Washington Post Editorial Against Obama's Tax Plan

The Washington Post has a posted opposition piece to Obama's Tax plan:
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/28/AR2008102802955.html

I will point out that neither candidate, when asked during the debates, would commit themselves to eliminate or reduce a single significantly expensive government program. Both are committed to tax cuts for the middle and lower classes, and more government spending. Both plans have been shown by independent organizations to increase the deficit.

Perhaps true fiscal conservatives should just vote "present".

Obama to Raise Minimum Wage

Barrack Obama has proposed an increase in the minimum wage to $9.50 per hour by 2011.

• The public argument: costs are rising, and people making the minimum wage cannot afford to live for things any more.
• The political motivation: the union members and many others in the Democratic party base have always favored increases in the minimum wage in particular and wages in general.

Obama takes it one step further, by proposing a permanent indexing of the minimum wage, so that it automatically increases with inflation.

Most conservatives would counter that raising the minimum wage would force employers to hire fewer people, and/or to raise prices. In personal experience, my Extra Value Meals always seem to increase in price whenever the minimum wage goes up.

Some Liberal arguments for increasing and/or indexing the minimum wage:
http://www.epi.org/content.cfm/issueguides_minwage_minwagefaq
http://www.commondreams.org/views01/0829-08.htm

A middle of the road view:
http://www.wisegeek.com/does-raising-the-minimum-wage-cause-inflation.htm

Conservative arguments against the minimum wage:
http://www.cato.org/pubs/pas/pa106.html
http://www.house.gov/jec/cost-gov/regs/minimum/50years.htm

The vast majority of people in America make more than the minimum wage, anyway. In theory, if you ate at In-N-Out (which pays far above minimum wage), your hamburger prices should hopefully be less affected.

What's your opinion on the minimum wage? We welcome your comments.

Plastic Antibodies: Future Wave of Biotech Drugs?

The MIT Technology Review published an article today summarizing the recent development of polymer-based artificial antibodies. The prototype polymer antibody was developed around the target protein melittin. It proved to be a highly specific and to have very high affinity for its target. The original scholarly article was published in the Journal of the American Chemical Society.

This is a significant development for several reasons, including the fact that it may be possible to develop entirely synthetic antibodies for therapeutic use. Current therapeutic uses of antibodies include FDA-approved drugs like Humira. Humira targets a protein known as TNF-alpha. By suppressing TNF-alpha, Humira is capable of suppressing the human immune system. Humira is indicated for diseases like Crohn's and Rheumatoid Arthritis. The development of Humira for therapeutic use is complex because it is a humanized monocolonal antibody - meaning, mouse monoclonal antibodies are massively modified with human DNA. The modified DNA is then placed in mammal cell cultures to grow and replicate.

Humira can cost more than US$13,000 per year for an uninsured person. These costs are largely driven by two factors, the expensive drug development Abbott pursued in getting Humira approved by FDA, and the cost of manufacturing.

Fully synthetic polymer-based antibody discovery and manufacturing offers a glimpse of what might be: cheaper drug discovery, development, and manufacturing for an important class of drugs. A welcome side-effect will be cheaper drugs for the gravely ill patients needing them most.

Wasting Minutes: Cell Phone Annoyance

The International Association for the Wireless Telecommunications Industry (CTIA) has an interesting web page. They claim that consumers are now (June 2008) using an average of 769 wireless minutes per month for an average bill of US$48.54. By way of contrast, in 1995 consumers used an average of 119 minutes and paid US$51.00. This works out to a (42.86 cents per minute - 6.31 cents per minute) = 36.55 cents per minute savings when comparing wireless rates in 1995 to rates in 2008. The 6.31 cents per minute average compares favorably with the 5 cents per minute anytime-rate that IDT is offering over landlines, in competition with AT&T, Sprint, and MCI.

One wonders how much more cost saving can be achieved. Large economies of scales have been achieved through mass manufacturing and the establishment of cell towers providing good wireless coverage in most areas. The competition between Verizon, Sprint, AT&T, and T-mobile is intense. And newer rivals are appearing on the horizon (Cricket, Metro PCS).

A good place to start for greater savings: standardized cell phone and wireless plan features. I am specifically thinking of the time I spend each day listening to slightly different, universally non-informative answer messages when the dialed person does not pick up. They typically run something like this:

"We're sorry, but the person you have dialed is not available. To leave a message, press 1 or simply wait for the tone. After the tone, leave your voice message. When you are finished, you may hang up or press 'pound' for more options. To leave a callback number, press 5."

These types of messages take approximately 10 - 12 seconds to finish. Why not dispense with the message (unless the user wants to record a custom one) and simply play "the tone"? If callers wanted to have a bit of warning, a couple of short, light beeps could precede "the tone". This would save 10 seconds of airtime. As long as everyone knew that '#' provided more options and '5' lets you leave a callback number, why should we be forced to listen to this ditty ad nauseum?

To get an idea of the potential time savings, we note that the average US mobile subscriber is currently a party to an average of 204 wireless phone calls per month. This means that each US subscriber makes an average of 102 outgoing phone calls per month -- 3.4 per day. Assuming 25% of calls require a message (my own personal experience), about 4.5 minutes per month per subscriber of currently wasted time would be saved. This is not only less annoying to the customer, but also more productive, efficient, and potentially cost-saving to the customer, especially for customers with plans that include rollover minutes.

Best of all: no more excuses for putting off that five-minute workout.

Barrel of Oil for only $64 - What's next, $2 gas?

USA Today reports that crude oil is down to $64 per , far shy of the $120 we were seeing just this year. The reason is simple: futures traders are seeing less demand for oil in a slowing global economy. Recent announcements by OPEC of reduced production has done very, very little to slow down the plunging price. For the time being, the anticipation of falling demand is outweighing the outright certainty of reduced OPEC supply.

My hope is that gasoline prices will also continue to fall. In our inflated Southern California area, gas is flirting with $3, going down to $2.90 hopefully soon. If people have less to spend at the pump, hopefully, they will have more to spend in their local economies. I know, awfully demand-side of me to say such things, but I do feel that high gasoline prices are a hideously regressive tax. Let's cross our fingers for $2.50 gas by Christmas.

Mortgage Irresponsibility: The $66,720 Reward

FDIC Chairman Sheila C. Bair testified today before the Senate Committee on Banking, Housing and Urban Affairs today, with Sen. Chris Dodd (D – Conn.) serving as committee Chairman. In her testimony, she stated:

“Through this week, IndyMac Federal [the bank that FDIC took over last summer] has mailed more than 15,000 loan modification proposals to borrowers, and has called many thousands more in continuing efforts to help avoid unnecessary foreclosures. While it is still early in our implementation of the program, over 3,500 borrowers have accepted the offers and many more are being processed. We are still working to verify incomes, but thousands of borrowers are already making their modified payments. I am pleased to report that these efforts have prevented many foreclosures that would have been costly to the FDIC and to investors. This has been done while providing long-term sustainable mortgage payments to borrowers who were seriously delinquent. On average, the modifications have cut each borrower’s monthly payment by more than $380.”

It is instructive to convert this innocuous US$380 into more meaningful numbers. For ease, all figures are given in US dollars.

To simplify the computations we shall assume that June 2005 is a reasonable proxy for the entire distressed portion of the IndyMac bank loan portfolio. We shall further assume that most of the loans were given for properties in California and will use this as a geographic proxy. Our final assumption will be to restrict ourselves to fixed, 30-year mortgages. The median price of a home in California in June 2005 was approximately $542,720 (source: California Association of Realtors). Assuming an annual interest rate of 5.6% (the national average in June 2005), we have a monthly payment of $3,115.64 (online mortgage calculator). (This does NOT include property taxes or Mello-Roos supplemental local California taxes, so the numbers presented in this post are conservative. Because the FDIC renegotiations of IndyMac mortgages carry commensurate reductions in property taxes, it means that California receives commensurately smaller revenues. But this is a topic for another post.)

More precisely, a -$383.02 per-month mortgage payment modification corresponds to a reduced loan having $476,000 in principal, with 5.6% interest over 30 years. This is a $66,720 mortgage reduction in today’s dollars, on average, for each mortgage in our hypothetical IndyMac loan portfolio. Over the life of the loan, this represents a $137,887.20 decrease in total mortgage payments.

To put things in greater perspective, a $476,000 mortgage corresponds to the median home price in California in late 2004. Effectively, people who could not afford homes at the June 2005 levels -- but bought anyway -- are having their mortgage principal back-dated approximately 9 months. Responsible persons buying homes in June 2005 are being offered no such deal. Unfair? You betcha.

The argument has been made that the problems facing our financial system are so severe, that to allow people to continue to default on their home loans would have catastrophic consequences. I understand this argument, but I am still angry. The government regulators, banks, and home buyers appear to want to “have their cake and eat it too” – a fault-free solution where no one suffers. What about the people who have been disciplined and not bought anything? What about the people who bought, knowing they could make the payments?

If a $66,720 (or $137,887.20 depending on how you want to look at it) tax-payer and bank-funded reward is being given to persons not capable of making their monthly payments, perhaps the banks and tax-payers should include everyone else in the largesse. Firstly, we need to impose strict regulations on banks combined with beefed-up armies of regulators to look over their shoulders. Secondly, give me a check for $50,000 and we’ll call it square.

More responsibly: Let the system that got us here feel its own pain. It's the best teacher of all.

Wardrobing Women Candidates

The Politico website today splashed this headline, "RNC shells out $150K for Palin fashion," which quickly became the most emailed story on Yahoo! news. It makes a predictably bad impression for the Palin camp, by comparing the outlays for high-end retailers, as well as almost five grand for hair and makeup, to John Edwards' $400 haircut and other famous political follies. It also notes no comparable expenses in the financial statements for the Obama campaign, which is surely better able to afford it.

Also circulating widely is this AP story, that significant Alaska public funds have been spent on hotels and airfare for the Palin kids during their mom's short term in office.There is a distinct whiff of abuse of power in the AP story. But the wardrobe story raises a different issue without addressing it: Women in the spotlight face higher expectations for their appearance than men do. Palin comes from a beauty pageant background, and has traded on her looks to attract (literally) political supporters. Call it the Princess Di candidacy, and expect it to have higher maintenance costs.

The relevant comparison is not with Obama's campaign, but Hillary Clinton's. The "traveling pantsuits" that became iconic during primary season presumably cost less than Palin's outlay, but still probably much more than Obama's or McCain's wardrobe. A man can run for office with a pair of shoes, 2 suits, 3 shirts, and 4 ties. No woman seeking public office could do the same. But if we don't want to end up where only Princess Di or Evita Perron can get elected, we'd better make peace with the pantsuits.

History Sides with Demand (and Dems)

This article, in the Christian Science Monitor, echoes an historical observation recently in circulation: that the economy fares better under Democrats, who tend to raise taxes on the wealthy, than Republicans, who reduce taxes most for the wealthy in hopes that their consumption will spread the wealth around, which notionally trickles down.

Using Vu's potato chip analogy: Potato chips are a low-cost snack, but not a staple food. You buy chips if you already have enough to eat, but just want a little something extra to nosh on. If you don't have enough to eat, you skip the chips and get white bread and peanut butter instead.

Ezra Hogg, the golden-parachuted CEO of FATCORP, doesn't buy chips when he wants a little something extra. He buys a Bentley or a Rolex, both manufacturers that employ far fewer workers than FATCORP. So if, facing higher taxes, Hogg buys fewer high-priced luxury goods, the economic impact is far less than if large numbers of low-income consumers have to give up their low-priced luxuries.

Ronald Reagan raised taxes in his second administration. George Bush I raised taxes after promising not to. Bill Clinton raised taxes in the early 1990s. For a time in the late-1990s, a balanced budget seemed thinkable. Now ten years later, the U. S. Government is mortgaged like an insolvent homeowner, by the supposedly business-friendly policies of the GOP. Like insolvent homeowners, the voting public is realizing the need for a little discipline, and some thought about how to pay for purchases.

Obama's Trickle Down Tax Plan: Let them eat potato chips

Obama's rationale for higher taxes: It's all about fairness. Corporations like Exxon made billions under Bush, now we're taking it all back and giving it to the middle class. When we spread the wealth around, everyone gets a little ahead.

Let's say I run FATCORP, which sells potato chips for $2 per bag. Let's say that taxable income each bag (after tax deductions) is $1. Currently, FATCORP would pay 35 cents in federal tax per bag. So FATCORP has a net profit of 65 cents per bag.

Under Obama, the federal tax per bag goes to 39.6 cents per bag. Now FATCORP pays 39.6 cents per bag of chips, for a net profit of 60.4 cents. All of the sudden, FATCORPs net profits are down 7.1%. FATCORP must now raise the price of potato chips, or else face the wrath of its shareholders. To get the same 65 cents of net profit per potato chip bag, FATCORP now must sell potato chips for $2.08 a bag.

Here's the problem: everyone eats potato chips, but the poor eat FATCORP's potato chips in far greater numbers. But it doesn't stop at 8 cents more per potato chip bag. It's a few more pennies for shoes, a few more for gas, and a few more cents for arugula at the Whole Foods Market. (I threw the last one in there because Obama himself complains about that.) By taxing the rich, who can indeed afford to pay it, you still ultimately end up taxing the poor, who arguably can least afford to pay it.

Of course, Obama would argue that corporations would choose to stay competitive and keep their prices the same. What's FATCORP to do if it feels no one will buy chips above $2? Sure, you can lower the costs by 7% to maintain the same 65 cent profit. What's the most expensive cost for FATCORP and almost all corporations? It's not the potatoes. FATCORP's employees, specifically their salaries, benefits, and healthcare, are the largest area of expense. FATCORP can freeze hiring (no new jobs), lay off workers, or reduce benefits. If you think lowering the CEO's salary would make a dent, think again....you could cut the CEO, CFO, and COO pay to minimum wage, and it won't get you even close to the 7% that Obama levied on FATCORP. In mature businesses like FATCORP, there isn't much more efficiency left to wring out of the system. Employees will usually feel the brunt of cost cutting first.

In summary, when tax rates increase on large corporations, they must raise prices, or lower costs. Raising corporate prices, especially on food, hurts consumers from EVERY walk of life, and usually hurts the poor the most. Lowering corporate costs hurts the middle class and lower class employees with fewer new hires, lower benefits, or worse, layoffs. I don't see how taxing big businesses more helps anyone in the long run. I agree with Senator Obama that the upper class will be fine no matter what. That's true...it's everyone else that I worry about. And for the 95% of us under the Obama tax cut, remember, that money doesn't come for free. You'll be paying for it every time you buy FATCORP potato chips, or anything else made by a corporation...which is basically everything.

Senator Obama, I will concede that wealth does not always trickle down perfectly, but I guarantee you that higher taxes always do.

Throwing more money at the problem

While it originally seemed a spot-on political impersonation worthy of Tina Fey, the Congressional Democrats' proposal for another economic stimulus package in recent weeks has actually won support from President Bush and Ben Bernanke. This would make the second stimulus package in a single year, and (I admit, I've lost count)--how many for President Bush's term in office?

In real life, I'm a history professor, and while teaching ancient Rome this semester, I got a feeling of deja vu when talking about the Roman Republic's devolution into Empire. Caesars found it easier, and presumably cheaper, to assuage the sufferings of the urban poor by creating a public dole of free daily bread.

The habit of sending out packets of spending money from public coffers, without a plan to recoup such losses through tax receipts, will prove a hard one to break. In the future, what politician will be able to refuse when such calls turn into demands? It seems just as likely to create a bidding war to see who can pledge the most "stimulus" funds, as well as growing public dependence upon such measures.

NYTimes Grab Bag

Tyler Gowen, a professor of economics at George Mason University, gives us some historical perspective on global economic interconnectedness since the last several recessions and downturns.

An article about the Volatility Index, or VIX, on the Chicago Board Options Exchange points out the new prominence of this hitherto obscure instrument for gauging market fear. Created in 1993, in response to the turmoil of the late-1980s, it is currently seeing its first major market panic. Now all we need is an economist to tie the VIX to Buffet-style value purchasing formula...

A profile of "Mad Money" host Jim Cramer points out that his viewership in recent weeks has doubled, even as his predictions at key moments this year have ranged from Pollyanna-ish (Bear Stearns is not in trouble; Wachovia is a bargain at $10) to Cassandrine (On Oct. 6, he went on the “Today” show ... and said, “Whatever money you may need for the next five years, please take it out of the stock market. Right now.”). The public's belief in hot money tips apparently has nothing to do with track record, and fear seems tempered by long-term faith.

Blame Game

The New York Times has an interesting 2003 article that is pertinent to the current Washington blame game. Many people are faulting the Bush administration for the blowup of Fannie Mae and Freddie Mac.

This is in fact, untrue. See Investor Business Daily's Editorial from September 18, 2008, for a more accurate picture. Also, another blog provides an interesting timeline of events surrounding Fannie and Freddie from 2001 through 2008. These events were drawn from a White House website. [I'm not necessarily recommending the blog, merely giving creditto Gateway Pundit for publishing this information before it was posted here.]

The Bush administration does not deserve the scorn and hatred being heaped upon it for the Fannie and Freddie disaster. But Bush and McCain need to do a better job of defending themselves and educating the public on the real history. To be certain, McCain took issue with Fannie and Freddie on May 25, 2006 and urged Congress to pass the Federal Housing Enterprise Regulatory Reform Act of 2005. The text of this Act (now dead) can be found here.

The Breakfast Buffet, Part II

http://www.msnbc.msn.com/id/27235731/

[This post relates to Warren Buffett's stated intentions to buy stocks -- to stand apart from "the herd". This is classic value investing. The post below entitled "The Breakfast Buffet" relates to the same topic. I have taken the liberty of adding a title to this post as well as creating keywords. --David Bogosian, blog owner.]

Many Municipalities Now Underwater

Fortune magazine has a nice article about the misfortunes of our country's municipalities. It wasn't just home buyers or Wall Street investment banks that drank the punch; everyone drank the punch.

In the early 1990's the County of Orange in California went broke. We can expect much of the same, but writ large -- cities, counties, pension funds, and even states will be feeling lots of pain for a long time to come.

The Breakfast Buffet

"Help yourselves," says Warren Buffett, or rather, "Get 'em while they're cheap." Well, actually, he said this, after admitting economic conditions now look bad: "What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," he said. "So if you wait for the robins, spring will be over."

Spoken like a guy who has made his fortune by not joining stampedes.

The View from Flyover Country

You've seen Jimmy Stewart in It's A Wonderful Life, right? Maybe the mega-banking industry (and its investors and regulators) need another screening of the film and a subsequent gut-check. I live in a town full of banks you've never heard of. According to this author, that's a good thing. Plus he's happy to invert the "what's the matter with Kansas" theme.

Derivatives Market Surpasses Total Global Wealth

From web.worldbank.org, it is possible to obtain estimates of the global total wealth. In 2000, there were approximately 6,070,581,000 persons on earth, according to Wikipedia. The World Bank estimates that each person contributes, on average, US$16,000 in produced capital and US$5,000 in natural capital. Natural capital consists of things like natural resources such as oil and other mineral deposits, whereas produced capital consists of things like goods manufactured for sale.

Thus, in 2000, the total wealth of planet earth is estimated to be US$127,482,201,000,000 -- or $127 trillion US dollars for short. This figure would need to be adjusted upwards now to account for the falling value of the US dollar, but you get the point. It's a really big number.

Unfortunately, it's not big enough to cover all of the financial bets being made in the derivatives market. In July 2008, the Bank of International Settlements (BIS; the only organization that tracks the derivatives market) reported that there were US$548 trillion dollars in outstanding derivatives on the listed market. BIS estimated that US$596 trillion dollars in outstanding derivatives is being traded over-the-counter, but this estimate is "iffier" since the OTC market is not actively tracked. For more information, you can visit jutiagroup.com or bloomberg.com.

If we take both figures as accurate, then US$1.14 quadrillion dollars in outstanding derivatives are in existence. That's over 1000 trillion US dollars, far larger than the total wealth of the entire planet. If even 10% of these risky derivatives tank, the total losses could exceed the wealth of our planet.

This is a bit doomsday-ish, because the face value of the derivatives represent losses in the extreme case of total meltdown. The derivatives themselves trade for $11 trillion - $15 trillion on the market. But the trade value is still 10% of the total wealth of our planet, and would have a cascading / ripple effect on the global economy if even 25% of them were to "go bad".

This is why Warren Buffett, in his 2002 letter to Berkshire Hathaway investors, said "...derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."

We have only begun to see how much pain and suffering can be inflicted on the global economy by too-smart financial engineers.

Bailout Package to be run by a 35 year old

Henry Paulson, the Secretary of Treasury, will be in charge of the recently passed $700 billion dollar mortgage bailout package. But it will be his undersecretary that will be doing the heavy lifting. Instead of the usual grey-haired Caucasian, the bulk to the bailout work will be done by a 35 year old former engineer turned MBA. Read the full story at USA Today.

Beer a Better Investment Than AIG, Lehman, and Fannie Mae

The conventional wisdom says to invest long-term in stocks. In the short-term, there are occasionally alternative investments that may perform better --

1. AIG (AIG, NYSE) traded at $68.59 on 10/1/2007.
It traded at $3.95 on 10/1/2008, for a 94.2% loss.
$1000 of AIG invested on 10/1/2007 would be worth $58 on 10/1/2008.

2. Lehman (now Lehman Brothers Holdings, Inc. since entering bankruptcy proceedings,
LEH, NYSE) traded at $63.65 on 10/1/2007. It traded at $0.21 on 10/1/2008,
for a 99.7% loss. $1000 of Lehman invested on 10/1/2007 would be worth $3 on 10/1/2008.

3. Fannie Mae (FNM, NYSE) traded at $62.49 on 10/1/2007.
It traded at $1.66 on 10/1/2008, for a 97.3% loss.
$1000 of Fannie Mae on 10/1/2007 would be worth $27 on 10/1/2008.

However, current Budweiser prices for a 12-pack of cans are about $9.00. This works out to $0.75 per can.

$1000 invested in Budweiser (beer, not stock) would get you 1,333 cans, each having $0.05 California Redemption Value. Upon redemption, you would receive $66.65 for all of the cans, and have the pleasure of drinking the beer.

Lehman Bros. CDS Fire Sale Provides Insight

http://en.wikipedia.org/wiki/Credit_default_swap

A Credit Default Swap (CDS) is a kind of insurance
whose value goes up when a bond goes down. Essentially
it is a way of insuring bonds so that if they go bad, the
bond owner doesn't lose everything.

On 10.10.08, Lehman Brothers had a fire-sale on its
Credit Default Swaps as a way of raising capital (they're
bankrupt). It's CDS policies were valued at $0.08 - $0.09
payout per $1.00 nominal value. Basically, the value of
Lehman's CDS policies are worth less than 10% of their
face value.

This means that the insurers are on the hook for about
90% of all defaulted bonds written on bad loans associated
with Lehman Bros. If this pattern holds true throughout the
CDS industry, bad things will happen....

If we make the further assumptions that

1. 1/10 of recently-written home loans will go bad (currently
1 out of 6 indebted homeowners are under water, so this
seems conservative)

2. The bad loans represent 1/10 of the total homeowner
indebtedness (total = approx. $10 trillion, so 1/10 = $1 trillion)

3. The nominal values of the bonds written on the bad
loans is equal to the value of the loans (also conservative
since mark-to-model valuation schemes can value bonds at
more than the underlying loans)

we arrive at an insurance nightmare:

$1 trillion US total defaulted bonds -> $900 billion insurance
payout

This of course, is a CONSERVATIVE estimate. Lehman Bros.
ALONE had about $400 billion in insurance underwritten by
outside parties, so it would not be surprising to see a total insur-
ance payout exceeding $4 trillion across the entire industry.

This dwarfs the total amount of written-off debts that the banks
have acknowledged so far. Chris Cox (head of SEC) testified a
couple of weeks ago when the Bailout bill was being debated
that Congress needed to take up the issue of Credit Default Swaps.
Now we know why he was so concerned.

The major monoline bond insurers in the United States are FSA,
AMBAC, CIFG, FGIC, AGC, XL Capital, ACA Financial
Guaranty Corp., and MBIA Insurance Corporation.

If your 401K has stock in any of these corporations, get out.
You might also consider shorting these stocks. But whatever
you do, don't buy. Sell.