Robbing banks is illegal?

"'As it stands now, they've turned [banks] into virtual cash machines,' New York
Police Commissioner Raymond Kelly said."

Golly, who's he talking about? Real estate agents? Mortgage brokers? Cash-back-at-close, zero-doc, no down borrowers? Naw, plain old bank robbers.

"In fact, bank robbers have simply handed tellers a note in a vast majority of
hold-ups in New York."

So, remember kids, its better to rob a bank with a mortgage (note) than with a hand-scrawled note. If you rob a bank with a real estate license, that's okay. If you rob a bank with a hood over your head, that's illegal. If you rob a bank by promising (via a "promissory note") to pay back money you have no intention or capability of repaying, you get a bailout. If you rob a bank by authorizing garbage loans that have slim chances of repayment, you get a fat bonus check and stock options. Confusing, ain't it?

Quotes are from: Is recession behind spike in bank robberies? - CNN.com

Happy New Year!

Health Care Flex Spending Account: Use it or lose it

If you have a balance remaining in a use-it-or-lose-it flex spending account, there is less than one week left in 2008. With over-the-counter drugs and first aid supplies now flex-spending eligible, there's no need to "lose it." Depending on how much you have left, you can clean out your medicine cabinet (replacing old, expired cold medicines and the like), pick up a first aid kit, even get a home defibrillator. Personally, I have been browsing drugstore.com's FSA store, seeing what is FSA eligible and gathering up receipts for things we bought earlier without realizing they were eligible. I've whittled our balance down to $26, which I'll use to restock the first aid kit before Dec. 1.

We've made a point of submitting receipts before year-end, allowing sufficient time for the administrator to process them and hopefully notify us of any non-approved claims while there's still time for us to use up our funds.

Hope you're all enjoying the holidays in good health and good cheer.

My Property IQ is 68: Zip Realty's new feature

Zip Realty has rolled out a new feature called Property IQ. This feature allows zip users to enter their best guess about what a property will ultimately sell for. In the absence of any other guesses, the list price is used as the "Community" prediction. Thus, if I guesstimate that an overpriced property will sell for less than asking - and there is not a community of other users agreeing with my guesstimate - then the algorithm deems me a nit wit. Even if I just entered the price that the agent told me the house actually went into contract for. The only "accurate" guess right now is the asking price.


The goal here seems to be to encourage, persuade, and peer-pressure buyers into the practice of thinking that homes will sell close to asking price, even when asking price is a pie-in-the-sky pipe dream. In our competitive society, we are well socialized to strive for high performance - high score, high net worth, low lap times, high status, rich networks. Games have power - pro racers play video games of unfamiliar tracks to gain familiarity, and even small-craft pilots have been known to fly three states over to pick up a good flight simulator. In striving for a win, an A, a certificate, an Attaboy, we learn over multiple attempts to perform to the grading scale rather than strive for real knowledge. Here, the grading scale is set-up out of the box to gently nudge users towards asking-price-is-the-real-value, despite launching the game in the midst of the worst real estate crisis since the Great Depression. Considering how many properties in Sacramento MSA are languishing on the market for a year and longer, the asking price is rarely ever the real value. But answering anything other than asking price, right now, is gently reprimanded through the insulting "Your Property IQ is 0!"


Yes, that's right, my property IQ was zero, because I guessed well-below-asking on a seriously overpriced property. But I was able to salvage my Property IQ by guessing well-above-asking on another property. So now I have a system - if a house sells, I bet at or above asking; otherwise, I only enter a Guess where the guess is well below asking price. I hate lazy programming and lazy algorithms as much as I hate the pervasive manipulation and bull$#!7 of the real estate industrial complex.

The End of Wall Street's Boom - What REALLY Happened?

The End of Wall Street's Boom - National Business News - Portfolio.com: "The era that defined Wall Street is finally, officially over. Michael Lewis, who chronicled its excess in Liar’s Poker, returns to his old haunt to figure out what went wrong."

This is a lengthy article, but quite an interesting read. If you don't know Michael Lewis, he wrote Liar's Poker, about his experience working on Wall Street in the 1980s. Liar's Poker is also the game the fellows at Long Term Capital Management played - the founder of LTCM worked at Salomon Bros. in the 1980s, too. Lewis also wrote a book about baseball, and one about the dot-com era before it became the dot-bomb era, and he writes an amusing column for Slate called Dad Again.

The article reaches some very interesting conclusions, which I won't spoil here. But one of them seems to be the same one I keep coming back to - Wall Street is run by idiots. Traders don't know anything about economics, and economists regularly admit that they're terrible traders.

I suspect that the art/science of economics is something of a crystal ball on Wall Street - yet, like all mystical sciences, the economic tarot can tell you what will happen, but not when. Trading is all about the when. If you get out too early, you'll never make enough gains to retire; if you get in too early, you'll drive yourself to an early stress-related death and won't get to retire, anyway (hey, maybe that's a good retirement plan - cheaper than the $200k they recommend you put away for retirement health costs alone!). Traders use the technicals (charts and pure market data) to try to get ahead of a curve - but charts, alone, don't warn you when an enormous wrecking ball like the housing implosion is heading your way. Which is why my broker laughed at me when I said I didn't want to touch anything housing related - not even funds holding Fannie/Freddie bonds. My theory is that good traders are neither traders nor economists - they are sufficiently detached to take the signals of both disciplines with a boulder-sized grain of salt. Throw in a healthy dose of market historian and psychologist, and you might actually have a trader who can turn the odds in his own favor.

Short of that (plus a lot of luck), Mr. John Q. Public is facing some looonnnggg odds. The SEC lets banks and brokerages hold off-balance sheet risks that an average investor doesn't know about until it sinks his share price. Even the on-balance-sheet holdings are sometimes sliced and diced and innovated to a point that finance professionals can't understand what they really are, let alone what they're worth, or how quickly they can sink the company. Index funds came about specifically because fund managers aren't superior traders - managed funds and index funds have roughly equal odds of outperforming various benchmarks. The market moves on rumors that can create the sorts of problems that were rumored to be a risk. And when Mr. John Q. Public throws his hands in the air, says the heck with it, and plows his money into the age-old safe haven - banks and big, stable Blue Chips, he finds out later that the banks aren't safe and the Blue Chips are dallying in risk loans. Even Money Market funds were "breaking the buck" and losing principal value, because the professional financiers invested in bonds that - despite being triple-A rated short-term bonds - went poof. Oh, yeah, that's because the ratings agencies are either inept, corrupt, or both. But what choice does a fellow have - Social Security is bankrupt, pensions are a privilege only the government-employee class can count on, and his 401k has to make up the difference. Good luck, Mr. Public. You'll need it.

Where's the Money?

jaycee commented on an earlier post:

"I am trying to understand what is going on and I found your post really interesting. But I still have a question: we are not making bets with Martians, so surely the money is staying in the system? If I make a bet with a sucker who says: Sorry, I don't have the means to pay you, it will not make me bankrupt, just a bit peeved."



It's an excellent question, and one I've been trying to figure out. I don't have an authoritative answer to jaycee's question, but I humbly offer an educated guess....

Winners and Losers, The Money's still there

For most trades, there's a winner for every loser, so the money is still in the system somewhere. If I buy Citibank at $45, the seller gets $45. When Citibank drops to $6, the $45 I gave the seller still exists. Ditto for a house - if I buy a house for $200k and it drops to $100k, the money still exists in the seller's bank account. Unless the money never existed - with fractional reserve banking, banks can lend more money than they have - basically "printing" vapor dollars. If the bank lends me money to buy a house or a stock, and I don't pay them back, the bank has to eat the loss. They lose real dollars.

Defaults suck the Vapor Dollars Out of Grandma's savings

The net losses are primarily in defaults. Suppose I'm a hedge fund trader, leveraged at 10-to-1, when I make a bad bet. I either have to eat the losses out of other gains/equity, or I'll default on the margin loan. The brokerage has to eat the defaults, and they can only eat so much. Banks are losing in mortgage defaults, and we're seeing increasing bankruptcy filings. Those are net dollars lost. As much as possible, the banks and brokerages dump the losses on shareholders.

Paper Losses Become Real Losses

Houses, stocks, and even business inventories are showing paper losses. To the extent that people have to pull cash, they are converting paper losses into real losses. That's why there's so much griping about 401k withdrawal requirements this year. Businesses have to sell inventories, even at a loss (due to tax rules, cash flow, inventory staleness/freshness, and cost of commercial real estate for storing inventory). Those losses take money out of the system permanently.
The risk is that leverage let us inflate asset values quite rapidly - doubling home values, for instance. As credit dries up and net losses on defaults accumulate, it creates a leveraged pop - that's why the government has pumped some $7 Trillion in liquidity into a $13 Trillion economy this year, and yet we're still in a recession.

Google Long Term Capital Management (LTCM) - they blew up in 1998 because they were highly leveraged and they were betting on derivatives. The government bailout in that situation was just persuading other brokerages to save LTCM, but it should have raised a red flag about the risk of leverage and derivatives.

Not Lost, Just Wandered Off

There's also the issue of money still in the system, but removed from investment assets. This is a little out there, but it does impact valuations. The money available to invest is not static. Every day, each consumer/investor decides whether to save/invest current income, or whether to withdraw/spend invested income.

Generally, a consumer invests the dollars that he or she perceives are "excess", above their basic needs. An investment dollar typically flows from investment to investment to investment; a consumption dollar flows from consumer to producer to employee/consumer to producer many times before possibly making its way back to investment markets. We are seeing net outflows from asset investments (stocks, bonds, real estate). Some of that outflow is from consumers just trying to pay the bills - some, for instance, flows to oil-producing nations, and much of that outflow won't come back. It's still in the system, but it's in the global system, essentially unavailable for domestic use. Other asset withdrawals are going to domestic producers, but as people lose their jobs, face income stagnation and cost inflation, fewer dollars are perceived as "excess" dollars to be saved/invested. Although that money is still in the system, it's a long way away from the investment assets whose valuations were based on how many dollars were invested.

Fast Money: Whoosh! It's Gone

Then there's the issue of the "velocity" of money. Middle class money is the best for stimulating economies, because middle class earners typically spend, spend, and spend some more, often spending a disproportionate amount on services. Services are almost entirely wages, which provides a second producer/consumer with money to spend - largely, on services, which provides a 3rd producer/consumer with money to spend. And so on. The exact same dollar changes hands many, many times - and each time, it counts as taxable income, it counts as GDP, it counts as someone employed, and it counts as another employee/consumer feeling a little more confident about the economy. I think of middle class money as slutty money - it gets around - well, that's velocity - the more a dollar gets around, the greater "velocity" it has. Poor folk don't have much money and rich folk keep a larger portion of their money than middle class folks do (that's why they're rich, and why an awful lot of rich folk got rich saving and investing off mere middle class income).

So if we go back to that Citibank transaction - if I buy a share for $45, the seller has the $45; it's still in the system. But I started with $45 of spendable money, $45 worth of earnings, $45 worth of wealth effect, $45 worth of net worth. If the share price drops to $7, well, there goes my spendable asset, my net worth, my wealth effect. There's a very, very good chance that my "velocity" of spending will decrease by the $38 the share dropped in value. If I was investing for a down payment on a house, that's $38 less house I can buy. If I was investing for a wedding, there goes the open bar. If I was investing for peace of mind and the satisfaction of securing my future - zoiks. Chances are, I'll pull $90 of spending velocity out of my budget to make up for the loss, and it still may not replace the lost peace of mind.

That's my best guess - we aren't suffering a mere shifting of assets, but a genuine implosion in some assets. Other assets are lost on the wrong side of the tracks, while others are dragging themselves sickly across the floor crying piteously, "help me, I'm hung over."

EcoWorld - Guest Commentary » Blog Archive » Sundown for California

EcoWorld - Guest Commentary » Blog Archive » Sundown for California: "The educational system, closely aligned with the Democrats in the legislature, accelerated its secular decline. Once full of highly skilled workers, California has become increasingly less so. For example, California ranks second in the percentage of its 65-year-olds holding an associate degree or higher and fifth in those with a bachelor’s degree. But when you look at the 25-to-34 age group, those rankings fade to 30th and 24th."

Rather lengthy, but interesting reading. I'm not sure why it's on EcoWorld, as the article isn't really about ecology at all.