Another Good One

This blog is not meant to be a collection of jokes, but I just e-mailed some friends to wish them a happy 5769 (the number of the new year according to the Jewish calendar), and one of them wrote back:

"Thanx. You know what drives me crazy? I'm gonna still be writing 5768 on all my checks for weeks. "

I laughed out loud.

Gotta run, the market is crashing.

Good One

I don't usually do this, but I enjoyed reading Larry King's interview with Chris Rock, and here's the best line:

KING: From a comedic stand point, who is funnier, McCain or Obama? Seriously. Is Obama not -- it's hard to be funny about Obama?

ROCK: No, no. It's weird. People ask me that all the time. ... McCain jokes are just easy jokes, like I don't want a president with a bucket list. That's like a McCain joke. Those jokes are easy. It's like you basically, you know, you know, take the dust off your Reagan jokes and tell them again. You know? But Obama, oh, this is a whole new set of jokes. I got to find a whole new move to the basket here. So I kind of hope he wins.

Interesting insight into a comedian's life, I thought. Rock also made this point: "The choice is you got a guy that's worth $150 million with 12 houses against a guy who's worth a million dollars with one house. . . . The guy with one house really cares about losing a house, because he is homeless. The other guy can lose five houses and still got a bunch of houses. Does this make any sense? Am I the only one that sees this?"

Share and enjoy.

Whoo Hoo!

While you were asleep last night, federal regulators seized Washington Mutual Savings & Loan. Then they sold it off to J.P. Morgan Chase. Whoo hoo!

Of course, you alreadly knew Washington Mutual was in trouble from its puzzlingly stupid ads. Apparently its target customers are people who go into daytime fantasies and scream at the thought of signing up for free checking online in just 7 minutes or being able to pay bills online securely. That's got to be a pretty small market. It certainly wasn't enough to keep the armies of the night from swooping in and shutting everything down in the largest bank failure in American history.

Good thing that selfless patriot John McCain showed up for the meeting that scuttled the tentative agreement on the rescue plan.

Sold everything yet?

Here We Go

Just in case you were wondering whether conservative pundits would roll out the rhetoric to support John McCain's silly decision to suspend his campaign and try to postpone tomorrow's debate so that he could add his inestimable weight to the efforts to solve the economic crisis, Newt Gingrich called it "the greatest single act of responsibility ever taken by a presidential candidate."

Pardon me while I retch.

McCain Rolls the Dice Again

That John McCain -- always putting the country first, especially when it suits him politically. He's suspending his campaign and returning to Washington to work on the economic bailout plan, and he'll even refuse to show up for tomorrow night's presidential debate because the economic crisis is so important.

Sorry, Senator, you're not fooling anyone. The economic crisis is important, but choosing the next President is important too. And besides, what exactly are you going to do to solve the crisis? You're not even on the Committee that's handling it. Are you just going to blow into the Committee room and announce, "everything's fine, McCain is here to save you"? That'll go over real well.

And what's the deal with pulling your ads? What, do you have to personally do the voice-over for each ad each time it runs? How exactly does running an ad interfere with your ability to do your whatever-the-heck-it-is that you're planning to do on the bailout bill?

You're just grandstanding. As usual, when you're behind, you roll the dice to try to shake things up. That was your strategy picking Sarah Palin -- how many press conferences has she done since then? Oh, right, zero -- and it's your strategy now. It's necessary strategy when you're behind, but it's not fooling anybody.

Now the really dreary part is going to be having to listen to all the conservative pundits explain why suspending his campaign shows McCain is a selfless hero. I'm guessing that even they will look a little exasperated.

Irresponsibility Relief Act

Whether you're a Democrat or a Republican, it seems that there's just no resisting proposals for bailing out irresponsible people. Republicans want to take $700 billion of public money -- or my money, as I like to think of it -- and throw it at Wall Street firms. Of course, these are the very firms that created the problem, by betting their companies on risky investment vehicles that they didn't fully understand. Can you say, "moral hazard"? Forever after, financiers will think that the best strategy is to make really big bets on really risky things -- if the bets pay off, you win big, and if you fail spectacularly, the taxpayers will come bail you out.

Meanwhile, Democrats want more relief for homeowners who are having trouble paying their mortgages -- they want to authorize bankruptcy judges to rewrite mortgages. Can you say "moral hazard"? If you irresponsibly bought more home than you could afford because the housing market was booming and you thought you could always flip it later, you get relief. If, like me, you live in a modest home that you can actually pay for, no help for you.

As always, half of me is outraged by proposals to give away vast sums of public money and the other half says, "where's my cut?"

Biggest Agency Ever

Is anyone thinking about the bailout from an administrative law perspective? Policymakers are saying we need quick action on the bailout, but before we blow away $700 billion in taxpayer money and create an enormous new government agency, let's just take a moment to think about the administrative implications.

This agency is going to buy up millions of mortgages. The reason for buying them is that they're in trouble, so naturally we would expect a high rate of default on these mortgages.

What exactly is going to happen when these government-owned mortgages go into default? Someone at the new agency is going to have to handle the foreclosure or the work-out. And how exactly will that happen? Can a new agency really be up and running and ready to handle millions of troubled mortgages overnight?

Even assuming the agency outsources much of the work, I would predict that everything will come to a screeching halt for at least a year. No one will know what to do -- from a very basic, practical, nuts-and-bolts perspective -- when these mortgages go into default.

Mortgage-backed securities have already led to trouble in foreclosure actions because they're so complicated that plaintiffs find themselves unable to prove that they really own the mortgage. If a new agency comes in and buys up millions of these things, there's going to be chaos for quite a while before anyone figures out what to do.

Time to Sell Everthing -- Or Buy More?

While I was away over the weekend, the greatest financial convulsion of our lifetime continued, with markets gyrating, century-old firms disappearing, others changing into fundamentally different companies, and the government buying up the biggest allegedly private companies in the country. As if that wasn't enough, Treasury Secretary Paulson has now suggested the greatest government bailout in history -- one that will make the 1980s S&L bailout look like chicken feed.

What's an individual investor to do? Last week, at the exact market trough, I moved some cash into my index fund (just a law professor amount, of course, not a financial wizard amount) -- I'd been meaning to do that for a while and this seemed like an opportunity. It went up 7% in the next two days. Brilliant. But not so brilliant if the crash is coming.

Now I am torn between conflicting impulses:

1. Sell Everything. When I see that the Republicans think that we haven't had enough government intervention -- after we've already had the biggest government intervention in a generation -- and now we need to have the taxpayers kick in $700 billion, what I see is that they think we're in big, big trouble. Secretary Paulson, who I at least hope knows a whole lot more about this stuff than I do, thinks we're really teetering on the brink. The whole thing could collapse. And remember, our fate is now in the hands of a bunch of politicians who are mostly lawyers and who have no clue about finance. It doesn't look good. If you lived through the '87 crash (I wasn't in the market in those days), you know that your portfolio can lose 22% in a single day. Of course that means that if you sold everything the day before and bought back the day after, you'd effectively have gained 22% in a single day. So maybe this is the time to sell everything. Get out of the market, the crash is coming.

2. Buy More. On the other hand, maybe this is the big opportunity to stay in. If this bailout plan goes through, it'll be the biggest taxpayer giveaway ever. Sure, the taxpayers will allegedly just be buying up questionable paper at its heavily discounted market value, but you know they'll actually end up paying far too much. Wall Street is going to have its greatest party ever and we're paying the bill. Maybe that's the whole point. Maybe what's really happening is that the Bush Administration sees this as its last, great opportunity to steal the taxpayers blind and shovel huge piles of money at its stockbroker friends. Maybe it's the financial equivalent of the Iraq war buildup -- selling the country a bucket of nonsense based on complete lies. It's certainly going to be the financial equivalent of the Iraq war in terms of the price tag. Even if there's no lying involved, it's still a big financial boost for rich stockbrokers at taxpayer expense. Your portfolio is your chance to get your small piece of the action. Buy more.

Not so easy to know what to do. I'm a buy-and-hold investor -- I hardly ever sell anything. I'm still young enough that I can weather most storms over time. So I'm unlikely to go with the first stragety, even though this might be the biggest storm of our lives. But this could really be the time for a bold, unusual decision.

One thing's for certain -- don't take your financial advice from law professors.

Intrade Arbitrage Opportunity

While wasting time surfing the election prediction websites (see my earlier post), I noticed that according to the most recent trades, the Intrade odds of the Democratic nominee winning Ohio is 53.9% and the odds of the Republican nominee winning is 55.0% (probably different, of course, by the time you click the link).

Hmm. Apart from what this says about the usefulness of Intrade, it's an obvious arbitrage opportunity. If you could sell $1,000,000 worth of contracts predicting Obama will win Ohio for $539,000 and $1,000,000 worth of contracts that McCain will win for $550,000, you'd pocket $1,089,000 and only have to pay out $1,000,000 to the winner, for a profit of a cool $89,000 (less commissions). And if by some miracle Barr or Nader wins Ohio, you get to keep the whole thing.

Well, I would leap to it, but I presume it wouldn't actually work in any amounts large enough to make it worth the effort. You might manage to sell two $100 contracts at the most recent prices for $53.90 and $55, yielding you a whopping $8.90 (less commissions), but I presume the prices would change pretty dramatically if you tried to make this work in larger amounts. Still, in case you thought Intrade prices were rational, they clearly aren't.

Poll-Driven

Every fourth year I lose a fair bit of productivity for a month or so because of time spent checking the election polls. The rise of the Internet has only made the polls more readily available and easier to check.

Of course, the most insidious sites are those that gather up all the polls in one, easy to check place. I love them, but boy, are they addictive.

In case you feel like you're too productive and you need some poll checking to eat up some of your time, here are the two best sites. The first is liberal and the second is conservative, but they both seem reasonably honest in reporting the poll numbers:

Electoral Vote Predictor from The Votemaster

Real Clear Politics (latest polls)

Real Clear Politics (electoral map)

The Votemaster updates his site only once per day (usually about 7:00 am eastern). Real Clear Politics updates its "latest polls" page continuously. Happy surfing.

Alaska Stonewall

In case you were wondering whether there really is anything to Troopergate (the allegations that Alaska Governor and Vice Presidential candidate Sarah Palin fired Alaska's public safety commissioner because he wouldn't fire her state trooper brother-in-law, with whom her family was feuding), here's an indicator: her Attorney General, only a week after saying that state employees would comply with legislative subpoenas relating to the probe, has now stated that they won't, in part because the probe is tainted by "partisan politics."

Now let's get this straight -- the Alaska legislature is dominated by Republicans. The legislative council, made up of 8 Republicans and 4 Democrats, voted 12-0 to investigate Troopergate, and appointed a state Democratic Senator who is a former prosector to do the investigation. Appointing someone from the other party to do the investigation is a standard move to produce a credible investigation. Now that Palin is a national VP candidate, suddenly the whole thing is put down to partisanship, and the fired public safety commissioner is being derided as "insubordinate" even though Palin offered him another job when she fired him.

Hmmm . . . what administration regularly declares itself above the law, stonewalls legislative subpoenas, derides any investigation of its wrongdoing as partisan, and trashes the reputation of anyone who gets in its way? It looks more and more and more like McCain-Palin would be more of the same.

Moral Hazard

Goodness, I just lent $283 to a private insurance company. And so do you and so did 299,999,998 other people, for a total of $85 billion.

"Moral hazard" is the economists' term for the force that causes the strange behavior that people may exhibit when they know that they are shielded from risk. If you're the CEO of a giant company, and you're thinking about making a risky investment, it's one thing if you think, "if this goes well, we make a lot of money, and if it goes badly we could lose the whole company," whereas it's another thing if you think, "if this goes well, we make a lot of money, and if it goes badly, the taxpayers will bail us out." Obviously, you're a lot more likely to take the plunge if you can count on the latter scenario.

So the government needs to be careful before it bails out big companies that have made bad decisions. It just encourages more and riskier behavior in the future.

As usual, I can't pretend to know whether bailing out A.I.G. was a good idea. I'm guessing most people, including those who did it, don't really know either. Perhaps A.I.G. was "too big to fail," perhaps not. But if taxpayer money is implicitly on the hook every time a really big company makes a risky investment decision, then CEOs are just going to take more and more risk.

Oops

The Dow lost a mere 504 points yesterday. That's almost exactly the same amount it dropped on Black Monday in 1987, but it's actually much less serious. The Black Monday drop represented 22% of the Dow's value; yesterday's drop was less than 5%.

What's interesting is the trend of stocks over the whole Bush administration. The Dow closed at at 10,917 yesterday. On January 20, 2001, it closed at 10,587. It's up a whopping 3.1% over the 7.66 years of the Bush administration. Remember, the historical average is for the index to go up about 10.5% per year. If you put $100 in an index fund, it should have slightly more than doubled over this period -- you should have about $215. Instead, you're stuck at $103.10.

Actually, it's worse than that. Your money probably isn't in the Dow -- I don't know of a lot of Dow Index funds. Probably it's in an S&P index fund. The S&P closed at 1192.69 yesterday. That's down 11.2% from the close of 1342.54 on January 20, 2001. And the NASDAQ is down 21.3% over the same period.

Thank goodness for those business-friendly, economy-promoting Republicans! Do you know what happened to the indexes during the Clinton administration? The Dow was up a mere 225%, the S&P 208%, the NASDAQ, 297%. And that's after the tech bubble burst (remember, the burst occurred in March, 2000, while Clinton was still in office).

Oh, I know the President doesn't really deserve full blame or credit for what happens in the markets. But you know the Republicans would be touting their economic policies to the skies if things were going well, so they have to get some blame for what's going badly. And the failure of regulation bears some blame for the credit crisis.

Here are those numbers again in a convenient table:

Markets during the Bush Administration, 1/20/01 to date:

Dow +3.1%

S&P -11.2%

NASDAQ -21.3%

Markets during the Clinton Administration, 1/20/93 - 1/20/01:

Dow +225.2%

S&P +208.5%

NASDAQ +297.6%

Smart People Being Stupid

How could so many smart people be so stupid? Let's see, Bear Stearns went up in smoke months ago, now Lehman Brothers is gone, Merril Lynch is selling itself to Bank of America, and insurance giant A.I.G. is on the brink of disaster.

These guys were supposed to be smart. They get paid sums that make my salary look like a rounding error, because they supposedly understand money. And here they are betting their companies on pools of mortgages made to borrowers who couldn't really be expected to pay them back. The wheel's come up on double zero, and I guess they're not bullish on America anymore.

I don't pretend to really understand what's happened. I have my own area of expertise and this isn't it. But I do think that if your annual income has two commas in it, you should be capable of not bankrupting your company.

We went through a crisis in junk bonds in the 1980s. We tried out the idea of putting a lot of high-risk debt into a bigger vehicle on the theory that it would somehow be lower risk. That didn't work out too well. So now we've tried the same thing with mortgage debt -- pooling together bad mortgages on the theory that a sufficient percentage of the high-risk borrowers would be able to pay, so that on the whole the debt vehicle wouldn't be too risky.

Didn't it occur to anyone that if there were an economic downturn a whole bunch of those high-risk debtors might be unable to pay at the same time? Apparently not.

As I say, I don't really understand the crisis (the above is about as close as I get), but somehow I wonder if people were thinking, don't worry, if it gets really bad, the government will have to bail us out, and we'll just pass the bill on to the taxpayers. Moral hazard.

Or maybe they were just smart people being stupid.

Only in Washington

I just passed Donald Rumsfeld walking up Connecticut Avenue, right past where I live. He's just walking on the street by himself (there was one guy behind him who might have been a bodyguard or something, but I think he was just a coincidence). Rumsfled was wearing dark glasses but was quite recognizable.

Funny town, Washington. One day you're the prince of the city and the next day you're ambling along like any other joe on the street.

Stewart for Campaign Manager

I can't prove that Jon Stewart is the sharpest political analyst in America, but he sure is the best exposer of hypocrisy. His technique is so simple: he just plays the tape of what some politician or pundit is saying now, and then he plays the tape of what they said a year, month, or even week before.

This Wednesday and Friday's shows are absolute, must-see classics. Probably the funniest moment is from Wednesday, during the Sarah Palin Gender Card segment, when Karl Rove first says how wonderful Sarah Palin is, touting her experience as the mayor of Wasilla, the "second-largest city in Alaska." Of course that's not even true (Wasilla is fourth or fifth, depending on which estimate you look at), but the incredible part is that just a month ago, Rove said that if Obama picked Governor Tim Kane of Virginia as his running mate, it would be an "intensely political choice," showing no interest in whether the person was capable of being President of the United States, because Kane lacked sufficient experience! He's Governor of Virginia and was mayor of Richmond, but Rove derided this experience because Kane had only been Governor three years and because Richmond was "not a big town"! Of course Richmond's population is more than 20 times that of Wasilla.

Also hilarious was watching Bill O'Reilly, saying recently, in response to news of Palin's pregnant, teenage daughter, that teen pregnancy was a "personal matter" so long as society didn't have to support the parents or baby. And then showing O'Reilly from December 2007, talking about the Jamie Lynn Spears pregnancy, and saying "blame falls primarily on the parents of the girl, who obviously have little control over her. "

But the more politically significant clips are those showing John McCain to be a shameless non-striaght-talking flip-flopper. Simple film clips show him saying one thing years ago, and the opposite now:

2000: Speaking against pandering to the "agents of intolerance"

2006: "Thank you, Dr. Falwell."

2000: Saying that Roe v. Wade's repeal would lead to thousands of illegal, dangerous operations.

2008: "I do not support Roe v. Wade. It should be overturned."

2004: "I would clearly support not extending those tax cuts."

2008: "I'll make the Bush tax cuts permanent."

2002: "I am very certain that this military engagement will not be very difficult"

2006: "Many of us fully understood from the beginning . . . would be a very very difficult undertaking."

So here's my pitch: can we put Jon Stewart in charge of Barack Obama's campaign? McCain gets points from his reputation for using maverick, "straight talk." Simple, straightforward video clips of McCain's own words coming out of his own mouth show how fake that image is. Can we just show these clips over and over until the election?

In with the Old

Unemployment hit 6.1% last month. John McCain's solution? Make the Bush tax cuts permanent.

Now, I know economists would probably recommend low taxes in times of economic recession to help pump things up. But haven't we had the Bush tax program for seven years now? If it's so great, why has the economy lost over 600,000 jobs since the start of the year? Why would continuing it help? Isn't it time for a change, rather than more of the same?

Hurricane Potpourri

President Bush and Vice President Cheney have announced that they will not attend the Republican National Convention, because they will be too busy personally supervising the government response to Hurrican Gustav. What an unlucky surprise! If Hurrican Gustav hadn't happened, they would have announced that they wouldn't attend the convention because they would be too busy washing their hair. There's no way the Republicans want Bush or Cheney within 1000 miles of their convention.

Meanwhile, here is the official public advisory from the National Weather Service regarding Hurrican Gustav. Have these people not changed their technology since 1970? What's up with the all-capital letters, courier font, and every phrase ending with ellipses (. . .) ? Can't you just see this coming off your teletype, with the selectric typeball clattering away?

At least FEMA is no longer headed by someone whose main expertise was Arabian horses.