The Curmudgeonly Professor's Business and Economics Blog

Comment on Columnist Walter Williams and his Proposal that Folks with Home Equity Should be Required to Live Off their Assets

Obviously, it's been eons since I've posted on this blog.  But the column by Walter Williams in the morning paper was too good to pass up offering some learned commentary.  Williams is an economics professor at George Mason University which is not exactly known for liberal thinking, so to speak.  Professor Williams advocates that folks who own their homes and have assets should live off their home equity and assets and not be leeches on the public trough, so to speak once more.  Wait, there's more, as the infomercial shills chant.  Well-to-do folks who were frugal all their lives should not be eligible for social security and other spoon-fed handouts, but should be required to pay their own bills from their carefully accumulated assets.

A few problems arise with this thinking.  The first problem is that economic analysis teaches that we should evaluate the consequences and circumstances of alternative courses of actual or proposed action.  So consider the following:  You have spent your money as you earned it all of your life, plus run your plastic debt through the ceiling, lived in a megahome with an ARM mortgage, enjoyed a boat and a Lexus.  And you went bust.  Not once, but two or three times.  You left others holding the bag when you couldn't pay your debts.  But, here's the beauty of the thing:  You retire with nothing, and you are eligible for social security, medicare, medicaid, and whatever other goodies the government dreams up to pass along to folks like you.  At least that's the "Williams Rule."  These folks can enjoy having the government take care of them, but not those frugal savers who prepared for retirement.  Great economic thinking, Walter.

A Proposed Required Course of Study for Members of Congress

One of the marvels of our wonderful democracy is that we have a people's legislature. Well, not quite, since each person elected must figure out how to raise millions and millions of dollars to convince a skeptical bunch of voters to vote for him or her instead of the opposition.  A citizenship and age requirement are about the only criteria for being a member of Congress.  There are no education or knowledge requirements to legislate the people's business, enact and debate complex legislation on hundreds of topics, debate countless labyrinths of thousands of pages of proposed bills, or to appear as guests on television talk shows.

At least it has been many decades since any fisticuffs occurred, though we have had a four letter epithet or two thrown out by otherwise dignified representatives of the people. So our relative good behavior in the midst of heated and nasty debate is a tribute to our system and those who limit their behavior to, in effect, telling one another how stupid the other side is.

As a suggestion, the Curmudgeonly Professor recommends that all current and prospective members of Congress be required to take the following curriculum and pass each course with a grade of at least B before they can legislate public policy:

• Introductory economics, topics including economic effects of public spending versus economic effects of tax cuts; multiplier effects of various spending proposals; trade retaliation from protectionism; interpretation of basic economic indicators such as GDP, unemployment, consumer prices;  and the difference between positive economics (what actually "is" or what actually "can be" as opposed to what people wish for or results based on value judgments and ideology).
• A brief course in economic history, with emphasis on economic recessions and depressions, beginning with the financial crises at the turn of the century which led to the creation of the Federal Reserve System.  Then, continuing, an analysis of the Great Depression, the New Deal, war economics, and then continuing to the economic effects of monetary and fiscal policies that have been enacted in the last half century, including Reagonomics, supply-side economics, and Federal Reserve monetary policies. 
• A course in regulation and deregulation of financial institutions and of other segments of the economy and  of the economic effects of such regulatory policies. 
• A course in basic ethics, including topics such as honesty, integrity, obeying the law, morality, nepotism, fraud, and deceit, among other topics.  Watch power-point presentations of current and recent examples of violations of these basic principles. 
• A course on the global economy. 
• A course on the standards of reliable knowledge and of the critical importance of using actual facts, as best we know them at the time, and reliable information in debate and in the writing and enacting of legislation.   
• A course in health economics. 

Don't whine.  We require CPA's to have at least five years or more of education before they can fill out your tax returns and keep your books.  We require lawyers to have three years of law school, doctors to have anywhere from eight to a dozen years or more of training before they can look down our throats and take out our appendix, and college professors to have at least seven, eight, or more years of intense study before they can spread their gems of wisdom before their adoring students. 

Thus, why should we not require members of Congress to know something besides party lines, ideology, and bits and pieces of information gleaned from here and there, before we allow them to legislate the people's business and to change the course of domestic and world history? I just wondered.  The Curmudgeonly Professor wearies of watching our paragons of Congress continue to repeat tag lines, spout forth erroneous economic history and economic principles, and then purport to represent the peoples' interests.  But then, our democracy is still a marvel, and we are likely doing the best we can do.  But why can't we do better with a little education?  

The Motley Fool Gives Us an Optimistic and Sensible View of the Bailout

In the Motley Fool, an excellent daily compendium of economic and financial wisdom, Richard Gibbons provides a common-sense and useful summary of the positive side of the financial bailout.  You can read his article here.  Among Gibbons' useful points are the following:

•  . . . as a country, we can't make decisions based simply on anger or capitalistic dogma.
• . . . regulation is necessary to reduce systemic risk.  Unfortunately, our regulators disliked regulation, and last year, the resulting crisis drove the banking system to the brink of collapse. 
• Without government assistance, it seems likely that most of the top-tire banks would have collapsed. 
• The repeal of Glass-Stegall (which separated investment banking from commercial banking) was repealed in 1999, which is one reason why banks were able to trade asset-backed securities (ABS) and blow up the system nine years later. 
• During the New Deal, after confidence was restored in the banking system, "Roosevelt focused on employment through numerous public works projects and agricultural programs. 
• Warren Buffet, who thought the bank bailout "absolutely necessary," says that "if stocks continue to trade at bargain prices,  he'll put his entire personal fortune into equities."

The Curmudgeonly Professor Gives a Pop Quiz

Good morning class.  Please take out ten blue books and pen for a pop quiz.  Explain your answers clearly and in detail.  You must use basic economic principles covered in any basic freshman level economics class to justify your answer.  Here we go.

1. If you had to choose and implement an economic policy that would result in the greatest economic impact, dollar for dollar, which would you choose:  (a) tax cuts, or (b) expenditure increases?  Explain clearly.
2. Would remodeling the U.S. Commerce Department building result in any economic stimulus?  Explain. 
3. Who originated the term "stinking, rotting corpse" to describe the current economic stimulus package? 
4. Discuss the economic effects of a "Buy America" requirement for all funds dispensed under the new economic stimulus package.  Would a Buy America rider result in the desired impact of saving American jobs and stimulating the American economy?
5. List five economic reasons for voting against the economic stimulus bill. 
6. Have  massive tax cuts worked to stimulate the economy since 1980?  Why or why not?  Explain.
7. What is "supply-side economics"?  Has supply-side economics been proven to be either or both a short- or long-term effective economic policy? 
8. Define the term socialism in analytical terms, devoid of biased opinions. 
9. Define the term communism in analytical terms, devoid of biased opinions.
10. What practical policy barriers serve as impediments to promising a balanced budget? 
11. During which Presidential term of office in the last thirty years did the following occur:  (a) the highest unemployment rate. (b) the largest budget deficits. (c) the highest economic growth rate. (c) a federal budget surplus. (d) the highest interest rate. (d) the greatest collapse in economic and financial markets since the 1930s. Explain, in each case, the circumstances underlying each of these economic benchmarks.  
12. Identify the principal areas of deregulation of financial markets during the past three decades.  Explain the economic results of these reductions in deregulation. 
13. What is a subprime mortgage? 
14. Outline the basic ethical and economic standards for loaning money and creating a new home mortgage. 
15. Who is responsible for overseeing ethical and economic standards for loaning money and creating new home mortgages?  The federal government?  The president and CEOs of banks?  The mortgage writers themselves? 
16. Should the federal government "bail out" shoddy and dishonest lending practices by "saving" the banking and financial system?  Or should the federal government just allow the financial system to "go down the drain" and start over again from scratch? 
17. What safety nets were in place to prevent the massive financial and banking collapse?  What additional safety nets and regulations are needed to prevent a reoccurrence of the current financial collapse?
18. What did the FDIC, the SEC, the U.S. Treasury, the fifty state bank examiners, do to protect the economy and the nation from predatory and unethical lenders and to remove or punish them for their decisions and actions? 
19. What is the average level of economic analysis competence attained by members of Congress, political pundits, talk show anchors, and the general public? 
20. Identify major changes in economic tax, budget, and financial policy that have been instituted in the past 30 years.  How many of these changes attained their desired effects?  Explain.       

You have three weeks to complete this exam. This exam is an open-book, open-source exam.  You are free to consult any source you wish to consult, including President Obama, Nobel-prize winning economists, textbooks, other books, the CEO of your local bank, members of the New York Stock Exchange, Suze Orman, Google, financial and economic analysts, the President of the American Economic Association, and the Secretary of the Treasury.  You must quote and cite your sources, and then provide your own objective analysis supporting or disagreeing with what you have learned.  

When you have finished, your exams will be reviewed and examined by a panel of distinguished faculty members, including a group of your peers.  The writer of the best exam will be awarded a Ph.D. in economics and appointed to the President's Council of Economic Advisers.  All others will be required to take a remedial course in elementary economics, to tutor members of Congress in elementary economics,  and to perform unpaid janitor work during spring term.  You may begin.

A Carnival of Clowns: Joe the Plumber Lectures GOP on the Stimulus Bill

Bring in the clowns.  The news sources tell us today that Joe the Plumber is now up on the Hill to talk to the GOP about the economic stimulus bill.  Apparently Joe's career as a foreign war correspondent was cut short.  During the interim, the ubiquitous Plumber has now become an economic expert who is qualified to impart wisdom on the stimulus bill. Skip the economic experts who have studied and analyzed economic issues for decades.  Avoid any liberal democrat or liberal media outlet.  Get right to the heart of hidden knowledge with Joe the Plumber.  Reminds the Curmudgeonly Professor of way back when economic forecasting was done either through reading tea leaves or sorting out camel dung.  Never has such a minimal person been able to squeeze so much notoriety out of such a miniscule and trivial beginning.  Only in America.

The Curmudgeonly Professor's Daily Recession Watch: February 3 2009

Economic analysts and historians will find no lack of employment or opportunties for at least a century or more by dissecting the Great Economic Collapse of the early 21^st century.  Doctoral dissertations will be written by the score.  Papers will be delivered passionately at annual meetings of the American Economics Association with viewpoints reflecting the parable of the blind men and the elephant.  Class lectures will be updated.  Economics textbooks and economic history books will be rewritten.  From a clinical point of view, the current downturn is fascinating to monitor.  From a personal standpoint, and from the standpoint of the daily welfare of the citizens of the world, the downturn is a disaster of historic proportions.

Here are some observations from the Daily Recession Watch on February 3 2009:

• David Serchuck notes in Forbes.com today that  regional banks are expected to fail as commercial real estate values fall.  Serchuck quotes John Jacquemin, head of investment house Mooring Financial Corporation, as saying "our economy cannot be fixed, " a veritable death sentence."  Wow.  You can't get any more pessimistic than that.  See the article here.
• Denny's announced free Grand Slam breakfasts today (Tuesday) in a Super Bowl ad between 6:00 a.m. and 2:00 p.m. as reported by Trevor Hughes of the Fort Collins Coloradoan in USA Today on February 3 2009. 
•  The Salt Lake Tribune announced today, February 3, in an article by Kirsten Stewart, that Utah State University is putting all 2,995 full- and part-time University employees, "from high-paid administrators to front-line office personnel" on furlough for five days over spring break, March 9-13, taking leave without pay. Read the story here. Ouch! 
• The Utah State Department of Workforce Services has nearly doubled its staff, from 56 to 100 workers, to handle the sharp rise in new claims (126% in 4Q 08 over 4Q 07) and an 81% increase in claims in 4Q 08 over 3Q 08 according to Jasen Lee, writing in Salt Lake's Deseret News on February 3 2009.
• Clearfield High School teens are becoming more frugal with their money, and girls are looking for cheap or free prom dresses, writes Amy K. Stewart in "Frugal Formals" in Salt Lake's Deseret News on February 3 2009.
• Banks are retaining tight lending policies despite influx of bailout funds, reports Sue Kirchoff in the February 3 2009 USA Today. 
• "Neither snow nor rain" but maybe the recession will deter our nation's mail carriers on their appointed rounds.  As Dennis Cauchon reports in his article titled "A part of Americana seeks to weather economic storm" in USA Today on February 3, the Post Office is in the hole $7.9 billion the past two years and has had to borrow money to pay its bills.  Mail volume sagged 4.5% last year, a number that is expected to continue downward.  So do your duty and quit sending email and using FedEx and UPS and support Uncle Sam.  You can read the story here. Actually, I haven't been happy with the Post Office for years, but that is another matter for future rants.  So get out your crystal balls and guess what will happen today and tomorrow, spend some money today, take an optimism pill, and sit tight. We'll get out of this swamp some day, we hope sooner rather than later.     

Predict the Outcome of the Recession by Looking at Economic Incentives and Disincentives

Economics has long been characterized as a study of the effects of "carrots and sticks." Dangle a carrot to get someone to do something, or hit someone with a stick to get them to stop and go in the opposite direction.  Among the principal economic carrots is a drop in prices, which obviously induces people to buy more and to substitute more of the cheaper good or service for other stuff.  A point seemingly beyond the comprehension level of legions of beginning economics students who get bored at the beginning of the semester and stay that way until the final exam.  But--and here's the catch--people will buy more at a cheaper price other things remaining equal.  And in a downturn, other things don't remain equal.  In particular, incomes fall or are wiped out from layoffs and cutbacks in work schedules.  Fears of worsening circumstances mount.  

Thus, consumers are induced by the carrot of cheaper prices to buy more of cheaper goods, but are hit over the head by the stick of falling or nonexistent incomes. Businesses, obviously, can only lower prices so much before they shutter their windows and close their doors.  Under these circumstances, the economy can only rebound once jobs and incomes stabilize once more so that spending can begin a steady upward increase.

These observations may seem so elementary that you may wonder why I am even insulting your intelligence by spelling them out.  However, the level of economic illiteracy among some news pundits, bloviators, politicians, and the general public is so appalling that even basic economic principles learned by college freshmen, supposedly, in the first month of a freshman economics class, remain largely absent in the current theater of debate and pontification over the Great Economic Stimulus Package of 2009. 

The problem in stimulating the economy is to find the carrots with the "biggest bang for the buck," to use a time-worn cliche.  And the biggest bang for the buck comes from spending, dollar for dollar, and not tax cuts, especially for people who don't make any money or who make very little money.  And rich people who make money don't really need a tax cut, and they will save it or pay off debt with it anyway, leading to little to no stimulus.  All of the idiotic talk by neanderthal observers about what constitutes "socialism" and what constitutes "true Americanism" just puts up smoke screens to cover the reality of what is happening or what is likely to happen under alternative courses of action in seeking paths out of the recession.  Just identify the carrots, and make a list of the sticks, and do your own economic analysis. 

Economics, we emphasize in lecture number 1 in Econ 101, is the study of what is, and not what we want things to be.  Figuring out "what is," or what is actually expected to happen, is positive economics and can be analytically examined.  Focusing on wishful thinking of what we think "ought to be" is just that, wishful thinking, bogged down in so-called value judgments, and can be fodder for daydreams and hopes, but cannot be objectively analyzed, even with a rubber band.

Effects of the Economic Downturn: Divorce Becomes Too Expensive

Stephanie Armour reports in the February 3 2009 issue of USA Today that "even spouses in the throes of divorce are putting off separating, living together in awkward cold wars because they can't sell their homes."  Families are moving back in together, and children are bringing parents home from assisted living facilities to ease the pinch. Read the story here.

An Economics and Finance Primer: Marking to Market and the Current Financial Crisis

Imagine if you could purge yourself of all of your sins, bad mistakes, bad debts, toxic loans, and obnoxious relatives in a pot and get rid of them all in one fell swoop.  Then the government could buy this potful of disasters you no longer have to worry about.  But first Uncle Sam would have to figure out what each bad loan, unpaid credit card debt, or worthless relative is worth in order to pass your disasters on to some willing buyer. Meanwhile, you can go on your merry way and take up where you left off, spending and partying and watching the Super Bowl.

Such is the dilemma of the "Bad Bank proposal" which would be a witches' brew of toxic assets purchased from banks so the "U. S. Government Toxic Bank" could sell the rotten assets over time and, presumably, recover some part of its expenditure on sour and toxic assets.  Problem is, what are the assets worth?  

Vikas Bajaj and Stephen Laboton have written a lucid and informative article for the New York Times in its February 2 2009 issue titled "Big Risks for U.S. in Trying to Value Bad Bank Assets."  The article comes complete with a documentation of "Fazbee" accounting standards, or accounting standards of the Financial Accounting Standards Board.  You can read the article and its FASB appendices here.

As the authors point out, low values would force "institutions selling and others holding similar assets to register crushing losses that could deplete their capital and make it harder for them to increase lending."  Yet, "inflated values would bail out the companies . . . at the expense of taxpayers."  So what should the market price of these toxic assets be?  Current market value?  Original cost?  And if current market value, how can such value be determined?

For the subprime mortgage crisis, the issue centers around the "mark-to-market" ruling of the SEC which requires "banks to "mark-to-market" their assets, particularly mortgage-backed securities."  However, mortgage related assets obviously have depressed prices leading to "significant losses" in 2008 by marking prices to market.  

Moreover, marking to market rules have led to financial shenanigans in cooking the books under some circumstances as in the Enron case where assets were based on the results of some theoretical model, thereby distorting the value of Enron assets.  So you thought accounting was a dreary and tedious profession of sorting out debits and credits?  It would require some serious study efforts to master what is known about marking to market rules.  But at least you have the general idea when you see the next reference to the topic in the current debate over the financial crisis:  that is, should you value assets at current market value, whatever that can be determined to be, or some other standard?  

Dear Economics Students: Please Write an Essay on the Economic Effects of Buy America Policies"

One of the great things about teaching economics always was finding new grist for the economic analysis mill in the adventures, misadventures, and policy proposals based on lack of knowledge about basic economic analysis and economic history.  Today, my exam question would have read "Please write a short essay on the economic effects of Buy America policies."

A temptation has long existed to believe that protecting American workers, jobs, and factories by imposing import quotas, "buy America first" policies, and placing restrictions on outsourcing is the answer to seeing our American economy continue to move more jobs and production activities overseas.  Dallas Federal Reserve President Richard Fisher warned today against "Buy America" provisions in a proposed fiscal stimulus law and said it could lead to devastating trade protectionism" according to Reuters News in an article reported by CNNMoney.com.  To read the article, go here.

Fisher labeled protectionism as the "crack cocaine of economics."  Such protectionism, he continued, " . . . may provide a high.  It's addictive and leads to economic death."  Not too many people today are even aware of the Smoot-Hawley tariff bill and its disastrous consequences earlier in the last century.  Protectionism, of course, always looks like the logical policy to adopt.  Save a factory going out of business.  Prevent American workers from losing their jobs.  But two months into Econ 101, students learn the perils of protectionism which leads to higher costs, lower incomes, and a declining domestic economy--exactly the opposite of hoped-for results.