Someone going by the name “thinking outside the box” responded to my Fuzzy Math post with the following brilliant idea:

I think people making $200,000 or more a year should form a union. This would at best, allow the group many perks and protections and at worst, confuse the current administration until the next election.

Obviously an impossibility on multiple levels – not to mention it runs completely counter to my philosophical distaste for unionization – but I like the creative thinking here.  The best defense is a good offense, right?

Fresh on the heels of my fuzzy math post yesterday, the WSJ ran a piece today on “earning well, feeling otherwise”.  Here are a couple quotes from a working couple who served as the article’s anecdotal focal point:

I’m not complaining, but the reality is Obama may call me wealthy, but I thought we were just good old middle class. Our needs are being met, but we don’t have a load of cash to cover wants….I’m not after sympathy. We are blessed. What I want is a reality check on what rich means.  I can pay my mortgage and I can buy some clothes. I’m not going without, but I’m not living a life of luxury.

A recent OpEd in the Los Angeles Times made fun of those silly little tea parties that took place yesterday.  A pretty lame piece overall, what struck me most was the way it started.  The byline asked, “What, exactly, are the protesters protesting?  The marginal tax rate rising 3% for millionaires?”.  Without going into the very reasonable grievances expressed at those rallies yesterday (though I’d agree the execution wasn’t the best), I’d like to explore the wonderfully misleading nature of that byline.

The last I checked, one could be considered a millionaire in the U.S. when his or her net worth exceeded $1 million.  There are two very important yet subtle points baked into that statement.  First, $1 million expressed numerically is $1,000,000.  That’s a one followed by six zeroes.  Second, one’s net worth is basically the sum of one’s hard (land, cars) and soft (stocks, bonds, cash) assets minus one’s liabilities (debt).

So let’s now look at Obama’s proposed tax hike on the “rich”.  His plan calls for those individuals making more than $200,000 per year ($250,000 for couples) to have their income tax rate increase from 35% to 39.6%.  Now try to reconcile that with the byline above.  Never mind, I’ll do it for you.  For one, people making $200,000 per year are by no means millionaires by default.  Indeed, they could very well have net worths substantially below $1 million.  That’s a common misconception that doesn’t get corrected enough.  And I’m not sure who decided that $200,000 in gross income qualifies as “rich”.  My guess is that a survey of those individuals would reveal that many of them consider themselves middle class or upper middle class – certainly not rich.  And regarding the hike itself, the actual increase looks to be 4.6% instead of the 3% the title indicates.

Similarly distasteful in the mislabeling department is the “millionaire’s tax” that is about to be imposed on New Yorkers earning more than $200,000 per year ($300,000 for couples).

Making such liberal use of the word “millionaire” appears to be part of a marketing campaign designed to paint these earners as filthy rich and thus less impacted by an increase in their tax rates.  As Obama would say himself, they can afford it.  But, Mr. President, an annual salary on its own does not a millionaire make!

Barron’s ran an interesting interview with Professor William Black, former deputy director at the Federal Savings and Loan Insurance Corporation, on The Lessons of the Savings-and-Loan Crisis.  His take on the current crisis and Washington’s response?  Let’s just say he’s not a fan.  Here’s a part that resonated with me given my general distaste for our leaders these days:

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

Two things I’ve been wondering about were recently addressed via timely pieces in a couple of my favorite rags – Slate and Reason.

The first relates to the 2016 Olympics.  Two cities very near and dear to me – Chicago and Tokyo – are locked in heated battle to win the right to host the event.  Similar to the sentiment expressed in a recent Reason piece, I’ve long wondered why these cities even bother since a win would very likely mean taking on monstrous amounts of debt (not a great time for that, by the way) and generating tons of headaches for local residents (traffic, noise, etc.).  And the total costs of hosting (including security, infrastructure, etc.) appear to often outweigh any long-term economic gains.  Of course, judging by what we hear from our local media and politicians, one would think that hosting events like the Olympics is a no-brainer.  However, it turns out the benefits of hosting these events should be treated as anything but foregone conclusions, as can be seen in sites such as this one, which encourages a balanced debate on whether it makes any fiscal sense for Chicago to make its push. This topic resonates with me for another reason as well – two economists who are leading experts on the economics of sport are Robert Baade and Vic Matheson, two of my former professors in college.  Indeed, thanks to taking his Intro to Economics class my freshman year, Professor Baade was the reason I became interested in the science of economics in the first place.  But for him, I would’ve become a podiatrist.  Or a used car salesman.  I’m sure of it.

The second topic relates to the contradictory nature of how certain countries refer to themselves.  In case you find yourself in a state of serious boredom someday, I recommend that you peruse a list of official country names.  A comprehensive review of that list will elicit more than a handful of head scratches and raised eyebrows (e.g. did you know that Greece’s official name is the Hellenic Republic?).  The name that most often makes me bristle is the highly counterintuitive Democratic People’s Republic of Korea (aka North Korea).  Obviously, there is nothing democratic about the DPRK, and it’s policies are certainly not about the “people” (rather, they’re about the “person”, that being Lil Kim).  And the Democratic Republic of the Congo ain’t so democratic either.  So I often wondered, “why do the least democratic countries have the most democratic-sounding names?”.  Luckily, Slate asked the same question.

The Japanese parliament spent almost a year debating a stimulus bill designed to give citizens (and foreign taxpayers, like us) handouts ranging from ¥12,000 – ¥20,000 ($120-$200).  The bill finally passed and we received our checks in the mail today.  Two things strike me as interesting here.  First, what the hell is such a nominal amount supposed to accomplish?  Even when I was a cash-starved college student, that type of money didn’t move the needle.  Second, why haven’t governments learned the lessons of the past when it comes to such handouts.  That is – they don’t work!  This is especially true for Japan, which has one of the highest savings rates around.  Given the highly uncertain future, there is no reason to expect the Japanese won’t save the bulk of that money, which would obviously defeat the purpose of the handout, itself an impotent attempt to stimulate consumption (I put impotent and stimulate in the same sentence on purpose, hehe).  I could see how such handouts may stand an outside chance of working in spend-happy America, but the whole notion strikes me as entirely disingenuous.  After all, over-consumption is what got us into this mess in the first place.  Any money the government returns to us should be saved, not spent.  But DC doesn’t want us thinking that way, believing it more prudent to spend what we don’t have rather than save what we do.  Monkey see, monkey do!

Barack Obama’s chief economic advisor, Lawrence Summers, is quite possibly the most boring speaker on the planet.  Though we’re told repeatedly that he’s got a magnificent mind, he is excruciating to listen to and should probably be prohibited from ever speaking in public.  One obvious problem with Summers (as I mentioned in a previous post) is that the man is scary good at talking without saying anything.  In an arena full of legitimate contenders (that being the world of politics), Summers may very well take the cake when it comes to achieving the lowest signal-to-noise ratio.  Pouring salt on the wound, the guy speaks in a stodgy monotone that should be bottled and sold as an insomnia drug.  As Anderson Cooper of CNN recently joked:

Larry Summers is maybe great behind closed doors, but he’s not about to get his own cable news show.

Despite his vapidity, Summers is back making the rounds as part of the Obama administration’s haphazard attempt to address the current global financial crisis.  For those of you who are gluttons for punishment, or in need of some help falling asleep, I encourage you to watch his appearance on Face The Nation this past weekend.  It illustrates perfectly the aforementioned gripes.

Beyond Summers’ painful inability to engage his audience, he comes off as a bit aloof and out-of-touch when he speaks, which makes him appear downright unlikeable.  (This was something that the NY Times’ Frank Rich addressed in his latest piece, which asked if Obama’s Katrina moment had arrived.)  Soured on his personality, I got to thinking…and a bit of a brainstormed developed.

Let’s go back to this notion that the man has a brain to rival all brains.  How much does that really matter?  I mean, I assume the guy is what we’d call book smart.  A sober review of his CV would easily confirm that.  But I wonder if something is missing.  Maybe the guy, despite all his “intelligence”, is actually an ineffective (and possibly bad) advisor.  After all, being smart doesn’t necessarily make you good at what you do.  There’s that elusive “judgment” component that is just as important in dictating success or failure as more traditional metrics (eg education).

And when it comes to judgment, my sense is that Summers’ record may very well be mediocre.  Of course, we all remember his Freudian slip that played a prominent role in his ouster as president of Harvard.  And lest we forget that Summers, along with his cohorts forming the economic triumvirate that surrounded President Clinton – Robert Rubin and Alan Greenspan – actually helped set the stage for the financial quagmire in which we currently find ourselves.  Referred to as The Three Marketeers by Time magazine back in 1999, the group helped engineer an irresponsibly loose monetary policy following the bursting of the tech bubble, which led to some really stupid risk-taking by businesses and consumers alike.  Those easy money policies caused risk to be massively mispriced and we’re now dealing with the consequences of having the pendulum swing to the completely opposite side of the spectrum.  The group also helped push through legislation that required banks to extend loans that they wouldn’t normally make.  Specifically, as part of Clinton’s desire to increase the rate of home ownership across the country, the Community Reinvestment Act was massaged on multiple occasions to encourage banks to make loans to borrowers who would normally be considered too risky to lend to.  With various government incentives and assurances in hand – and by devising ways to lessen (and even monetize) those heightened risks via securitization – banks obliged.  What resulted was an explosion in irresponsible borrowing and lending, and a real estate bubble whose burst served as the primary catalyst for the current downturn.  And for those of you who subscribe to the theory that this whole thing is a result of insufficient regulation, recall that Summers played an instrumental role in the passing of the Financial Services Modernization Act.  Among other things, the act allowed for the creation of institutions we now deem too big to fail.

I’m not suggesting that Summers should bear all or even the majority of the responsibility for our current doldrums.  Indeed, there is plenty of blame to go around.  But he deserves at least some of the blame.  After all, I’m sure he was at the very least present in the room when various of those misguided government initiatives were being discussed.  More likely, knowing him to be the overbearing type, my guess is he was actively engaged in many of those discussions.  So this begs the question – why does he have his current job?  Why is it that we rarely see people held accountable for their professional mistakes?  And why are so many people with spotty track records continuously afforded the benefit of the doubt?  We see this all the time in professional sports, where players and coaches who underperform at one place get bounced around to a host of others before finally being put to pasture, as if a change in venue was all they needed.  We also see this when it comes to the talking heads on ESPN, whose record at picking the outcomes of various games appears to be immaterial in the grand scheme.  This is even more evident (and meaningful) in the financial marketplace, where prognosticators like Jim Cramer manage to stay on air (or in print) despite consistently getting things wrong (quick – name one economist or market watcher not named Roubini or Faber who correctly predicted this downturn).  As the WSJ smartly put it recently, financial journalists fail upward:

If the world of financial infotainment can itself be described as a “market,” it is a market where accountability does not seem to exist, where the heaviest of incentives seems to carry no weight, and where consumers, to judge by what they get, seem constantly to choose the lousy over the good. The old order discredits itself, but the old order persists nevertheless…The reasons the financial-entertainment biz failed us are many and complex, but they ultimately come down to this: In the marketplace to describe the marketplace itself, there is precious little competition. There is a single, standard product that comes in packaging that is alternately sultry, energetic or fun — bitter, brainy or Cramer “crazy” — but which rarely strays beyond certain ideological boundaries. Adversarial voices are few. Criticism is sacrificed for access. Advice sometimes shades over into simple propaganda. Even the worst prognosticators sometimes go on to jobs with presidential campaigns or prominent think tanks.

Not to belabor the point, but consider the case of embattled Treasury Secretary, Timothy Geithner.  I can’t help but feel for the guy…obviously plenty smart and capable, the dude’s been dealt a pretty shitty hand.  But it’s not all about bad luck.  Let’s not forget that prior to his current gig, Geithner was president of the New York Federal Reserve Bank (since 2003), which not only put him in the cockpit with Greenspan (and then Bernanke) but also made him vice chairman of the Federal Open Market Committee (the principal organ of our nation’s monetary policy).  Thusly, he was knee-deep in the muck in the lead-up to the current crisis.  And so his reward for such complicity is being made king of the castle?  Really?  A sporting analogy I like to use for this comes from the gridiron:  My football team had a bad year last year, which was largely the result of the defense being a sieve rather than the offense not producing; indeed, the offense was lights-out.  In response, my misguided owner (let’s call him Jerry) fired the head coach and promoted the defensive coordinator to the top job.  Huh?  Seriously?

I’ll never understand why we always rely on the very people who helped get us into our various messes to then get us out of them.  Rather than hold them accountable for their lapses in judgment, we give them increasingly greater powers of authority.  I can understand needing to have people who know where the bodies are buried but that is only justifiable up to a point.  As they say in Texas, “that dog don’t hunt!”

I quite enjoyed the impromptu rant that CNBC’s Rick Santelli provided us the other day.  However, I was perturbed when I learned that he’s claiming the White House is threatening him and his family because of that rant.  Below is an exchange between Santelli and G. Gordon Liddy on Liddy’s radio show:

SANTELLI: He started that press conference saying, “I don’t know where he lives, I don’t know where his house is.” This is the Press Secretary of the White House. Is that the kind of thing we want? Is that –

LIDDY: It’s a veiled threat.

SANTELLI: It really is. [...] I don’t really want to be a spokesman, but I really am very proud of a) the response I’m getting, which is overwhelmingly positive, and b) discourse, that is debate. That if the pressure and the heat I’m taking from the White House – the fact my kids are nervous to go to school – I can take that, okay.

Dude, relax.  There is no way in hell the White House would ever publicly threaten the safety of one of its citizens, particularly over something so trivial.  Privately, sure.  Publicly, not so much.  Here’s what Gibbs actually said:

I’m not entirely sure where Mr. Santelli lives or in what house he lives,” Gibbs said during the daily briefing. “But the American people are struggling every day to meet their mortgage, stay in their jobs, pay their bills to send their kids to school, and to hope that they don’t get sick or somebody they care for gets sick that sends them into bankruptcy. I think we left a few months ago the adage that if it was good for a derivatives trader, that it was good for main street. I think the verdict is in on that.

Gibbs was obviously making a point that Santelli is a bit out of touch with those Americans currently experiencing financial difficulty.  Clearly, Santelli needs a drink.  Someone please buy him one.  And then ask him for help paying your mortgage.

The UK newspaper The Guardian put together a list of the twenty-five people responsible for the current economic crisis, which – in case you’ve been comatose for the past 18 months – is turning out to be the most severe downturn the world has seen since at least World War II. 

The list is pretty good.  At the top is Alan Greenspan, a designation I find quite fitting, and it also includes some folks that tend to get overlooked, including my favorite:

The American public
There’s no escaping the fact: politicians might have teed up the financial system and failed to police it properly and Wall Street’s greedy bankers might have got carried away with the riches they could generate, but if millions of Americans had just realised they were borrowing more than they could repay then we would not be in this mess. The British public got just as carried away. We are the credit junkies of Europe and many of our problems could easily have been avoided if we had been more sensible and just said no.

Those whom I believe should’ve at least received an honorable mention include Charles Schumer (slimy, dimwitted and conflicted politician), Barney Frank (see Schumer…and add bombastic and abrasive), Franklin Raines (someone from Fannie or Freddie should get a mention), Christopher Cox (just for running a clueless organization), Robert Rubin (where shall I begin?) and anyone associated with the ratings agencies (oddly, the list includes the former CEO of S&P as someone who saw the storm approaching, which doesn’t seem to fit with the spirit of the section).   Oh, and Rod Blagojevic, for no other reason than he should, by rule, be included on any list of ignominy from this point onward.  His actual involvement in, or relevance to, the topic at hand should be viewed as immaterial.  Just put his name in there and move on. 

Speaking of special mentions, we should not exclude John Thain, the now former CEO of Merrill Lynch.  Of course, he was brought in to fix the mess that Stanley O’Neal left him with, so you can’t assign him much of the direct blame for Merrill’s current woes.  However, his performance in the Bank of America/Merrill Lynch merger (where he was reportedly less than forthcoming regarding his firm’s exposure to toxic assets and where he expedited bonus payouts to clear before he was found out) and his penchant for high-end redecorating (where he spent $1.2 million to upgrade his office space) clearly stand out.  Now, I have no problem with executives treating themselves to certain accoutrements, particularly when at the helm of successful enterprises whose profits could justify such extravagance.  But $87,000 for an area rug?  When your company would likely be in dire straits but for a fire sale transaction with a bank that itself could’ve gone under but for the generosity of Uncle Sam?  And when said merger will result in the termination of thousands of employees?  Seriously?  To paraphrase Robert Scheer, whom I heard this weekend on KCRW’s Left, Right and Center, it would appear that Thain subscribes to the Marie Antoinette school of public presentation.