Creating Bubbles

Bloomberg has an interesting story, suggesting a bubble in 30 year mortgage bonds. As usual, it's government rules that are largely responsible:

Because of the government guarantees, banks that hold these securities qualify for favorable capital treatment under risk- based-capital rules. Securities of Ginnie Mae, a government- owned entity that subsidizes affordable housing, carry a risk weight of 0 percent, meaning a bank doesn’t have to hold any capital against them. Fannie and Freddie securities carry a risk weight of 20 percent, meaning 1.6 percent capital is required rather than the normal of about 8 percent. These same capital rules allowed European banks to load up on the 0 percent risk- weighted debt of Greece and other countries on the periphery of the euro area.
[...]
This wouldn’t be the first financial crisis in which the 30-year fixed-rate mortgage played a large role. Twice in the last 20 years we have seen spectacular failures of U.S. housing finance, each at enormous cost to taxpayers. Both the savings and loan crisis and the Fannie-Freddie bailouts can be traced to congressional support for, and subsidization of, the 30-year fixed-rate mortgage.

The S&Ls invested in 30-year mortgages that they funded with short-term deposits. By 1981, when deposit rates soared as high as 15 percent, the thrift industry found itself insolvent due to portfolios stuffed with 9 percent mortgages.

Fannie and Freddie were set up to support the 30-year fixed-rate mortgage market, buying the loans from lenders, packaging them into securities and selling some of them to investors -- all with an implicit federal guarantee that helped to lower mortgage rates. In 2008, both were taken over by the government, costing taxpayers more than $160 billion and counting.

Freddie, and Fannie to a lesser extent, suffered a classic liquidity squeeze. In the late summer of 2008 as debt markets became concerned about the two companies’ solvency, yields on their debt relative to U.S. Treasuries ballooned. That imperiled their ability refinance hundreds of billions in debt used to back its huge mortgage portfolio.

The solution is to wean the housing market from its dependence on subsidized 30-year fixed-rate mortgages, starting with winding down Fannie and Freddie over a period of five to seven years. A private market focused on prime quality mortgages would offer borrowers a wider variety of loan choices. These loans would have varying amortization terms, prepayment options and periods of protection against changes in interest rates. In flush times, lenders should be required to build capital to better cover credit risk. Finally, risk weights should be increased to reflect price volatility inherent in securities backed by long-term mortgages.

Teaching Character

Via crossfit.com comes this article on education. There are lots of reasons to read it, e.g. to whet your appetite as to what might be possible if free-market innovation were ever let loose in the sector, but I'll highlight this:

In fact, though, the character-strength approach of Seligman and Peterson isn’t an expansion of programs like CARE; if anything, it is a repudiation of them. In 2008, a national organization called the Character Education Partnership published a paper that divided character education into two categories: programs that develop “moral character,” which embodies ethical values like fairness, generosity and integrity; and those that address “performance character,” which includes values like effort, diligence and perseverance. The CARE program falls firmly on the “moral character” side of the divide, while the seven strengths that Randolph and Levin have chosen for their schools lean much more heavily toward performance character: while they do have a moral component, strengths like zest, optimism, social intelligence and curiosity aren’t particularly heroic; they make you think of Steve Jobs or Bill Clinton more than the Rev. Martin Luther King Jr. or Gandhi.

If today's generally accepted ethics were actually aimed at making each of our lives go well, there would be no such divide. But under altruism it's a real problem.

(This is but one example of why Yaron and Onkar argued for a new moral code --Ayn Rand's -- in a CNN editorial last year.) Their commentary is relevant to the quote above.

Ask someone on the street to name a moral hero; if he isn't at a loss, he'll likely name someone like Jesus Christ or Mother Teresa. Why? Because they're regarded as people of faith who shunned personal profit for the collective good. No one would dream of naming Galileo, Darwin, Thomas Edison or John D. Rockefeller.

Yet we should. It is they, not the Mother Teresas of the world, that we should strive to be like and teach our kids the same.

If morality is judgment to discern the truth and courage to act on it and make something of and for your own life, then these individuals, in their capacity as great creators, are moral exemplars. Put another way, if morality is a guide in the quest to achieve your own happiness by creating the values of mind and body that make a successful life, then morality is about personal profit, not its renunciation.

Immigrants as Entrepreneurs

An interesting factoid: "Immigrants founded or cofounded almost half of 50 top venture-backed companies in the United States".

It doesn't surprise me, because immigrants are generally self-selected; they come to take advantage of the unique opportunities available in the US, and we all benefit as a result.

Tackling the Issue of Public Pensions

An interesting development in the pension story. Previously it seemed that pensions could not be touched, even in bankruptcy, but that may no longer be true. Here's how this NY Times article describes the situation:

The last American city to work its way through Chapter 9 bankruptcy was Vallejo, Calif., which finished the process this year. It had to navigate similar stumbling blocks. Initially, it planned to cut its workers’ and retirees’ pensions, but it changed course when California’s giant state pension system, which administered Vallejo’s plan, threatened a costly and debilitating court battle.

Vallejo instead cut pay, health care and other benefits, as well as city services and payments to its bondholders, and left the pensions intact. Even though the bondholders faced a loss, all parties eventually agreed they had been treated equitably, and the state passed a law making it easier for Vallejo to continue borrowing.

The episode strengthened the perception that public retirement plans were unalterable, even in bankruptcy.

[...]

Until now, 60 percent of Central Falls police officers and firefighters have retired on full disability pensions, drawing the inflation-protected and tax-free payments even when they embarked on new careers. One of them, at 43, has become a prominent personal-injury lawyer and can be seen in television ads shooting baskets and pretending to fall down a manhole. That retiree, Robert Levine, a former police officer, said his disability was the result of an on-duty car crash where he was not at fault, and that his pension had been granted lawfully after his condition was certified by three different doctors.

The retirees, who are not represented by the unions, voted in favor of their pension reductions last week. The cuts would be up to 55 percent of each retiree’s benefits, which now vary widely, from about $4,000 to $46,000 a year, depending on final salary, years of service and other factors. A few retirees would give up more than $25,000 a year. Central Falls’s police and firefighters do not participate in Social Security.

Merry Christmas

Merry Christmas everyone!

To mark the day, here's my favorite "holiday" editorial, written by Dr. Peikoff: Why Christmas Should be More Commercial. A sample paragraph, but be sure to read the whole thing:

Of course, the Puritans denounced Santa as the Anti-Christ, because he pushed Jesus to the background. Furthermore, Santa implicitly rejected the whole Christian ethics. He did not denounce the rich and demand that they give everything to the poor; on the contrary, he gave gifts to rich and poor children alike. Nor is Santa a champion of Christian mercy or unconditional love. On the contrary, he is for justice--Santa gives only to good children, not to bad ones.

For more on the history of the holiday, see this Bloomberg piece.

This is a promising development. (Of course longer term any real hope for better politics is a return to an explicit protection of individual rights, but this type of legislation can buy us time to get there.)

A bill that would give the controlling party of either chamber of Congress veto power over any major new regulation passed the House of Representatives Wednesday.

The measure, dubbed the Regulations From the Executive in Need of Scrutiny -- or REINS -- Act, would require Congress to sign off on any new rule estimated to cost more than $100 million. It passed 241 to 184, with a handful of Democrats crossing the aisle.

Greece as Harbinger of Socialist Europe and perhaps the US

This well-written story does a good job of concretizing the situation in Greece, including its cause: the entitlement mentality bred by the socialist state. An excerpt:

Spray paint is ubiquitous, besmirching the marble steps leading up to the front of the Parliament, the walls and columns of the surrounding streets, and the storefronts in the nearby shopping district. The odor of urine is an unwelcome companion, not just in back alleys but along the sidewalks of major streets near the Parliament and along the walk to Hadrian’s Arch. Windows have been broken, marble walls and columns smashed.

Let’s be very clear about who is being targeted here. The shops that have been trashed are not just the chic brand names one finds in major cities all across Europe. No, these noble protestors have not confined their destruction to icons of wealth and power. They are equally destructive of small religious goods stores and assorted “Mom and Pop” establishments. They disrespect all businesses, small and large, in the same ugly fashion.

The police, union members after all, have done little to prevent the violence and property destruction. And their inaction, as we heard many say, has simply emboldened the thuggish elements among the protestors.

For ordinary Athenians the ongoing “occupation” has had a variety of unpleasant consequences. A young schoolteacher we know shops for her parents; they are afraid to leave their apartment. Other Athenian friends tell us that union thugs sympathetic to the “indignants” frequently intimidate ordinary citizens, whether they are shopping or going to work or simply out for a walk. This is understandable when one considers that the protestors’ goal is to bring everything to a halt. Quite simply, that means disrupting the public’s ability to carry on with daily life. People are told they should have known what would happen, they should stay off the streets.

The disruption, of course, is aimed at more than the general population. The strikes and other unannounced work stoppages cause electricity and water service outages frequently. Many of these are deliberately timed for late afternoon, to maximize discomfort for tourists checking into hotels, for restaurants preparing evening meals (it’s tough to cook and wash dishes without electricity or hot water), for merchants trying to make sales at the peak shopping time of day (electronic cash registers and inventory systems go “down” when the power fails), and so on.

Welfare as a Way of Life

An interesting account of the welfare mentality as seen through the eyes of a Walmart cashier.

Argument via "Mic Check"

An interesting story reporting Dr. Bernstein's recent lecture at UMass and the OWS protest it sparked. As far as I can tell, the OWS crowd has no arguments or even anything positive to offer, the best they can do is invoke censorship (at an institution of higher learning no less!):

Klein continued, questioning what kind of subject matter should be allowed to be discussed on the campus of a public university.

“What they were saying was not in the interest of our school. We’re a public school. We’re not in support of the destruction of the public sector,” said Klein.

Hedge Fund Manager Kyle Bass on Europe and Trading.

Worth a listen to. I'm as much impressed with the way he handles himself in the media as with his research and trading.