Occupy Wall Street and Black Friday

People want to compare Occupy Wall Street (OWS) and Black Friday (BF).  I see it frequently on my newsfeeds and social media, plus I heard it a lot over the past few days as I was out and about.  Sure, they both involve crowds and camp-outs, but does that really mean they can be compared?  Lots of OWS supporters are saying how the crowds and camp-outs for BF are acceptable (OWS also tries to broaden this to include camp-outs for tickets to sports and the recent Twilight movie), but when OWS tries to form crowds and camp-outs, they get brutalized by the police (we’ll leave aside the question of whether it’s appropriate or excessive force for now).  That OWS wants to compare themselves to BF is highly amusing because the two are so different, there’s nothing meaningful to glean from comparing them.

First, we’ll talk size.  Exact numbers aren’t readily available or verifiable yet for BF, but I think it’s reasonable to guess that tens of millions of Americans participated.  Maybe even 100M is reasonable.  I’ve heard estimates as high as 150M, but that would mean literally every other American was out shopping on BF and I find that hard to believe.  So, let’s just leave this in the tens of millions and up to 100M.  I looked previously at OWS’s size and haven’t revisited that in a few weeks.  For the sake of simplicity, let’s just assume that OWS has grown in size directly proportionally to the growth of followers of @OccupyWallSt on Twitter.  It was about 57,000 and it’s now about 130,000, which is a little more than double.  My largest estimate in that OWS post was 464,000 people, so if we apply a similar growth factor, we’re just over a million.  We have a million or so in OWS versus tens of millions or up to 100M out on BF, meaning BF is 1-2 orders of magnitude bigger than OWS.

Next, let’s look at duration.  OWS has made it very clear that their goal is an indefinite occupation of their campgrounds.  They’ve tried to hold their ground for weeks, even months as time drags on.  By contrast, BF shoppers camped out for a couple nights, maybe a week in a few hardcore cases.  However, the BF crowd did their shopping and went home.  There aren’t many, if any, campers still outside stores.  BF was a very short duration with a clear ending date.  OWS is not.

Third, we need to consider who owns the property in question.  In the case of BF, we’re talking about almost exclusively private property that is either owned by the store itself or owned by a real estate firm that is renting the property to the store.  In the case of OWS, there are varying degrees of public ownership, ranging from a public-private hybrid model like in New York City’s case to fully public elsewhere.  This matters because property rights still matter.  The owner in the private property case gets to decide whether or not to allow camp-outs (assuming legal compliance, of course).  When the owner is the public, the government has an obligation to ensure that the property remains accessible to the entire public, not just a small portion of it. 

Fourth, consider the lawless elements of each.  BF had some ugly incidents this year, such as the woman who maced a crowd to gain an advantage, a couple robbery/shooting incidents, other criminal actions, injuries, and even a couple deaths.  And these were all in one day.  OWS has also had some ugly incidents over its 2+ months nationwide, including some vandalism, drug overdoses, sexual assaults (enough to necessitate woman-only tents in some camps), and gunshot incidents. It’s my opinion that OWS has on the whole out-uglied BF (if that’s a word). 

I have no way of guessing exactly how many BF arrests occurred, but it’s unfathomable to me that BF would have more than the nearly 5,000 arrests OWS has racked up in its 2+ months nationwide according to @OccupyArrests.  I doubt BF had even 500 arrests on the day nationwide (for perspective, 700 were arrested trying to shut down the Brooklyn Bridge).  Even if we, for the sake of argument, make the highly remote assumption BF had as many arrests in one day as OWS had in 2+ months, OWS is still worse in this regard because we established above that the BF crowd is 1-2 orders of magnitude larger than OWS. 

One last side note.  OWS tried, and apparently failed, to disrupt BF.  I’d be curious to see if the OWS disruption efforts resulted in an uptick in arrests.  It’s a very hard question to answer because we have to have historical data on BF arrests and we need to be able to separate OWS-related and regular BF arrests.  It’s not something I’ve seen any research done on, but it is a curiosity.

Size, duration, location, and lawlessness make it really hard to compare OWS and BF in any meaningful fashion.  It’s a laughable comparison if you think even slightly about it.  Don’t let yourself fall for that logic trap. 

Printing Money

The topic of government finances is back in the limelight once again.  Not only do we have the carnage that is the European Union (I'm trying to be nice), but we also have the USA’s so-called “super-committee” has their deadline coming up, but don’t worry because that’s not today’s topic.  In general, my view of the super-committee is that it’s a hollow effort because it was originally conceived to get both parties past the 2012 election (yes, another delay by our elected officials in dealing with real problems) and even today, an effort to repeal the mandatory cuts or reduce the threshold would somehow fail to surprise me (yes, they’re basically able to change the rules of the road and the objectives of the mission if they don’t like them).  This is why I don’t plan to write much about the topic.

Instead, I want to take this chance to put out a couple posts I worked on back then, but didn’t post.  In my previous debt ceiling discussions, I mentioned that, aside from the ability of a government to print money, there’s not that much of a difference between personal and business finance versus government finance.  In a nutshell, as long as you take in more money than you put out, you’re in good shape, and in both cases, there’s good debt (investment and survival) and there’s bad debt (excess consumption). 

Today, I’m going to talk about that printing money difference.  So, what do we mean when we talk about the government printing money?  This is a very oversimplified explanation, but bear with me.  In the USA, we have the Treasury and the Federal Reserve.  The Fed is ‘in charge of’ our currency, the dollar, so they essentially decide how many dollars they want out there. When the Fed wants more dollars out there, they lower their interest rates, and when they want less dollars out there, they raise rates.  The underlying value of a dollar used to be backed by gold on the gold standard, but we went off that a couple decades ago. 

It’s the Treasury’s job to actually finance the government spending and operations.  They do this in two ways.  First, they collect tax revenues, which makes up about 60% of the money that comes into the Treasury.  Second, they issue Treasury bonds to cover the other 40% or so, which are basically pieces of paper the Treasury sells to a buyer and in exchange, Treasury promises to repay the buyer of the bond a certain amount of money at some future date.  These bonds trade on the markets with various durations and interest rates.  They’ve been doing this for decades, so when the Treasury does their auctions, which they usually do three times per week for various durations, not only are they issuing new bonds, but they’re retiring old bonds. 

Basically, if the government wants to print money, they ramp up the Treasury bond auctions.  And how can a government inflate their way out of debt?  There, the Treasury needs the Fed’s help because the Treasury would need the Fed to lower the dollar’s value. 

Suppose we have X dollars of debt and Y dollars in circulation.  At the moment, the given value of the dollar is Z.  Now, say we increase Y.  Two things happen.  First, assuming whatever collateral, C, is underlying the dollar to back its value remains constant in amount and value itself, Z falls.  Our dollars are now worth less because there are more of them in circulation with an amount of backing that remained constant.  Were we to increase Y while seeking to keep Z constant, we would have to increase the amount and/or value of C.  Simply speaking, Z = C / Y. 

So, we’ve increased Y and held C constant, thereby lowering Z.  But, we have this debt X.  Guess what?  X remains constant.  So, this means we have the same actual number of dollars X in debt, but the value of those dollars, Z, is now lower.  Basically, we’re borrowing money today that we’d repay in the future with less valuable dollars.  Say I borrow $100,000 today and assume Z drops by 1%/year for the next decade.  In a decade, assuming no repayment and no interest in this simple example, today’s $100,000 would be equal to tomorrow’s roughly $110,000 (I know it’s not exact due to percentage compounding).  However, in the future, my debt would still be only $100,000.  Voila.  I’m inflating my way out of debt. 

The US government has been playing this game for decades.  Europe’s been playing this game longer and stronger than we have.  Even corporations and local/state-level governments play this game to a degree in the bond markets (they’ll sell bonds of a certain duration and when that duration is up, they’ll retire the current bonds and issue more new ones). 

Printing money is a big difference between individual and government finance, but the fundamental structures of the two are still very similar.  It’s an important difference to understand.  Because of this ability to print money, the US federal government can’t really go bankrupt in the truest sense of the word like a person, corporation, town, county, or even state could. 

Don’t take this to mean that deficits don’t matter because they most certainly do.  They just matter in a different way for the US government than what we would typically think of for people, corporations, or state/local governments.  Also, don’t take this to mean that we can print money indefinitely without consequences because that’s just not true.  This would get way deeper than I intended into higher-level stuff like Modern Monetary Theory (MMT) and the intricacies and nuances of global economics and finance, so I’ll stop here.

Obama's Student and Mortgage Loan Actions

Recently, Barack Obama announced a pair of executive actions, one related to mortgage loans and one related to student loans.  Let’s take a look at these two actions separately before we look at how they’re related. 

First, the mortgage plan is an effort to help people be able to refinance and take advantage of these historically low interest rates.  That’d be a great thing for millions of homeowners if they could because they’d be able to shave hundreds off their monthly mortgage payments.  We all know how big of a problem the housing market is right now.

It’s useful to think of credit in terms of 3C – character, capacity, and collateral.  They’re measured by credit score, a debt/income ratio, and other assets like home equity, savings, etc.  Over the past few years, all three requirements have tightened up and reverted back to historic norms.  From the late 1990’s well into the 2000’s, we had a nationwide relaxation of credit standards for housing, which we’ve begun to undo over the past couple years by returning to those historic norms.  Gone are the days where no minimum credit score, proof of income, and down payment are required.  Now, just like in the days of yore, people need higher credit scores, higher documented incomes, and down payments.  This tightening of requirements back to the historic (and proven effective) norm is a big deal because the people who need mortgage modification the most are the ones with subprime loans.  They ended up with subprime loans because of a low credit score, low and/or undocumented income, and/or low/no collateral. 

But, here’s the thing.  In the program’s current form, I don’t think many will be able to take advantage.  The criteria for eligibility are far too stringent based on 3C.  Credit scores and documented income will be issues on a case by case basis, but two other requirements worry me.  The ratio of the loan amount to the value of the house, or loan-to-value (LTV) ratio, cannot exceed 125%.  It may be able to eventually, but not yet.  Such a low LTV ratio won’t do much good in the worst housing markets like California, Nevada, and Florida.  It’s simple math.  If you buy a house and its value gets cut in half, as has happened in many of the aforementioned trouble areas, the LTV is going to be 200%.  Obviously, it’ll be lower if we assume some down payment and principle reduction, but it’ll still likely be well above even the 125% level.  Lastly, and this is a big deal, the mortgage must be current, meaning no payments over 30 days past due in the past year.  This is an important characteristic because it makes it so that the taxpayers are helping people who are trying their best to stay current in their payments versus helping squatters who stopped paying a long time ago.  It’s a necessary trait, but it will diminish the program’s effectiveness because it’s a huge hurdle to clear. 

Next, we move onto Obama’s student loan action.  Starting in 2012 under the plan, borrowers will be able to reduce their monthly payment from 15% to 10% of discretionary income, debt would be forgiven after 20 years instead of the current 25 years.  It will also allow borrowers to consolidate their loans to obtain lower rates. 

We hear the numbers about how dire the student loan situation is and we’ve heard the calls that higher education is the next bubble to burst, so I’m not going to belabor that point.  We all know this is a major issue.  The debt is overwhelming and it will suffocate our economy if we allow it to.

As with the mortgage plan, the devil is in the details.  Note that we are talking about discretionary income, not total income.  Discretionary income is a subset of total income.  Discretionary income is generally defined as income left after taxes and personal necessities have been paid.  Because of this key distinction, it cannot be thought of as an instant 5% raise to borrowers.  Again, it’s simple math.  Suppose discretionary income is 20% of a person’s total income.  A reduction from 15% to 10% of discretionary income sounds like a lot, but it only translates to a 1% gain in total income.  A gain in income is a gain in income, but I don’t think it’s that big of a deal.

Shortening the duration of loans from 25 years to 20 years will have no meaningful effect, either.  Yes, college costs have been handily outpacing inflation for a couple decades, but the major increases in student debt really only began within the past 10-15 years (not coincidentally, as the costs of college have spiraled even further out of control).  A meaningful chunk of student loan debt won’t go away for another 5-10 years under this plan, versus 10-15 in the current plan.  The timelines just don’t mesh right now to make this effective.

Consolidating college loans into lower rates is also generally not going to be that effective because many college loans are at very low rates to begin with.  Because the rates are generally very low, the concept of diminishing returns becomes an issue (this would apply for the mortgage program, too, but it would be even more pronounced here because the rates are generally lower).  The rate reduction would be minimal and all that would really be gained here is the convenience of only having one bill. 

What common connections do I see between these two plans?  

First, these plans are nothing new.  The mortgage plan is a modified version of Obama’s previous mortgage plan and the student loan plan is merely an acceleration of the timetable of an existing plan from 2014 to 2012.  Along with his jobs bill, this is further evidence that Obama is simply not willing to try anything new and merely continues to tweak or expand existing ideas. 

Second, as I’ve outlined above, I question the effectiveness of both plans.  Because I do not view either program as terribly effective, I could take two lines of thought.  I could say that it’s because he can only do so much without Congress.  Given the blatant disregard for the rule of written law Obama has displayed throughout his presidency, I don’t see this as an issue.  Instead, I naturally suspect this is yet another case of Obama wanting to look like he’s doing something, but in actuality doing nothing.   It’s all about reelection and perception trumps reality.

Third, I view both of these measures as clear efforts to pander to the Occupy Wall Street (OWS) crowd because student debt and mortgage debt have been two central issues for that movement.  It’s an effort to energize Obama’s base.  Young voters (early 30’s and younger) tend to be overwhelmingly Democrat or liberal, with the 2008 election being a notable example.  I hope OWS is smart enough to see this for what it is, and many of them probably are. 

I know I’ve only pointed out the flaws with Obama’s actions here and not provided viable solutions of my own.  My solutions are out of scope for this post and I will provide them in the future.  In a nutshell, these two measures are focusing on merely the symptoms and papering over the problems versus actually addressing the root cause of both the housing and college issues, but like I said, that’s another topic for another day.  The bottom line is Obama has put forth actions to address two major problems, mortgage debt and student debt, that will prove ineffective and were only implemented to help his reelection by creating the appearance that he is trying to solve problems

More on Libya

Moammar Gadhafi was killed, ending his 40+ years ruling Libya.  This makes the fourth major shake-up in the Middle East and North Africa (MENA) region this year, along with the ouster of Hosni Mubarak in Egypt, the government overthrow in Tunisia, and the division of the Sudan into two nations.  Particularly, the lack of coverage on the Sudan was disappointing to me in that it’s a big deal when we need to start making new globes and world maps.  We also recently deployed some special forces into Uganda, but that’s not getting much press coverage, either. 

This makes a great time to lay out some thoughts on Libya.  I’ve written previously about Obama and the War Powers Act (WPA), so I won’t belabor that point too much except to say that nothing in the past few months, including the recent events, has changed my views that Obama violated the WPA, that the WPA is constitutional, that this is an impeachable offense, and that the GOP won’t press to impeach.  Aside from the legalities, the only real criticism I have of this whole ordeal is our government’s general inability to tell the story and clearly answer the public’s questions.  These criticisms, though they may sound trivial, are actually very important because if both were handled properly, I believe Obama would have enjoyed much greater popular support for this endeavor.  Personally, the lack of clarity was the biggest thing that kept me in a more neutral position on the matter versus supporting/opposing the measure. 

Another thing that makes my criticisms look trivial is the fact that I’m not really attacking the goals, strategies, and tactics used, as those looked pretty sound to me.  Given we already had significant military commitments elsewhere, we simply were not in the position to take the lead on this operation.  And nor should we have.  Humanitarian concerns aside, a stable Libya is much more vital to Europe’s interests than our own.  As I said before, Libya wasn’t really a threat to us and we don’t get much oil from them.  I can appreciate the criticism of leading from behind because it sort of does make America and Obama look weak, but the fact that we shouldn’t have been leading this charge alone in the first place mutes that attack somewhat (not entirely because perceptions of strength and weakness are a critical component of foreign policy). 

Speaking of Obama, I see multiple political angles here for him.  One, I think he was looking for an opportunity to try his multilateral approach versus Bush Jr.’s more unilateral approach.  Obama will trumpet this on the campaign trail, provided the situation in Libya doesn’t degenerate in the next year, in which case he will try to sweep it under the rug.  Two, I think the American government felt like it owed one to the Europeans because of Iraq, thus adding a new motive to our involvement and possibly providing another facet to answering the question of why we went to Libya in the first place.  Three, Obama can build upon his record of dealing with enemies of America.  He can build his credibility on foreign policy now that he has a list of accomplishments that includes Osama bin Laden, Anwar al-Awlaki, and Moammar Gadhafi.  Obama still has some perceptions of foreign policy errors to address, (like his sloth on signing trade agreements and his timidity with Iran, North Korea, Russia, and China to a degree, yet they are a very special case), but he now has a list of accomplishments to buffer those weaknesses. 

In the end, however, this isn’t about Obama or the GOP or really even the American people.  It’s about the people of Libya.  I’m hopeful for the Libyan people that this is a turning point for them for the better.  Let’s hope they don’t end up replacing Gadhafi with something worse.  It’s hard to imagine given how bad Gadhafi was, but it’s not an impossibility.  These are some crucial days coming up for them and only time will tell.