Archive for banking

“Earning”

While I was home for Thanksgiving, my dad and I had several conversations about economics that centered around people’s earnings and their rights to them.

I think our issues were largely semantic — we use the word “earned” with at least two distinct senses:

  • Exchange of Labor — Bob cleaned the gutters on my house and earned $35.
  • Capital Investment — In the last 30 seconds, Warren earned $4718 in the market.

(That’s $62 billion at the historical 8% return from the stock market. Of course all his money isn’t in the stock market, and he likely has less now than he did a few months ago, but the idea’s the same.)

$62×109
.08year
1 year365 days
1 day24 hours
1 hour60 minutes
1 minute60 seconds
30 seconds

$4718.42

I don’t think that it makes sense to treat these two transfers of money as even remotely similar in terms impact on a person’s life or amount of effort put forth. I don’t really know the terms to use to separate “earning” in investment from “earning” in labor, but I think I would have an easier time talking to my dad if I could create a separation.

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The L-Curve

I wrote a while back about David Chandler’s l-curve. Recently I read an interesting factoid and I thought I would do an alternate version.

In March 2007 Forbes reported 946 billionaires in the US with combined net worth of $3.5 trillion.

So, just like the l-curve, we line all the households in the US up along a football field, but this time we tell them to get into groups of 1000 with the people near them. Next, we give each group their annual income in $10,000 bills.

$10,000 bill

Standing at the 50 yard line are the median 1000 families with $50,233,000[1] stacked up a whopping 1.8 inches.

The L-Curve

At the far end of the field are those billionaires with their $3.6 trillion. Their stack is 24 miles tall. Whatever your salary, consider it in $10,000 bills, then try to imagine 360 million of them stacked up to four and a half times the height of Mount Everest. If the $3.6 trillion were in $1 bills, they would reach 244,318 miles, and the moon would knock the stack over as it passed overhead.

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Evolving Economies

I’m trying really hard not to work on revolutionary plans and instead do robots. They’re just so much less interesting. One quick thought before I go to bed:

Resource production and distribution systems (i.e. economic models) advance in proportion to individual’s realistic capacity to make accurate predictions about the future. The better securities on future action that exist, the more permissive distributions schemes can be.

Virtual identities are only useful in economic transactions to the extent that they can be aligned to unique corporeal actors (otherwise cheaters will simply cheat and dump their past).

We have an existing centralized system for maintaining these identities: credit ratings. The government makes it inescapable and companies can use the information to make more accurate long term decision.

We need something with those characteristics, but non-centralized and publicly available to bring these benefits to society at large. That is the top-down project description I think I need to help people understand what I want to do.

When the going gets weird, the weird turn pro.

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A Socialist Tesla

[T]he job is not to see where “Marx was wrong” so much as to make a fresh application of his theory to the world around us as it is, not as it once was. To borrow a comparison from the field of physics, we need socialist Faradays and Maxwells or if we are lucky, Einsteins and Plancks, not people who confine themselves to knocking Isaac Newton.
— Harry Braverman

I like the idea of being a socialist Faraday. (Einstein was already a socialist Einstein.) Actually, I think I want to be a socialist Tesla — the quirky scientist motif always entertained me. I’m thinking about having mad scientist business cards made up to give to people when schmoozing in B’more.

At the very least, I want to help people realize that economics is a science. In various discussions, I’ve had six or seven people so far say, “that sounds like socialism, which has been proven not to work.” This one little patent oversimplification gets passed around making people sound like they know what they’re talking about, but hiding the fact that there are lots of economic options yet untried.

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Blog Action Day

Today is Blog Action Day on the subject of poverty, apparently. I happened upon a post at MomGrind:

What if we could create a social system where no one is outrageously rich and no one is miserably poor?

No matter how smart or capable you were, you would not be able to accumulate more assets than a certain pre-determined amount.

No matter how bad you had it, you would always have a roof over your head, food on your table and access to basic health care.

In reading the discussion I was frustrated by the fact that most people really don’t understand economic disparity in the US.

My current favorite explanation is the L curve. It helps put the numbers into perspective with the ever-helpful football field analogy.

It starts off by lining everyone in the world up across the the field:

Then it shows the middle income family on the 50 yard line with their yearly income of $40,000 in $100 bills stacked at their feet an inch and a half high.

Then it pulls back to show the far end of the football field where Bill Gates’ stands beside his annual income as $100 bills, or at least by the base of the 30 mile high stack of it.

Money is freedom and the power to cause change in the world. I’m fine with the fact that some people work harder than others and should have more power. The thing about that is that Bill Gates is actually far more powerful than the already absurd disparity suggests. Not only does he have his huge pile of money, but people tend to hang out with the people close to them on the football field. Ideas within that group have amazing financial backing.

The other half of the problem is that the investor class expects returns on their money. In order for that to happen, managers of huge pools of capital are constantly seeking the best place to invest to bring in the largest returns.

One of the very fundamental problems with our economy is the fact that these huge quantities of investment capital are overwhelming markets that are simply insufficient to deal with the amazingly large sums of money involved. Ultimately, people either get greedy or stupid or both, and there’s yet another financial debacle.

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Dictator for a Day

I’ve been talking to Matt about our economics situation. He is quite a bit better informed on the issue and the subject of macroeconomics in general than I am.

He put up a post of his actions as dictator of the United States for a day.

Both of us have issues with the distribution of wealth being unequal. Whereas I say take away the ungodly piles of money (who needs to be paid a billion dollars?) to reduce incentives to be greedy, he, reasonably, asks what happens to that money when not concentrated in the hands of a few people.

To some extent there would simply be less money since much of our problem is a whole lot of the money we theoretically have currently is fictitious. Bankers created it by managing to sell things at far beyond their actual value. Coming to terms with the reality of how much actual value there is in things is an adjustment that has to be felt somewhere.

I think my favorite of his suggestions has to do with an increase in shareholder rights. It would help dilute the concentration of power in the hands of a few so that even if they were inclined to let their greed to get them to do something shady, they can’t.

He also discusses the extent to which the government should do things like bail out Bear Stearns — “privatize profits and publicize losses.” He argues that so long as there’s money to be made someone will come to take their place.

My position is less certain for the same reason that I’m more of a proponent of public policy changes to affect corporate behavior. We are very likely headed into a recession not because of the mortgages or even because of the over leveraging. There has certainly been an over extension beyond real value, but what will make the readjustment painful is the speed at which it is likely to happen.

The reason economists discuss consumer confidence is business is about making things to be consumed. If people are insecure about needing stuff then businesses get insecure about having bunches of stuff on their shelves. If businesses order less stuff then manufacturing needs less people to make stuff and eventually start laying people off. This cycle slows the economy down in a variety of ways.

Note that this starts only tangentially related to actual money. The economy isn’t simply individual workers fighting for their piece of the pie. Particularly in the financial markets, bad behavior doesn’t just risk the livelihoods of the people making bad decisions, as we are seeing right now it can put middle class families on the street without a job.

The public has a right to control how corporations are run, not only because corporations only exist because we decided as a society to make them pseudo-people, but because the system is now intertwined to an extent that their actions affect everyone.

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Eat the Rich

My dad and I have a long standing argument on what exactly would happen if we had a progressive tax system pitched so steeply it was essentially a salary cap.

I argue the moral position that you have no right to have $3 billion at your disposal while there are people who can’t afford to feed their children. He argues the moral position that a person has the right to their earnings. Our country is predicated on free enterprise and by limiting how much a person can make you restrict the invisible hand of capitalism.

Honestly though, it seems like the invisible hand of capitalism has slowly been throttling our country, particularly in the area of executive compensation. I was reading an article today on similarities between the Enron debacle and Merrill Lynch. Both of them were done with knowledge aforethought by executives to protect their compensation.

The same trends are present in the predatory lending practices and over-leveraging of companies that is currently pulling our economy down. The people doing it weren’t simply confused and thought that these people were going to be able to pay their mortgages or that their companies were going to be able to meet their inflated worth. They expected to make huge amounts of money and took steps to make it happen.

I know some people who are starting work in financial services. I had a friend who worked 12+ hour days six days a week at an unpaid internship. Did she love money management so much that she wanted to do that? No, she liked the field, but would have been more than happy to just do it 40 hours a week. She was investing in a future where she might earn a million dollars a year, and that she is sacrificing her youth to get there will affect how attached she is to making it happen.

I was reading Cialdini’s Influence yesterday discuss how taking an economics class will short-circuit your sense of reciprocity.

Recessions frequently follow periods of expanded growth. The economy takes off for a bit, gets a bit over extended and then ratchets back. This recession is different from past recessions in that though the economy overall did see the expected expansion, middle class buying power actually fell. The group that saw the benefits of this expansion was the top 20% who experienced 9% growth.

The invisible hand of capitalism gives to each according to his worth in the market. Robert Skidelsky in “The Moral Vulnerability of Markets” points out that this theoretically means the average CEO is approximately 50,000% more productive than the average worker.

So, you not only need to believe that a person has the moral right to a huge portion of the available wealth, you also need to believe that this system is working in the face of an increasingly convincing argument that when faced with a choice between the public good and stacks of money, most people are going to choose the cash.

So I say tax the hell out of them. I’m sure that out of the tens of thousands of aspiring young investors we can find at least a couple to work for a paltry $500,000 a year.

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Privacy

In my ongoing attempt to get companies to stop filling my mailbox with random crap, prescription I sent Bank of America a message asking them to kindly bugger off. They sent me to a nice little privacy page where I learned the huge amount of my information that they apparently share with the world. If you happen to have dealings with BoA, you might give it a visit.

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Junk Mail

I have a Chase Freedom credit card. I use it to buy most of my stuff and the balance is automatically paid in whole from my HSBC Direct savings account. I get a bit of cashback and it keeps a larger balance in my savings account. Both of these are negligible bits of money, but who am I do turn down free money?

The one thing that has been irritating me is the huge amount of crap I get in the mail from Chase. They like those promotions which say, “Here’s a check for $20 just for being you (btw, cashing this check enrolls you in our $15/month identity protection program).”

I sent them a message today saying, “Please leave me alone Chase. I’m tired of having to destroy all the things you send me that are much more attractive to thieves than they are to me.”

They didn’t entirely agree to it, but they said they’d leave me alone for five years or until I changed my address. Not perfect, but I reckon I’ll take what I can get.

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Carte Blanche

I don’t own a checkbook. I didn’t get one because I was moving when I opened my bank account and I didn’t know what my address would be. Since being here the only check I’ve had to write was the one for my rent. I’ve been doing that through my bank’s online bill-pay.

I’ve been contemplating what to do about the check my landlord said he never received and was searching the internet. I ran across a lovely story of a guy who had his checkbook stolen and the twenty or so businesses where his checks were subsequently forged and accepted without ID. I’ve been trying to find something on if you had an already completed check stolen, but I am having trouble with the huge number of results for stolen checkbooks. One of my favorites is for this woman who was paid with her own check.

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