Disney's Up

If you liked Disney's movie, "Up," I've got a treat for you. Lou Romano, also known as the voice of Remy in Ratatouille, has revealed color scripts from the film. Scroll down his blog to find them:

http://louromano.blogspot.com/

The best part of "Up" was the first ten minutes, which are unforgettable.

Book Review: Barry Ritholtz's Bailout Nation

I'm a huge fan of Barry Ritholtz. His blog, The Big Picture, accurately predicted the most recent stock market collapse; as a result, Mr. Ritholtz gained millions of fans. Not being content with blogging and television appearances, Mr. Ritholtz published a book, Bailout Nation. His thesis is that excessive financial leverage, lax regulation, and government incompetence and cronyism caused our current economic crisis.

Bailout Nation is geared towards the general public, i.e., non-experts. If you have been waiting for an easy-to-read, thorough explanation about how we reached our current economic crisis, Bailout Nation is for you.

The flip side of making Bailout Nation so accessible is that long-time market followers will not be surprised by most of book's substantive content. In addition, I was disappointed that Mr. Ritholtz used a more formal writing style for his book. On his blog, Mr. Ritholtz brings an irreverent tone that makes him a delight to read. In fact, I've called Mr. Ritholtz the "Anthony Bourdain of Wall Street" because of his intelligent, devil-may-care style. (Jim Cramer would be Rachael Ray, of course.) Fans of The Big Picture, where curse words are used on a semi-regular basis, will be disappointed to know that I found only one curse word (on page 165).

Perhaps Mr. Ritholtz sanitized his writing style to reach a broader audience. (Either that, or Aaron Task, his editor, had a heavy hand in the book.) Whoever decided to sanitize Mr. Ritholtz made a mistake. As anyone who's read his blog posts can tell you, one reason people love Mr. Ritholtz is because he's the opposite of uptight. In fact, if there was ever such a thing as a "blue-collar" banker, Mr. Ritholtz would be it. There are too few people on Wall Street who have inside knowledge of the business and who are willing to take on the big boys (like Goldman Sachs) with panache. When you are one of the very few people on Wall Street who told people to get out of the market before it collapsed, your record speaks for itself--you don't need a dry, Utah-esque writing style to gain anyone's credibility. Even though readers won't see much of Mr. Ritholtz's normally informal style, don't let it stop you from reading the book--it's not quintessential Barry, but it's still pretty darn good.

Mr. Ritholtz starts out by telling us the "modern era of finance is now defined by the bailout...Perhaps what the government should be doing is acting to prevent systemic risk before it threatens to destabilize the world's economy, rather than merely cleaning it up and bailing out out afterward." (page 5) He then distinguishes between corporate welfare--bailing out individual companies--and broad-based stimulus plans, noting that the "public works programs of the Depression era were designed to impact the entire economy," not a few politically-connected groups. (page 11)

Although Mr. Ritholtz singles out the government's 1971 Lockheed Martin bailout, which he believes paved the way for other taxpayer-backed boondoggles, he places much of the blame on the banking sector and the Federal Reserve. His scorn for former Federal Reserve chairman Alan Greenspan is palpable. Mr. Ritholtz believes Greenspan actively aided and abetted the financial and housing bubbles when his job was to prevent bubbles, not make them. (As Charlie Munger once said, "Greenspan overdosed on Ayn Rand.") Given the ripple effects of the banking sector's collapse on the general economy, Thomas Jefferson's quote--that "Banking establishments are more dangerous than standing armies"--seems all too prescient today. (page 15)

Mr. Ritholtz then surveys the financial damage, and it is heartbreaking. "[A]s of March 2009, the S&P 500 was back at levels below where it was [in] 1996...If you bought the broad index [in 1996] some 13 years later you would have nothing to show for it." (page 66) The market's reversion to 1996 levels makes sense, because so much perceived wealth creation was based on false housing valuations. Most of us know that consumers used their homes as piggy banks, but I was unaware of the extent to which this occurred. Mr. Ritholtz says that "the impact of mortgage equity withdrawal [MEW] has been nothing short of breathtaking: MEW was responsible for more than 75 percent of GDP growth from 2003 to 2006." (page 96)

It doesn't get better, unfortunately. Mr. Ritholtz slams us with another shocking statistic: "From 2001 to 2008, the [American] greenback lost nearly 40 percent of its purchasing power." (page 106)

One reason Mr. Ritholtz may have seen the crisis coming was because of the unreasonable yield spread between U.S. Treasuries and mortgage-backed CDOs. He points out the absurdity in having mortgage-backed CDOs rated the same as U.S. Treasuries but paying a much higher interest rate: "These CDOs rewrote the laws of economics. They promised to be as safe as U.S. Treasuries, but paid out a significantly higher yield. In other words, for the same exact risk, the reward was much greater. This should have been recognized as an impossibility...Someone would either be winning a Nobel Prize in economics--or going to jail." (page 113)

Mid-way through the book, Mr. Ritholtz mentions the "net capital rule." "From 1975 to 2004, this was the primary tool used to prevent investment banks from taking on too much leverage. The rule limited their ratio of debt to net capital to 12 to 1; in other words, $12 was the maximum they could borrow for every $1 in capital." (page 143) After 2004, however, the net capital rule did not apply to major investment banks.

After reading about the SEC's relaxation of the net capital rule, I made up my mind--the economic collapse occurred because the SEC allowed a small number of investment banks to take on an unholy amount of leverage. How much more leverage? Well, in 2004, the SEC exempted investment firms with a market capitalization of over $5 billion from the net capital rule. Thus, Goldman, Lehman, Bear Stearns, and Morgan Stanley were no longer governed by the 12 to 1 limit. These investment firms promptly increased leverage dramatically, sometimes up to a 40 to 1 ratio. Welcome to Wall Street on steroids. Initially, the growth looks good to you and everyone else, but the shrinkage is inevitable. Or, as Mr. Ritholtz writes,

Thus we learn that the tragic financial events of 2008 and 2009 are not an unfortunate accident. Rather, they are the results of a conscious SEC decision to allow these firms to legally violate net capital rules that had existed for decades, limiting broker-dealers' debt-to-net-capital ratio to 12-to-1. You couldn't make this stuff up if you tried. (page 144)

The paragraph above sums up the book for me, but Mr. Ritholtz isn't done. He talks about the fact that "We in the United States have lived beyond our means for many years. " (page 210) As a result, we are dependent on the kindness of foreigners willing to fund our spendthrift ways, and once "you begin to depend on the kindness of strangers, it's best not to make those strangers too angry." (Id.) So, "Why bail out overseas counterparties and debt holders? One gets the sense Uncle Sam had little choice in the matter." (Id.) I echoed Mr. Ritholtz's conclusion here in September 2008:

The money belongs mostly to the Japanese and Chinese, who have lent us trillions of dollars by buying up U.S. debt, bonds, and preferred shares. If we want them to continue financing our lifestyle—-which they will do, because few other places contain citizens so willing to spend—-they set the terms of the bailouts, not us...In large part, international investors are willing to forgive our transgressions because of the bailouts.

Or, as the joke goes, "I just took out a dollar bill to buy coffee and the bill had the inscription, 'Made in China.' Is this going to be a problem?" It's funny, in a Weimar Republic sort of way.

Lest you think Mr. Ritholtz favors bailouts, don't worry--he later writes, "We cannot have privatized profits and socialized risks." (page 227) I wholeheartedly concur. If you're interested in reading about the seeds of the current economic crisis, you'll enjoy Barry Ritholtz's book.

English Majors Unite: on page 199, "tax deferred" is spelled "tax defered."

Note: page numbers refer to the 2009 hardcover edition, published by John Wiley & Sons, Inc.

Disclosures: the publisher provided me with a complimentary copy of Bailout Nation. I do not currently have a financial stake with the author or the publishing company.

Glenn Loury

Here is a really interesting 2002 interview with Glenn Loury about race, identity, and economics. One excerpt from the NY Times Magazine profile:

[Professor Glenn] Loury argues that blacks are no longer held back by ''discrimination in contract'' -- discrimination in the job market -- but rather by ''discrimination in contact,'' informal and entirely legal patterns of socializing and networking that tend to exclude blacks and thereby perpetuate racial inequality.

Fascinating stuff. If the link doesn't work, try Professor Loury's homepage.

Immigrants Founded Many Famous U.S. Companies

Whenever anti-immigrant sentiment arises--almost always during a recession--I wonder how people can forget the jobs and inventions immigrants have given to America:

http://www.smartmoney.com/investing/stocks/10-companies-founded-by-immigrants

If you've ever used eBay, Google, or almost any technology company's products, chances are, you are benefiting from an immigrant's work. Even Steve Jobs is ethnically part-Egyptian.

More on immigration here, where I wrote, "Being anti-immigration seems like another case of cutting your nose to spite your face--at the end of the day, you just hurt yourself."

Bonus: from Palo Alto's Sutter Hill Ventures, an article titled, "America’s Secret Innovation Weapon: Immigration."

Mary Elizabeth Lease on Wall Street

From Mary Elizabeth Lease:

Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street...Our laws are the output of a system which clothes rascals in robes and honesty in rags.

The full speech, in all its American glory, is below:

This is a nation of inconsistencies. The Puritans fleeing from oppression became oppressors. We fought England for our liberty and put chains on four million of blacks. We wiped out slavery and our tariff laws and national banks began a system of white wage slavery worse than the first. Wall Street owns the country. It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street. The great common people of this country are slaves, and monopoly is the master. The West and South are bound and prostrate before the manufacturing East. Money rules, and our Vice-President is a London banker. Our laws are the output of a system which clothes rascals in robes and honesty in rags. The [political] parties lie to us and the political speakers mislead us. We were told two years ago to go to work and raise a big crop, that was all we needed. We went to work and plowed and planted; the rains fell, the sun shone, nature smiled, and we raised the big crop that they told us to; and what came of it? Eight-cent corn, ten-cent oats, two-cent beef and no price at all for butter and eggs-that's what came of it. The politicians said we suffered from overproduction. Overproduction, when 10,000 little children, so statistics tell us, starve to death every year in the United States, and over 100,000 shopgirls in New York are forced to sell their virtue for the bread their niggardly wages deny them... We want money, land and transportation. We want the abolition of the National Banks, and we want the power to make loans direct from the government. We want the foreclosure system wiped out... We will stand by our homes and stay by our fireside by force if necessary, and we will not pay our debts to the loan-shark companies until the government pays its debts to us. The people are at bay; let the bloodhounds of money who dogged us thus far beware.

Did you catch the part about the national banks? This speech was delivered around the year 1890. The more things change, the more they stay the same.

The FT on IQ

The FT On IQ:

http://www.ft.com/cms/s/2/4add9230-23d5-11de-996a-00144feabdc0.html

The last time the debate flowered in full was in 1994, on the publication of The Bell Curve by the psychologist Richard Herrnstein and the conservative political scientist, Charles Murray. They argued that intelligence test scores were both a good indicator of social success and strongly determined by our genes. The implication, that an unequal society was inevitable and fair, and that a black, inner city “cognitive underclass” was having too many children, made it seem as though eugenics had never gone away. “Mr Murray can protest all he wants,” wrote Bob Herbert, a columnist for The New York Times, “his book is just a genteel way of calling somebody a n*gg*r.”

More on The Bell Curve here.

Too Soon to Judge Current Stimulus Package

The WSJ's Corey Boles brings some common sense to the table:

According to the report, 90% of the money distributed has come in the form of increased federal education and health-care grants to state governments...[but] most of the spending money from the stimulus plan had yet to go out, and so it was too soon to tell whether it was working.

The author says that $29 billion out of the $787 billion stimulus package has been given to state governments. The WSJ author also writes that of the money that has been spent, almost all of it has gone to state governments, presumably to prevent layoffs and the stoppage of essential services.

Unless I'm missing something, the $29 billion number does not represent the total amount distributed so far. The federal government's own website states that a total of $60.4 billion has been paid out. The government's website is quite interesting, because it shows several non-U.S. states receiving millions of dollars from the Recovery Act. For example, Palau is receiving about $2 million. I don't necessarily mind these smaller outlays--it's good to have friends all over the world--but why did it have to part of the "American Recovery and Reinvestment Act of 2009"?

In any case, although we still have hundreds of billions of dollars to go, many people, including Paul Krugman, are already recommending a second stimulus plan. A second stimulus plan seems premature at this stage. Hundreds of billions of dollars have yet to be distributed. Haven't these second-stimulus people heard the (sarcastic) remark, “A billion here, a billion there, and pretty soon you're talking about real money”? Sarcasm aside, shouldn't we wait a little longer for the current stimulus money to work its way through the system before devising a Plan B?