zoning for large lots, like one acre. This forces larger houses and higher prices. In the past, many individual homes would be only 1/6 of an acre. Rybczynski states,

Smaller houses on smaller lots are the logical solution to the problem of affordability, yet density--and less affluent neighbors--are precisely what most communities fear most.

I would love to see a return to smaller houses. One advantage of not having a lot of space is people will consume less if they know there isn't so much space to hold their new purchases.

Follow-up from Mankiw's blog: Assar Lindbeck once called rent control "the best way to destroy a city, other than bombing." Rent control is another regulation that discourages new real estate development by providing an incentive for renters not to move. At the same time, it discourages new developers from investing in new buildings because the owners will be unable to charge higher market prices. I am conflicted about rent control, because there must be some cap on rent increases that will satisfy both renters and developers. Leaving renters to the pure whims of landlords doesn't seem ideal. Of course, in trying to establish an ideal cap on rent increases, we could end up with the problem of the cap actually inflating rents. For instance, if we enact a 5% annual cap, all landlords will probably raise the rent 5% a year when they might have kept the rent unchanged without the law.

Debt, debt, and more debt

The SJ Mercury News published a chart about America's addiction to debt. As Barry Ritholtz would say, this is lovely chartporn.

If you're into credit cards, the chart also lists the market share of each major credit card company:

Visa 46%
Mastercard 36%
American Express 12%
Discover 6%

Take Two and EA Call It Off

The NY Times is reporting the EA/Take-Two courtship is no more:

http://www.nytimes.com/2008/09/15/technology/15deal.html?ref=technology

On top of the credit turmoil this weekend, this is really bad news for Take Two (TTWO). It's going to be interesting to see how far TTWO drops on Monday, and how much ERTS increases. I told the Board at this year's ERTS shareholder meeting the EA/TTWO merger was a fine idea prior to TTWO's numbers being released. Everyone knew the latest release of Grand Theft Auto would do well, which would cause Take Two to demand a far higher premium than its intrinsic value warranted. The simple fact is Take Two's pipeline is weak. Like Pfizer (PFE), Take Two has a great balance sheet, but not much in the way of forward growth. That being said, I expect EA to come back to Take Two when its numbers show a gradual decline in sales, forcing Take Two to be more reasonable. Someone will buy Take Two at some point--as I said before, it's just a matter of who and when.

I sold my Take Two shares on Friday, netting a 2.2% percentage gain in three days. As a trader, sometimes it's better to be lucky than good.

Disclosure: although I do not currently own TTWO shares, I may buy shares in the future.

The NAACP's New Man

Another blogger wrote a post about race in America and the new head of the NAACP. It's such a well-written post, I had to share:

http://politicalcolors.blogspot.com/2008/09/new-face-of-naacp.html

The writer makes a great point when she asks the rhetorical question, "What happens to high school dropouts? They become the chronically unemployed."

War, Teddy Roosevelt, and Wilfred Owen

On this tragic date, I provide you two perspectives. One is from a former U.S. president; the other, from a British poet.

It may be that at some time in the dim future of the race the need for war will vanish: but that time is yet ages distant. As yet no nation can hold its place in the world, or can do any work really worth doing, unless it stands ready to guard its right with an armed hand. (Quoted in Edmund Morris, The Rise Of Theodore Roosevelt, p. 594)

Dulce Et Decorum Est
by Wilfred Owen

Bent double, like old beggars under sacks,
Knock-kneed, coughing like hags, we cursed through sludge,
Till on the haunting flares we turned our backs
And towards our distant rest began to trudge.
Men marched asleep. Many had lost their boots
But limped on, blood-shod. All went lame; all blind;
Drunk with fatigue; deaf even to the hoots
Of disappointed shells that dropped behind.

GAS! Gas! Quick, boys!-- An ecstasy of fumbling,
Fitting the clumsy helmets just in time;
But someone still was yelling out and stumbling
And floundering like a man in fire or lime.--
Dim, through the misty panes and thick green light
As under a green sea, I saw him drowning.

In all my dreams, before my helpless sight,
He plunges at me, guttering, choking, drowning.

If in some smothering dreams you too could pace
Behind the wagon that we flung him in,
And watch the white eyes writhing in his face,
His hanging face, like a devil's sick of sin;
If you could hear, at every jolt, the blood
Come gargling from the froth-corrupted lungs,
Obscene as cancer, bitter as the cud
Of vile, incurable sores on innocent tongues,--
My friend, you would not tell with such high zest
To children ardent for some desperate glory,
The old Lie: Dulce et decorum est
Pro patria mori.

Take Two Options

The EA and Take Two Entertainment (TTWO) saga continues. Here is what my friend had to say about TTWO's options:

The number of call contracts (meaning, they can buy the stock at that price no matter how high it rises) are very high, way exceeding the puts contracts (meaning, they can sell the stock at that price no matter how far the stock drops). This is for September, October, and December. The number of open contracts is significantly higher for September than the other months, probably because a lot of these contracts were opened months ago when ERTS was rattling its saber particularly loudly. I think the drastic drop in open contracts means people are getting bored with ERTS' overtures. Buying the December 25 calls [might] be a cheap way to play this baby. You'd only tie up a nominal amount of money, and...if ERTS does buy TTWO it will be for at least 26, so it's pretty much a double-or-nothing type venture. The flip side is, the very small number of open put contracts suggests everybody's expecting ERTS' offer to remain on the table indefinitely.

I am blessed to have some smart friends (thanks, Jeff), and I think his analysis is spot-on. At a certain point, Electronic Arts (ERTS) must acquire other companies to grow, and the few potential targets in the video game sector mean ERTS will work hard to buy TTWO.

Also, ERTS is not playing it safe--it's been reporting a loss per share for some time now--so ERTS may end up offering significant cash per share to make the deal happen. TTWO, on the other hand, is cash-rich and just reported net revenue of 433 million. For TTWO, the only question is who and when--who will take them over, and when will it be? TTWO's high cash reserves make it difficult to place a takeover value on the company, and because it has been reporting reasonably good sales, TTWO may take the attitude that it can just sit back and wait for better offers. Yahoo's Jerry Yang tried that, too, with disastrous consequences for his company's share price. I can't wait to see how this particular drama unfolds.