This was requested

By commenter on Reason's blog so I took the 5 minutes to make it and send it to him.

If I had a zilllion dollars

I would run this on television as an ad during the Super Bowl and American Idol....

Economic Crisis Reaction: Liberal vs Conservative.

I live in a remote-ish mountain region in New Mexico. It is a relatively poor town – lots of people relying on the local food bank, free-cycling, odd jobs, etc. There are liberals and conservatives (I use the Common American Usage here), anarchists and libertarians, communists, socialists, hippies etc etc. In other words: people of all stripes. One thing I have noticed is the gap between liberals and conservatives in reaction to the economic crisis:

Conservatives:
“Get a gun, stockpile canned goods and gold. Generator. Create defensive perimeter. Stockpile fuel. Self-sufficiency and self-defence”

Liberals:
“Community garden. Food bank. Clothing drive. New Free Box. Share firewood, water, living space. Fundraiser. Festival.”

As much as the latter group annoys with their earnestness, believe in nonsense, lack of basic economics understanding and generally poorer work ethic, conviction that “the man” is out to get them, they really do have a better attitude.

It’s amazing: the people who cannot plan, cannot organize, and generally do not exhibit the greatest skill-set are the ones who try while the planners, organizers and generally more skilled retreat into their own. If there was some way to blend the two, that would be formidable. Of course, such has been the power of the free market when times are good and the economy is growing.

Where have I been, you ask

Working in a coal mine, going downtown. Working in a coal mine, going down town.

Lord I am so tired, how long can this go on?

Seriously. Work and life has made me a bad blogger. With any luck I will get back to posting.

For now we have a picture....

Wall Street: Changing one incentive structure

I worked on Wall Street for 10 years and recently re-upped with a hedge fund with an eye to taking advantage of the current crisis to make a little money – at least for a while. So I know something about the perverse incentive structures on Wall Street. There are many of them, but today I want to discuss the bonus problem.

There are a number of problems with Wall Street bonuses, one of them being that they are disproportionate to other, in many cases more worthwhile, professions. This has caused Wall Street to drain off many very talented people from other parts of the economy where rather than shuffling bits of paper about making numerical profits, they could be curing disease or figuring out how to make a better solar panel. I do not joke: many of the main “quants” I worked with were chemists, physicists, mathematicians, statisticians etc whose talents could have been (and hopefully will be) employed better.

More importantly, the bonus cycle causes a number of other perverse behaviors. Since the base salary does not provide the lifestyle most employees live beyond their monthly means and rely on the bonus to bail them out at the end of the year. The problem here is that it has become impossible for bonuses to be paid only for exceptional work. Rather as it is the lion’s share of annual income it is expected. “No Bone” is hardly ever “No Bone” but rather some smaller amount. A true zero bonus has often been used as a sign that it is time for a person to move on.

What is to be done?

I think that the bonus culture is entrenched and could be reformed so that it works as it should. I would have the bonus carved into three equal tranches. The first would be the cash bonus as it is now. The second would be an all equity tranche that would vest one third after three years, and another third after four and a final one after five. The final equal tranche would be paid after three years.

This way not only would the worker have an interest in the health of the firm, he would also have an incentive to not get himself fired (fired with cause and you lose your outstanding payments) and also not to lose money. If your contribution were ever negative, the firm would be able to claw back any or all of your future payments.

This way that trader I worked with who, in advance of the Russian Crisis, loaded up on Russian risk and was paid handsomely would not only have lost his job when it all went pear-shaped, he would also have lost most of his income from taking risks others of us warned him about. Instead he made a ton of money and walked away laughing even as the firm almost went under.

May the Great Inflation Save Us

Many economists and other observers believe that we risk a new Great Depression. It certainly seems that way given how over leveraged the system is and how much of that will have to fall. The big-3 automakers will have to either shutter their doors or restructure (through bankruptcy) their operations to a production of less than half the current. There are too many retailers, too much stuff on the shelves not moving, too many houses, too much consumer debt, mortgage debt, and government debt.

Outstanding obligations come to some 200+% of GDP depending on how you measure these things.... And yes it is silly to calculate the Social Security, Medicare etc at $53,000,000,000,000 but that's what the handwringers tell us.

So there could be a collapse of economic activity, everyone buried under the pile of debt and standing in breadlines. That could happen.... but it won't.

It won't because we did learn a couple of things from the Great Depression among them the importance of battling deflation, of avoiding the collapse of the financial system, of the risks of a liquidity trap, etc. So the powers that be will stuff money everywhere until prices rise, they will do it through seniorage and monetization in the guise of fiscal deficits and Central Bank lending. They will allow inflation to clear out all of our obligations and get us back on track.

Inflation paid for The Great Society, the Vietnam War, and the imbalances incurred by the Gold Standard.

This inflation will make people right-side up on their mortgages, it will whittle down the costs if social programs. It will eat away a goodly portion of our national debt and burn off the value of the toxic paper the government will be forced to take onto its books.

It will hurt and those of us who do not have many debts now will be in worse shape on the other side. But it will bail out everyone who needs it.

Letter to my faux-libertarian friend

Dear D,

When we first met you were thrilled to have someone of your political persuasion in town. It is a town almost entirely composed of leftists and your penchant for wearing a gun on your hip and spouting off politically incorrect statements had made you something of a pariah. Here I arrived, eagerly defending my personal libertarian viewpoints and agreeing whole-heatedly that owning firearms is a perfectly reasonable thing to do. You thought you had found a fellow traveler and assured me that you too were a libertarian.

Alas, my friend, you are not a libertarian. You are a Conservative Republican and you drink deeply from the groupthink of Fox News and the NRA and all the other partisans of the right side of the spectrum. And I told you this the other day when you were ranting about Obama and the pending Socialist Order and your conviction that all the guns will be taken away. You balked at my assertion and professed that no, you are, indeed, a libertarian.

The problem is that, at least as I see it, a libertarian believes in liberty for all, not some selective liberty that only benefits he. You do not support gay marriage, or drug legalization, or open borders. In fact, on that last point you openly declare yourself a racist and support deporting all the Mexicans and the building of a wall. You also regularly call Arabs “Sand Niggers” and freely opine that we should kill them all. You support the wars in Iraq and Afghanistan in spite of all the arguments against. Your best friends (a couple of whom I have had the unfortunate experience of meeting) are reactionary wing-nuts. Should I, for a moment, not think that you are closer to their kind than mine?

You are dumbfounded when I respond to some of your statements and seem unwilling to listen to the content, preferring to hold some hope that I think as you do. I tell you that I think that all borders should be done away with and you shudder to think of all the brown people coming here to take advantage of our public services. I respond that in “libertopia” that would not be an issue because such services would be negligible at best (but then opine that we’ve always been better off with hard working people coming here rather than simply exporting jobs and in any event, who is going to keep Social Security going (Not that it should) if we don’t let people in?)

I would leave marriage to contract, but so long as marriage is a codified thing that provides legal benefits then it should be open to anyone. In libertopia any consenting adults could enter into any contract they so wished…. And no one would send troops to break up possible polygamists. You complain that the town is full of dykes, unwilling to see that more of my friends in town are lesbians than straight people of either gender. And yes I disagree with their political views, but unless you have not cottoned on, I disagree with most of yours.

The drug war should end and people be allowed to do as they please with their own bodies. Most libertarians support such a statement, at least to some degree. You disagree.

The Empire must end, our wars brought to a close and our troops brought home. National security is a legitimate function of the state, but only barely. As long as there is no existential threat such as Nazism or Soviet Communism (“We will bury you”) there is no need to project force or have on hand the means to destroy the world. Countries that do not pick fights do not get picked on. Let the people arm themselves and have the tiny government maintain a dozen or so nukes for deterrent. And leave everyone alone.

You want our young men actively making enemies by killing people’s brothers and sisters and sons and daughters. “Blowback” is a meaningless phrase to you.

And you are in that minority that supports Sarah Palin. Can you really not see that you are a member of the Republican base?

I won’t send you this letter since you walk around armed. But I wanted to post it because there’s a catharsis to it.

And I doubt we will have a discussion of this nature because my wife is so tired of your views that she does not want to associate with you anymore. I suppose I am too. If I want to hear invective I can always phone my octogenarian father in South Carolina. Something I really should do more often.

Cheers,


Kahn