Although I like to think of myself as sane I was the president of my homeowners association (HOA) for two years. Why? Essentially it was a mess and getting worse and no-one else seemed to notice.
The association had just settled a construction defects lawsuit (I guess this is pretty common in California), for $11.5M out of a claim of ~$18M. Unfortunately, neither the lawsuit nor the finances had been well managed. The lawsuit part of it is complicated. Essentially, the association netted about $6.5M less expenses of about $700K. To add insult, the association's paid financial advisor (also a Board member -- for god's sake!) had lost about $2M (of the $6.5M) on the stock market. The Board at the time, realizing that this was all a disaster, started ripping each other's throats out. It was crazy stuff. The paid financial advisor (a Board member) resigned as advisor amid the uproar but was hired back until a replacement was found -- and then charged with finding a replacement. I know, you couldn't make this stuff up! After 3 months no replacement had been found -- big surprise.
Anyway, at this point I decided to jump on the grenade. Bad idea. My wife had just given birth to our second daughter a month before, so it was pretty unfair to her. But I found it so hard to sit on the sidelines while 160 homeowners had their finances ruined.
I'll say more about what ensued. The up shot for me: I gained a lot of grey hair, learned a lot of lessons -- but lets just say I no longer live in that HOA.
Sunday, September 20, 2009
Sunday, September 13, 2009
Paul Krugman: The Return of Depression Economics and the Crisis of 2008
It was actually this book that inspired me to start writing a blog. Well, not so much this book as the fact that I was reading this book. I thought the book would inspire me to thinking and that this blog would encourage me to structure my thoughts and spend a little time thinking about the topic.
So did the book inspire me. Well, somewhat. I found it a little too fluffy. There were lots of unsupported assertions. Assertions about which I believe there remains significant controversy.
Anyway, the core of Krugman's argument appears to be that the "Shadow Financial System" had a fairly classic "run on the bank". That is that financial instruments like auction rate securities behave very much like a bank, i.e., they provide borrowers with secure long-term financing, but provide lenders with liquidity. But they do so while yielding higher returns to the lenders. They achieve this by not being actual banks and not being subject to the regulations that banks face. Many of these regulations are designed to prevent or discourage runs on the bank, and so these non-bank banks face that risk. In the case of auction-rate securities the "run" was brought about when auctions started to fail. Lenders were then stuck with long-term illiquid investments when they thought they had short-term liquid ones. The initial failures lead to a collapse in confidence, now no-one wanted to participate and more and more such auctions failed. This pulled about $400B of liquidity out of the market and lead to the abandonment of auction rate securities as an instrument. Removing not just the liquidity, but also the source of financing. Of course auction rate securities were just one example. But the general principal was: there is a problem --> collapse in confidence --> run on the bank --> problem is greatly magnified.
I guess the other general argument of the book is that demand side economics is important and should have more of a voice. The notion here is that a recession/depression is really a lack of demand. That is, there is unused productive capacity in the economy. But there is no demand for the output of this capacity. One might expect that this would result in a drop in wages, and a drop in prices until goods were sufficiently cheap to stimulate demand. But this doesn't appear to happen.
My favorite page in the book was the last. Krugman says: "Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. The true scarcity in Keynes's world -- and ours -- was therefore not of resources, or even of virtue, but of understanding."
Ah, now I guess it did spur me to at least a little thinking, so maybe it wasn't too bad after all.
9/20/2009: So I actually appreciate this book a little better now. I was listening to NPR about the financial crisis and nobody seemed to quite comprehend the confidence game that is our modern financial system. Someone from the Hoover Institute was even proposing scrapping FDIC insurance. Can you imagine how bad it would have been without the FDIC!! Everyone would have taken their money out. I certainly would have.
So did the book inspire me. Well, somewhat. I found it a little too fluffy. There were lots of unsupported assertions. Assertions about which I believe there remains significant controversy.
Anyway, the core of Krugman's argument appears to be that the "Shadow Financial System" had a fairly classic "run on the bank". That is that financial instruments like auction rate securities behave very much like a bank, i.e., they provide borrowers with secure long-term financing, but provide lenders with liquidity. But they do so while yielding higher returns to the lenders. They achieve this by not being actual banks and not being subject to the regulations that banks face. Many of these regulations are designed to prevent or discourage runs on the bank, and so these non-bank banks face that risk. In the case of auction-rate securities the "run" was brought about when auctions started to fail. Lenders were then stuck with long-term illiquid investments when they thought they had short-term liquid ones. The initial failures lead to a collapse in confidence, now no-one wanted to participate and more and more such auctions failed. This pulled about $400B of liquidity out of the market and lead to the abandonment of auction rate securities as an instrument. Removing not just the liquidity, but also the source of financing. Of course auction rate securities were just one example. But the general principal was: there is a problem --> collapse in confidence --> run on the bank --> problem is greatly magnified.
I guess the other general argument of the book is that demand side economics is important and should have more of a voice. The notion here is that a recession/depression is really a lack of demand. That is, there is unused productive capacity in the economy. But there is no demand for the output of this capacity. One might expect that this would result in a drop in wages, and a drop in prices until goods were sufficiently cheap to stimulate demand. But this doesn't appear to happen.
My favorite page in the book was the last. Krugman says: "Depression economics, however, is the study of situations where there is a free lunch, if we can only figure out how to get our hands on it, because there are unemployed resources that could be put to work. The true scarcity in Keynes's world -- and ours -- was therefore not of resources, or even of virtue, but of understanding."
Ah, now I guess it did spur me to at least a little thinking, so maybe it wasn't too bad after all.
9/20/2009: So I actually appreciate this book a little better now. I was listening to NPR about the financial crisis and nobody seemed to quite comprehend the confidence game that is our modern financial system. Someone from the Hoover Institute was even proposing scrapping FDIC insurance. Can you imagine how bad it would have been without the FDIC!! Everyone would have taken their money out. I certainly would have.
Saturday, September 5, 2009
Wibble
The word used by Rowan Atkinson in "blackadder goes forth" to denote a state of insanity. In the scene he puts pencils up his nose and repeats "wibble wibble" in order to get sent home from the trenches.
George: "What is your name?"Blackadder: "Wibble."
George: "What is 2 plus 2?"
Blackadder: "Wibble, Wibble."
Blackadder, trying to prove he is mad, in his bunker, with underpants on his head and a pencil up each nostril
What's the point?
So, why am I writing a blog? It's mainly a way to force me to collect my thoughts about various things. I used to read a lot, and actually remember what I had read for more than 5 minutes. Now, well not so much ...
I recently got a Kindle DX and have started reading again, but to a certain extent what's the point. Why read interesting things, if I never actually think about what I've read? Hence this blog. We'll see how it works out.
I recently got a Kindle DX and have started reading again, but to a certain extent what's the point. Why read interesting things, if I never actually think about what I've read? Hence this blog. We'll see how it works out.
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