Category: Economic measurement

Credit Rating Overused

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics

Credit ratings are one way to measure the risk a borrower poses. It is ironic that during the housing bubble that a low credit rating often got one a mortgage while today it takes it a high one to get a similar or lessor mortgage.

An article in the New York Times discusses this problem.

It seems that lenders are overusing credit ratings because of their simplicity and a misunderstanding of their limitations. The score is an algorithm based on a collection of data by one of three major rating agencies: Transunion, Equifax and Experian. But there are no rules on how information is gathered. Lending companies and other debt organizations have a great deal of freedom in choosing what to disclose and where to disclose it.

This is a quote from the article:

You would think, given the critical importance of an accurate score, that there would be rules about the information that is submitted to them. There aren’t. Lenders can submit information about your credit history to one of the bureaus, all of them or none of them. Some of them turn over information right away; some take months; some don’t do it at all. Some are sticklers for accuracy; others are sloppy. The point is that the credit score is derived after an information-gathering process that is anything but rigorous.

The author went on to point out many errors in his report. These companies are unregulated and make up their own rules. But their decisions can be disastrous for individuals. Whether or not you can buy a house or a car is a critical decision for most people. Not to mention, the interest rate to be paid and whether or not you can get adjustments in rates are also factors determined in whole or part by credit ratings.

There need to be rules. These credit agencies have more power than most parts of the federal government, certainly more than the states. Isn’t it objectionable to you that there is a private company determining without oversight some of the most important elements of your life? Shouldn’t we do something about it?

How about just a small thing? Let’s make them correct errors not when they want to but whenever there is an error. Why don’t we standardize the rules about to whom and about what lending companies must report? How about criminal or civil penalties when reports are deliberately falsified? We can fix the problems that bedevil capitalism. There should always be ground rules. It is unfortunate that we cannot rely on the morals and honesty of individuals but that is not the case.

These companies have virtually unfettered power. Is that good for anyone or any organization at any time? Let’s change the rules. As citizens in a democracy we are entitled to fairness.

James Pilant

Goldman Sachs’ Value Drop – July 20th, 2010

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure

This a news analysis of the July 20th, drop in Goldman Sachs’ shares. Forgive the commercial that opens it. I can’t get around it.

This is a PBS two part series on how Goldman Sachs’ profit. If you want to understand our economy’s problems and what is likely to continue to go wrong, this is a good place to start.

This is the second part.

Wall Street Overpays!

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure

“Stop me before I overpay again,”might be scratched on the wall of Goldman Sachs’, if the firm had any insight or shame. But they don’t. Reuters News Agency reports that Goldman Sachs, J.P. Morgan and Citibank are among the firms who will be cited by the Obama administration pay czar Kenneth Feinberg for having made “ill-advised” payments. (For ill-advised read unearned) The payments in the 17 institutions cited total over one billion dollars. This was in 2008 when the firms were awash with taxpayer money from the bailout.

You see it doesn’t matter what scrutiny they are under, whether or not the public is angry, whether an action is right or wrong as long as the money flows. Money, Money, Money, the arbiter of all decision making on Wall Street, the great green god that supplants the real God and any of sense of responsibility. They know that the only important thing in the world is money. It buys happiness, sex, influence and immunity from the duties that the rest of us take for granted as part of our lives. They live in separate communities with separate education systems and when our children serve in the military, become teachers, policeman or firemen, they snicker at our stupidity.

Or they decide we are unworthy, take a look at this excerpt from Ben Stein’s article in the American Spectator:

The people who have been laid off and cannot find work are generally people with poor work habits and poor personalities. I say “generally” because there are exceptions. But in general, as I survey the ranks of those who are unemployed, I see people who have overbearing and unpleasant personalities and/or who do not know how to do a day’s work.

That’s right, the millions of unemployed their lives in tatters because of casino capitalism, aren’t there because of a savage recession (depression). No, they’re just lazy.

By the way, the article just oozes with Ben Stein’s concern for his poor friends who made bad investments. I can’t help but be curious where he would meet the unemployed. Maybe he’s just confused. Maybe he’s really thinking about his upper crust friends who don’t know how to do an honest day’s work or exercise a workable personality.

I shouldn’t be so angry. Right? Why should the fact that there is one job for every five applicants bother me? Why should an economic elite that moves every job humanly possible to some distant shore where they can ignore those annoying work place laws like child labor, wage and hour, and most annoyingly of all, worker safety, bother me? Why should I be upset? After all, there are a lot of workers, a lot of surplus population that needs culling.

I want justice. I want hard working American to reap the benefits of their hard work, their devotion to this country and their willingness to go the extra mile to do what’s right.

James Pilant

Are High Salaries Unethical?

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure2 Comments

I guess like most things it depends on the situation. Well, let’s take a look at an unusual situation. Let us wander around the state of California until we arrive at the small town of Bell. No, it is not small by the standards of some western states but a population of 36,000 does put it in the average category. And this place is tough. I mean almost impossible to run. Because they have such difficulties getting skilled politicians that they pay the mayor about $800,000. This is not quite twice as much as the President of the United States, but the mayor of Bell must have tougher problems. Obviously.

However, the mayor is not the only one who makes a good salary. Let me quote from the article:

Residents, however, have no problem expressing what they think about their city’s budget, which pays the police chief — who oversees a 46-person department — $457,000 a year. By contrast, Los Angeles’ police chief oversees 12,899 people and earns $307,000.

My favorite part is the city council. To be a city councilman required a person to work part time and it’s must be really tough part time work because these guys get a $100,000 for their efforts.

Chief Administrative Officer Robert Rizzo (I refer to him as the mayor.) is not upset or sorry. He says he can make the same in the private sector. Of course, some wiseacre might point that he isn’t in the private sector and that since the private sector seldom owns and operates small cities, it might be hard to get a comparative number.

Now as always when people with real ability are rewarded for their skills and effort, there will be people who squawk and complain. Let me quote from another article on the same subject:

Bell resident Douglas Waugh said he was infuriated when he learned that city officials in his small city had some of the highest salaries in the nation. “They think we’re stupid,” Waugh said standing outside of his home. “They get into power and talk to us like little kids and they think we’re ignorant, but we’re not.”

The top officials in Bell receive a 12% pay hike every July. The mayor has been working in that position since 1993. At that rate he will be earning $2,446,680 in the year 2020. Did you know that the city has been cutting back on services and laying off employees? But these guys have their priorities straight. Right?

James Pilant

Screwing The Public With “Financial Restraint”

On By southwerkIn business ethics, Capitalism, Economic measurement, Government Failure1 Comment

Keith Chrostowski at the Kansas City Star provides a good summary of the arguments for fiscal restraint during this economic disaster while calling for extension of unemployment benefits. I find the arguments for such restraint to be ridiculous. Chrostowski only summarizes these arguments and I have no problem with his views but the arguments for fiscal restraint during this crisis border on the bizarre.

Where were all those people when the Bush tax cuts were put in place? Where were all these people when during a period of massive public approval and unity, George Bush asked for no tax to finance the war? Where were all these people when Congress approved an enormous expansion in Medicaid? Is it only when the crisis concerns the basic middle class American that we discover we are in a crisis?

Where were all these economists when the estate tax (fortunately only for a while) was repealed? Where were all these formerly employed politicians (Alan Simpson, are you reading this?) now shouting “fiscal restraint?”

It is hard to describe my anger at these “born again” budgeteers. My students suffer. The people I know suffer. This economy is damaging lives and destroying the hopes and dreams of tens of millions of Americans. And now, only now, do these cowardly wretches find the fortitude to challenge spending. It seems you can make wars, cut taxes and do every kind of strange appropriation until the American people are hurting and then and only then, must we become “tough minded” and fiscally concerned.

We exercise fiscal restraint according to Keynes when the economy is healthy. This one isn’t. We labor under intense levels of unemployment, a little under 10%. If we count those who have simply given up looking for work, the number climbs toward 16% which is roughly the same as in the great depression. I tell you with conviction that this recession is becoming and may already be a depression and our leaders are unable and unwilling to meet that challenge.

We are rapidly moving toward desperate times. Each day I drive to work and see businesses closing. Each day I see nothing to give me hope for my students and confidence in the economy. Each day I wait and hope and pray that the leadership of this country will do the simple and basic things necessary to employ the great and good American people. This people who have astonished the world with their achievements and can do so once again if only given the opportunity.

But I know this is not going to happen. This people do not appear to be worth a second glance. When fiscal pain must in the eyes of these unsought comedians, these fact distant fools, be felt, it is only when the great mass of Americans are enduring the pain and suffering of evil economic times brought on by the rapacious stupidity of the financial elite.

James Pilant

Business Ethics Newspaper Column Roundup 7/7/10

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure

Edward Lotterman of the Pioneer Press discusses the economic fallacy of mercantilism.

Loren Steffy has a poll up – How long will Hayward remain as head of British Petroleum? I’d get on his site and vote if I were you. Stffey’s previous column speculates on whether or not Libya will acquire British Petroleum.

Jon Talton picks out the best of the writing on our current economic collapse.

Alain Sherter at BNET writes about the likelihood of a Chinese real estate crash. My Chinese students have been saying things to me along the same lines.

David Moon has some interesting thoughts on solving the debt crisis

Educating My Students – To What End?

On By southwerkIn business ethics, Capitalism, Economic measurement, ethics, Government Failure, Teaching2 Comments

I have students. I am college professor. Generally speaking in these very tough economic times, they come to school not for an education but to get that piece of paper they have been grandly told over and over again will get them a job. Oh, yeah, I guess that is confusing, going to school but not for an education. Let me explain.

We have a thing in America called No Child Left Behind, which makes the mammoth and bizarre claim that we can measure progress based on tests. That’s right, bizarre. I might agree with you if had some numbers correlating success with grades (and you don’t). Oh, there are some university studies, which since they develop their very own concept of what we might call success, don’t amount to anything useful. (If you get to decide what determines success for your own programs, you have a tendency to win.)

No Child Left Behind means that for a school to be determined to be successful (worthy of money from the State and the Feds), it has to have good test scores generated by its students. So, in pursuit of this, students are drilled relentlessly in the subjects to be tested. The school that drills its students longer and harder than the others is supposed to be improving. Since the primary indicator of grades is social and economic class, the scores fall into utterly predictable categories. Obviously there are variations. An inspired group of teachers can pump up test scores with skill and effort. But inspired teachers are just like inspired politicians, inspired architects, inspired pediatricians, etc. There are only so many per profession.

Now, you will find that there are people who say we can train teacher to be inspired in large numbers. That enthusiasm and a willingness to go beyond requirements should be the standard. This is nonsense. There are only so many inspired, truly dedicated individuals on earth and that’s it.

The effect over time of teaching to large scale tests is devastating. Students are conditioned not to think but to remember. The advent of the internet solves many problems of remembering and great deal of remembering is useless trivia. America needs thinkers and it’s as if we wish to exterminate them that we do this crazy testing. We have perverted the idea of education from developing human beings to the production of standard products as if on an assembly line. My students aren’t products, they are people. Human achievement is not measured by tests. No test will ever be a substitute for the real life measurements of success these people will produce.

It fills me with rage to look at what has been done to my students. I want thinkers, doers and patriots. What I get are rote learners, good passive students and bumper sticker patriots whose knowledge of the greatness of this nation is limited to the most trivial.

You see, there is a funny thing about these people, these students; they’re magnificent. When I look over my classes I don’t see A and B and C students. I see these people waiting to be told of the enormous power, potential and talent they each carry within them.

My students are the heart and soul of America. They are leaders of the next generation. They work hard. I don’t see the government of the United States lavishing care on these most vital people for the future of this country. There is more an attitude of how much we can make them financially obligated for the rest of their lives and make sure that they don’t escape paying a dime of it.

We need to figure out our priorities. If you truly desire a second rate society of “information” workers, if you truly believe that this country is merely a corporate resource to be disdained if the money is too dear and that only the “right” people should have a say in what happens, this educational system is perfect for you.

This is the United States of American. We can do better.

James Alan Pilant

Structuralist Economics

On By southwerkIn Economic measurement, Teaching

I found a pdf file of an interview with Lance Taylor. Structural economics is a form of macroeconomics that challenges the current orthodoxy. An orthodoxy, I might add, that has failed to explain or predict the current economic crisis.

Here is a quote where Taylor explains the reversion to classical economics after the second world war:

“It went through several stages, but in effect, what happened is
that by, say, the 1970s and certainly the 1980s, mainstream macroeconomics
had reverted to nineteenth-century economics. The major
figure in late-nineteenth–early-twentieth-century economics was Knut
Wicksell from Sweden, and basically what has come out in recent
decades is a less interesting version of his work.”

This is fascinating work. I recommend it.

James Pilant

This is a Lance Taylor lecture. He is quite good at making economics straightforward and understandable. (It makes me wish I was a student again!)

Here’s another:

Wall Street’s Incredible Victory

On By southwerkIn business ethics, Economic measurement, Government Failure

The LegislationIt’s difficult to conceive that a nation driven to the brink of financial collapse by an irresponsible, greedy, incompetent industry that runs an operation more comparable to Monte Carlo gambling casino than banking could escape meaningful regulation and yet, they did. It is a catastrophic failure on the part of the Presidency and Congress to protect the American people from rapacious financial predators.

I exaggerate you say? From wikipedia –

In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke reportedly told them: “If we don’t do this, we may not have an economy on Monday.”

That sounds serious. A disinterested observer might conclude that an unregulated financial industry could be a problem. But remember we all know that the financial industry is self regulating. It’s watched over by a horde of business publications and reporters who would detect any problem long before it could happen. What’s more, the people, these amazing highly talented aces of industry who clearly merited the enormous sums they commanded were of such high intellectual capabilities and monumental experience that their unmatched stewardship would without any doubt guide their businesses and as a pleasant but wonderful and inevitable side effect, the United States of America to well deserved financial success.

Forgive me. I don’t want to spread the idea that the Chicago School of Economics might not understand economics.

The disaster that occurred in the financial industry in 2007 and 2008 and cost this nation more than ten million jobs should have been made impossible under a new set of rules. But the game is the same. The incentives are the same. The players are the same. The legislation changes none of that. An economic disaster resulting in millions of unemployed Americans is now avoidable through luck. Don’t you feel good?

There are plenty out there who say take what you get. We got more than could have been expected. No. Again no. This isn’t a matter where you can compromise. The survival of the United States as an economic power is an issue here. There are some who proclaim this an incredible victory over immense odds. You’d think they’d just blown up the Death Star, when they compromised with it and decided they could forgive that little Alderran incident as looking backward not forward.

There are some who say the banking industry got creamed. There is one guy who thinks this is a major success for Congress.

What does the banking industry think? Do they feel that it was a compromise in which they got some stuff and lost some stuff, a gain of one thing and the loss of another? No, that’s not how they feel about it. Let’s read the AP headline – Bank stocks soar on financial regulation agreement.

So, what do we do now? Nothing. The Congress and the President are not interested. They have created a piece of legislation with the correct sounding name. This will convince many that something has been done. But it’s just another joker, another game, another day in Washington where symbolism trumps reality.

I have read commentary that says that the government of the United States has been unable to deal with any major legislative crisis over the last thirty years, that the government is simply paralyzed only able to eek out temporary compromises, small bandages for large problems.

This is America. We can accomplish amazing things. We do not have to suffer the foolish and the greedy. We can do better than this.

(What do you think? If you disagree, don’t let me wonder about it. Tell me. I won’t learn if you don’t let me know. If you agree, I can be more confident that I speak for others as well as myself. Don’t be silent.)

James Pilant

The Second Great Depression?

On By southwerkIn Economic measurement1 Comment

In The Business Insider, The Money Game, there is a series of charts comparing the stock market numbers from 1929 crash and the 2008 market disaster. There are a good number of other charts, graphs and numbers demonstrating similarities between our situation and that of the 1930’s.

I have pointed out repeatedly to my classes of Business Law Students that the 1929 stock crash did not immediately result in the Great Depression. It was a spiral downwards that culminated in 1933. There were stock market rallies from time to time but the numbers never reached the previous rally high. That’s what I watch for. We started at around 14,000 in 2007. We dropped at the worst of the crisis to above 7,000 and then rallied back to around 10,000. If we continue to cycle down (if the crisis continues), we will fall to some disastrous number but never make it back to 10,000, and then we will fall again and rally and never make it back and so on. I am in no way confident that there is a sustainable recovery. Our government has never in any way fixed the problems in our banking system. I hope that we all do well and prosper but those individuals who have the power to defend the nation against disaster have failed in their duty and little more than luck defends us from another or a continuing financial disaster.

James Alan Pilant