You got to explain this to me: what toxic assets?

I have been listening to talks about toxic assets for three years and I still don't get it. Please help!
I always thought that the idea of bundles (you link a lot of good houses with one or two risky-toxic ones) was very good: it is the way to go because it limits the risk.  Also, we all know that the price of houses can level or fall because it happens every time that an average house costs more than two median salaries can afford. I know that: it was a big problem when I was still in Paris in the 80s. So of course bankers take that into account.
I have been in school long enough to know that you can estimate how much risk you can take, and banks do that every day, so what happened? I read that the banks did not care because they insured their risk.
Fair enough.
Now it is the insurance's business to estimate risk. How are they going to make money on your life if they don't know when your prostate is likely to lose its ... its spongicity? They got tables, they push a button, and they know how much of a risk you are. Estimating the risk is what they do for a living, right? And they are widely used to the theory of bundles: they bundle the risk of a hurricane in coastal zones with the risk of tornadoes inland. It is their profession to estimate the risk and to bundle it to their advantage. It is all about statistics, whether you buy, or sell, or if you are a a banker and in the end, even more so if you are an insurer.
So, if you would stop throwing to my face words like greed and toxic assets, which look like they explain the crisis but don't, and tell me what really happened,  I would be grateful: I don't get it. There are always toxic assets, being in life insurance or in housing or in car insurance. That is what estimating risk is about. I am under the disquieting impression that we are treated like a bunch of idiots. It is simple: I want to know who cheated.

Thinking about business

"... the alpha and omega of business life has become keeping up the share price. Innovation and investment can go hang."

In an interesting paper of Will Hutton in the UK Guardian

Incompetence in democracy

I was puzzled today too: a certain amount of incompetence goes with our electoral system. I asked myself the same question as yesterday about flaming incompetence. I have been following Secretary Geithner on C-Span while he goes from committee to subcommittees in congress. Of course, he has adversaries, of course some representatives or senators are intent on reading their questions and do not listen to his answers, but frankly, there is a significant number of them who visibly do not understand the answers at all. You can see that at the way they try to repeat their question as if Geithner or Bernanke were deaf.
You do not have to know much about government and specially finance to be elected to Washington: it is the idea. It is a very healthy system: I do not want to be governed by an elite of scientists, bankers and philosophers (specially not Aristotle). First, there are just as many racists within Nobel prizes than the rest of us; then there is no more morality: look at the arrest this month of a college professor who planned to rape a five years old girl (he is 62 years old). Third. a lot of the people we elect are extremely competent: they may look stupid in general assembly, but they certainly impress me in most committees.
Except for finance matters. The economy is confusing because it is largely a matter of ideology and because it has its own vocabulary (like normal for a statistician is not normal for a normal person). We all learned quickly what is a toxic asset and a subprime mortgage, but it is more difficult to get through a sentence like this: "The SEC should share the reports that it receives from the funds with the systemic risk regulator, which would then determine whether any hedge funds could pose a systemic threat and should be subjected to the prudential standards outlined above." We get the idea, sort of...who is which?
All I can think of is to tell Mr Geithner and Mr Bernanke: could you please try to have your reports translated in common English without looking paternalistic? It would help you.

Blinding views in the press

There are in the press a few things that I find really tiresome.

Bernard Madoff is ashamed. Really? At his age? After all these years?
It makes me think of "Nixon was just a political victim, everybody does that". People who say this are well intentioned, but they have never listened to the tapes.

A.I.G. Planning Huge Bonuses NOT AGAIN?

If we do not do anything, the economy will recover by itself. Well, yeah, it is like you pollute an estuary, you still have crabs: "mother nature takes care of herself". And five millions unemployed? It is "the price we pay" for progress?

Museums (ruined by the economy and some just by Madoff) have to sell works of art to survive. If that is all the imagination they have, it is time to fire their CEOs. The New York State Legislature had apparently the same feeling, because they just introduced a new bill to prevent that. See in the NYTimes here an excellent paper by ROBIN POGREBIN. It made me want to meet Richard L. Brodsky who drafted the bill, and it is not very often that I want to meet a politician! I wish legislation like this would appear in every State.

I see that our senators are all excited by "Financial literacy". I am all for it. Who do you think will teach us? The broker or the banker?

The bizarre ways of Detroit: no cheap car?

A car for less than $ 7,000? I keep wondering why we do not have a simple cheap car. The Europeans have one: it is called the Chevrolet Matiz.In fact there is a French one that is cheap but looks sleek too: Renault has a nice car called la Logan.

Fiat has a smaller, cheaper car and India has promised a car for about $ 3,000 (the Tata Nano) but it has been delayed by trouble with the recession and with their factory site.
I used to have the funniest small van when I was in France, it was a GME with Japanese and German parts sold by Opel. It was perfect: you could access your stuff from the sides, the front, the back and it had an incredible capacity for accepting weird shaped objects, dogs and cats: I filled it up when I moved to the US from France and went gaily to the airport with all my stuff. It was so narrow that you could touch the right side window without moving from your seat. The van was also high. As a result, if there was wind, you felt like sailing rather than driving! Apart from that, it was a little marvel. But as long as Detroit is convinced that everybody loves big SUVs except me, there is little hope to have a fun car around here.

New Sacrifices? Lower Salaries? or New Aims?

Please follow my reasoning before jumping in the air:
1) I am all for sacrifices when they are required and lowering salaries to keep one's job. Got to do what we got to do.
2) I am all in favor of other countries doing better, specially in the third world. If young people in the Islam world had a job, we would have less suicides and less terrorists. Peace comes with opportunities, criminal minds are forged in despair with the money of some misfits. It means that I am against protectionism: historically, it never did us any good.
3) Nobody has demonstrated that if we are more miserable, the other countries will do better for it. In fact most economists do not believe that. So let us encourage the others countries to go up, that is good for everybody, but do not let us go down: it is bad for everybody.
4)Illegal immigration is a new form of slavery: it is cheap work and no taxes and no rights. I am against it. It is just as immoral as slavery. But I am against the hypocrisy behind it all: how come these guys find jobs? Who gives them jobs? We should be clear: we still need the work of a lot of immigrants that are here: then they should have the same rights as anybody. It is better to give a tax relief to some categories of employers than to close our eyes on illegal immigrants because the American employers could not pay their social security. And the rest should not be here as a constant menace for security and the organization of society. If nobody lied about this, it would be easy to solve. All that talk about punishment and rewarding illegality is jazz. It is millions of people. Let us solve this.
5) I strongly believe that a person working hard for 8 hours a day should have enough money to survive. If you work, you should not wear the stamp of poverty. I found a good site where you can see how much money you need in any state. Verify here:
http://www.livingwage.geog.psu.edu/
You select your location, the number of people you are responsible for, and they give you a number. It is not complicated. Survival money should be the basic salary: in many places, it is not..
6) How come so many people have to work two jobs? Because businesses are in for the money. It is their legal responsibility to bring as much money to the stockholders as they can. We are a bit between a stone and a hard rock: communism we do not want because it does not work and brings endless miseries of all kinds (including the death of democracy), on the other hand capitalism is only about greed. Today's capitalists who say that everything works out in the end do not take into account the cost of human misery; they are a bit like the 19th century priests in Europe claiming that workers suffer now to get paradise in the end.
7) So we need businesses and industries to develop a conscience at the same time as they come out of the economic mess. There have been many examples in the past and until now of a conscience in small to big firms, and some have been the stuff of legends like Hershey or Ben and Jerry. But they became legends because they were the exception.
8) We need to look at the new list of Fortune 100 best companies to work for and study these companies to come up with a chart of business morality.
Then we need to teach it in business schools and try to enforce it: it is not just about money. It is about avoiding to create another generation of business people who behave like psychopaths, because that is what they learn in business schools.
9) The time to do that is now: we must regain ethics at the same time as we regain customers. Waiting for the economic recovery hoping that we can ameliorate workers situation "later" is a pipe dream.These steps have to work out together.
10)We should also look in our own closets. How come we spend so much time on TV and in our lives talking about obesity rather than talking about our own kids? What kind of society is this with one million children abused and neglected every year, and thirty million people who take illegal drugs regularly?

Too young, too old, no experience, lacks skills, overskilled?

Unemployment was for most of my life much larger in European countries than in North America. So, here, you had a chance to hear that you were skilled and good to work with, whereas in Europe, finding a job has always been an unpleasant journey.
This unpleasantness is coming to America.
I was too young at 25 and too old at 40. I have been lacking experience, and an instant later I was told I was overskilled. And soon enough, my skills became obsolete. Then I was a "woman" and I was going to get pregnant (it is not legal to say it any more, don't imagine they do not think it any more). And if you are part of a minority, disabled, or just a small size person, your prospect is worse even if that does not have anything to do with the position you apply for. Handling rejection can be tough: you got to think it has nothing to do with you while always trying to get better at obtaining a job: it is a fine line.

I always found work, though. I would say it is because:
1) I am pretty sure I am good at what I do.
2) I am obstinate: I kept trying.
3) I am not picky: a little money is much more than nothing, and a small job away is better than no job here.
4) I have been very lucky.

There was a neat discussion of unemployment numbers in the Curious Capitalist. If you wonder how so many people are unemployed and do not even look for a job, think of it this way: it is like arthritis, one gets used to it, because it is a human skill of survival to get used to bad things. In cases like this, it can be deadly: I have seen friends losing appreciation for how to dress for a job, when to get up for a job, how to talk to the boss and how to look for a job altogether. So it is best to keep trying.

Domino effect in Savannah, GA

In the relatively small town where I live, Savannah GA, there are more and more signs of recession.

• Like everywhere else, houses stopped selling. We did not get very anxious about it, as housing around here had gone up much faster than salaries: this can only go on for so long.

• The neighbors at the fringe of society in our neighborhood disappeared: the mom who was on drugs, the couple who "worked to drink", the entire household of some freshly installed students that we suspected of selling drugs.

• The new commercial building, pretty and well located, did not rent. It is usual for old business locations to stay empty for a year, but for a new building, it is surprising.

• Places that had little excuse for survival started going, going and were gone. such as the Linen and Things specially designed for people much older than me (I am almost 70 years old: it does not leave many customers of an older generation), the fast food which was always dirty, the fabric store where the manager hated all her customers, the antique shop which was filled with expensive junk, the restaurant where nobody ever greets you. They are gone, it may be sad, but it is healthy.

• We lost the very nice couple next door and their five kids. They both worked in construction, lost their job the same day and could not pay the rent. In six months, unemployment in Savannah has gone from 4.7% to 6.0 %. Construction, manufacturing, leisure and information are hit.
  

• Shops that I really liked disappeared, the nice small Mexican restaurant just slightly out of the way, the great little store of wine and cheese, who went from fair business to loosing money for the last five months.

• Smart places are in trouble like the elegant extended stay hotel nearby, the best restaurant, the gallery owner.

• LOWES sent me a card offering me 10 dollars if I spend $25.
  

• A friend of mine lost his job in the local newspaper... but we made it in the New York Times with a sad story and a beautiful picture.

Spending more to fix the economy?

One one hand, we get called names for using too much credit, and that killed our economy. On the other hand, we are supposed to spend more to support the economy because we do not spend enough and that kills the economy.

It does not make sense. Ah, wait a minute! The US Gross Domestic Product is about 14 trillion dollars a year, about the same as the European Union and twice as much as China. But most of it is made of services (79% compared to 19.8 for industry and 1.2 for agriculture). What is services? Everything not included in the two other categories: transport, health care, finance, retailers, etc). It means that over three quarters of the economy is built on our capacity to spend: buy or rent houses, dresses and books and go to the movies and end up in a restaurant. It has been decades now that businesses look for more stuff to put in our hands, from hoola hoops to cell phones. They calculate a shorter and shorter lifetime for everything we buy to force us to buy the same thing again, be it a house, a computer, a car or a refrigerator. then of course we need credit to buy the stuff. And businesses outsource and import to make more profit. So our industrial capacity disappears.

Unhappily, the more unemployed and poor retirees like me, the less we spend and the economy shrinks. This US economy: the one that is more built on spending than on building.
So the real solution is not for the government to throw a trillion dollars around, it should be to get more industry in the US. Let us get back to a 30% industry and agriculture: that is the real wealth of a country. Working and creating before spending.

Bailing out Detroit

Yesterday, I was all in favor of bailing out the car industry because 1) I am worried about Detroit and 2) I am old and sentimental.
I should not have listened to the debate today; I changed my mind. I am so naive even in my advanced years that I thought they would come with a plan. They did not: they came with justifications for their need of money. With a few billions more, they cant even innovate, they are going to produce the same misunderstood cars and promote them through the same crooky advertisers.
I really thought yesterday, and that tells you how stupid I am, that they would come back and say stuff like:

- look, the average car price has been 40% of the median American salary every year since 1990: we are going to change that. Refrigerators and TV prices went down, we should do the same.
- We realize that hybrid cars are too expensive for now, we are going to propose a totally electric subcompact at a very low price and get into the low car rental with our unsold big cars. We are even going to offer a 10-days free rent of a big car to anybody who buys a small one. Most people buy bigger cars just to visit their mother once a year: let them do that for free.
- With all the battle for more electronics in everybody's car, we have forgotten that there is a market for cheap cars. We are going to look back at the Bug and the 2CV Citroen and produce an elegant go anywhere, cheap, robust little car with low gas consumption and low price for parts.
- We want to invest in a woman's car with stuff like a place for driving shoes.
- We are sick and tired of watching people take a buggy at the grocery store, fill it up, get everything out to pay, put everything back in, go to the car, put everything in the car and go to the house and take everything out again.From now on we produce our cars with a sliding buggy that stays upright, with a mechanism like ambulance beds. Furthermore, we are going to buy the patent to read the prices of the produces you buy directly in the buggy without putting them on a counter.

You see? That is a plan. Maybe not the best, but it is a plan.

Not only I am dangerously naive, I am also dangerously disappointed: let them die. Cut them in chunks and let a new generation of CEOs deal with each chunk.

With 10 billion dollars, you can pay and train 200,000 people for one year. Get 10 billions in reserve for pension plans(but it is not enough), 5 billions as a stimulus to small, bolder car makers. Who needs the old fusspots?

We need a car to love.
PS They are getting some money, thanks congress for that, but I still hope they will make better cars.

Economists should work as chemists do

The notebook of Marie Curie, tragically, is smeared with radioactive fingerprints: people of her generation did not know how dangerous radiations could be. This image is from aip.org


If like me you keep a look on C-SPAN, you got to admit (surprise, surprise) that some people in Washington are smarter than you and me. So what is it that does not work? It is not corruption, we always have too much corruption, but not enough to justify our stagnation.
Some people get so exasperated by our muddy economics, that they would gladly let go of the federal reserve altogether (check for instance the interesting site of co-stumbler LesLafave here). But I am not sure that any ideology is the guilty part: past experiences show that zero intervention does not work and too much intervention does not work either.
I think that sometimes, smart people get lost in the details instead of keeping the aim in mind. They should do like the old chemists did.
Many years ago, a chemistry Prof of New Zealand, Keith Hunter,check him here told me that a chemist notebook should always start with writing down what is the aim of the experiment. In a chemistry notebook, you write down everything, because trivial things like using glass or plastic could explain why you have contamination or why you cannot reproduce earlier results. Why do you write down the aim? Because you can get lost in so many sub-experiments, such as checking the use of plastic vs the use of glass that your original intention can very well get lost in the details.
Dear economists, please work as chemists do. After consulting, getting counter-proposals, after the interventions of various ideologues, politicians and lobbyists, after incorporating all the details you had forgotten in the first place, please check again your final thoughts against what you first wanted to accomplish. Are you off course? Does your solution answer the question?