amazon associates

Amazon kicked me out of their "Associates" program because I am a resident of Connecticut. That state, as have a few others, recently passed legislation subjecting sales through state-based affiliates to the sales tax. Amazon is protesting such bills nationwide by terminating affiliate contracts like the one I absent-mindedly signed up for a week ago. They claim the taxes are unconsitutional, as online traffic is protected by the commerce clause.


I think this is bullcrap.


Internet and catalog sales are already subject to the use tax, the ubiquitous but rarely obeyed companion to all (I think all) state sales taxes. The states are attempting to enforce, where they see legal nexus, i.e. with affiliates, the established use taxes. Given the situation with state budgets, to enforce existing, widely flouted tax laws seems like a reasonable idea.


The moritorium on taxing online sales was established in the 1990s as a way of encouraging an exciting new growth-industry. It seems to have worked. Well, whether or not the moritorium had any role in the explosion of e-commerce, online sales without a doubt have thrived. In fact it's the old-fashioned way of shopping that seems vulnerable today. Blockbuster and Borders are pretty much gone, driven out of business by online rivals, mainly Netflix and Amazon.


It would be a shame if the existence of online shopping continues to diminish oour access to stores. Stores are places to gather. They also offer an effortless way to see what the world offers. Videos are in three dimensions organized by genre, alphabet, and nation of origin. A bookstore table might be heaped with a hundred new novels the staff recommneds. At the moment, Americans are strolling through stores and shopping online. They get the benefit of both. But one business model is profitable and thriving while the other is weak and looking for ideas.


Equalizing the sales taxes we pay in the two ways we shop would be a good place to start. I don't see how that's not fair. Why should someone who buys via internet or catalog pay less taxes than someone patronizing a local store? Given the communal and eductional benefits of stores, you might argue they should pay less taxes than an online merchant, who extracts business from your state's resident without delivering your state a three-dimensional amenity.

But now Amazon, another corporation enjoying the benefit of existing law, has found someone to bully, and twist their arms into helping to preserve their sop. In this case, the victims, of all people, are their affiliates! These are small business people who steer business to internet retailers and earn a small percentage in return. The contrast in the personas of the players involved is almost comical. The thriving internet retailer who is putting bookstores out of business is fighting to withhold pennies from strapped state governments by terminating the tiny business operations of local resellers, the lowest-cost route to entrepreneur status for people with spare time and a desire to work from home.


I say tax Amazon sales and damn their whining!

Regulate Pill Prices

My friend Sudip came up with a public policy idea so simple and logical, I am surprised I haven't heard it before. It's a powerful idea that could make an enormous difference for the American economy and the federal government deficit.

First, observe the anti-dumping laws in our trade regulations, which prevent non-US manufacturers from selling products at a loss in the states. Dumping is considered a predatory practice, an investment foreign companies make with the goal of hurting their American competitors, while they make their profits elsewhere. The US government protects American manufacturers by regulating multi-national pricing practices.

Now take the pharmaceutical industry. It is well established that the multinational pharmaceuticals earn their profits in the United States. In the developing world, people can't afford to pay anything close to US prices. In the developed world, away from the states, governments negotiate with manufacturers and set prices, generally far below US prices. Here in the states, the market determines how much the drug companies can charge. Certainly, health insurers can negotiate more effectively than individuals can, but they don't get help from regulators. In fact, legislators know how important US profits are to the pharmaceuticals, so they protect this industry from regulators who might want to side with consumers. So life-improving or life-saving pills are available here, and often invented here, but we pay fifty times what our friends in India pay.

While the practice of regulating prices and the relative profitability of selling in different countries is well established, it is employed only to protect US business. American consumers are asked to provide big pharma with almost all its profits, while sales abroad clearly prove that pills could be made and sold profitably for much less.

A profitable pharmaceutical industry is a critical player in American health care and we are fortunate to have them as a part of our compelling economic arsenal. And clearly profits drive them to perform research which can lead to newer better drugs with luck and a lot of money. But health care costs in the US are famously unsustainable. Governments, corporations, and individuals who pick up the tab for our health care cannot make their future budgets balance, because health care inflation has been steadily above inflation in other goods. Why should the American consumer, the sick consumer in particular, be asked to shoulder the whole subsidy, while the rest of the world free rides on the latest science?

Pharmaceuical companies that sell drugs in different countries should not be allowed to vary the price as they see fit. Why not say the US price can't be more than, say, 25% greater than the average price in the next five highest-price countries? That's far from "most favored nation," and would still leave a lot of profitability and incentive to do research. The US consumer would benefit, insurance carriers would benefit. US non-pharma business and government would benefit. Other rich countries might see a price increase for their pills. But the pricing would be much more fair.

Taxation of Dividends

Making dividends exempt from income taxation is anathema to liberals and perhaps a majority of the US population, because its direct beneficiaries are the wealthier half of the population and the amount of the benefit would be directly proportional to how rich you are. A sizeable minority of the population, those owning no stocks, would not benefit at all. One could argue, however, that a number of social problems would be alleviated by having corporations increase their dividends. If we can identify steps that would lead to larger dividends, such as through the tax code, they should be considered. For example, I suggest that in exchange for a slightly higher corporate income tax rate, any dividend paid out of retained earnings be tax free to the investor. The benefits of greater dividends include the following.

1. There would be less reliance on net income accounting in determining profitability of a corporation. Dividends now are a small fraction of earnings, and earnings are the prime focus of investors in evaluating stocks. With the focus on earnings, there is a strong temptation to inflate non-cash income in reported earnings, undermining investor confidence and creating volatility in asset prices. An increased focus on dividends would also reduce fraud along with more benign forms of bias in reported earnings.
2. Resources would be invested more efficiently because there would no longer be a tax rationale for hoarding cash.
3. Retirees would draw more income from the dividends on their stocks and there would be less pressure on Americans to save massively for retirement. If dividends are 2% to 3% as they are now, Americans need to save about $2 million to receive $50,000 per year in dividend income. They could obtain additional funds by selling appreciated shares, but buying and selling shares is a fundamentally speculative activity, not an appropriate foundation for retirement planning for a broad segment of society. Doubling the dividend rate cuts the target in half.

employment taxes

It seems odd that in this era of the jobless recovery and declining real median income that we are still taxing employment. The 7.5% social security, unemployment insurance, workers comp, though they're all unimpeachable uses of funds, all make it more expensive for businesses to hire people. Health insurance also famously adds to the cost of hiring. In this high-productivity and low-employment growth era, it's high time we found another economic transaction to piggyback on. I'd love to see a federal sales or excise tax, and if it were coupled with a lower tax on employment-based social security who would complain? Another possibility would be catalog and internet shopping. People owe use tax to their home state on those transactions already, but states probably need federal help to enforce those liabilities.

The jobs bill is fine, but we should recognize that the jobs problem isn't temporary. Jobs are disappearing. Since the 1980s, companies have been avoiding hiring and finding alternative ways of responding to growth. I have no doubt that most people will make do perfectly well in their new entrepreneurial / consulting / temp / home office careers. But stable jobs are a good option for most people and for the economy and we should adjust our tax system to promote them.

Wall Street

All this Wall Street pay business is red herring. Changing the salaries of a handful of people at the top of a hadful of firms is a superficial move, pure politics. It's not unfair though. If we're bailing them out, we can tell them what to do with tax payer money.

Here are a few tougher changes that would be good but that don't seem to be in the works, because our political leadership is surprisingly timid, given what we've just been through:

Resurrect Glass Steagall. (Resurrectionism! See the NYTimes piece on Paul Volcker
NYTimes.comwww.nytimes.com/2009/10/21/business/21volcker.html) Split up the super global financial instiutions and force the businesses that get the benefit of the discount window and FDIC insurance to perform the banking services that we actually need, such as lending to small business.

Force interest rate swaps and other derivatives to be traded in an exchange, rather than over the counter. Having these instruments rely on the credit of the counter-parties puts a very difficult to determine amount of risk on thousands of company and government balance sheets, unnecessarily. Standardize agreements, and pool credit.

Bring back the uptick rule on short-selling. Eliminate naked short-selling. The short-sellers effected a self-fulfilling prophecy by causing a run on Bear and Lehman in 2008. The banks were overleveraged, but a soft wind-down would have been more pleasant for all of us. Hey, I'm no defender of bubbles. But making a killing by wiping out a vulnerable big company is unwholesome.

Let shareholders vote on senior executive pay packages.

If a trader's annual profits are contingent on iffy "mark to markets" of illiquid assets, leave some compensation for the future, when the real results are known. You could easily have a situation otherwise, where bankers are gaming their employers because they know how they'll get compensated, and are sticking shareholders with risks they wouldn't want to own themselves.

stimulative taxes?

The US has a tough economic problem here in late 2009. Growth is extremely sluggish and expected to stay that way for at least a year. And the budget deficit and debt situation strikes many people - including currency markets, who are driving the dollar down - as so serious that significant fiscal stimulus, in the form of new spending or tax cuts may not be possilble.

What's the answer?

Stimulative taxes. We have to identify fiscal initiatives that will lower the deficit while not further depressing the economy, and if such a thing is possible, find taxes that can actually stimulate investment.

One way to do this would be to pass laws today that have taxes rise gradually over time. This helps with long-term fiscal imbalance while not dragging dollars out of a bad economy. Also, businesses will have a chance to respond to the coming tax hikes, potentially in stimulative ways. If we're going to impose a gas tax that will gradually rise to $2.00 a gallon, we need to start designing more efficient cars. If electricity from coal is going to go up with excise taxes, we need more windmills and solar panels.

health care reform

I agree that we should reform the US health care "system."

Here are some of the reasons:

1. Fee for service insurance plans drive up costs of services and of premiums.
2. 48 million cannot afford insurance and don't get healthcare they need.
3. Preventative care should be encouraged.
4. Competitive businesses that must compete with other countries - i.e. manufacturing - compete at a disadvantage if they provide high-cost American healthcare.
5. High cost pushes down quality. We can't buy as much when something is more expensive.
6. Attaching health insurance to employment increases the cost of hiring people and therefore reduces employment.

Here's a simple plan that addresses all of these issues:

The federal government should define a set of services that it wants provided. It should comprise a fairly comprehensive offering, but more importantly be a very well defined list. Once the package is articulated a cost can be estimated. I would take a less ambitious package at this point, because a successful program can be expanded. And a basic program would help the situation immensely.

To deliver the package in the most cost-effective way, it should then hold a bidding process in each of the 438 Congressional districts. The winning bidder would be the enity that can credibly provide the specified service for the lowest price. The price would include a regular payment from the government, based on population covered, plus small co-payments from the users, designed to produce appropriate levels of use.

The cost of the program would be paid for by new taxes. These taxes should be designed to not discourage employment. OK things to tax would be personal income, corporate profits, excise taxes on goods we want people to use less, such as oil.

The entities that I envision bidding would be amalgams of existing hospitals, medical offices, drugstores, etc, depending on the services articulated, but organized under a single managerial umbrella for the purposes of delivering those services.

Each of the resulting regional health providers would be a multi-billion dollar business, but the job wouldn't be so enormous that it necessarily creates an oppressive bloated bureacracy. Think of an entity about the size of a state police force or a county school system. Having multiple providers would lead to a variety of innovations, which would then be copied around the country. The service would be offered to all comers, but would not rope in the entire health industry, so people who wanted to spend more for what they think are better services would be free to do so. But the public package would be subject to renewal every, say, five years, so that the provider would have to perform or one of the other providers would likely win the next time around.

Use Gas Tax to Solve Social Security Concerns

I'll leave health care until tomorrow but the other concerns of our nation can be dealth with a single policy proposal that I call a houseboat with wheels because it can do more than one thing. Here are the objectives:

1. Increase fuel efficiency of cars in order to reduce our economy's dependence on fossil fuels and to reduce carbon emmissions.
2. Overfund social security so that we don't need to raise income taxes significantly in the future when we will have far fewer workers for each beneficiary.
3. Invest in US infrastructure, such as electrical transmission, renewable energy generation, mass transit, high speed rail.

All these things can be done with one new thing. We have a rare political consensus now that we need dramatic change in the way the US economy has been moving. Here's what we should do:

1. Impose a tax on gasoline consumption. The federal excise is low now, about 20 cents a gallon. I would like to see it increased gradually over the course of the next 15 years. Say 10 cents in 2010, 20 cents in 2011, etc. through 2024. This would give the auto industry some time to create more fuel efficient cars. The policy would be good for them because it would encourage people to replace their old inefficient cars.
2. Take the proceeds of the tax and put them into the social security trust fund.
3. Do not buy US treasury bonds with the proceeds. The point of the trust fund is to fund the certain increase in social security costs over a longer time period, by starting now. Using the fund to buy US treasuries just delays the tax consequences, undermining it's raison d'etre.
4. Instead buy municipal bonds with the proceeds. Direct muni purchases to new, clean, sustainable infrastructure projects, such as renewable energy, electric transmission, trains.
5. Structure the muni securities to pay debt service when we need it for social security, 2030 - 2050.

Why Patton and Fast Times

Some of you may be wondering why I chose to review two such different movies, Patton and Fast Times at Ridgemont High last month. Maybe I should explain. The point is, these pictures mark the beginning and the end of the best era of American film-making. Stick to movies that came out between these two.

Patton upped the ante on psychological insight. After Patton (1970) came The Conversation, Five Easy Pieces, Dirty Harry, Taxi Driver, Dog Day Afternoon, Two Lane Blacktop, Dirty Mary Crazy Larry, movies with crazy heroes, sick individuals with real beating hearts. Compare their heroes with Mr. Tibbs in In the Heat of the Night (1968). In the Heat of the Night is a great movie, with a great score and the always entertaining Rod Steiger, but Sidney Poitier's hero is totally inhuman once you get to know him. Likewise Steve McQueen's Thomas Crown (1968) is a super cool zero. Gregory Peck in To Kill a Mockingbird (1962) is another good example. Heroic, but too pure, too simple. There's no aha! this is real life! You have to go back to the 1950s, say to Marlon Brando's Terry Malloy to find to find a high level of complexity in a central character. But On the Waterfront was a rarity. Even genre movies in the 1970s had substance and psychological complexity.

At the end of the decade came Fast Times. Like a 1970s movie, it's serious about journalistic integrity and serious about taking on the tough issues. There's an abortion. All the characters have depressing part-time jobs at the mall or in convenience stores, other than the one who scalps concert tickets. But it's also funny. The history teacher says Aloha all the time. And it's sexy: Phoebe Cates reveals her chest to great effect, especially on poor Judge Reinhold. Hollywood learned the wrong lessons from the seminal Fast Times. The teen movie industry that blossomed in its wake told touching stories of early romance, but rarely would a viewer recognize what he saw. The independent Dazed and Confused came the closest. But in general, the movie makers copied the Fast Times surface: show sexy kids in sunny climates triumphing over their own foolishness and some mild adversity. Hey I loved those movies as much as the next guy, but they were not sufficiently challenging. The imitations delivered pleasures but didn't leave an impression and don't hold up. War Games was fun, but Matthew Broderick, like Tom Cruise, is a piece of cardboard. He's a smile in a pair of chinos. Compare them with sweaty Mike Damone in Fast Times. Things just got saccharine.

I recommend Smile, written by Jerry Belson, and directed by Michael Ritchie. A beauty pageant in the California hinterlands. A sophisticated ensemble story about the politics of how to play in rigged games in a small town. It came out in 1975, five years after Patton and seven years before Fast Times.

Smile

Bob's and Eric's Ideas for the Economy

My friends Eric Weaver and Bob Palmer wrote some good opinion pieces on the current economic troubles in the US. Eric argues that stimulus dollars flowing to banks should include money for commmunity development banks, not just because their work is important, but because they've been fulfilling their mission while the rest of the financial services sector has been buttering its belly. Bob lays out a plan for mortgage relief. Nice job, guys.

http://progressillinois.com/2009/1/16/palmer-six-steps-foreclosure-crisis

http://www.sfbayguardian.com/entry.php?entry_id=7926&catid=4&volume_id=398&issue_id=416&volume_num=43&issue_num=18

I'm not normally an iconoclast or crank, but I can't understand why the land purchase program I have described in this blog is not being taken up. Here's an op-ed I submitted to the NY Times:

I keep reading that a rebound in the housing industry will be a balm for bank and household balance sheets and a potential key to ending the US economic crisis. This formulation glosses over the fact that housing is two competing industries, both sick. Curing both, however, may not be what's best for the economy. The housing industry includes the sales of new and of existing homes. In fact, the credit crisis and the foreclosure crisis both stem from the decline in the price of existing homes. The decline in the new home construction industry hurts homebuilders and their employees, but that pain does not radiate out to the financial system or American homeowners generally. In fact, there are a lot of benefits from a decline in new home construction.

The contraction in credit markets has led to sharp reductions in investment and consumption and a broad fiscal stimulus is now necessary to sustain businesses and households through the worst of the slow-down. But a targeted plan identifying existing homes as the root of the problem, and protecting or restoring their value might have saved us from this monumental effort. At this point, a targeted initiative increasing the value of existing homes might be one of the most efficient investments of stimulus dollars, and would accomplish a variety of other worthy aims. To achieve this aim, the government should provide dollars to states for the purpose of buying undeveloped land to be set aside for conservation. Removing potential home lots from the marketplace would immediately add to the value of the existing lots, adding to homeowners' wealth and increasing the value of the home mortgages on bank balance sheets.

Homebuilding is an important industry in the United States. Americans prefer newer homes and economic vitality depends on the existence of affordable, appealing places to live located close to desirable jobs. New homes, though, can come from already developed property as well as from forest or farmland. Industrial and commercial property can be converted into lofts and apartments. Old houses can be torn down and rebuilt, remodeled, added to, or just renovated. The fact is, though, the large homebuilding corporations sell new homes on a very large scale. Their business model depends almost entirely on new home construction. The proposal here is to push back on that business model, increase the ratio of reconstruction to new construction, and give existing homeowners some much-needed market power.

New home construction has been too easy for a long time. In addition to the familiar story of the financial encouragement, the regulatory environment has also been helpful in that home-building permits are awarded at the local level. The metropolitan areas we live and work in are ungoverned. Changing land use and traffic patterns have a regional impact, but permitting is handled locally, and the narrow aim of increasing the local property tax base is usually a significant factor. The resulting sprawl strains city and inner-ring suburban economies and tax bases, and leads to longer commutes, more traffic, and more air pollution, while legacy mass transit systems are made less and less relevant.

Buying undeveloped land is a simple solution to a complex problem. Many states and localities have "land banks" in place. Their traditional role is to take temporary possession of blighted properties and eventually resell them to owners who put them to good use. With sufficient funding they, or other land conservation groups, could fight blight before it happens, rather than after a decade or two of disuse and decline. If a homebuilder sells, say, 2,000 acres of land outside a metropolitan area for $30,000,000 and undeveloped land is made more expensive by the program, the builder would dial down new home construction on undeveloped land in favor of investing in existing homes or other properties and transforming them into more desirable properties. The program could make reinvestment along these lines a condition of the sale. This would be a great benefit for the owners of existing homes, who have seen years of price declines and with inventories at very high levels, face difficulties selling their homes at all.

For 10 months in 2008, the inventory level of existing homes for sale in the United States, was more than 4 million, representing more than eleven months of sales, according to the National Association of Realtors. The annual rate of housing starts (new homes) in December 2008, twelve months into the recession and three months into the credit crisis was 550,000, according to the Census Bureau. That's 45% below the rate of housing starts one year ago, but it's still adding to the available inventory. In December of 2008, the inventory of existing homes for sale finally dropped below 4 million, dropping in fact by 490,000 even though only 360,000 homes were sold. The difference must be a result of would-be sellers giving up. That's not surprising as sales prices in December were 19% below the 2007 level.

One could argue that the time to guard against oversupply of housing has come and gone. New construction has slowed down tremendously, and the four million people who want to sell their homes have little to fear from the half a million new homes currently being made. But the question is, how do we turn the problem around? The key may this: home prices reflect expected appreciation in addition to current supply and demand. The home-making machine is humming quietly today, but the volume will certainly get louder if home prices start to stabilize. Home-builders have substantial amounts of land inventoried, have debt service payments to make, and have an incentive to make and sell houses as soon as and as long as the sales price is greater than the cost of construction. Given this possibility, why buy now? A nationally funded land purchase program would give us a tool to steer, to some extent, new home-buying dollars toward much needed home price appreciation and redevelopment of languishing existing property, rather than toward unneeded additional home construction.

Patton and Fast Times

I watched Patton a couple weeks ago. The DVD began with Francis Ford Coppolla on a couch. I had to fast-forward through it, pushing the button, since under the DVD's menu system, the interview was part of the movie itself, not a separate feature. As a result your dense correspondent was made aware, by force, that Francis Ford Coppolla wrote the screenplay. Patton is the triumphal story of a brilliant commander and seems to fit snugly in the camp of movies about great heroes in good wars. But it's also a Coppolla movie and foretells the darker depiction of war in Apocalypse Now. What connects them is insanity. The movie Patton is an absolute nut. He reads Rommel's book on tank battle tactics before going to bed. Looking over a great valley, he hears the explosions from the Carthaginians' brave stand against the Roman legions. Omar Bradley tells him, "I do this because I was trained to do it. You do it because you love it." The movie is full of great lines. During a tank battle, Patton shouts, "Rommel you magnificent bastard. I read your book!" The 1970s were the golden age of great movies about not-great people, and Patton, from 1970, marks the transition, bridging the tough, heroic World War 2 movies like Bridge on the River Kwai with the dark 1970s take seen in Apocalapyse Now or The Deerhunter.

I left Fast Times at Ridgemont High off of my five favorites list earlier this year. I don't know how this happened. I think memory loss and confusion may be side effects of Lunesta. Fast Times was on cable TV a couple weeks ago and it never gets old. The brilliance of Cameron Crowe is his subtle, documentarian's interest in getting the quiet stuff just right. In reference to an old teacher, one teenager says to another, "You had Deegan?" Mike Damone's lines, such as "this is great iced tea!" and "I come here for the strudel," are not funny lines, but they are absolutely right for the character, who is very sharply drawn, as are many others. I've come across others over the years who know every line in the movie. It's a concatenation of episodes and it's remembered for the funny ones and the sexual ones, but what really sets it apart is the artistic freedom given to the writers and actors to create vivid, subtle, realistic characters. An added bonus: Jeff Spicoli has two mostly mute pals. Look closely and they are Eric Stoltz and Anthony Edwards!



Fast Times at Ridgemont High (Widescreen Special Edition)

buy land?

This really seems like a golden opportunity to do something about sprawl. Land is cheap. Sprawl causes increased driving and pollution, undermines the fiscal health of towns and cities, and undermines the property value of existing homes. Buying exurban land would address all these very important issues, and address falling home prices at the same time.

The only possible argument in opposition is that increasing land prices would hurt the new home construction industry. But homebuilders are not buying land in this environment. They would much prefer to sell it. If any homebuilders holding land are recapitalized with money instead, and undeveloped land was being bought at above market rates by land banks backed by the federal government, the homebuilders would turn their attention to existing homes, to buy and improve. A fine, non-polluting activity, and one that would help out the owners of those existing homes, a large group of people who have been getting socked with declining equity for about 4 years. I don't think the banks would mind seeing a rise in home prices either.

Proceed with Bailout and have Toll Brothers rebuild North Philadelphia

I'm very disappointed that the bailout failed. What I think many Americans don't understand is that we have nothing approaching a free market in the United States. We have a regulated, mixed economy in which government agencies provide many services, enfranchise businesses to provide many services, regulate businesses in an enormous variety of ways, and step in and save businesses when deemed necessary. Obviously, the size of this bail-out shows that huge mismanagement has occurred. Placing blame for it will be a fun parlor game for many years. But the credit crisis can be solved with this bold dramatic step. If the government also takes steps to improve the real estate market, they would not have to deploy the full face amount of the bailout and the investments they do make might well be pretty good ones. But the success of the legislation will itself have significant ameliorative effects on the credit market.

To improve the real estate market they should read my entry of January 26, 2008. I'd like to see the government buy some land and shrink new home development in overbuilt places like Las Vegas and Phoenix. That would be hugely helpful to existing homeowners and their creditors. Even if they bought the land someone like Toll Brothers has on inventory. I'd like to see them put Toll Brothers to work re-building North Philadelphia.

Glass Steagall is not the Issue. Economic Fundamentals are the real story.

There's a lot of talk now about how John McCain is particularly ill-equipped to lead the country out of the current financial melt-down because he and Phil Gramm were proponents of deregulation and deregulation, including Gramm's dismantling of the Glass Steagall act that separated commercial from investment banking, is what got us into this mess. There are two main problems with this argument. First, Wall Street has been highly regulated in the last decade. Eliot Spitzer's prosecutions, Sarbanes Oxley, regulation FD, have left the business neck-deep in red tape. For example, communications between different functions of the firms are tightly constricted, and employees need permission to make personal investments or accept positions on corporate boards. Second, Glass Steagall might have made things worse. Bear could not have jumped into the arms of JPM had Glass Steagall been in place, nor could Merrill have merged with Bank of America. Past mergers may have been responsible for averting other potential crises as well. Could Citi's or UBS's investment banking arms have weathered the storm without their banking parents?

So regulation and oversight sound good (and appear to have worked in the case of commercial banks), but their application doesn't necessarily protect us, as illustrated by the recent crisis.

The problem this time around was really pretty similar to what happened in the dot-com bubble. Investors had a great appetite for a particular category of investment, in this case structured finance including mortgage-backed securities, and so Wall Street provided a great amount of it. The bizarre twist in this case was that a lot of what turned out to be rubbish was not equities, bets on promising technology, but AAA-rated debt. That made this bubble more toxic than the last one. Another realization that didn't really come up in the dot-com era: broker-dealers hold a lot of inventory and can suffer significant losses as a result.

The problems occurred in the unregulated "structured finance" realm rather than in the regulated world of corporate finance. One response would be to demand the kind of transparency and disclosure of structured entities that is demanded of public corporations. After all, if billions of dollars are being invested in them, the cost of disclosure might be worth the benefit. This might help, and we should probably do what we can, but it's safe to say it won't solve the problem. When investor appetites are in play, securities will flow and when the good stuff is gone, the junky stuff will be conjured up. The problems were flawed science, hopeful investing, and old-fashioned spin-meistering. These things can't be stopped.

So what ought to be done? First, a litle more diagnosis.

The root of the problem is the distribution of income. Wealth was quickly accumulating in the newly global investor class and it wound up spilling into these instruments that looked conservative, but in fact relied on a healthy American middle class. This group didn't exist anymore.

The US response to anemic economic growth was to keep interest rates really low. Growth was anemic because the American consumer saw no growth in earnings. Low interest rates permitted borrowing and grew asset prices in real estate, as well as sustaining politically presentable levels of consumption growth. Beggars can't be choosers, and this debt-based economic growth was all the US could muster.

Can anything be done about the skewed distribution of income which is essentially a technological phenomenon? Well, the appropriate public policy response is to recognize that economic growth as well as the basic health of a society depends on broad-based prosperity. If the dollars are flowing to corporations and the wealthy, tax them and make the middle class better off with free popular services that benefit everyone such as education, health care, infrastructure.

Historically, societies marked prosperous times by building great, lasting things, like universities, city boulevards, museums, skyscrapers. The prosperity of the 1990s and the more narrow prosperity of the mid-2000s didn't yield much public manifestation. I think that's the root of the problem here. The wealth wasn't shared. And as Obama says, the poverty trickled up.

Polk

I've read the new biography of James Polk, by Walter Borneman. It's a great read, and it's a long-overdue effort to explain how it was that Polk was able to accomplish so much in such a short period of time. What it comes down to is that Polk knew exactly what he wanted to accomplish but also that to get it done, you need to be shrewd and indirect. That's the dark horse strategy.

Just to take one example, for many years before Polk, the US and the British disputed sovereignty over a large area called Oregon, including, I think, what is now Oregon, Washington, and British Columbia. He campaigned on a Jacksonian expansionist platform, and implied that he supported the aggressive Westeners' slogan, "54-40 or fight," a reference to a latitude at the very northern end of the disputed territory. Once in office, however, he said that it was his duty to stand by a US offer to the British at around the 49th parallel, or a little south of it in some instances. So he gave the British an opportunity to accept this compromise, based on his need to honor an American promise. When the British negotiator said no, Polk said, fine, that offer is now off the table.

Many Americans were worried about war with the British and were eager to make counter-proposals. Secretary of State Buchanan was especially anxious to engage in new negotiations. (Another element of the dark-horse philosophy: keep your enemy, Buchanan, in the administration and keep your hands on his neck at all times. Buchanan was undermining Polk right and left, but Polk never fired him. Just kept slapping him down.) No communication with the British took place, and the British negotiator ended up getting in trouble for failing to get a deal done, and risking war. Ultimately they came back with a proposal like the one they had rejected, but a little more favorable to the US: the famous 49th parallel. Polk asked the Senate for advice and consent. They said fine. Oregon and Washington were then part of the US.

What interests me about this story is that an administration remembered for its aggressive postures in fact accomplished its aims through a careful communications strategy, encompassing a calculated obfuscation about Polk's position prior to the election and then a careful couching of the US position once he took power. It was this kind of poker-playing that got him elected in the first place and then permitted him to accomplish what he did in his four-year term.

Five Favorites

On facebook, there's an application called Flixter that asks you to name your ten favorite movies. I did it and nobody noticed. I, however, was pleased with the list so I will reproduce it here, but with commentary, and a shorter tougher to make list. It occurred to me that these favorites are also products, so I've linked to amazon.com for your convenience!

Saturday Night Fever

How can you not like this one? The whole movie rides effortlessly along the seam between guilty-pleasure cheesy entertainment and cinematic glory. The music is cheesy pop but brilliant cheesy pop. The star is a television star in the tradition of David Cassidy but revealed in this movie to be a really good dramatic actor. The plot is a hackneyed dance contest and a hackneyed struggle to overcome class. But the sturdy story does the job: the local dancing talent isn't bad at all. The two-bit pals perfectly set off the star power of the king of the dicso, and the group's desperation is beautifully illustrated in a harrowing action sequence on the Verrizano Bridge . It's a great film from talented, unpretentious director John Badham.

Friday Night Lights

As a football fan, the topic - football is life itself for small-town boys in West Texas - interested me a lot, and I bought the book. But I didn't even get half way through. The kids just didn't come off the page and become three-dimensional people for me. But boy do they in the movie. The boys and the coach really mean it on the field and their home lives are tough too, with embarrassing atypical families, and not a cliche in sight. The action is extremely well-filmed; the football is riveting. The no-stars casting and naturalistic dialog make it feel real, and it's very affecting. And then Tim McGraw, like fellow country musician Dwight Yoakam did in Sling Blade, delivers a tough dose of redneck authenticity.

Dog Day Afternoon

Listen to how people talk in this movie. Look at the rubber in the legs of that pizza man, excited to get onto the evening news, for delivering a pie to bank robbers at work. Look at how a gathering of earnest New Yorkers, some of whom have strayed off the courses prescribed for them, but all of whom are trying to do the humane thing, push each other into impossibly difficult circumstances on a hot day in a tense time on the busy dirty streets of striving, thriving, jiving Brooklyn. Sidney Lumet keeps things ultra-tense, but you get some levity too. I like a little levity.

Broadway Danny Rose

Woody Allen transitioned from great stand-up to funny comedy movies in the late 1960s and 1970s. Annie Hall, Manhattan, and others mixed in poignant commentary, took on some big questions, and wowed the critics, but for me, they weren't great movies. They didn't have plots, drama, characters you cared much about, and they showed a cloying insular world. I became a big fan of Woody's with Broadway Danny Rose. The Danny character is an inspired exaggeration of the characters Woody played in previous movies. He's a joker, a mannered little man, trapped by who he is, nervous, elaborately polite, forever trotting out the trusty conversation starters, and in an original twist, he's an ultra-loyal talent agent, delivering well-intentioned, half-way capable representaion to a group who brings new meaning to the word motley. With an elaborate plot, a nutty mass of blue-collar/gray-market Italian-American characters including a tough tawkin' Mia Farrow, it's the story of a man who can't help being a sentimental fool and his so-called friends, who can't not be who they are either. The movie is framed in a conversation among a group of comics reminiscing about Danny Rose, the legend. The device adds a timeless nostalgic quality to the story, as does the use of black and white film, although the cars and the clothes are pointedly tacky and contemporary.

Poseidon Adventure

Please don't lump this one with The Towering Inferno. Inferno isn't terrible but it feels like a sequel; you can smell a formula afoot right from the start. Poseidon is a big mainstream Hollywood movie too, with its alotment of big stars, has-beens, and up and coming cuties. The difference between the first and second disaster movie is huge though, like the difference between Rocky and Rocky II or Star Wars and Revenge of the Jedi. The actors show it when something big is being taken on for the first time; you can see the rage in their faces and the audience can feel it in their spines. I don't think Gene Hackman is going through the motions when he preaches to newly arrived passengers on a cold and overcast day at the beginning of the film or when he's leading his little party through the pits of hell at the end. Shelley Winters is one of the great actresses of the 20th century and she left it on the field in this one.

On board ship is the world, including a priest, a cop, and a hooker (no joke), plus old people and children. The ship is a marvel, just as you'd guess. But nature has other plans for our little microcosm! The test is harrowing, and the response to it invokes great themes: perseverance, faith, intelligence, sacrifice. It feels historic. It feels biblical. It's a big, juicy drama with a great cast.

Memorial Day

On the Sunday before Memorial Day of this year my wife and I went to a cookout in New Rochelle. I was playing a cd in the car as we pulled away from our house. It was country or jazz. “I feel like rock n roll,” she said, “on the radio.” I noticed we were both wearing blue jeans, and I hoped her desire foretold a day or two of youthful fun.

I was in a different car, our Volvo, the next morning, when I loaded up our dogs and went out for my morning coffee. I remembered my wife’s preference from the day before, and tuned into a new station. I think they played Van Halen for the first leg of my outing. I don’t know hard rock too well, but it wasn’t bad, and I thought I’d stick with this station for the time being.

Loaded up with hot coffee, dark and sweet, from the Bagel Boys, I headed on to the video store. We got shafted earlier in the weekend with all the new releases we wanted gone when we stopped by after dinner. It was actually pretty stunning because they had about 25 empty cases of each one on the shelves. You’d think that would be enough of The Good Shepherd, say, but it was not. We love the new releases around here, I guess. A morning video run seemed like a savvy answer. Besides, what’s better than a little early beat-the-traffic tooling around with three dogs and a hot cup of coffee?

I took a right after the coffee, turned the radio back on and “Piece of My Heart,” was just getting started. “… and didn’t I give you everythang… that a woman possibly caaan?..” I turned it up a little louder. It was raw and real; she meant "everythang." It was a gorgeous morning too. No traffic on route 35. The mastiff sat in the back seat and pressed her rugby ball head against my right shoulder while I drove. The dogs love routine and this is what we like to do. They get a little down if the errand running goes past a half-hour or so.

I screamed along with Janis for another three minutes. Then they played, “Already Gone,” the Eagles song. I thought, what a good station. It’s a great song, not a classic that’s worn out a groove in your brain, but a familiar goodie. The sentiment is I don’t want you either baby and who can’t relate to that? “I will sing this victory song!”

But victory was not to be mine. Blockbuster opens at 10 am as it turns out. You can return videos in the slot, and I had to content myself with that. My hope of picking up an evening’s entertainment with a painless morning car ride had ended at 9:15 am.

Steve Miller made it all better. The chorus of The Joker is dull and overly familiar. I’m a joker, I’m a smoker, yeah yeah yeah. But the song starts out with the some wiggy stuff: “Some people call me Maurice because I speak of the pompitous of love.” I read an article about Steve Miller once that made me admire him. As I recall, he moved to San Francisco in the late sixties as a business proposition. He was a good blues guitarist and knew that the hippy bands there would need players who could actually play. His plan worked out well. So I enjoyed the Joker. Gimme Three Steps came next. My mood stayed fine although that one is doesn’t hold up all that well for me.

I arrived back in South Salem and took a left off the state route 35 onto Bouton, the same road where my wife said she wanted to hear the radio. Gimme Three Steps was over and the most richly produced drum beats I know of started to pound. It was Bruce Springsteen doing Born in the USA. Bouton Road goes up over a little mountain so its early stages give you a chance to engage the motor. And up over the mountain we went. I love how Born in the USA is a patriotic-feeling rock n roll anthem and a protest song. Inclusive and incisive at the same time. Quite a trick. I was rocking too.

We came down the moutain’s other side and cars were accumulating at the T, about 200 feet from my house. Six cars stopped at the yield sign, with someone at the bottom of the hill holding everybody up. I squinted and leaned forward to see. Suddenly, three men in tank tops came around the corner and charged up the hill. It was a race; the Memorial Day 10-K. The top guy looked like he was about 17 but two men breathing hard on his left and right were in their middle or late twenties.

The mastiff went nuts. Poor old Penny, our mutt, who’s 17 herself, had to scramble out of the way. Magda, 180 pounds and a deafening barker was drowning out Bruce and trying to scare the crap out of all the racers. They chugged by my car, which was literally rocking, heroically working the hill. A whole town’s worth of runners. After the leaders came the middle-aged majority, 30 men and women in better shape than I. Then the men with baby carriages, then a few hardy elderly. Penny joined the barking. So did our Shih Tsu. Their rage is contagious, and they show no mercy for the weak or old.

At first I was embarrassed by the barking, the fury, the fogged up windows. But then I thought: this is applause. They love this. I do too. The Memorial Day racers are reminding us to remember. I was missing the good song, but holidays are like that.

The Right Stimulus Package

In the United States we have built too many houses in the last five years. The culprit here, in part, is a group of big public corporations like Lennar and Toll Brothers, with plenty of access to capital. Mom and pop construction companies would have had the capacity to slow down when demand tapered off after 2005 or so. But public companies need to keep up their sales in order to keep their stock price up.

The first couple years of the millennium were great for them, because demand for new houses was very strong. There was a notion afoot at the time that a single family residence was a great place to park your money. And if a $500,000 home was a good investment, why not build a million dollar one? Farms and other undeveloped properties two hours outside of major cities were subdivided a fresh batch of 3000 square foot colonials was harvested. The boom lasted longer than expected, and when demand for new houses started to peter the construction boom was sustained by the pernicious financing experiments we've heard so much about. Prices weren't going up anymore but houses were still getting built and the developers had to find a way to sell them. Why not partner up with mortgage providers and work out some way to get somebody's name on the deed. The mortgage banks needed to keep things moving too. Credit standards came down, and the houses got sold.

The economic consequences of this run-amok home construction are manifold. One direct victim is the new home construction industry, which is clearly in a deep recession. An indirect consequence of the excessive construction is a declining price for existing homes. A plethora of empty houses and uncertainty about the direction of prices make this an awful time to sell any house. When people can't sell things they want to sell, a lot of potential transactions are unconsummated. Geographically wider metro areas make for more traffic and longer commutes. Oh and by the way our transportaion "system" is emitting increasing amounts of carbon dioxide into the atmosphere and warming the earth.

Can the government do anything to help the market for existing homes? It can and it should. Home prices could be supported by taking some developable land off the table. The numbers are not easy, but I think you could make a difference by pouring fifty billion dollars into state land conservation programs, using matching grants, and letting the states aggressively acquire land around overbuilt metro areas, in an effort to concentrate development. The "downside" here is that new home construction will not be helped by less land and higher land prices. But the downside is an upside in my view: sprawl is terrible for the environment! New home construction on the outskirts of huge metro areas like Phoenix is a terrible idea, and public policy should discourage not encourage it. Conserving land will put dollars in the wallets of owners of existing homes and believe me, they could use a hand, as could our planet.

Eye of the Needle

For a couple of weeks I was satisfied with having read 5 pages of the book and entered an ill-informed but enthusiastic thumbs-up into this blog (see my last entry). After all, it was purchased to protect me from sitting on my hands for 20 minutes when I couldn't find a magazine, and deriving pleasure worth memorializing from a stub reading experience seemed like enough to ask. I felt obliged to the author, though, for answering my basic need for amusement with unexpected flair so I went ahead and finished the book. The title is The Eye of the Needle and if it isn't it should be considered a spy thriller classic. The London postal worker I took for the hero was in fact the villain, ruthless, brilliant, the legendary Needle. The characters are not short-changed cliches the way they often are in genre fiction; they feel real, even the minor characters. Many of them have bit parts to play in this battle within a battle, and have little knowledge of the significance of their contributions. The novel's heroes are not so different from their fellow citizens. Certainly they can't claim to be smarter or stronger than the villain. They're just logical and dogged, admirable Brits, illustrative of the Churchillian virtue of never giving up.

The problem with suspense novels is they can't keep the mystery mysterious straight through to the end. The flip side of relying on mystery is that once you see how things are winding up, enjoyment weakens and you finish for the sake of finishing, if you finish at all. The Eye of the Needle keeps you curious about 99% through it, so it's in the Hall of Fame. It doesn't transcend the category, like, say, Raymond Chandler or James Ellroy, but it is masterful and memorable. Speaking of Ellroy I cracked the Cool 6,000 or whatever his latest is called and it's stylized beyond comprehension. I'm a big fan. Maybe I'll try it again.

Another Story of Wall Street

I went into my colleague KL’s office last week to discuss how to advise an entity about to increase its outstanding debt from 30 billion to 90 billion over the next five years. He hemmed and hawed before arriving at some reasonably good thoughts. We agreed to convene a broader group for the broad question, then he stopped me on my way out the door he said there’s something on your pants. He asked me to turn around, and then said, “there’s hole in your pants!” I asked him what he thought I should do and he said in the near term you should tear a patch out of your cuff and glue it onto the butt. I hope our clients get better advice than this.

What I did was I went to the dry cleaners. They said they could fix it, but said I would have to take off my pants while they worked on it. They pointed to the small cubicle where I would be sitting. I asked if they took credit cards. Cash only. So I went out to get some money and something to read. Weirdly, I couldn’t find a newsstand—I work in lower Manhattan—but a Fedex Kinko’s had about 10 bookshelves of old paperbacks for sale, a few on the front step and then a few more inside. I asked the salesgirl, “what’s up with all these paperbacks?” She couldn’t make sense of my question, so I offered her my dollar and took a Ken Follette book.

It was damn good. I gave the seamstress my pants through the closed door and sat in my underpants reading. The central character was a highly intelligent postal worker who made keen observations about England’s war preparations, just by observing phenomena on the street and in the post office most of us would miss. His landlady makes a fuss over him; he’s coolly aware that she is looking for a husband. He was an interesting character, a stud, a prig, and an iceberg, with a lot going on under the surface. Soon to be revealed as a heroic spy I’m sure, but his pretext was well-drawn. A frenetic pounding on the cubicle door informed me my pants were done. I opened the door and knew that no one being there was a result of my privacy being respected. Everyone on Pearl Street could see me in my underwear, but my recently hired seamstress was hiding behind the door with my pants being offered back to me in her outstretched hands. I closed the door and inspected her work. The material is a little informal for Wall Street. I think it’s a twill, but a very soft and sleek twill from Tommy Bahama. Sweet and supple, but if you sit on your butt for 12 hours a day like Bartleby the scrivener, you will rub a hole in it eventually. I had three holes and they were all repaired with very nice work from the sewing machine. Black pants, black patches, black thread. Twenty dollars, well-spent.