My Google news homepage tells me that the U.S. to increase pressure on mortgage industry. According to the article:

The Obama administration said Monday it will crack down on mortgage companies that are failing to do enough to help U.S. borrowers at risk of foreclosure, as part of a broad effort to ramp up participation in its mortgage assistance program. The Treasury Department said it will withhold payments from mortgage companies that aren’t doing enough to make the changes permanent.

I mention this just in case it wasn’t clear that the “Obama administration” has forgotten every economics class it ever took from people who know better.

Remember six months ago? The “Obama administration” doesn’t seem to. Remember when it seemed like all the banks were failing and screwed? Remember how that wasn’t actually true? How some banks were doing just fine, because they didn’t make stupid loans? Remember how those banks were given crappy ratings by the government due their fiscal responsibility? Oh… you don’t?

Well, consider Massachusetts bank East Bridgewater Savings. Back in March, when all the banks were going to hell, East Bridgewater Savings was doing fine:

Bad or delinquent loans?

Zero.

Foreclosures?

None.

Money set aside in 2008 for anticipated loan losses?

Nothing.

“We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.

East Bridgewater Savings ended 2008 with $135 million in assets and deposits of $84 million.

The bank even squeaked out a profit of $87,000. And its Tier 1 risk-based capital ratio was 31.6 percent, or more than three times higher than many community banks in Massachusetts.

In other words, rather than do the “predatory lending” and “sub-prime” shenanigans that the government and media would lead us to believe caused all this trouble, this particular bank only made reasonable loans, and avoided the problems entirely. But, for its trouble, the FDIC “slapped East Bridgewater Savings with a rare ‘needs to improve’ rating after evaluating the bank under the Community Reinvestment Act.”

The CRA is a set of laws that have been revised over the past 30 years to “encourage” banks to lend to local, low- and moderate-income borrowers. Because East Bridgewater Savings judged that giving loans for large houses to low-income families was not worth the risk, the FDIC essentially published a statement saying they were a bad bank.

Now, it is unlikely that the banks pushing subprime loans did so to avoid this FDIC ranking; they probably would have done it anyway. But it certainly is not particularly useful that, should you want to manage risk correctly, the government will tell the world you are an idiot for doing so. It is a totally misdirected incentive.

This current push from the Obama administration works in a similar way, offering incentives to force exactly the wrong kind of behavior.

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A few months back, when General Motors could no longer escape its own incompetence, Saturn was put on the chopping block. It got an unexpected reprieve when Penske, an auto-parts maker, offered to buy it. The reprieve ran out today, when Penske backed out of the deal. So, now the press bids good riddance to Saturn in a number of eulogy-like stories.

All of these journalists seem to be missing a huge part of the story, though, with the kind of “don’t bother looking under the surface” reporting I can’t stand.

The AP story says:

Although GM and Penske reached a tentative agreement to sell the brand in June, the deal collapsed Wednesday after Penske was told by an unidentified manufacturer that its board had rejected a deal to make cars for the new Saturn.

And then… that’s it. Nothing. No information about who this “unidentified manufacturer” might have been, or why they didn’t want to deal. This is unfortunate on two counts: 1) it’s where the real story is and 2) it isn’t that difficult to figure out.

If you get your news from something other than traditional sources, you might have noticed a story still playing out around another tattered remnant of GM: Opel. In a probably increasingly common union of Canadian and Russian companies, Opel is about to be sold to Canadian car parts maker Magna and Russian bank Sberbank.

So what? Well, many people (including, evidently, all journalists) don’t realize that most of Saturn’s recent product line are just relabeled Opel models. This makes it extremely likely that the “unidentified manufacturer” who wouldn’t sell cars to Penske is Magna.

Given that they are both in the auto parts business, it might make sense at first glance why Magna wouldn’t want to help competitor Penske. But it gets more complicated as you think on it more. Why would Magna, who is just getting into the car business, pass up a huge (and highly loyal) built-in market for their new product by refusing to work with Saturn-under-Penske? I can only think of five possibilities:

1. They are idiots. They have let hatred for a competitor blind them to a good opportunity. Maybe I’m optimistic, but I’d like to think that this isn’t the reason.
2. They fear a long term merger. It seems to me the inevitable result of cooperation between Magna and Penske in Saturn would eventually result in a merger, hostile or otherwise. Magna may figure that they would be worse off for such a thing. I’m less sure of this reason, but it still smells wrong.
3. They don’t care about the American market. As Opel is mostly a European brand, it may be that they have enough to handle without adding in the American market as well. This seems implausible, given that Penske would be doing all the work in America in this scenario, and also that Magna is a Canadian company.
4. They consider the Saturn brand a liability. Read any of the previously linked eulogies of Saturn and most of them mention Saturns as being mediocre cars. It could be that Magna has convinced itself that pitching the Opel directly to America would work better for them. They could be right, but turning your back on millions of already loyal customers seems a might risky.
5. They want Saturn for themselves. It could be that Magna was betting on exactly what happened: that if they didn’t deal, Penske would walk, leaving Saturn ripe for picking. Even if they only bought pieces of it (branding, customer databases, some dealerships), they would have a huge head start on penetrating the American market.

Of all these, the last seems more likely to me. Which means the current reports of Saturn’s death may be exaggerated.

Popularity: 1% [?]

The BBC World Service aired a 20 minute documentary recently called “Selling cheese to the Chinese”. The title makes it sound a bit like a puff piece, and it even starts a bit like one, but it isn’t. Bits of it have been rattling around in my head for the past few days. If you really want see the power if cheese or, more importantly, predict the future of China and the West, you should give this piece a serious listen to the end.

These five things stand out to me:

1. Around five minutes in, a woman says “Even though we are in an economic crisis, we see an increase every single of week of Europeans landing here with their suitcases and a dream, and they want to make it.” Has the American dream moved to China already?
2. “One seemingly innocuous comment surprises me… ‘Only very old people know about Chinese culture’, says one girl.” China has one of the longest lasting cultures on Earth, but the Communists more or less obliterated it from living memory. So the young now have no grounding in in the old ways. This is good and bad for the West, it seems to me. On the one hand, it means that making cultural in-roads into China will meet much less resistance from the youth of China, particularly the rising middle class. On the other hand, it also may mean that China’s historical insularity, which sometimes worked to its detriment on the world stage (and the West’s benefit), may be over. I suspect that the end result will be a much more intellectually agile China, and that will almost certainly mean a much more dominant China over the next century than I have been expecting.
3. Around 15 minutes in: “The rise of McDonald’s in post-reform China was predicated on the demise of nation wide food rationing, but the consumption of cheese and wine will be more than that.” Instead, it will be the emergence of consumer choice driving a market, largely outside of government influence. In short: capitalism. Which means either Communism doesn’t have much longer in China or it will have to get even nastier.
4. “People at my age spend all of their salary every month. People from my mom’s generation save as much as they could.” Not sure what to make of that. What do you think?
5. “‘We trust foreign companies more than we trust local companies, because we have suffered a lot.’ It was a penny drop moment. Curious Jessie may have experimented with pricey Belgian chocolate, but the only European product this family buy regularly is a breakfast cereal…which they trust to be free from chemical additives.” This is probably a short term advantage for the West, but to compete against it, Chinese products will have to get safer, which will make them more expensive. It will also probably increase the standard of living in China, which will probably increase the cost of labor there. That is probably good for everyone, but will dampen China’s ascent slightly.

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The large fine levied on Intel by the EU for supposedly antitrust actions, coupled with the announcement that Obama administration foolishly intends to dust off the United State’s antitrust guns, begs a number of questions. For the moment, though, I’m only interested in two: where is this fine money supposed to be going? how much of it actually ends up there?

Naturally, like all fines from regulators or courts, actual payment will be mired by years of legislative wrangling and will probably end up being settled for some smaller number. But, according to Silicon Valley Mercury News, the EUR 1.06 billion fine “will have to be put into a bank account by Intel within the next three months and left there pending the outcome of its appeals.” A legal news site indicates, however, that “it was not reported who would control the bank account—Intel, or the European Commission. Nor was there any word as to who would own the interest earned from such a large sum of money sitting in an interest-bearing account.” It also doesn’t seem to be specified if there are any limits on which banks can be used. Can this be a US bank, for example, or does it need to be in the EU? Europe being Europe, I’m assuming that they will demand that the money be kept in a European bank.

In what looks like a FAQ on the decision, a site claiming to be “Europe’s leading independent online business information service about the European Union” says the following:

Does Intel have to pay the fine immediately?

The fine must be paid within three months of the date of notification of the Decision.

Where does the money go?

Once final judgment has been delivered in any appeals before the Court of First Instance (CFI) and the Court of Justice, the money goes into the EU’s central budget, thus reducing the contributions that Member States pay to the EU.

Does Intel have to pay the fine if it appeals to the European Court of First Instance (CFI)?

Yes. In case of appeals to the CFI, it is normal practice that the fine is paid into a blocked bank account pending the final outcome of the appeals process. Any fine that is provisionally paid will produce interest based on the interest rate applied by the European Central Bank to its main refinancing operations. In exceptional circumstances, companies may be allowed to cover the amount of the fine by a bank guarantee at a higher interest rate.

What percentage of Intel’s turnover does the fine represent?

The fine represents 4.15 % of Intel’s turnover in 2008. This is less than half the allowable maximum, which is 10% of a company’s annual turnover.

This last bit means that the European Commission could have made this fine as high as EUR 2.55 billion, but somehow concluded that 1.06 billion was the proper amount for this offense.

So, what you have in this case is over a billion euro from an American company deposited into (probably) a European bank, but locked there until the appeals process is over. (Hey, what a coincidence! Just when European banks badly need large deposits that are unlikely to be withdrawn.) The interest seems to just accumulate there for the interim. Once the appeal is sorted out, it’s likely that at least some of the money in this account will be inserted into the European Union’s central budget, possibly with interest. Since this is a central fund, and not earmarked for anything specific, the EU can then use this money pretty much any way it likes. Here’s how they spent it last year:

I can’t find a good source of information about what percentage of fines like these eventually get paid in reality, or how much grift there might be in the system. I’d love to hear about both.

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Since hearing a lecture by Laurence Kotlikoff, author of The Coming Generational Storm, it’s been pretty clear to me that:

1. The political future of the United States is going to be colored significantly by generational conflict, with the needs of the various generations pulling the country in very different directions.
2. My generation, Generation X, is basically totally screwed in such a conflict because, among other things, we are flanked by generations that are much larger than us.

One battle in this generational war is almost certain to involve social security and other entitlements. In the coming years, the Baby Boomers will do what they have proven over and over again that they do best: look out for themselves. Amid anti-aging treatments and doses of viagra, a good number of them will scream like hell at any attempt to reform the current entitlement system to their detriment and support any change that helps them, regardless of the long term cost. In spite of the fact that any such reform would have needed to start years ago to really be effective, their massive voting clout will ensure that it doesn’t happen at all, even when entitlements start unraveling.

And unravel they will, all over Generation X. By the time the Boomers die off, Gen X will be ready to reap the rewards of the giant Ponzi scheme that is social security, right when it starts to collapse. They will try the same tricks that the Boomers did to get what they were told was coming, but it won’t matter: not only will the money be gone, but Generation Y will massively outvote Gen X, and see to it that whatever comes out of the wreckage will benefit themselves, at the expense of Gen X. (To add insult to injury, a lot of the “moral justification” for this will probably involve a sort of “guilt by association” with the selfishness of the Baby Boomers.)

So, what chance does Gen X really have? Well, its best bet is to engineer (or at least hope for) some situation that radically reduces the voting power of the Baby Boomers. One sure thing that would do this is a massive reduction in their population. Since the Boomers have repeatedly shown a willingness to do nearly anything to avoid unpleasantness, or even inconvenience, it might be possible to manipulate them into extinction. With the right ad campaign and marketing, we could probably make offing yourself for the benefit of the following generations “dying with dignity” cool enough that many would volunteer. An opening strike would be a campaign to eliminate laws against assisted suicide. If done right, we might even get some kind of trial Logan’s Run mandatory death law, that expires shortly after most of the Boomers.

None of this will happen, of course. So, if the Boomers themselves cannot be eliminated, the next best thing would be to severely reduce their spending power. They would still have the bodies to vote, but without a lot of cash, it may be possible to outspend them for political influence, even if their candidates get elected.

To do this, we’d need to generate some kind of economic situation where the Boomers are convinced to invest and save their earnings in certain ways and then, right when they retire, pull the rug out from under the markets to erode their investments. This is something of a “scorched earth” policy, as it would hurt everyone else as well, but Gen X would still have time to replenish their funds, while the Boomers’ sources of income would have dried up.

Engineering this would be a massive undertaking, but fortunately, it’s happening already. The silver lining of this whole economic downturn is that the massive market losses are eroding the wealth of the Boomers as we speak, right as they are starting to retire. This is especially true since many Boomers couldn’t afford to retire, even before the current downturn.

Gen X couldn’t have planned this better. And, to think; they called us slackers.

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I had a dream the other day that seems like exactly the right concept for an SNL sketch. (Meaning, it’s initially funny, but would go on too long.) The dream goes like this: my wife and sit down to eat in a fancy restaurant called L ’Idiot (my subconscious pulling a reference from L.A. Story). We’re dressed well (yes, this is a dream) and it’s all very proper. Then our waiter comes, and it is this guy:

In his typical loud voice, he says “Hi! Billy Mays here for L ’Idiot, the last word in restaurant pretension!” The dream is a bit cloudy in my memory, but he goes on to tell us about the specials. I remember lines like “You get it all! The linguine! The clam sauce! All for just two easy payments of $14.95!” and “But wait! If you order now, you’ll also get L ’Idiot’s world famous chocolate mousse, absolutely free!”.

It was weird, man.

Popularity: 3% [?]

If you’ve read my earlier posts, it will probably come as no surprise that I don’t consume much mainstream news, particularly the televised variety. Having dinner with my CNN-addicted in-laws a few days ago exposed me to an episode of Campbell Brown: No Bias. No Bull.

The particular segment to which I paid attention focussed on the U.S. government’s impending interventions into the auto industry. To the show’s credit, they did seem to give more air time than the average show to a single topic. Unfortunately, they didn’t fill it with much other than prattle. There were some words you heard repeated over and over, such as “bailout” and “billions”. One word that I didn’t hear at all, however, was “loan”. (I looked for transcripts of this show to verify this, but couldn’t find any. Leave a link in a comment below if you know where they are kept.) You couldn’t be blamed for concluding from the coverage that the government was contemplating giving free money to GM, rather than providing them the federal loans that they are actually requesting. You know, loans that would mean we’d be getting the cash back, with interest. Now, while giving loans to GM is stupid enough on its own, it doesn’t need any media trickery that makes it sound like something stupider, like just giving them free money.

Given that the auto-industry is a powerful lobby, it may turn out that they can weasel out of these loans at some point in the future, so maybe no one actually believes the idea that these would be loans. But if so that is the story, and you’d expect at least a passing comment on it.

While the difference between a loan and gift seems rather fundamental to me, mainstream media seems to either not understand the difference, not care, and/or assume that their audience doesn’t know or care either. They (and this particular CNN show is far from alone here) appear to be happy essentially screaming “billions of your money! billions of your money! billions of your money!” over and over for a bit, then cutting to a talking head who screams “billions of your money! billions of your money! billions of your money!” a bit more. When covering the “$700 billion bailout” the government is engaged in now, nearly every media source I watched or read seemed to go out of their way to give the impression that this money was just being pissed away. Some of it surely will be, but mostly the idea is to buy things. While the government will probably overpay for these assets—hard to tell for sure, because the main problem is no one really knows what they are worth—but they are certainly worth more than zero. Most of the money buys instruments that are ultimately backed by houses. This might force the government to be something like a landlord to get value out of these assets, which, gee, seems like a fairly important story for journalists to cover to me. Or, how about the story that, while the plan calls for buying things (and thus, the possibility of recovering losses), the lawmakers that did as much as anyone to cause this mess in the first place are now screaming that this money shouldn’t be used to buy things, but rather to just give money to citizens who can’t add in order to allow them to shirk their obligations. That seems like a good story, too.

Or, how about a story detailing people that saw this collapse coming and how Wall Street will never look the same again. That would be interesting.

Or even just pieces that help inform the viewer, such as a metaphor for what’s causing the credit crisis or what the hell these freaky instruments are that caused all the trouble. Those would be welcome stories as well.

Fortunately, such stories exist. You just won’t find them on television.

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