baz.com - Brett Thomas' Blog

As is my wont, I spent (with my wife's help) a lot of time thinking about the propositions we have to vote on, this year. Only a couple of these were completely obvious to me right out the gate, and a couple of our decisions surprised me a little bit. I'd like to document my thoughts on it, and explain things - in part so I can keep myself honest on what I was thinking, later, and, obviously, in hope that I can convince some people to vote the way I'm going to.

In order:

NO: 1A - SAFE, RELIABLE HIGH-SPEED PASSENGER TRAIN BOND ACT
I'd love to see a high-speed bullet train to Los Angelas, I really would. Call me crazy in thinking that right now isn't a good time to borrow billions of dollars to do it.

YES: 2 - STANDARDS FOR CONFINING FARM ANIMALS. INITIATIVE STATUTE
Some may find it surprising that a libertarian like me is voting "yes" on this one. My wife was an aggie major at Cornell, so she's been inside these farms. Most of what the proposition ads highlight are actually irrelevant, for a number of reasons. The primary effect of this proposition would be to take chickens that lay eggs, which are currently confined six-to-a-very-small-cage and make them instead be confined at something like two-to-a-very-small-cage. The law seems to us to be surprisingly well-crafted; it does not, in fact, outlaw most reasonable farming practices. I do feel that animal cruelty is an important moral issue. Megan Mcardle, who is now a vegan, wrote last year:

...I'm essentially an aggregate utilitarian: I think that as long as [animals'] lives are worth living, it is a positive good to [raise them to] eat them.

It is hard, to be sure, to determine what a chicken considers "the good life". However, I'm pretty sure that industrial farming conditions do not constitute a life worth living; if those chickens had the cognitive and mechanical capacity to commit suicide, they would.

NO: 3 - CHILDREN'S HOSPITAL BOND ACT. GRANT PROGRAM. INITIATIVE STATUTE
In the state of California, bond acts get qualified for one of two reasons - either the legislature approves them, in which case they have to ask us to fund the bonds, or, groups can come up with their own acts without any consideration by the legislature of whether there is a need. One of the most egregious misuses of the proposition system has been for construction interests to push bond acts for popular-sounding projects in hope that they'll receive the money spent. I'm unclear who's behind this initiative - construction groups, hospitals themselves, or even the parents of sick children. Regardless, this is a case of an interested group trying to get us to borrow money and spend it on them. The legislature didn't vote on this proposal. My general policy on bond issues is to vote "no", especially now, and especially on items that weren't vetted by the legislature, to begin with.

NO: 4 - WAITING PERIOD AND PARENTAL NOTIFICATION BEFORE TERMINATION OF MINOR'S PREGNANCY
The existence of fundamentalists of all faiths make a "no" vote on this one pretty obvious to me.

YES: 5 - NONVIOLENT DRUG OFFENSES. SENTENCING, PAROLE AND REHABILITATION
This one was hard for me. The other terrible abuse we've seen of the proposition system has been to "earmark" some amount of the general budget for specific policy outcomes. Because we've been doing this for decades, I think it's quite possible we're now looking at a system where having a balanced budget in California would actually be illegal. It's certainly impractical.

However, I also believe that the greatest moral outrage our country perpetrates on a daily basis is the War on Drugs. It is my deepest hope that all the Democrats outraged at the treatment of prisoners at Gitmo and the perceived loss of civil liberties under George W. Bush will transfer that anger and hatred to what we do, every day, to our own citizens in order to prevent them from doing things that harm only themselves. Of course, I'm not optimistic.

In any event, as much as I am generally opposed to "earmarks" of this nature, it is very clear that the politicians in Sacramento are too afraid of being seen "soft on crime" to make rational decisions, here. This proposition, while far from perfect, would try to shunt non-violent drug offenders into a treatment and rehabilitation program, instead of sending them to prison in order to shut off any future job opportunities and teach them how to be real criminals. In the end, I feel I have to hold my nose at the funding methods and vote "Yes" on 5.

NO: 6 - POLICE AND LAW ENFORCEMENT FUNDING
This is an example of the type of earmarking I'm clearly against. This earmarks nearly a billion dollars - helpfully indexed to inflation to keep rising in the future - for "police, sheriffs, district attorneys, adult probation, jails and juvenile probation facilities". It also "Makes approximately 30 revisions to California criminal law, many of which cover gang-related offenses. Revisions create multiple new crimes and additional penalties, some with the potential for new life sentences". Because, you know, we just need to have more things illegal and put more people in jail for longer.

NO: 7 - RENEWABLE ENERGY GENERATION
This requires that, by 2025, 50% of the power generated in California must come from "renewable" sources. Note that nuclear does not count as "renewable" (which, honestly, it isn't, but that's not really relevant to anything). This is just the sort of ham-handed top-down control we tend to regret later. If this passes, no doubt, the same people who voted for it will be screaming at the governor about how expensive their electric bills are.

I'll also note that many leading environmental groups are opposing this as being poorly drafted. Frankly, anyone who is concerned in any way about global warming should vote no; I consider fundamentally unserious any person who thinks that carbon dioxide is a significant cause of rising temperatures and yet does not also support significant nuclear electrical generation.

NO: 8 - ELIMINATES RIGHT OF SAME-SEX COUPLES TO MARRY
If you feel otherwise, don't argue with me, because I'll probably end up yelling at you. This is the closest thing to the civil rights battle of the 1960s our generation will (hopefully) ever see. While I try very hard not to take rational discourse off the table, in my opinion, if you support this measure, you are simply not a member of civilized society.

NO: 9 - CRIMINAL JUSTICE SYSTEM. VICTIMS' RIGHTS. PAROLE
Makes it easier for victims to keep the criminals that wronged them in prison, longer. There have been a few cases of people getting paroled who shouldn't have. However, in general, I continue to think that the thing we're not missing in this state is tools to keep people locked up long enough.

NO: 10 - ALTERNATIVE FUEL VEHICLES AND RENEWABLE ENERGY
This would borrow $5 billion to pay people rebates to buy Priuses (in effect, and do some research). I think this would be a bad idea at any time, it's an especially bad idea when we're already billions in the hole.

YES: 11 - REDISTRICTING
I continue to consider gerrymandering to be one of the greatest threats The Republic has ever faced. Making the legislature do things that are in our interest, and against theirs, should be what the proposition system is all about. This proposition's loss in 2006 cut off hopes in the proposition system for me. I have no idea if it'll pass, or not, but if it did, it would go a long way to convincing me that maybe all this is worth it. This and 8 were the two I knew how I wanted to vote before I read anything.

NO: 12 - VETERANS' BOND ACT OF 2008
This borrows a billion dollars to lend it to veterans to buy houses and farms with. As much as I support the sacrifices our men and women in uniform make, I continue to think that spending a billion dollars we don't have right now is an especially bad idea.

NO: San Mateo Q - 8% tax on parking providers
NO: San Mateo R - 2.5% tax on rental car companies
San Mateo has been running a budget deficit for a while. This is an attempt to close the gap. The proponents try to claim that this deficit has been because of state spending cuts, but it's clear that San Mateo has been spending more money than they get for a long time, now. Since 2005, revenues have gone up 3% per year, while expenditures have gone up 8.5% per year. We need to cut spending, not raise taxes, here.

YES: San Carlos S - +$75 parcel tax for San Carlos schools
San Carlos, similarly, has been running a structural deficit for a while. Since the unfortunate proposition in 2000 to allow education bonds with a simple majority (rather then 60% majority), they have also come to us, hat-in-hand, for hundreds of millions in bonds, every two years.

I'd vowed that, if they did it again, I'd vote "no". This time, however, they have come to us with a tax increase. In part, this actually is to offset lower educational spending by the state. In general, I prefer that these things be funded, locally, and with taxes and not bonds, so I'm supporting this measure.

I've known for some time that things aren't working the way people were thinking. I sadly didn't blog about it - in no small part because I couldn't figure out what the heck was going on - but I know the first time I really realized there was a problem was in June of 2007.

I believe it was around my birthday, that year. I went up to San Francisco to hang out with my friend, Jeff, and we went to lunch at Bossa Nova, which I am not nearly cool enough to hang out in, but has delicious food. We definitely went to a baseball game, afterwards - I clearly remember being a bit embarrassed about my Giants gear in such a hip establishment, and I know it was a weekend day, with a fairly rare weekend night game.

Anyway, at lunch, Jeff commented on a colleague from Europe coming to the US and going on a shopping spree because the dollar was so cheap. I'd been vaguely aware the Euro was up on the dollar, but I hadn't realized how much so. I remember being aghast at the idea that, say, a bellhop in London's work moving bags was worth, apparently, so much more than the work of New York bellhop's. Even taking into account things like trade imbalances, it just didn't make any sense to me that the same amount of labor in Europe was apparently worth more than the same labor in the US. I remember at the end of the day just shaking my head and saying, "there's something going on here that people don't understand."

Of course, the Euro was worth $.74 at the end of June, that year - it dropped further from there, hitting its nadir in April of 2008 at $.625. I was baffled why people thought the Euro (and European companies) were a better investment than those here, in the US, given that I believe the US's policies are generally more pro-growth. You can argue that the net trade-off for the average American is worse than for the average European, but I think it's difficult to argue that European companies are going to, on average, grow faster than American ones, or that European GDP will.

The good news (for me) is that it has recently turned around. The dollar is back to being worth about what it was in June of '07, as the financial contagion continues to spread. I say good news, because I'm long on the dollar - I pretty much have to be, since I live here. Most of my net worth is tied up in Silicon Valley real estate and a private, US company. If I measure my net worth in, say, Fiats, or oil I've actually had my net worth go up pretty well in the past few months, simply by virtue of currency exchange rates changing.

The bad news is that I mostly still don't understand what's going on, and I suspect that nobody does. I saw the oil bubble coming - I was advising my brothers to sell oil a good six months ago. But, the current financial crisis in Europe I didn't see coming. I thought the dollar was too low against the Euro, but it at the same time doesn't make sense that, the more we learn about the US crisis, the faster people buy dollars.

The best guess I have right now is that professionals are finally starting to understand that they don't understand. The scope of the crisis in the US, I hope, is mostly known - but what's going on in Europe is even less known. Iceland appears to have bailed out a bank with assets of six times their GDP, and hence literally nationalized the banking risk. Runs (on currencies, banks or any securities) become self-fulfilling prophecies as people panic.

I remain optimistic that this will turn itself around. This is probably just the darkest part, before the dawn. The fact that no one seems to really understand anything, or be able to predict the next problem, does not give me hope.

Paulson's original proposal was three pages. When it was defeated in The House, it was 102. Now, it's 451 pages (thanks to the Wall Street Journal for the full text).

On page 88, there is Section 131, "AUTHORITY TO SUSPEND MARK-TO-MARKET ACCOUNTING."

The Securities and Exchange Commission shall have the authority under the securities laws...to suspend, by rule, regulation, or order, the application of Statement Number 157 of the Financial Accounting Standards Board [FASB] for any issuer...or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.

Below it is Section 132 (surprise!), "STUDY ON MARK-TO-MARKET ACCOUNTING", which directs the SEC to conduct a study on mark-to-market, and report back to Congress within 90 days. The study is to attempt to determine if such accounting hurts banks, if it helped cause this crisis, and what we might use as a replacement.

I'm sure the rest of it is riveting reading - it starts with the Troubled Assets Relief Program, which it helpfully points out spells "TARP". I guess we'll use it to temporarily cover our Really Outrageous Overwhelming Failure. I am also sure that very few people will have finished reading it by the time it passes.

However, the inclusion of at least the mechanism to suspend mark-to-market shows some hope that perhaps some understanding of underlying causes is beginning to seep in. Mr. Paulson, for one still (as far as we can tell) is a fan of the accounting measure - as recently as July, he said "I think it’s hard to run a financial institution if you don’t have the discipline which requires you to mark securities to market." Perhaps he's changed his mind, or perhaps the near future will, and perhaps the SEC thinks otherwise, in any case. It's nice to see they'll have the choice, anyway (if this measure passes, of course...)

The Wall Street Journal is reporting this morning that the new, compromise "don't call it a bailout" bill is moving its way through the Senate. It focuses on the proposal that FDIC deposit insurance be raised from $100,000 to $250,000 in an attempt to keep the modestly wealthy from causing a run on already undercapitalized banks. There is a little bit of complexity, there - will they ever be able to get the rates back down, when the crisis is over? Will they be able to get the extra insurance premiums out of already cash-strapped banks? But, overall, that proposal makes sense to me.

However, more interesting, and that I had not heard reported elsewhere, is that the SEC on Tuesday issued guidance on the applicability of "mark to market" accounting for assets that have no useful market at the moment. I haven't blogged about this, specifically, but it's my personal belief that the requirement of "mark to market" on illiquid and untraded items (such as Mortgage-Backed Securities) have been a major player in bank illiquidity and subsequent insolvency. From the Journal:

The SEC said on Tuesday that in some circumstances it might make more sense to judge assets not on what the market will bear, but on their intrinsic value -- for example, if they're from a highly respected company that is unlikely to default.

I loved Eric Posner's comment on the bailout process:

Here's a recap. Paulson sought to give Treasury the power to buy mortgage-related assets. A power grab!, said the critics. So congressional Democrats sought to give Treasury the power to buy mortgage-related assets, non-mortgage-related assets, and equity interests, and to regulate executive pay. Socialism!, said the congressional Republicans. So the final bill gives Treasury the power to buy mortgage-related assets, non-mortgage-related assets, and equity interests, and to regulate executive pay, and to issue insurance to distressed institutions. Madisonian deliberation at its finest!

Over at the Volokh Conspiracy, Ilya Somin and Eric Posner have been having a spirited debate about the recent failure of the "Paulson Plan" to pass Congress. Prof. Somin is of the opinion that yesterday's drop in the markets provides no information about the intrinsic value of such a bailout - Paulson proposed to transfer lots of money from taxpayers to shareholders: that failed; shareholders were disappointed.

Prof. Posner believes, instead, that the markets fell because the plan was good for everyone (taxpayers and shareholders) and that, consequently, when it failed, the markets were signaling their overall fear of the future, not their specific fear that they'll be unable to rob taxpayers.

David Post weighs in with his opinion that the information in the market is not sufficient to tell the two apart:

I don't see any way to distinguish between those two hypotheses without asking a (large) number of yesterday's traders what they had in their heads, and why they made the trades they made (and even that, of course, is deeply problematical, given the enormous difficulties of getting any reliable information from surveys of that kind).

First, it's quite possible that these movements are largely random. People are making individual decisions not based entirely upon news, but more upon other conditions in their portfolios, expectations of what everyone else is going to do, raw emotions. If these are the causes, no conclusion may be drawn, in any case.

Second, investors abhor risk that they know that they don't understand. When a company announces that it's going to restate previous earnings, it often causes a drop in the stock well out of proportion to the eventual restatement. It reminds investors that they really have no idea of the actual underlying information about this security, and causes them to sell.

A similar problem is the event that started this whole mess - it turned out that subprime mortgages that were thought to have a pretty low default rate (say, 4%) will have a larger default rate. How much larger? No one knows. It's hard to imagine that, even in a Great Depression scenario, it'll be more than 20% (and that is really in an unmitigated and highly unlikely disaster). When investors realized they had no idea what the underlying risk of default was, they fled these investments, causing a precipitous drop in price, far beyond even the worst estimates of the actual losses.

It is not unheard of for companies to rise on bad news - because the uncertainty about their fate has been eliminated. It is quite possible that the market had been expecting that the Paulson Plan would pass for the past week. It's also possible that the consensus was that it was worth than nothing - but, that consensus was priced into the securities, already. When Congress failed to pass the Paulson Plan, it raised the specter that something even worse would happen, and this possibility is what the markets were responding to.

As Prof. Post notes, we have no way to distinguish between any of these hypotheses. I thought it was worth noting, though, that there is even an argument that the market went down because it thinks the Paulson Plan that didn't pass is worse than doing nothing.

Of course, the market went up, today: What does that tell us of the market consensus of what we should do?

I gave up, by conscious decision, being angry at the government about a decade ago. My liberal friends become outraged at the latest injustice (civil liberties, The Republican War on Science, crony capitalism), and my response is a yawn. Most of these things were either a direct problem a decade ago, or easily foreseeable as a logical consequence of government power. I got angry about it two decades ago, and realized there really isn't a lot of difference between the two parties. They have different rhetoric, but, at the end of the day, they both increase government power and help out their friends. Approximately ten years ago, I realized most people didn't care, and that things weren't going to change, so I decided that I could be really angry for the rest of my life, or just figure that things have been basically stumbling along in our modern system for about the last four score years, and hopefully they'd do so for the next.

And, probably, they will. But, the recent government response to the "economic crisis" has really raised my ire, again. To be clear: This bailout is no less the Republican party's fault than it is the Democrat's. It's Paulson's plan, but the Congressional Democrats think they're doing the Right Thing for the economy, and the country. Charles Schumer described Paulson's briefing as making him "gulp". Chris Dowd said this is "one of those rare moments [of] Democrats and Republicans deciding we need to work together quickly." My opinion has been for some time that "bipartisanship" is when both parties decide to work together to spend your money.

At best - if it does what the government plans - it will result in the government buying assets at more than anyone else is willing to pay for them. That's basically definitional - if someone else was willing to pay more, the companies involved would perform those transactions. The Treasury department is, of course, describing what they're willing to pay as "fair market prices", which Yves Smith very accurately describes as Orwellian double-speak for "above market prices".

As well, all the news stories desrcribing the "700 Billion Dollar Bailout" are wrong - we have no idea what this will cost. The Treasury Secretary and The Fed have the authority to purchase assets with up to $700 Billion. Imagine, though - as hard as this is to picture - that what they're talking about buying are banks with as-yet unknown liabilities. "Liabilities" here being accounting-speak for "money they are owed but may never get paid". The market says: "Firm X is owed $200B by borrowers of unknown quality. They also owe other firms $100B in other obligations. We have no idea what percentage of what they're owed they're going to get - so, we'll assume...say, 25%, and value the firm at -$50B, net of their obligations (i.e., they're bankrupt)." The government is going to say, "No, no, it must be worth more than that...we'll pay $50B." Then, it turns out that the market was right, and "asset" the government just paid $50B for is worth $50B in income, but owes $200B to others. If that "extra" $150B exceeds the $700B, do we have any reason to think that the Federal Government will simply default? Doubtless, if they did, the long-term cost to the credit of the nation would be higher than simply paying.

Of course, the old libertarian complaint that we're taxing "Grandma" to save the losses of a bunch of rich bankers is no longer true. In fact, progressives can't honestly make this complaint, anymore. The top earners underwrite most of the Federal budget. In effect, we're taxing rich non-bankers to pay rich bankers (and Grandma, via Social Security).

Perhaps, maybe, the silver lining is that leftish folks are starting to question whether giving government this kind of power is a good idea in the first place, since they always seem to need to use it. Matt Yglesias (a leftish blogger) notes:

It'd be one thing for a bunch of conservative politicians to ram a terrible policy through. Then we could say "well, if some progressives win the next election things will be different." But if this comes through an allegedly progressive congress then the whole enterprise starts looking pretty hollow.

[T]here are a number of enterprises -- not just Matt's -- which are looking pretty hollow these days. And I don't just mean banks. You can blame lots of the crisis on government -- more than most people think -- but at the end of the day it is hard to escape the conclusion that markets simply have performed horribly in a number of important regards.

This naturally leads us to "moral hazard" - that bankers make risky bets, knowing they get to keep the profits and government gets to keep the losses. The markets, I think, will accurately (over) value firms that have a now explicit government guarantee. The bankers, of course, are now incented to hold out for a better price from the government. That's their job. In theory, the government's job is to watch out for us. We all know that isn't going to happen, though. Since we know (from places like the USSR) that trying to make the bankers act in our interest doesn't work, the only alternative I see is to stop trusting the regulators.

But, we all know that isn't going to happen, either.

Socialism without the jobs...

A professor was recently lamenting the sartorial sins of his fellows, in a pompus article about how educators should dress better.

Leaving aside the wisdom of such a proposal, the following leapt out at me:

Here's a draft Uniform Uniform Code:

Faculty members shall, when on college grounds or on college business, dress in a way that would not embarrass their mothers, unless their mothers are under age 50 and are therefore likely to be immune to embarrassment from scruffy dressing, in which case faculty members shall dress in a way that would not embarrass my mother.
That's it. Brevity works.

"Brevity works" he says, after using sixty-five words to elucidate a rule that could be expressed as "Faculty members shall dress in a way that would not embarrass my mother." If you're feeling charitable, you could add "...when on college business." Of course, his rule is more flexible - if your Mom is 51 and thinks teaching in a thong is OK, you've got a free pass! But, somehow, I don't think that was his intent. His solution is wordy and doesn't get the result he wants!

About two and half years ago (I think - it seems to me it was just as Vindicia moved into its current office, which would've been then) I got a call from a recruiter. He was looking for someone to be VP of Technology and/or CTO for Yahoo! Music. This isn't that surprising - I was EVP of Tech at EMusic, and, if you're looking for software development executives with downloadable music experience, there's like maybe three people with that on their resume, and I'm one of them.

Ian C. Rogers, late of Nullsoft (the guys who did Winamp) ended up taking some sort of management role with Yahoo! Music (though, I'm not sure precisely what). He has updated his personal blog with an extended anti-music-industry rant, in which declares he's done with the DRM crap Yahoo! Music has been shoving down customers' throats:

I'm here to tell you today that I for one am no longer going to fall into this trap. If the licensing labels offer their content to Yahoo! put more barriers in front of the users, I'm not interested. Do what you feel you need to do for your business, I'll be polite, say thank you, and decline to sign. I won't let Yahoo! invest any more money in consumer inconvenience. I will tell Yahoo! to give the money they were going to give me to build awesome media applications to Yahoo! Mail or Answers or some other deserving endeavor. I personally don't have any more time to give and can't bear to see any more money spent on pathetic attempts for control instead of building consumer value. Life's too short. I want to delight consumers, not bum them out.

The start of this rant is an overview of the digital music history - one which does not touch on GoodNoise, which was selling unencumbered MP3s for $.99 in 1998, nor the company it became, EMusic, which was selling subscriptions for $9.99, again, to unencumbered MP3s in 2000. Ian just tried Amazon's new digital download service, which is unencumbered, as well. It beats GoodNoise's offering by having the content of two major labels - something were never thought it would take nine years to convince them was inevitable. Ian wonders what took so long: "But now, eight years later, Amazon's finally done what was clearly the right solution in 1999. Music in the format that people actually want it in, with a Web-based experience that's simple and works with any device... PRAISE JESUS. It only took 8 years." Well, to some of us, it was obvious in 1998, but, I'm glad everyone else is finally coming around.

Ian's bottom line is right on, though: "Convenience wins, hubris loses."

Oh, and that recruiter - I had a vision pop in my head of endlessly trying to convince major labels, yet again that they should drop DRM because it was killing their sales while not preventing piracy. I told him, "There's not enough money." He was taken aback. "We're Yahoo! It's never been a problem, before."

"No," I explained, "I didn't say you don't have enough money. I said there isn't enough."