As I was walking from my car into the grocery store this afternoon I saw a penny lying on the pavement. I picked it up, and that started me thinking: What a country! The streets may not be paved with gold, but they are paved with copper clad zinc slugs!
Yes, I am one of those people that picks up pennies that other people have dropped. I know that most people will not bother. Not worth the effort, they say. Heck, obviously the people who were the owners of the coins didn’t think it was worthwhile to retrieve the pennies they dropped.
My feeling is that it is a worthwhile activity. Taking a second or two to bend down and gather money up off the street is a way of reminding myself of the importance of frugality. If I will expend the effort to bend down and pick up a penny, than I should work that much harder to save real money by avoiding unnecessary expenses and getting better deals.
In addition to being a physical reminder of the need for fiscal vigilance, a sort of metaphorical value, I also receive real value from this habit. They may only be pennies, but it’s still money, after all.
If it takes me two seconds to bend down, pick up the penny, and regain my stride, that works out to a pay rate of $18 per hour. My compensation at work is at a higher rate than that, but it’s more money than I would otherwise make while running errands.
This makes me curious about how much money I can actually pull off the streets. So as part of this blog, I am going to start keeping track of how many pennies I pick up. Last week, there was one in the parking lot at work, three coming out of the movie theater on Friday night, and then the one going into the grocery store this afternoon. So far I’m up to 5 cents.
Mmmm. Maybe I shouldn’t quit my day job just yet.
Sunday, April 27, 2008
Tuesday, April 22, 2008
Shoulda, woulda, coulda...
Watching the early returns from Pennsylvania, Hillary Clinton is projected to win the Democratic primary. No big surprise there. The real question is whether she will win over Barack Obama by a big enough margin to convince Democratic Party superdelegates that they should back her instead of him at the convention later this year. At this point Hillary is extremely unlikely to catch up Barack in the number of ordinary delegates going into the convention.
We may actually see a real live political convention, complete with back room deals, before this is all over. As opposed to the 100% scripted and choreographed lovefests that have taken place every four years for the last few decades.
But tonight I actually want to shift the focus to Florida and Michigan. Last year the state Democratic party apparatus in both states decided to move up their primary without getting approval from national party headquarters. To punish the renegades, and to keep the other states in line, the national party stripped both states of their delegates to the national convention. To hold with party discipline, the candidates agreed not to campaign in either state (well, Hillary did show up in Florida, put she pulled out as soon as she came under sniper fire). Barack Obama was not even on the ballot in Michigan. So the fourth and the eighth largest states were shut out of the nominating process.
So why did both Florida and Michigan decide to move their primaries? They did it because the conventional wisdom (which is not the same thing as convention wisdom) was that Super Tuesday would sew up the nomination, back on February 5. After a candidate wins enough primaries to mathematically guarantee the nomination, any primaries after that are moot, and the winning candidate essentially coasts until the general election campaign starts after both parties have their nominating conventions. You haven't seen John McCain buying a lot of television ads in Pennsylvania this month, have you?
Both Florida and Michigan wanted to be "relevant" in the primary season. The party leadership in both states wanted the candidates to campaign (i.e. spend money) in their states, so they risked, and incurred, the wrath of the national headquarters.
The irony here, of course, is that the conventional wisdom was dead wrong. The Democratic nomination wasn't sewed up on Super Tuesday. Not even close. So if Florida and Michigan had left their primaries until March, as originally scheduled, they would have been crucial battleground states for the Democratic nomination. As such, they would have received a ton of attention, and money, from both Clinton and Obama.
Instead, that attention and money have been poured into Pennsylvania for the last month and a half.
For the state party leaders in both states, I guess that it's appropriate that the symbol of the Democratic Party is a donkey.
We may actually see a real live political convention, complete with back room deals, before this is all over. As opposed to the 100% scripted and choreographed lovefests that have taken place every four years for the last few decades.
But tonight I actually want to shift the focus to Florida and Michigan. Last year the state Democratic party apparatus in both states decided to move up their primary without getting approval from national party headquarters. To punish the renegades, and to keep the other states in line, the national party stripped both states of their delegates to the national convention. To hold with party discipline, the candidates agreed not to campaign in either state (well, Hillary did show up in Florida, put she pulled out as soon as she came under sniper fire). Barack Obama was not even on the ballot in Michigan. So the fourth and the eighth largest states were shut out of the nominating process.
So why did both Florida and Michigan decide to move their primaries? They did it because the conventional wisdom (which is not the same thing as convention wisdom) was that Super Tuesday would sew up the nomination, back on February 5. After a candidate wins enough primaries to mathematically guarantee the nomination, any primaries after that are moot, and the winning candidate essentially coasts until the general election campaign starts after both parties have their nominating conventions. You haven't seen John McCain buying a lot of television ads in Pennsylvania this month, have you?
Both Florida and Michigan wanted to be "relevant" in the primary season. The party leadership in both states wanted the candidates to campaign (i.e. spend money) in their states, so they risked, and incurred, the wrath of the national headquarters.
The irony here, of course, is that the conventional wisdom was dead wrong. The Democratic nomination wasn't sewed up on Super Tuesday. Not even close. So if Florida and Michigan had left their primaries until March, as originally scheduled, they would have been crucial battleground states for the Democratic nomination. As such, they would have received a ton of attention, and money, from both Clinton and Obama.
Instead, that attention and money have been poured into Pennsylvania for the last month and a half.
For the state party leaders in both states, I guess that it's appropriate that the symbol of the Democratic Party is a donkey.
Sunday, April 20, 2008
A Modest Proposal
My company drug tests all applicants for employment. That includes contract employees that we hire through a labor staffing service (that’s a fancy way of saying we use a lot of temps). If you fail the drug test, you don’t start work.
We also require periodic random drug screens. For the temps, you only get one bite of the apple. You fail a random test, you do not pass GO; you do not collect $200 dollars. Your assignment ends and the temp service fires you.
For our regular full-time employees, the policy is more lenient. If you fail one drug test, you get the option of being suspended while you go through drug rehab counseling. By the way, the employee has to pay for the cost of rehab. If the employee does not pay for rehab, or gets a second positive drug test, we fire them.
If someone is terminated for failing a drug test, they are not eligible for unemployment benefits. It’s treated the same way as if you had quit your job. One other place employees are drug tested is right after any workplace accident. A positive drug test there leads to a denial of worker’s compensation benefits. “Stitch yourself up there, buddy. Bet you wish you hadn’t done those lines of coke this weekend, huh?”
The laws allow the stoppage of benefits to drug users. The laws allow it because as a democratic society, we have collectively decided that the use of illegal narcotics is harmful to society as a whole. So we allow significant negative consequences to befall people caught using while they are employed. And drug testing in the first place is allowed because of free association. Nobody holds a gun to your head and tells you to go to work for a company that drug tests. The individual’s freedom of choice is preserved.
My question is this: If drug use disqualifies you from unemployment and worker’s comp benefits, why shouldn’t it disqualify from other types of benefits? Welfare benefits or disability benefits, for example. If random drug screening was a condition of receiving benefits, that would have to make a dent in the demand for illegal drugs, wouldn’t it?
I would like to hear what the arguments are against such a proposal. If we tried to put a policy like this into place, somebody would scream that it wasn’t fair. But I don’t see it as unfair.
If you are going to take taxpayer money, surely the taxpayers have an interest in making sure you are following the rules that society sets up. After all, nobody holds a gun to your head and makes you sign up for welfare.
It’s your choice.
We also require periodic random drug screens. For the temps, you only get one bite of the apple. You fail a random test, you do not pass GO; you do not collect $200 dollars. Your assignment ends and the temp service fires you.
For our regular full-time employees, the policy is more lenient. If you fail one drug test, you get the option of being suspended while you go through drug rehab counseling. By the way, the employee has to pay for the cost of rehab. If the employee does not pay for rehab, or gets a second positive drug test, we fire them.
If someone is terminated for failing a drug test, they are not eligible for unemployment benefits. It’s treated the same way as if you had quit your job. One other place employees are drug tested is right after any workplace accident. A positive drug test there leads to a denial of worker’s compensation benefits. “Stitch yourself up there, buddy. Bet you wish you hadn’t done those lines of coke this weekend, huh?”
The laws allow the stoppage of benefits to drug users. The laws allow it because as a democratic society, we have collectively decided that the use of illegal narcotics is harmful to society as a whole. So we allow significant negative consequences to befall people caught using while they are employed. And drug testing in the first place is allowed because of free association. Nobody holds a gun to your head and tells you to go to work for a company that drug tests. The individual’s freedom of choice is preserved.
My question is this: If drug use disqualifies you from unemployment and worker’s comp benefits, why shouldn’t it disqualify from other types of benefits? Welfare benefits or disability benefits, for example. If random drug screening was a condition of receiving benefits, that would have to make a dent in the demand for illegal drugs, wouldn’t it?
I would like to hear what the arguments are against such a proposal. If we tried to put a policy like this into place, somebody would scream that it wasn’t fair. But I don’t see it as unfair.
If you are going to take taxpayer money, surely the taxpayers have an interest in making sure you are following the rules that society sets up. After all, nobody holds a gun to your head and makes you sign up for welfare.
It’s your choice.
Wednesday, April 16, 2008
The Law of Unintended Consequences
I think that one of the unwritten laws that govern economic activity is this: Whatever you pay for, you get more of.
By this I mean that once you establish a market for anything, suppliers will come forward to meet the demand for that product or service. If all of the supply is bought up, those suppliers will go out and produce more, operating on the assumption that if someone paid for it before, someone will pay for it again.
Jay Leno once did an ad campaign for Frito-Lay that expressed this concept better than I can. The tagline for the ads was “Crunch all you want. We’ll make more.”
Ordinarily, I have no objections to free markets and how they operate. Indeed, I’ve spent most of my adult life working under this principle. Finding ways to reduce the cost of what someone wants to pay for. Trying to anticipate when the next order is coming. Planning to increase capacity to supply more. Of course, I’ve always worked in legal industries. What makes free markets work is the buyers freely giving up their money to acquire what the sellers are selling.
But what about markets where the buyer has to buy, as long as the sellers are out there? Remember: Whatever you pay for, you get more of. If you keep paying, over time you’ll get more suppliers.
Welfare markets work like that. Aid to unwed mothers originally started out as a way of ameliorating poverty and protecting children. But what the government is paying for is women who aren’t married to have children. Not surprisingly, the number of women with children born out of wedlock has exploded in the past few decades.
Another area where the payer has no choice but to pay is in health care. Third parties pay for most of the health care in this country. The consumers of health care, the patients, don’t write the checks. The government, through Medicare and Medicaid, and private insurance companies, are how most Americans finance their health care. Health insurance is a pretty heavily regulated industry. And one of the regulations says that insurers have to pay for procedures, tests, and drugs that are “medically necessary.”
Not the cheapest way possible. Not the most cost effective. Whatever the doctor deems medically necessary, that’s what the insurer has to pay for.
So let’s suppose you are a supplier to the health care industry, like a medical device manufacturer, or a pharmaceutical manufacturer. Do you bend your efforts to reducing costs, or do you work to develop new treatments, and then work towards getting doctors to recommend those new methods? The latter does lead to progress in medical technology, but it also drives costs ever upward. Upward to the point that increasing numbers of people cannot afford insurance coverage.
“Crunch all you want. We’ll make more.”
By this I mean that once you establish a market for anything, suppliers will come forward to meet the demand for that product or service. If all of the supply is bought up, those suppliers will go out and produce more, operating on the assumption that if someone paid for it before, someone will pay for it again.
Jay Leno once did an ad campaign for Frito-Lay that expressed this concept better than I can. The tagline for the ads was “Crunch all you want. We’ll make more.”
Ordinarily, I have no objections to free markets and how they operate. Indeed, I’ve spent most of my adult life working under this principle. Finding ways to reduce the cost of what someone wants to pay for. Trying to anticipate when the next order is coming. Planning to increase capacity to supply more. Of course, I’ve always worked in legal industries. What makes free markets work is the buyers freely giving up their money to acquire what the sellers are selling.
But what about markets where the buyer has to buy, as long as the sellers are out there? Remember: Whatever you pay for, you get more of. If you keep paying, over time you’ll get more suppliers.
Welfare markets work like that. Aid to unwed mothers originally started out as a way of ameliorating poverty and protecting children. But what the government is paying for is women who aren’t married to have children. Not surprisingly, the number of women with children born out of wedlock has exploded in the past few decades.
Another area where the payer has no choice but to pay is in health care. Third parties pay for most of the health care in this country. The consumers of health care, the patients, don’t write the checks. The government, through Medicare and Medicaid, and private insurance companies, are how most Americans finance their health care. Health insurance is a pretty heavily regulated industry. And one of the regulations says that insurers have to pay for procedures, tests, and drugs that are “medically necessary.”
Not the cheapest way possible. Not the most cost effective. Whatever the doctor deems medically necessary, that’s what the insurer has to pay for.
So let’s suppose you are a supplier to the health care industry, like a medical device manufacturer, or a pharmaceutical manufacturer. Do you bend your efforts to reducing costs, or do you work to develop new treatments, and then work towards getting doctors to recommend those new methods? The latter does lead to progress in medical technology, but it also drives costs ever upward. Upward to the point that increasing numbers of people cannot afford insurance coverage.
“Crunch all you want. We’ll make more.”
Sunday, April 13, 2008
Feet of Clay
The ongoing turmoil in the US credit markets appears to have snared another victim. General Electric announced 1st quarter earnings that were sharply lower than what they had led investors to expect as little as a month ago. The gunslingers, oops, sorry, the professional investors who work on Wall Street don’t like surprises, and they hammered the stock. The price for a share of GE dropped 12% on Friday, which was the largest one-day decline for GE in over twenty years. The last time GE stock dropped so much was in the stock market crash of October 1987, when the Dow Jones Industrial average dropped 25% in a single day.
The damage to earnings was apparently not caused by the industrial and high tech businesses, which are doing well. Companies all over the world are still buying jet engines, power plants, and MRI scanners. The financial services businesses in the GE portfolio did not provide the profits that had been estimated.
The guys who run GE know that Wall Street punishes surprises on the downside. So there are only two possible explanations for missing their earnings targets by so much:
1. Senior management does not know what is going on inside the company. That is, losses in GE Capital were piling up, but no one wanted to take the write off, or tell the higher ups about the losses.
2. Things turned around so much in the last two weeks of March that they overwhelmed the progress of the previous ten weeks.
Jeffrey Immelt, the CEO of GE, choose what was behind Door #2, saying: “the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairments."
These results are important because GE, due to the size and breadth of their operations, is considered a bellwether for the US, and indeed, the global economy.
Also, GE is considered an unusually well managed company, with excellent risk control. In the annual report for last year, much was made of the fact that GE had no debt that was secured by sub-prime mortgages as collateral.
If GE is having problems in the financial markets, than other banks and investment companies will be having problems as well. Even with all the announced write downs and loans made by the Federal Reserve, we’re not out of the woods yet.
The damage to earnings was apparently not caused by the industrial and high tech businesses, which are doing well. Companies all over the world are still buying jet engines, power plants, and MRI scanners. The financial services businesses in the GE portfolio did not provide the profits that had been estimated.
The guys who run GE know that Wall Street punishes surprises on the downside. So there are only two possible explanations for missing their earnings targets by so much:
1. Senior management does not know what is going on inside the company. That is, losses in GE Capital were piling up, but no one wanted to take the write off, or tell the higher ups about the losses.
2. Things turned around so much in the last two weeks of March that they overwhelmed the progress of the previous ten weeks.
Jeffrey Immelt, the CEO of GE, choose what was behind Door #2, saying: “the extraordinary disruption in the capital markets in March affected our ability to complete asset sales and resulted in higher mark-to-market losses and impairments."
These results are important because GE, due to the size and breadth of their operations, is considered a bellwether for the US, and indeed, the global economy.
Also, GE is considered an unusually well managed company, with excellent risk control. In the annual report for last year, much was made of the fact that GE had no debt that was secured by sub-prime mortgages as collateral.
If GE is having problems in the financial markets, than other banks and investment companies will be having problems as well. Even with all the announced write downs and loans made by the Federal Reserve, we’re not out of the woods yet.
Monday, April 7, 2008
I keep reading the terms Bear Stearns and bailout used in the same sentence, or at least in the same paragraph. Usually the gist of these news stories is that Wall Street (i.e. Bear Stearns) got a bailout, therefore fairness demands that Main Street (i.e. the poor schlemiels who paid too much for their house) also get bailed out. I've got two problems with the folks who make this argument.
First of all, next month the Federal government is going to mail out checks of up to $1200 to almost everyone in America who filed a tax return. People who have not paid taxes in years, like many Social Security recipients, are being advised to file for 2007, in order to reserve their place at the public feeding trough. The cost of this government largesse will total $150 billion. Surely that's enough of a bailout to satisfy the most ardent of parachutist, isn't it?
But more to the point, it is hard to see how the Bear Stearns deal could be considered a Federal bailout in the first place. To make the deal go, the Fed gave $30 billion to JP Morgan Chase, the acquirer. In exchange, the Fed received a portfolio of Bear Stearns assets with a book value of $30 billion. For political reasons, the cash given to JP Morgan was called a loan, and the Bear Stearns assets were called collateral. Frankly, these assets are certainly not worth the book value in today's market. However, the Fed does not have to sell the assets on any timetable. In the fullness of time the Fed may be able to recover most of the money they put into the deal. There will almost certainly be an eventual loss, however, and that loss will be borne by the taxpayers.
The Fed took this action not to bailout Bear Stearns, but to keep the financial markets from freezing up in the panic that would have accompanied a bankruptcy filing by the fifth largest US investment bank. That panic would have hurt a number of large financial institutions. Institutions like the pension funds that pay pensions to retirees. Institutions like the insurance companies that pay to rebuild your house if it burns down. Institutions like municipal governments that issue bonds to build roads and sewage systems. Institutions that serve local Main Street interests.
Meanwhile, what happened to stockholders of Bear Stearns stock? Many of these stockholders were Bear Stearns' employees. As a matter of fact, the employees owned about 30% of the company. In January 2007 the stock was worth $170 per share. The Friday before the deal with JP Morgan, the stock was still worth $30 per share. The latest offer from JP Morgan was $10 a share.
So. over the weekend, two thirds of their equity was wiped out. Adding insult to injury, large numbers of the former owner/employees are facing pink slips in the very near future.
Calling this a bailout is like saying that what Henry the Eigth did to Anne Boleyn was a haircut.
First of all, next month the Federal government is going to mail out checks of up to $1200 to almost everyone in America who filed a tax return. People who have not paid taxes in years, like many Social Security recipients, are being advised to file for 2007, in order to reserve their place at the public feeding trough. The cost of this government largesse will total $150 billion. Surely that's enough of a bailout to satisfy the most ardent of parachutist, isn't it?
But more to the point, it is hard to see how the Bear Stearns deal could be considered a Federal bailout in the first place. To make the deal go, the Fed gave $30 billion to JP Morgan Chase, the acquirer. In exchange, the Fed received a portfolio of Bear Stearns assets with a book value of $30 billion. For political reasons, the cash given to JP Morgan was called a loan, and the Bear Stearns assets were called collateral. Frankly, these assets are certainly not worth the book value in today's market. However, the Fed does not have to sell the assets on any timetable. In the fullness of time the Fed may be able to recover most of the money they put into the deal. There will almost certainly be an eventual loss, however, and that loss will be borne by the taxpayers.
The Fed took this action not to bailout Bear Stearns, but to keep the financial markets from freezing up in the panic that would have accompanied a bankruptcy filing by the fifth largest US investment bank. That panic would have hurt a number of large financial institutions. Institutions like the pension funds that pay pensions to retirees. Institutions like the insurance companies that pay to rebuild your house if it burns down. Institutions like municipal governments that issue bonds to build roads and sewage systems. Institutions that serve local Main Street interests.
Meanwhile, what happened to stockholders of Bear Stearns stock? Many of these stockholders were Bear Stearns' employees. As a matter of fact, the employees owned about 30% of the company. In January 2007 the stock was worth $170 per share. The Friday before the deal with JP Morgan, the stock was still worth $30 per share. The latest offer from JP Morgan was $10 a share.
So. over the weekend, two thirds of their equity was wiped out. Adding insult to injury, large numbers of the former owner/employees are facing pink slips in the very near future.
Calling this a bailout is like saying that what Henry the Eigth did to Anne Boleyn was a haircut.
Wednesday, April 2, 2008
Sometimes It's Just Hail
I'm a contrarian by nature. Hand me silver, and all I see is the lining to a cloud. As far as I'm concerned, there is no glass so overbrimming that evaporative losses won't eventually make it half empty. When things look bleak, I remind myself that it is always darkest just before it gets really dark. But although I discount good news, I also take news that the world is coming to an end with a grain of salt.
A case in point came in today. Swiss banking giant UBS announced that it was writing off $19 billion in assets related to subprime mortgages in the US. This is on top of the $18 billion that they wrote off less than six months ago. UBS is seeking to raise $15 billion in fresh capital to shore up their balance sheet, and oh yes, they've pitched their chairman out the airlock for orchestrating this debacle. "Can you breathe vacuum, Herr Chairman?"
The headline for this story is obvious: "UBS Writes Off $19 Billion." I think the critical item comes a little deeper than the lead paragraph, however. The asset write off came as part of UBS's announcement of first quarter earnings. For the first quarter of 2008, UBS lost $12 billion, including the write off. A little simple math tells us that without the subprime mortgage problems, the bank would have earned $7 billion in the last three months.
That is the real story here. The banks taking the hits that have shaken the global financial system are large diverse organizations with multiple lines of business that are still very profitable. In time, they will work their way out of the mess that they created, and will begin providing a return for their investors again.
We're not out of the woods yet. Housing prices are going to fall further, and we are going to see further write downs on securities backed by unpaid mortgages. We haven't seen the full effect of the collapse of the housing bubble, as it plays out on the wider economy. There will be a lot of pain, and a lot of bad headlines still to come.
But the sky isn't really falling. At least, not today.
A case in point came in today. Swiss banking giant UBS announced that it was writing off $19 billion in assets related to subprime mortgages in the US. This is on top of the $18 billion that they wrote off less than six months ago. UBS is seeking to raise $15 billion in fresh capital to shore up their balance sheet, and oh yes, they've pitched their chairman out the airlock for orchestrating this debacle. "Can you breathe vacuum, Herr Chairman?"
The headline for this story is obvious: "UBS Writes Off $19 Billion." I think the critical item comes a little deeper than the lead paragraph, however. The asset write off came as part of UBS's announcement of first quarter earnings. For the first quarter of 2008, UBS lost $12 billion, including the write off. A little simple math tells us that without the subprime mortgage problems, the bank would have earned $7 billion in the last three months.
That is the real story here. The banks taking the hits that have shaken the global financial system are large diverse organizations with multiple lines of business that are still very profitable. In time, they will work their way out of the mess that they created, and will begin providing a return for their investors again.
We're not out of the woods yet. Housing prices are going to fall further, and we are going to see further write downs on securities backed by unpaid mortgages. We haven't seen the full effect of the collapse of the housing bubble, as it plays out on the wider economy. There will be a lot of pain, and a lot of bad headlines still to come.
But the sky isn't really falling. At least, not today.
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