The Encouraging Reckless Activity Bill

If you want proof that Congress does not understand finance/economics/money management, watch C-SPAN. While there are some good things in this bill, they overestimate their ability to make a positive difference.

The road to hell is paved with good intentions.

I have only listened to a part of the discussion. It continues as I type. I was out of the room and did not catch the name of the representative speaking. This comment was not something unique to this speaker. I am not fond of redundancy and I am paraphrasing -

We need to do this to guarantee that average Americans will be guaranteed a return on their investment in the stock market.

Well, that average American should buy bonds. They are guaranteed by the American government. The more people buy, the lower the interest rates go, but the interest rate will always be positive.^[1] Of course, the government may default on these. US government default was seriously considered a few decades ago. The funny thing is The Encouraging Reckless Activity Bill increases the chances of a government default.

The argument from many of the speakers seems to be for the ability to guarantee investment return. This is a bad idea. This is already available with bonds, but if interest rates climb, the bonds may lose value .

A note on the screen listing some of the features of this bill listed Mental Health Benefits. I love irony.

Representative Jeb Hensarling made an amusing comment. Again I am only paraphrasing -

How can we have Capitalism on the way up, but Socialism on the way down?

This does capture a significant part of the problem. The idea that government can protect us from risk is Socialism. While many companies do a poor job of money management, the ability to take risk is the important part of having free markets (Capitalism is not the right term).

Too many people think that free markets will provide for survival of the fittest. This is usually a misunderstanding of how survival of the fittest works. Survival of the fittest depends on the circumstances of the environment - in the short term. Sometimes this includes criminal activity. Enron is one example of a company that was the darling of the market. Enron started out as a good company, but began to lie and cheat, in order to satisfy the expectations of the market analysts for ever increasing profits and projections. Should the government have bought Enron to keep people from losing money? No. If the government does that, it is subsidizing this criminal behavior. Were people hurt by this? Absolutely. A lot of innocent people.

What about the internet bubble? Should the government have bailed out the investors/speculators in the stocks that lost, in many cases over 90% of their value. Hey! I lost some money in that. I am not a great trader. I want my government bailout. On the other hand, I don't want the government to control how I can invest/speculate.

Representative Christopher Shays gave an excellent example of the misunderstanding of how markets work. He stated that the market dropped by a trillion plus dollars on Monday. He blames the lack of passage of the bill for this. That may be what many investors/speculators were thinking. He is using the open market behavior, which is usually wrong in the short term, to justify a removal of market forces and the introduction of greater political control of the markets. I guess he has never read Catch-22.^[2] Maybe he read it and never understood it. When I write that the market is usually wrong in the short term, I don't mean that the reaction of the market is exactly opposite of the correct response. I mean that the extremes of the markets are usually wrong. The time of greatest panic is the time to buy. The time of greatest optimism is the time to sell.

If we want the government to guarantee that people do not experience financial hardship, where do we stop?

Should the government guarantee that you will not lose your job, when your employer is going to go out of business, regardless of the reason?

Should the government step in and take over these businesses?

Should the government establish more regulations to control that business, even if the regulations were a significant contribution to the failure?

Read this article, Fannie Mae Eases Credit To Aid Mortgage Lending,^[3] from the New York times. It was written 9 years ago and points out the problems that were coming. Problems that have arrived. Problems that were encouraged by the government. The government that is now the solution to the problem.

And the example of Representative Chaka Fattah -

I request unanimous permission to revise and extend my remarks.

This is the way those in Congress make it seem as if they gave a literate speech, while not actually giving any speech. They add something, maybe ghost written, to the official record of the debate. Imagine if a presidential candidate were able to go back to revise and extend my remarks from a presidential debate. Just another example of how Congress isolates itself from reality. these are the saviors of the market.

I am waiting for the bill that will prevent injuries, because it is unfair for people to be injured. They try to legislate safety, and claim success, but when will they actually make rules that forbid activity that might put an individual at risk? We need to limit everyone to prevent the lowest common denominators. Read Harrison Bergeron.^[4] A very short story by Kurt Vonnegut.

Then, the Speaker of the House, Representative Nancy Pelosi finishes up with -

(This is) only the beginning of our work to protect the American people

But is being saved by Nancy Pelosi a fate worse than death?

Even Paul Krugman is for it in his article Edge of the Abyss.^[5] Could there be more convincing evidence that this is a mistake? Should we let him push us off of the edge of the abyss? He fancies himself standing on the abyss, pushing us away from the abyss. This is a good metaphor for the kind of footing he is accustomed to.

This mistake has now passed both the House (263 to 171) and Senate (74 to 25).


Footnotes:

^ ¹ If you have more demand for an item, in a market with open bidding, the price will go up. Buying a bond means that you are paying X dollars today for a fixed amount of dollars in the future. I use one year and round dollars for ease of explanation. If there are not many people bidding for the product, the price might be $96 now, for $100 in a year. A profit of $4 on a $96 investment. The interest rate would be 4/96 - just over 4% per year, since this is only for one year. If there are more people bidding for the product, the price might be $97 now, for $100 in a year. A profit of $3 on a $97 investment. The interest rate would be 3/97 - just over 3% per year, since this is only for one year. If there are a lot of people bidding for the product, the price might be $98 now, for $100 in a year. A profit of $2 on a $98 investment. The interest rate would be 2/98 - just over 2% per year, since this is only for one year. You are paying different amounts now, for a fixed amount in the future. The more you pay, the lower the interest rate.

At the end of that year, the interest rate could be higher, lower, or even the same. Even with bonds there is a risk of the interest rate being lower than inflation. Back in the 1970's this was common, since the interest rates rose very quickly. If you owned a long term bond before the interest rates started going up, you probably would not be able to sell that bond for as much as you paid for it, because the value of the money you paid has been eroded by inflation. At the end of the loan, the money you are paid is in current dollars. Dollars which have been devalued by inflation. You paid for it in earlier, pre-inflation dollars. Dollars that had more value than the current value of the loan. We do not currently have high inflation. Few predict it. This bill encourages it, because it decreases the confidence in the ability of the American government to manage its money competently. America becomes a greater credit risk. I do not base this on the current reaction of the of the bond market, because the market is usually wrong in the short term. The long term will tell us where interest rates will go. In the short term, the government sets some interest rates. In the long term, the impotence of the government to control interest rates is demonstrated by the markets.


^ ² Catch-22
From The Straight Dope.


^ ³ Fannie Mae Eases Credit To Aid Mortgage Lending
New York Times Business section
September 30, 1999


^ ⁴ Harrison Bergeron
From Welcome to the Monkey House
By Kurt Vonnegut (1961)


^ ⁵ Edge of the Abyss
New York Times Op-Ed
October 2, 2008

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Why IBM?

In the government's glorious attempt to do the impossible, they have banned short sales of many financial stocks. Today they added a bunch more. But first, why ban short sales?

A previously permissible short sale of stock was to borrow enough money to borrow the stock at the current price, and sell the stock. The reason to do this is the belief that the stock price will decrease.

Many people claim that this is somehow unAmerican. We should only want companies to increase in value. This is like saying that we should try to prevent rain, because people do not like getting wet. Or because Hurricane Katrina was such a disaster.

This clearly ignores the problems of not enough rain, just as the ban on short sales ignores the positives of short sellers.

Positives?

To eliminate the shorts eliminates the critics. Yes, there would still be the mindless talking heads with none of their own money at risk commentators. You know, like George Will telling Robert Shiller that . . . . Actually Nassim Nicholas Taleb tells it much better.

One illustration of a dangerous refusal to consider alternative histories is provided by the interview that media person George Will, a "commentator" of the extensively commenting variety, conducted with Professor Robert Shiller, a man known to the public for his best-selling book Irrational Exuberance, but known to the connoisseur for his remarkable insights about the structure of market randomness and volatility.

The interview is illustrative of the destructive aspect of the media, in catering to our heavily warped common sense and biases. I was told that George Will was very famous and extremely respected (that is, for a journalist). He might even be someone of utmost intellectual integrity; his profession, however, is merely to sound smart and intelligent to the hordes. Shiller, on the other hand, understands the ins and outs of randomness; he is trained to deal with rigorous argumentation, but does sound less smart in public because his subject matter is highly counterintuitive. Shiller had been pronouncing the stock market to be overpriced for a long time. George Will indicated to Shiller that had people listened to him in the past they would have lost money, as the market has more than doubled since he started pronouncing it overvalued. To such a journalistic and well sounding (but senseless) argument, Shiller was unable to respond expect to explain that the fact that he was wrong in one single market call should not carry undue significance. Shiller, as a scientist, did not claim being a prophet or one of the entertainers who comment on the markets on the evening news. Yogi Berra would have had a better time with his confident comment on the fat lady not having sung yet.

I could not understand what Shiller, untrained to compress his ideas into vapid sound-bites, was doing on such a TV show. Clearly, it is foolish to think that an irrational market cannot become even more irrational; Shiller's views on the rationality of the market are not invalidated by the argument that he was wrong in the past. Here I could not help seeing in the person of George Will the representative of so many nightmares in my career; my attempting to prevent someone from playing Russian roulette for $10 million and seeing journalist George Will humiliating me in public by saying that had the person listened to me it would have cost him a considerable fortune. In addition, Will's comment was not an off-the-cuff remark; he wrote an article on the matter discussing Shiller's bad "prophecy". Such tendency to make and unmake prophets based on the fate of the roulette wheel is symptomatic of our genetic inability to cope with the complex structure of randomness prevailing in the modern world. Mixing forecast and prophecy symptomatic of randomness foolishness.^[1]

Some of this is more clear if you read his book, but you get an idea of just how useless commentators are in making informed decisions about risk. If nothing else - they have nothing at stake. Short sellers put their money on the line. Those who buy stocks (longs) also put their money on the line. Both have opinions, but unlike the commentators, buyers and short sellers back up their opinions with money. Making money is what investment/speculation is all about.

Why would anyone listen to some fool who doesn't put his own money on the line, but wants to tell them what to do with their money? I guess there is always a bigger fool.

When it comes to finance, everyone thinks they know what is going on. Ignoring the short sellers has been a part of the problem with market bubbles. Silencing those who actually put their money on the line - that is poor risk management.

View the full WM chart at Wikinvest

WM was -1.526 (-90.30% from $1.690 to $0.164) just today (Friday, September 26, 2008). Almost as if the government coming in and bailing out the company is not a good thing. Those darned short sellers are the problem. This is a 6 month chart. You can see that Everything looks kind of stable. Right up until the beginning of May. Clearly, this is where the problems began. In after hours trading WM was up +1.526 (930.49% from $0.164 to $1.690) - right back to where it closed the day before

View the full WM chart at Wikinvest

If you go back 5 years, instead of the 6 month period of the first chart, you can see that WM has had some serious problems for a much longer period of time. At least according to the one measurement that matters to investors/speculators. Price.

Some have suggested that the problem is the short sellers forcing the price down. Short sellers did not create the problem of giving money to people with no ability to pay the money back - unless the buyers were able to turn around and sell the house for more money. And the adjustable interest rates remained low enough that the buyers might be able to keep making payments. As long as everything went perfectly in their lives, and they had not borrowed more than the value of the home, and they were smart enough to sell early enough in the housing downturn to not have lost to much of the value of their ill considered rush to grab some of the money growing on trees investment. As long as they could find a bigger fool to sell to.

View the full GS chart at Wikinvest

Back in March, GS was just under $180. I was commenting that it was odd that GS was not outperforming the rest of the similar financial companies. They were reporting record earnings. They were claiming that they were not affected by subprime. Why would the market not recognize that they were doing better than the rest? The obvious reason, to me, was that somebody knew something and was selling a lot of GS. Not all shorts will broadcast their intentions. Or it might have been someone selling a huge amount of GS they bought when they had more confidence in the company.

Remember Enron? The short sellers were telling everyone that Enron was a bad company, but people did not want to believe the evil short sellers. Enron was not the only company to feel pressure from short sellers. It is typical for the short sellers to spot problems long before any of the other analysts following the companies to notice problems.

One of the best ways to insure against bad market performance is diversification, but when the general market is going down, diversification may not accomplish much. To protect against that, people buy puts. These are options that protect against large losses. Without the ability to sell short when selling puts, the price of the puts has to go up to account for the increased risk of selling this kind of insurance.

The goal of investment/speculation is to increase the possibility of gain, while minimizing the possibility of loss. The insurance allows you to be more aggressive in buying stock, because you have protection against catastrophic loss. When that protection becomes much more expensive, the buying will decrease. This is not the goal of the ban on shorting financial stocks.

So. Back to the title of this post - Why IBM? Today there were a few companies added to the list of those which may not be shorted. Their financial circumstances are so fragile, that they need all of the market manipulation possible to keep them a break from giving up the ghost being driven down by evil short sellers.

The original 799 stocks^[2] that could not be shorted was not enough, so today they added 21 stocks to the list.^[3] All the unshortable companies seem to be financial - banks, credit, realty, investment, trading. So, why IBM?

The Company’s major operations include a Global Technology Services (GTS) segment, a Global Business Services (GBS) segment, a Systems and Technology segment, a Software segment and a Global Financing segment.^[4]

Finally, below there are contributions from Cato@Liberty on why liberals are thrilled at this government take over of large parts of the financial markets. The hubris described by Dr. Taleb, in the passage about George Will's underestimation of the predictability of the markets, is just a hint at the damage that would be done by those on the left - those devoted to the ridiculous belief that the government can control markets. By attempting to control the markets they believe they can protect the poor pathetic common man from himself. This is far more dangerous than any private corruption could ever be.

When the Mafia sells protection from the own behavior, we recognize it as a crime. Why is this not so with the government?

One reason is that the Mafia has more control over effects of their actions than The Wizard of Oz - pulling levers behind a curtain to create the impression of potency. This is Enzyte for the financial markets. As should be obvious -

In our opinion the primary effect Enzyte had on its users was to shrink the size of their wallets.^[5]

Deal or No Deal?

Fannie and Freddie


Footnotes:

^ ¹ Fooled by Randomness: The Hidden Role of Chance in the Markets and Life, 2nd Edition Amazon(US), Barnes and Noble (US), Amazon (UK). Paperback: Random House, 2005, Penguin (UK) 2007. Hardcover: New York, and London: Thomson Texere, April 2004 (1st Ed. November 2001). Published in 20+ languages. “One of the Smartest Books of all Time” (Fortune).

History has been extremely kind to the book: Of all the books published in 2001, it seems to be currently among the 2 or 3 highest selling ones, if not the highest (across all categories, fiction, nonfiction, etc.).


^ ² SEC List: The 799 No-Short Stocks
From CNBC.com
Page 1, Page 2, Page 3, Page 4, and Page 5.


^ ³ More than 20 Firms Added to Short-Sell List
From CNBC.com


^ ⁴ Google Finance
IBM Summary
My italics.


^ ⁵ Enzyte Marketers Sued
Press Release, Hagens Berman
March 17, 2004
From Quackwatch

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National Security Roulette Follow Up (Rant)

I decided to post this on both blogs, because there may be some who only reads my rants blog. It says a lot of what I think needs to be said about the Constitution.

Here is a response to my post National Security Roulette, which was an expanded comment to a post by Too Old To Work, Too Young To Retire called Airport Security Again. The TSA (Transportation Security Administration) has a lot of problems and I chose to address some of the other problems, aside from profiling, or the lack of it. Hmm, not the lack of it, but the clumsy attempts to be doing everything possible to avoid the appearance of it - profiling, that is.

TOTWTYTR said...

A friend of mine recently returned from a week long trip to Israel. The short story is that airline security, by necessity, is much more serious a matter in Israel than it is in the US.

Not only is the questioning more intense and appropriate, but they actually *gasp* profile. Quite successfully to as it happens.

Profiling is another tool that can be used. As with any tool it can be misused. If we alienate Muslims, or Arabs, or any other group of which a small number are a threat, by using just that identity as our profile, we lose resources and gain nothing significant. The resources we lose are those in the community who are opposed to what the terrorists are doing. Even if they agree with the political aims of the terrorists, they may be completely opposed to the methods. What we gain is the appearance of safety, but not the substance.

We need counter-terrorist people from the communities that threaten us. One problem with indiscriminate profiling, other than the inherent oxymoron, is that it is just a stereotype that leads us to make mistakes that are easy to manipulate. Back in the days when drug smuggling on airlines was more common, one tactic was to have a very normal looking person carry on the drugs, with a very suspicious looking person a couple of people behind in line, the security person becomes so eager to get to the person who is the profile poster boy that he performs a more cursory than usual examination of all those between the him and the suspect.

We need to be thinking about the ways that we make security worse by profiling, but there is nothing inherently wrong with using a profile that is more specific than just Arab-looking or Muslim-looking. The FBI uses profiles to track down all sorts of criminals. The idea that this should be abandoned, just because of one of the parts of the profile is not politically correct, is a bad idea.

With the attacks on abortion clinics, the profile would have included all Christians. Christians oppose abortion and would support the aim of someone trying to limit abortions. Few Christians have supported the use of terrorism to achieve that goal. Muslims have expressed displeasure with the secular excesses of our society. The terrorists claim that this tolerance, which is essential to our Constitution, is what they seek to destroy with violence. Few Muslims have supported the use of terrorism to achieve that goal.

To limit the profile, of those attacking abortion clinics, to Christians would have been a mistake and probably would have alienated those most likely to be able to help in identifying the criminals. Christians have a similar history of killing people because of religion and they also have the history of being extremely peaceful. The same arguments of "religion of peace" and "look at this passage that demonstrates the inherent violent nature of the religion" could be used for Christians as well as Muslims.

The important point in profiling is to have people with both the capability to use critical judgment and the the permission to use critical judgment. This is not really any different from my approach to paramedics. The people who work for the TSA do not seem to have either. I'm sure there are screeners, who could be taught to use critical judgment and some who understand, but just are not permitted to use critical judgment. The approach of the TSA administration seems to be to discourage all possible critical judgment. This is not the way to security, no matter how prominently the word Security is placed in the organization's name.

Paramedics have the same problem. Protocols written to prevent critical judgment, end up discouraging all judgment. A wise medical director will know what his/her medics are capable of, will educate them to use critical judgment, and will write protocols to encourage them to use critical judgment.

While I have been posting on less medical topics lately, the reason is to discuss problems with judgment. Bad science, bad oversight, and bad judgment in general. These are problems that have significant ramifications for all medical topics.

One of the things opposed by the terrorists is the open nature of our society. This is something protected by our Constitution. They have been somewhat successful in getting us to remodel our society in a way to limit freedom. The powers given to the government, in reaction to the terrorism, have made us less protected by our Constitution, in exchange for the appearance of safety. How much of that appearance is real? I don't know, but too much of the method is in ways that strip America of the things that this country was created to exemplify.

One of my favorite quotes is from A Man for All Seasons. I hate to give a recommendation for a movie over a book, but I have not read the play. The acting is so good, that it probably only adds to the quality of the material. I think these quotes stand on their own, but I can provide more information if you disagree. This is from hundreds of years before our revolution, in the country America fought against for independence, a country not protected with something like America's Bill of Rights.

William Roper: So, now you give the Devil the benefit of law!

Sir Thomas More: Yes! What would you do? Cut a great road through the law to get after the Devil?

William Roper: Yes, I'd cut down every law in England to do that!

Sir Thomas More: Oh? And when the last law was down, and the Devil turned 'round on you, where would you hide, Roper, the laws all being flat? This country is planted thick with laws, from coast to coast, Man's laws, not God's! And if you cut them down, and you're just the man to do it, do you really think you could stand upright in the winds that would blow then? Yes, I'd give the Devil benefit of law, for my own safety's sake!

And in another part, when he is having the law used against him:

Sir Thomas More: You threaten like a dockside bully.

Cromwell: How should I threaten?

Sir Thomas More: Like a minister of state. With justice.

Cromwell: Oh, justice is what you're threatened with.

Sir Thomas More: Then I am not threatened.

We have to be careful what we give up to protect ourselves. We end up mocking those who fought and died for the freedoms we give up. Mocking those who continue to fight and die to protect and defend that Constitution. In order to protect us, it sometimes needs to protect those who would harm us.

To put this in the EMS perspective, we need to be looking to do what we can to protect and defend the well being of the patient. This is our entire reason for having EMS. Rules that defeat that purpose need to be opposed. Whether they come from doctors, lawyers, politicians, or medics. We need to stop putting the patient last, or so far down the list of priorities, that the patient might as well be last. Both directions lead to harm, but continually working to improve the care of patients is one that learns from its mistakes and improves.

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