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March 29, 2008

Profile in Irresponsibility

I saw this story on's front page a few days ago but had been too busy to comment on it until now. It's an anecdote of a family under sudden financial stress:

When she was laid off in February, Patricia Guerrero was making $70,000 a year. Weeks later, with bills piling up and in need of food for her family, this middle-class mother did something she never thought she would do: She went to a food bank.

I question the journalistic value of publishing stories like this for a national audience. I see no purpose for it, except perhaps to tug at heartstrings and build support for bailouts. It's ironic, then, that this story is actually a marvelous example of someone who does not deserve a bailout. (And I'm pleased that many of the commenters there share my sentiment.)

I have very little sympathy for Patricia Guerrero. She was financially irresponsible, and I'm incensed that politicians will be falling over each other pledging to solve her problems with my tax dollars. Let's review the relevant facts.

She couldn't afford her home to begin with. Her mortgage costs $2,500/month, or $30,000 annually, yet her income was only $70,000! Even worse, she had an interest-only mortgage… she was paying over 40% of her income on interest and building no equity at all! The jaw-dropper here is that she was a loan processor before being laid off — she, of all people, was in a position to know the risks of a mortgage like hers. (The story didn't say whether she processed mortgage loans, but I expect anyone working in the field to have this kind of knowledge.)

She had little or no savings, probably as a consequence of this unaffordable house. She was laid off only two months ago and she's already at the end of her resources. Despite drawing unemployment checks and having her mother move in with her to split costs, she used up her tax refund to pay bills and is now going to the food bank because she can't afford to buy food for her two young children.

The story does say that she is estranged from her husband, but there is understandably no additional detail. I wonder cynically whether he didn't want to be with her because she was financially irresponsible. (Of course it could have been for many reasons).

It is irresponsible to be at her station in life — good-paying job, husband, kids, house — without having a solid financial footing. She should have had an emergency fund in case she lost her job. (Especially if she processed mortgage loans, she should have seen the writing on the wall months ago.) She should not have bought a house she could not afford. Yes, she lived in California, but she could have rented… or moved somewhere affordable even if that meant leaving the state. Most importantly she should not have brought two children into the world when her financial situation was so precarious. Those children deserve better. (But not on my dime, take careful note.)

She should sell her house. She can't afford it. Get out, get out, get out!

March 26, 2008

A Reisman Must-Read

Professor of economics George Reisman has penned a must-read article about the credit crunch. It is long but absolutely worth your time. Plus, he once again makes the case for gold:

Despite the certainty that a proposal of this kind will be almost completely ignored and has virtually no chance of being enacted in the foreseeable future, it still must be made. This is because the most fundamental and important consideration is not what people are willing to accept or reject at the moment but what would in fact accomplish the objectives that need to be accomplished. Using gold as a major asset of the banking system, in the way set forth below, would in fact safeguard the banking system from possible deflationary collapse, prevent the recurrence of any such threat, and do so in a way that substantially advanced the cause of economic freedom. Making the proposal is necessary in order to uphold the philosophy of economic freedom, by providing a demonstration that that philosophy offers the solution to the growing monetary problems we face and is not their cause.

Go. Read it. Now.

The article is more valuable for its explanation of how we got into the current mess than for its short call for a gold standard. You can find a much more detailed elaboration of that in Reisman's book, Capitalism.

March 20, 2008

Does it Matter Where I Buy Gasoline?

A reader forwarded me a letter encouraging people to buy gasoline only from companies that don't import oil from the Middle East or from Venezuela, for the stated purpose of sending a financial/political statement to those regimes, many of which are anti-American. Would following that advice hurt those countries? Is it a good idea?

The short answers are "yes" and "no". The reasoning behind both answers is the same: Following the advice would make all gasoline more expensive.

The data about imports is interesting but not actually relevant to the economics, so let's get that out of the way first. The top five countries we import oil from are Canada, Saudi Arabia, Venezuela, Mexico, and Nigeria. These five sources account for 73% of our crude oil imports; the other suppliers are all much smaller. (There are seasonal changes in these figures; I'm looking at the Dec. 2007 data.) Ignoring the minor suppliers, only Saudi Arabia and Venezuela could be called "unfriendly" and they only supply 30% of our imports… and we only import 66% of our crude oil to begin with. These two "unfriendly" suppliers only account for 20% of our total crude oil supply. We're getting all worked up about that? Really?

Okay, let's say that we are bothered by that 20%. What happens if we switch sources? The price will rise. The clearest example here is Venezuela. It makes sense from a cost perspective to buy from them. The transportation costs are modest because they're nearby, and our refineries can handle the high sulfur content in Venezuelan crude. If we buy from somewhere else, Venezuela has to sell its oil elsewhere. Let's say that it would cost an extra $3 a barrel for them to do that. Congratulations, you've hurt their profits. But if we're buying from somewhere else, we will also face higher costs. The reason we buy from Venezuela today is that it's cheaper than the alternative! If we buy from somewhere else, our costs go up for the same reasons as Venezuela's. We're hurting ourselves at the same time we're hurting Venezuela. And who does this hurt the most? The poor. They spend the greatest proportion of their budget on gasoline. They'll be the most impacted by higher costs.

It would be wasteful, too. (That's nearly synonymous with recognizing that it would raise costs.) Assume that we bought our oil from Norway instead of from Venezuela. Now all that oil has to cross the Atlantic ocean in gigantic ships that frighten the charismatic oceanic megafauna. But what about the countries of Europe that used to buy Norway's oil? They still need oil. They'll buy it from Venezuela. So now we've got crude oil crossing the ocean in both directions. Unnecessarily. Wastefully. Scaring the whales.

If you care about the poor, or about the poor whales, you should be happily indifferent to the national origin of the gasoline you buy. Just buy what's cheapest and sleep soundly in the knowledge that market forces operate to minimize costs. Sure some dictator gets an extra couple bucks of profit per barrel. But more importantly, some poor person saves money on gasoline and is able to put a little more food on the table, or pay off that credit card a little bit sooner, or save a little bit more for the future — and there are millions of such people.

March 18, 2008

I Shoulda Been There

On St. Patrick's Day my parents went to see Wylde Nept in concert at 3rd Street Live in Cedar Rapids. They sent me this photo and remarked "I'll bet you are GREEN with envy":

Wylde Nept

Yes, I am. I have all their CDs — and listen to them more often than anything else in my car — but have never had the pleasure of hearing them live, because I live way out here in Oregon.

March 17, 2008


Is it time to panic yet? We're getting there. All this financial calamity makes me giddy. Sometimes I wonder whether that's healthy…

JP Morgan made a deal to buy Bear Stearns for a mere $2/share. Bear Stearns closed at $30 on Friday… and $57 on Thursday.

JPMorgan's acquisition of Bear Stearns represents roughly 1 percent of what the investment bank was worth just 16 days ago. It marked a 93.3 percent discount to Bear Stearns' market capitalization as of Friday, and roughly a 98.8 percent discount to its book value as of Feb. 29.

Poof!! I'm always unhappy with the Fed, but I was particularly unhappy that they were bailing out a broker instead of a bank by using JP Morgan as a conduit. Now that JP Morgan is acquiring Bear Stearns I no longer have a reason to feel more upset than usual. Also, there's this (emphasis added):

At almost the same time as the deal for control of Bear Stearns was announced, the Federal Reserve said it approved a cut in its lending rate to banks to 3.25 percent from 3.50 percent and created another lending facility for big investment banks. The central bank's official meeting is on Tuesday. Before the emergency move to lower the discount rate, which is the rate at which banks lend each other money, the Fed was widely expected to again cut its headline rate by as much as a full point to 2 percent.

All this news has provoked a large negative reaction in the Asian markets. It's going to be a lousy day for U.S. markets too.

Oh yes, and this confidence-building [sic] move caused the dollar to sink to fresh lows. You can guess what that's doing for gold and silver.

3-day US Dollar Index 3-day Gold Spot Price 3-day Silver Spot Price

P.S., Carlyle Capital, the hedge fund that defaulted on margin calls last week, is liquidating.

March 11, 2008

Good Riddance

I'm shocked, shocked to learn that New York Governor Eliot Spitzer was caught doing something illegal.

Prostitution, of course, ought to be legal. (He says as if that's not controversial at all.) While ordinarily I would lament someone's career being ruined by doing things that should be legal, in Eliot Spitzer's case I am happy to see this thug who has done great damage get a dose of his own medicine. Also, it seems that he will actually be charged for some kind of payment structuring intended to obscure how he was paying his prostitute(s) rather than for the fact of hiring them.

In my opinion Eliot Spitzer was among the most abusive politicians on the national stage and I am relieved that he's on his way out.

Also, a reader points me to this story noting "the most highly ranked prostitutes cost $5,500 an hour". Wow!

I didn't guess they would be that expensive.

That price is likely much higher than a market equilibrium price would be. The fact that prostitution is illegal severely limits the supply, driving up the price. (The same argument applies to illegal recreational drugs.)

I wonder how that compares with the legal brothels in Nevada or the legal brothels in Europe?

Anyone know?

P.S., I can't resist captioning the following photo from the first link in my article. (I can't give proper attribution because ABC News didn't, either…)

Eliot Spitzer

Disgraced New York Governor Eliot Spitzer reveals his encounter with a prostitute and demonstrates his "O Face" to a horrified press corps.

[Or his "uh-oh face"? -ed]

March 07, 2008

No More 0% Fun

Longtime readers know that for the past several years I've been taking advantage of 0%-introductory-rate credit cards to hold a large balance paying no interest, while having the proceeds in a high-yield savings account, earning a 4-5% return with almost no risk.

I'm stopping. The credit crunch that began roiling the secondary mortgage market last year has rippled into consumer credit cards. The lucrative 0% offers (those with caps on balance transfer fees) have dried up. I still got such offers a few months ago, but recently, nothing. At least a handful of cards are offering good terms, but I already have them. I applied for the only one I thought was suitable that I didn't already have, but they only gave me a $4000 credit limit (no, there's nothing wrong with my credit report) so I decided it's not worth continuing. I scheduled a $19,700 payment to my last 0% card to happen about two weeks from now, and then I'm done.

I've made several thousand dollars doing this over the past few years, and I'm a little sad to see it end. But only a little sad. I think the edge is taken off by my schadenfreude from watching how much pain the banks are in. :)

The banks were foolish to offer such generous terms in the first place, especially after the phenomenon of people (like me) taking advantage of them became well-known. But the banks have been doing foolish things all through the easy credit environment.

My only regret will be if all the talk of mortgage bailouts (which are a terrible idea) makes its way, in a worsening economy, to people with a lot of credit card debt too. Because then I could have been bailed out, which would've been sweet. :)

March 04, 2008

A Life Alone?

A female friend of mine, who wishes to remain anonymous, recently made the decision not to re-enter the dating pool after she ends her current relationship. She intends to remain single for years, and possibly forever.

In brief, the motivation for this decision is that she wants to be independent. She has made important life decisions for the sake of men who disappointed and hurt her, and resents the power a man would have over her if she depended on him. She would be comfortable never having children… so what does she need a man for?

When I heard it, my heart sank. Is this the victory of (a caricature of) feminism? Women liberated from men, and men discarded as unnecessary?

(For the rest of this article, be aware that I'm talking about women in general and not about my friend in particular. Don't ascribe everything I say below to her.)

For a long time I have believed that my great means and deep desire to care for a woman was my advantage in the relationship market. I would be the man uniquely dedicated to her happiness, doing everything in my power to make her feel valued and secure. That is what I could offer, that is what would set me apart.

But she doesn't want that!

Perhaps she wanted that when she was young. Before she depended on a man who was undependable. Before she was with a man who took her for granted. Before she changed the course of her life for a man who didn't reciprocate her seriousness. Now, because of her experiences, she is afraid of what I have to offer.

In the not-so-distant past, marriage was as much an economic arrangement as a family arrangement. People were poor, and sharing resources made the couple much more comfortable. But in the modern economy it's typical that a person's income is more than sufficient to meet their needs. The economic side of marriage is fading in importance. And to a person who is comfortable without having children (which is also increasingly common in wealthy nations), the family aspects of marriage also hold little appeal.

I understand how someone could conclude that romantic relationships are more trouble than they're worth.

But I don't like what it implies.

Unlike my friend, I do want to have children. But more than that, I have been living the single life for a long time and I don't like it. I've been increasingly unhappy being single, especially with my birthday approaching. This revelation from my friend has shaken up my understanding of relationships. What I thought was my advantage is, at least for some women, something to run away from.

I don't know how many women are content to live their lives alone. But whatever the number, they condemn an equal number of men to being alone. Some won't mind very much. I'm one who does. It's sobering to realize that to some presumably large number of women, I am considered worse than nothing; that they would rather be alone than be with someone like me. (To paint it even more extremely, imagine the same idea but use the phrase "last man on earth".)

Whatever happened to the fairy tale? Where is the woman who wants what I have to offer, and who would want to work as hard for my happiness as I want to work for hers? If she met the wrong kind of men, she's afraid of a guy like me. If she met the right kind of men, she's already married. Either way, she's not out there for me to meet.

I need to reexamine my approach lest someone else's decision to live life alone force me, unhappily, into the same.

Be mindful when commenting that my friend wishes to remain anonymous.

Tiny Island