Debt and Moral Hazard

Photo by: Vinay Deep

For decades now the American approach to debt has been to worry about it later.  We’ve essentially kicked the problem down the road.  While some points in our history may have suggested somewhat higher debt levels, we’ve done nothing to reduce them in more booming times.  Ultimately we’ve just turned a blind eye to a growing problem and it may be too late. 

Many people are talking about moral hazard these days, but strangely they all seem to think it’s something that applies to someone else.  Bailouts of millionaire bankers strike us as outrageous, while we personally hold an absurd amount of debt.  Somehow the country got all screwed up without any of us being at fault. 

Our politicians seem to suggest that their opponents are the ones rewarding negative behavior and that they themselves would never commit such an act.  This doesn’t hold up to much scrutiny however.  Throughout the booms of the previous decades, neither Democrat nor Republican has ever used fiscal policy to “cool down” a boom.  Nor have they used any of the booms to reduce our debt to increase our capacity to deal with the next bust.

Clinton was just beginning to talk about reducing the debt when the Internet bubble burst.  Bush managed to go through a massive housing bubble while growing the national debt by over 4 trillion dollars.1  Government has simply never shown any discipline in managing its budgets.  Unfortunately, this is not only true of the government.

Short Term Myopia

Americans and people in general have a tendency to look at a very short sample space and assume that the results they’re seeing are meaningful.  Ten years is a long period of time in a human life, so if something has held true for the last decade, it must be true, the thinking goes.   Unfortunately those ten years are actually quite a short time in the life of an economy.

So many times in history we’ve been told that “things have changed.”  Something has fundamentally shifted and the old rules don’t apply anymore.  For the last decade, people watched their 401(k) accounts grow by double digit figures each year and they just came to assume that this was a sustainable result.  Similarly they’ve leveraged themselves to the hilt and assumed that since they’ve been able to sustain themselves with this massive debt they’d be able to do so in the future.  Sadly, this is an untenable ponzi scheme. (more…)

1. CBS News – Bush Administration Adds $4 Trillion To National Debt [↩]

Analyzing Health Insurance

Photo by: gwire

For many of us, particularly the self-employed, choosing health insurance can be a difficult proposition.  Laws and rules tend to vary by state, so it is difficult to make general guidelines for buying insurance.  In fact, state legislation is one of the biggest factors in the availability of affordable health insurance in the state.  As such, it’s difficult to write a comprehensive guide to analyzing health insurance, however there are several guidelines that can make it easier.

Do You Need Health Insurance?

The first question many of us ask is:  Do I even need health insurance?  The short answer is “yes.”  Insurance can be a bad deal for us.  Ultimately if the odds weren’t stacked in the company’s favor they wouldn’t be offering the product in the first place.  While this logic may be true, the real reason we buy insurance is to offload catastrophic risk.  We don’t want to have our lives ruined if we get a serious illness, so it makes sense to protect ourselves from such a fate.

That’s an important point to remember when you’re making decisions about your health insurance.  You’re not buying health insurance because you want every medical procedure to be free.  You’re buying health insurance because you don’t want to be ruined.  If you’re paying $300 per month so that you can get a $100 doctor visit for free, you’re not doing yourself any good.  We’ll look at this more closely when we start crunching numbers. (more…)

Why Now May Be the Right Time for Green Stimulus

Photo by: andjohan

In the period leading up to the realization of the current economic crisis, Green was booming.  Solar cell companies were stock market darlings, and the whole sector looked like it may have the makings of the next bubble.  Unfortunately the crash has of course taken some of the bloom off that rose and investment has decreased to 2007 levels.1  But the crash is offset somewhat by the components of President Obama’s stimulus package that call for spending on renewable energy and other “Green” projects.

Why Green?

Generally the idea behind counter-cyclical spending is for the government to put people to work doing things that benefit the country as a whole-thus the idea of building roads, schools, or something else that will give a lasting benefit while helping invigorate the economy through the spending.  This is a win-win.  For those who are pro-Green, environmentally friendly projects seem like the perfect kind of project.  You can wean the country off oil, save the environment and fix the economy all at once.  But is this argument realistic? (more…)

1. Forbes – Venture Capital Investment in Renewable Energy Exceeds $836.1M in Q1 2009 [↩]

The Difficulty of Investing in 2009

Photo by: Mel B.

2009 is a dreadful year to try to invest.  While we have seen a massive rebound in stocks, there are a variety of factors that make long term planning very difficult.

Asset Class Difficulties

The first thing that makes the current economic climate so difficult is the correlation between asset classes.  Under normal circumstances declines in one asset class involve money moving to another asset class.  Thus when stocks go down, bonds or gold or another asset class is usually the beneficiary.

What makes the current economy so difficult is that you see capital essentially being “destroyed” by the deflationary spiral.  Forced liquidation on the part of many funds caused by redemptions and margin calls contribute to this problem as well.  While this problem was particularly pronounced in 2008, you continue to see deflationary pressures affecting all asset classes.

Government Intervention

One of the most obvious difficulties of building a long term plan in 2009 is the frequency and fervor of government intervention.  Policy makers are attempting to walk several fine lines and thus are constantly exerting strong forces upon the market.  In their zeal they make it very difficult to draw long range conclusions about what makes sense.

(more…)

Is the Financial Sector a Utility?

Photo by:  futureatlas.com

I am a fervent believer in free markets.  More specifically I believe that they, much like Democracy, are flawed but vastly superior to any alternative.  As various elements in the world decry the current financial crisis as an indictment of the flaws of capitalism, I wait patiently for them to suggest the proven alternative.  Despite this, I am left wondering if the financial sector is an exception to the wisdom of free markets.

Does Regulation Even Work?

If I’m defending free financial markets, my first piece of evidence is the Office of Federal Housing Enterprise Oversight.   This organization was 225 people as of 2006, tasked solely with regulating and overseeing Freddie Mac and Fannie Mae.1 With both of those organizations now being operated by the government after becoming tremendously over-leveraged, the efficacy of regulation is certainly in doubt.  If an organization of 225 people cannot regulate a large financial entity, what good does adding more regulation to the system do? (more…)

1. OFHEO 2006 Performance and Accountability Report [↩]