Chinese investors and techies inflating global real estate

http://www.kqed.org/a/forum/R201510271000

I know we're probably tired of the cliched lamenting over "the good old days", but this NYT piece by a CA author describes the boom-and-bust cycle of "CA dreaming" since the Gold Rush. One generation feels like the prevailing dream is dead, but then a new dream comes to take its place.

But what about now, as our state is more constrained than ever (economically, environmentally, maybe culturally)? The inclusive middle class, environmentally-sustainable (if it ever was) CA dream seems to be in jeopardy now, replaced by the "tech dream" that only a small subset of wealthy folks can enjoy, and constant environmental crises (that the rich can mostly insulate themselves from). Of course the top earners in medicine, entertainment, finance, etc. can still partake in the dream; contrary to media hype, tech is only like 10-15% of CA's workforce and GDP. But we don't need CA to be a bunch of high-end condos, yoga studios, "$20 burger" foodie joints, plus the old suburban infrastructure (golf courses, Costcos, 5BR McMansions) grandfathered in - when the tech yuppies want to leave SF to get more space. There's more to CA than that, otherwise what's the point of paying the high prices to experience it?

Top schools ostensibly lead to top salaries, which lets your kids afford to live in the top school districts later and continue your legacy. But why is there such inequality in public schools that creates real estate bubbles in the neighborhoods near the best schools? What kind of "free society" do we have when some schools have metal detectors and 1990s computers, and some schools are like this?

I don't mean to be like "woe is me, my life is so hard." I'm not happy with some aspects of my situation, but I'm trying to keep perspective. What's scary is a big % of Americans have it much tougher, in CA and elsewhere. So what is the solution? Clearly it doesn't have to be this way, and there are many "mid-cap" cities that have a great rep for affordability, quality of life, and good jobs/schools (SLC, Raleigh-Durham, Denver, etc.). They make it work without being socialist. But it's just a shame that CA, the most populous and most economically important state, is becoming an exclusive country club with an entrance fee of $300K household income. "This land is your/my land," remember? Can't we do a better job sharing and making things easier for those with fewer resources (especially as our resources are further strained by environmental problems and gov't failures)?

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I foresee housing and land as a large problem in the future, more so than now.  People want to live near where they work.  And culture and food and art follows the places where people live and have money.  So desirable living areas will always be clumpy.  California just happens to be very desirable for a variety of reasons so I can't see a way to get these problems resolved.  And ultimately there will be a distribution of incomes available to people in these areas.  People have a very hard time voting in poor people into their neighborhoods by mandate and capitalism won't provide for them when demand exceeds supply.  Not sure I have any solutions but to say that your (and my) situation is in some objective sense terrific.  To be able to, but not easily, afford to live in a world city, raise a family, take vacations, you are a global elite.  But as you noted, locally you are a B- so it is hard to feel as good as you should.  I think if you consider only asian households you are more like a C+ haha.

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Yeah that is true, but I think a common complaint is that the high prices are forcing out the "traditional" artists and culturalists from SF, so all you have left are the wealthy consumers and capitalists.

An over the top documentary about it from Pelosi's daughter: Alexandra Pelosi on RT w Bill Maher -- Destructio…: http://youtu.be/ksTRKwCDCLM

Haha in Asian households, B- = whipping and C+ = sent to foster care!

More consequences of SF's economic changes: http://ww2.kqed.org/news/2015/04/24/san-francisco-could-be-a-lot-whiter-in-25-years-predicts-a-new-profile-of-bay-area 

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http://m.sfgate.com/news/article/Million-Dollar-Shack-documentary-Bay-Area-housing-6582122.php

First time I heard of the "ghost house" term referring to empty homes
that investors just bought to park their cash, but didn't bother to
rent out. You can guess where most of the investors are from. I wonder
what % of prime BA cities' housing stocks are affected. Probably
small, but enough to affect prices.

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This apparently has been going on in certain neighborhoods in London and other world cities for a while.  A product of Chinese money disallowed from buying stocks and the poor bond returns.  Can't blame them for finding the opportunity but it is hurting the locals.

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Agreed, it's legal, but it's making the median home price in Vancouver rise to $1.5MM (c'mon, Vanc. is nice but not that nice). According to that video, it's happening all over the Pac. Rim (NZ, AUS, SEA, SoCal), and I guess the desirable parts of Europe too (I guess Russians, Saudis, Emiratis, etc. are doing the same, but there are fewer such buyers).

This seems to be another global consequence of China's social-economic policies. Unlike the US, where ~50% of households own some stock (which is still way too low considering the ROI), for China it's like under 20% - maybe this is driven by the unproven (some might say corrupt) nature of their markets, and the cultural tendencies of Chinese to put their savings in cash or physical assets. So if retirement was more secure in China (better kids:parent ratio, more functional equities markets, gov't safety net), maybe there would be less demand for foreign property. And if Chinese are using illicit funds to buy real estate, then I also fault Beijing for not enforcing the laws and regs to make that harder to pull off. And I also fault parties in the US for not checking where the foreign buyers' funds came from. As you know, to get approved for a mortgage we practically have to sacrifice our firstborn, but it's all-cash home purchase, no questions asked.

But I assume that only the wealthiest 10% of Chinese have the funds to buy overseas real estate anyway - though 10% of China is still a shitload of buyers. This is offensive and I'm just joking, but sometimes I miss the '80s when the US and Western Europe were the only rich nations, and Japan was the only rising economic power to worry about. :)

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I think in China the basic idea is that land is something you can physically own and see with your own eyes. Chinese people (well people everywhere, but maybe moreso in China) feel that it isn't too hard to be an amateur expert in property prices - that you can beat the market basically. Finally, property prices are perceived to be relatively stable compared to other forms of investment.

Compare that with stocks, where who knows how to value anything. Stock markets in China are basically thought of as gambling markets (actually not too far off....), whereas property investment is the slow and steady, tried and true investment strategy. Everyone understands (or thinks they understand) real estate markets. Understanding stock markets is not something that the average Chinese person has much experience in.

Additionally, for very wealthy Chinese there is the idea that you want a property (or perhaps multiple) overseas where you can escape if things get bad in China. The Chinese don't like pollution any more than we do and most realize that overseas places are a lot nicer than most cities in China.

Finally, getting permission to convert money into foreign currency is a lot easier if you're buying property than if you're buying stocks.

Of course, the smart strategy would be to invest in low-cost index funds in a Vanguard coop account, but I guess Vanguard's marketing team hasn't made too many inroads in China yet :-P

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These days it seems that very little in the Chinese economy is slow and steady :P - they had a major RE bubble too with levels of speculation likely exceeding those of US-CAN. I could sympathize if the average Chinese person doesn't have a lot of good options for capital gains to save for their retirement, but I assume that it's the top 10% who are the ones buying most of the foreign property (i.e. the average Chinese can't pay $1.5MM cash for a CA condo).

I don't know if funds/pensions are very popular in China, but that overcomes the investor ignorance problem. Most Westerners have no idea about equities too, but at least they leave it in the hands of pros and pay them a commission (this strategy only screws them every decade or so with a widespread financial crisis :). And as you said, you can lower risk by diversifying (equities tend to outperform REITs and most single properties in the long term).

So there is a difference between a justifiable need for financial security, and greed. I am not sure what category most Chinese overseas RE buyers are, maybe both, but probably skews towards greed. That is legal but unfortunate in my book. And of course the same can be said of domestic speculators.

There is some harm in speculators manipulating the price of securities or silver. But then again, most people aren't paid directly from capital gains (except pensioners and rich fund mgrs). But if people are inflating the prices of life necessities, like oil, water, and housing - then it's a bigger deal. Like when oil rose to $120+ a barrel, some were saying that this wasn't the speculators' fault - it was just normal supply and demand. Maybe so, but it's pretty hard to precisely pin down causality in market price, which is of course an aggregation of many factors. But huge inflation in inelastic goods tends to hurt many but only benefit few.

Bottom line, I wish people would at least buy homes with the intent to use them, or make them available to those who need them. I understand that not all of us are "entitled" to an affordable picket-fence place with a 5 mile commute. It would be nice, but there is always going to be inequality in housing. Though I think we are at pretty bad levels in most of the economic centers of the world.

BTW - if you made it to the end of that YT video, you saw that horrendous quote from the real estate mogul d-bag with the Rolls. Something like, "I think a Googler working hard is more deserving of a home in Si Valley than someone who happened to grow up here. Just get more education if you want it." Yeah, as if the issue is that cut and dried. Hard work and edu is all you need to be a millionaire in CA, sure. It doesn't need further comment - but you are all welcome to vent. :)

VW's diesel scandal and Shkreli's drug price-gouging

More of the same - this week was not exactly ethical capitalism's (if such a thing exists) finest hour:

VW may have to pay fines in the billions for deceiving pollution monitors and violating the Clean Air Act with their TDI "clean diesel" vehicles (stock plunged 20% in response). Apparently it's not so easy for a diesel engine to be both clean burning AND great mileage.

There is a new (and sick) trend in biopharma (link1, link2) where shell companies buy up the rights to "below market price" drugs and then jack up the prices by orders of magnitude to make a ROI. Well, at least those firms aren't deluding themselves that they're trying to help patients - they're explicit in their pure pursuit of profit, and it doesn't matter if needy patients are priced out.

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Following up on VW and drug prices:

How an academic lab at UWV (an ironically similar acronym) detected VW's diesel cheating: http://www.vox.com/2015/9/23/9383663/vw-emissions-scandal-photo. I just wonder why VW's diesel rivals didn't question how VW could get superior mileage/torque while still keeping pollution low (the diesel engine is kind of zero-sum for these performance metrics). Like wouldn't they say, "Wow, in our lab we can only get 25 mpg if we stay under the NOx limit - I wonder how VW gets 40 mpg?" (numbers are fictional) Other auto makers are professing that their vehicles don't cheat, but we'll see. Even though very few light cars in the US are diesel, we of course have plenty of semi-trucks and heavier vehicles spewing particulates and carcinogens every day (but at least in CA, these vehicles now have to adhere to tighter limits). Not sure how big the impact will be in Europe, where ~half their light cars are diesel (but they have fewer cars per capita and drive fewer miles per capita vs. the US).

This article has an interesting viewpoint on the Shkreli drug prices scandal: http://www.vox.com/policy-and-politics/2015/9/23/9383899/martin-shkreli-daraprim-price. He's been such an a-hole and unapologetic capitalist re: his company's actions that he's garnered a ton of negative publicity. That actually helps to shed light on the drug price-gouging issue that Big Pharma has been engaging in for decades (BS loopholes to extend patents, buying the rights to generics or cheaper rival drugs to keep them off the market, etc.). Hopefully the increased attention and outrage will motivate lawmakers to consider new rules for the industry, but I'm not holding my breath.

"Toxic Hot Seat" about cigarettes, flame retardants, and death for profits

Toxic Hot Seat:

http://www.huffingtonpost.com/marcia-g-yerman/toxic-hot-seat-ignites-aw_b_4338572.html

This is a clear example of Pope Francis' principle of greed-driven "murder", for lack of a better term. Some companies and trade groups decided to protect their profits rather than do the right thing for their customers. And this has created enormous social costs for everyone.

The storyline:

- Since the '70s, 2-6K Americans died each year from residential fires.

- By far, the biggest driver of these tragedies are unmonitored cigarettes (yet another way they kill users and bystanders), and this trend persists in most nations.

- A self-extinguishing cigarette is affordable and easily implementable, but the tobacco industry resisted, and created a "fire marshal" advocacy org to convince leaders and public that the problem was the "fuel" (household flammable stuff), not the ignition.

- So the chemical industry jumped on this and developed "flame retardants" that could be sprayed on curtains, furniture cushions, etc. (this was during the era of DDT and such where toxicity testing was nonexistent).

- In 1975, a professional study was warped by some CA regulators and lobbyists to mandate all furniture sold in the state to contain fire retardants with no health risk conditions. Since CA was such a big market, and it was expensive to develop 2 versions of furniture, manufacturers decided to put retardants on everything, and the standard has stuck.

- Despite a huge "astroturf" (fake grassroots) chemical industry push, Maine was able to ban retardants in favor of safer alternatives. The lobbying machine has prevailed so far in CA, and Representative Leno has sponsored several similar bills to ban them, but they failed each time due to the irrational fire scare and industry advocacy. Changing the law is part of Gov. Brown's current agenda, and so far he was able to at least permit the sale of furniture that doesn't contain retardants. It's up to consumers to check whether the products they buy have them or not, but an outright ban like Maine is still elusive.

Commentary:

So what are the consequences of big tobacco's greed/negligence and big chemical's opportunism (now a $5B global industry)? We know that preventing/reducing fire severity is important and can save lives/money. But are these retardants the most cost-effective solution? Studies show that smoke alarms and sprinklers are much more effective than retardants - with nearly zero downside. Only the retardant manufacturer association has produced a few suspect studies to support the use of their product. But fires are scary and their arguments won the day for decades ("whatever it takes" to prevent fires!). Fire danger is a lot more tangible and acute than nearly invisible carcinogens that may need extended exposure to do measurable harm (but no less bodily harm than burns). So it's easy to fixate on the fire risk, which may trump other concerns. 

It's one thing if retardants are ~90% effective (at least as effective as condoms), but they're not. The flame retardant standards state that the material must be able to resist a "small flame" for 12 secs. While that could be effective in some situations, it is deficient in many tests and in the field, because a furniture's unprotected covering burns first, so by the time it hits the cushions (that contain the retardants), it's no longer a small flame and the retardants are no longer effective.

So they don't really make us safer, yet they are likely making us sicker. Retardants are known carcinogens and mutagens like thalates, bromides, and BPA (that the baby industry has been forced to remove from plastic products due to customer anger). Retardant-containing products still burn, so when firefighters have to respond, they are rushing into and inhaling the chemical soup. When SFFD personnel were tested, incidence of middle-age female breast cancer was 6X the population average, and incidence of cancer among retirees was also unusually high. Parents groups fought to get these chemicals banned in child pajamas (on toxic grounds) and won, yet the exact same chemicals are still present in child car seats, play pens, backpacks, furniture, etc. that kids touch and lick. They're still present in those products because it's expensive to mount a legal challenge, and chemicals get the benefit of the doubt.

Speaking of that, why do virtually all side effects, interactions, allowable dosages, etc. need to be thoroughly documented and scrutinized for a drug to reach the market, but chemicals are "innocent until proven guilty"? It's about the burden of proof. As depicted in films like "A Civil Action", it is very hard to prove that a specific chemical directly caused measurable harm over what could be years of exposure to many chemicals. Companies can just show that rats "survived" when exposed to the chemical under specific, arbitrary conditions - and that is supposed to prove that they are universally safe.

And when pro-business leaders continually weaken and defund the EPA and other regulators, that makes them look ineffective/unnecessary and strengthens the industry argument to just trust the companies, not delay new product approval with frivolous tests, and not stifle chemical innovation, which "creates jobs/revenue" and "makes our lives better". And this is not just about retardants, but literally thousands of chemicals that we don't even know we're exposed to each day. Like all those "dispersants" used by BP to make the Gulf spill look less nasty to the naked eye - we have no idea WTF they do to living tissues over time, and they will likely show up in seafood, breast milk, etc.

There is an underlying assumption that benevolent gov't is watching out for us, and products wouldn't be on the shelf unless they were totally safe (and Dow and Monsanto say you can trust them). Well after leaded gas, asbestos, CFCs, and the sad history of tobacco, we should know better. The only ones who are looking after public safety are scientists, survivor victims, and grassroots orgs. And politicians will only listen to them if voter anger outweighs industry lobbying dollars. But this is obviously short-sighted leadership. It makes no sense to threaten and poison future society's health and productivity for present-day industry profits. Taxpayers and gov't coffers will be burdened by the health costs of harmful chemicals, which means less money for other national priorities. Everyone loses but the companies and their stakeholders.

The same thing is playing out in places like China with pathetic regulation, but they recognize this and are trying to improve. Can you imagine the impact on their economy when their current population ages and disproportionately develops all sorts of illnesses from the ubiquitous pollution, toxins, etc.?

And it's not like these "innovative chemicals" are so critical to human survival. We can get along fine with many natural, renewable products like wool, plants, and wax. We don't need chemical X to make our jacket down 0.1% warmer but our kids 10% sicker. Someone has to say enough is enough.

Gender differences among white collar criminals

This was interesting though not surprising (but it's good to put #s to our suspicions).

http://www.pewresearch.org/fact-tank/2013/08/05/even-in-white-collar-crime-female-crooks-face-a-glass-ceiling/

This Penn St. study looked at 83 fraud cases from last decade involving over 400 defendants. As you would expect, women made up only 9% of the defendant pool, so not sure if that was enough to make statistical conclusions. But half of the male defendants gained >$500K from their alleged frauds, while half of the female defendants earned nothing. The women were more often in lower subordinate job titles too vs. their male co-conspirators.

Females were more likely to occupy accounting/finance positions, and were not the "ringleaders" or creative force behind the crime. Their crimes were less likely to be personal profiteering, and instead they were accused of embellishing #s to make the firm look better or covering up losses to avoid bankruptcy. So they were doing wrong while "trying to help someone else", whereas the men were straight up stealing for themselves (and maybe making their firms some $ too).

Scientific studies suggest money makes you an a-hole

http://www.pbs.org/newshour/bb/business/jan-june13/makingsense_06-21.html
http://www.nytimes.com/roomfordebate/2012/03/15/does-morality-have-a-place-on-wall-street/greed-on-wall-street-prevents-good-from-happening
http://www.pbs.org/newshour/businessdesk/2013/06/why-those-who-feel-they-have-less-give-more.html

Psychologists from Berkeley (of course) conducted a series of experiments on how wealth differences (real or perceived) affect social behavior and ethical choices.

First, they conducted a simple observation of pedestrian and driver behavior at an intersection. They found that 90% of drivers do yield for pedestrians (as law and safety demands), but of those who blew through, a significantly higher % of those vehicles were classified as "luxury". Also luxury cars cut off other drivers at a higher rate. A lot of things could be potentially wrong with such a study, but the result seems logical - spending a lot on a car with attached marketing messages like: you have arrived, you are Mr. Badass, you deserve it, you're better - may motivate the driver to feel that he/she (mostly he probably) doesn't have to stop for "peasants" and is entitled to get to the destination unhindered. Or maybe their social environment is very status conscious and competitive, so driving is also an opportunity to demonstrate their perceived superiority, or they may feel the need to drive like a jerk to fit the mold of success (even if they actually want to drive more politely). Of course this doesn't apply to all luxury drivers, and there are plenty of jerks driving clunkers.

You know how politicians take candy from babies? Rich people do too, literally. Controlling for various other attributes, they had participants fill out a phony form in a private room. There was a small jar of candy on the table, which they were told was for kids for the next study later in the day, but they could have some if they wanted. Participants labeled as "rich" (maybe above some cutoff for self-identified household income, reference their PNAS paper for details) took 2X more candy than non-rich. Even though they were permitted to, typical conscientious thinking might be: I can buy my own candy later, the kids will enjoy it more, I don't want to look like a pig, etc. to motivate them to refrain. But maybe rich people are used to getting better service and favors from others (with less regard for sharing & limits), so they are conditioned to take when offered without considering others.

You have probably heard about studies that show CEOs are more likely to cheat on games (even with no rewards) by self-reporting higher scores (with no outside verification). The same applies to rich people. In a computer-simulated die toss game, the richer participants in their study were more likely to cheat and report scores that were mathematically possible, but actually impossible due to the hidden logic of the sim. The narrative seems reasonable: rich people are competitive and may lie to increase their chances of winning if they can get away with it. Their personal payoffs for winning unethically outweigh the possible consequences of getting caught, and that calculus may not apply as much to the sub-rich, where consequences dominate (jail, getting fired, etc.).

Lastly, what happens when non-rich people "feel rich" and vice versa? The researchers had people play a rigged game of Monopoly, where a randomly decided player (of various personal wealth levels) got to be Goldman Sachs (more starting $, more die rolls, got to have the car playing piece). It was about mathematically impossible to lose from that position. During the game, the Goldman player tended to exhibit more bossy, dominant behaviors. When asked how they felt about the game results, the Goldman player was more likely to take personal credit for their success rather than acknowledge their randomly-assigned advantages. We know that manifests itself in real life, as from our previous discussions, the rich may feel OK with tax evasion because they feel they already paid enough, and they deserve to keep more of it due to their cunning/superiority. Conversely in the Monopoly game, those in the position of the disadvantaged player tended to exhibit more compassionate, gracious behavior (despite their actual social class).

Extrapolating these results out to the real world, I suppose we shouldn't be surprised when the most rich and powerful among us behave badly and are caught in greed/ethics scandals. And for the rich who behave well and can still be generous to others (like Buffet), they have particularly impressive discipline and caring, especially considering the temptations, lack of accountability, and pernicious culture of their elite social class. I doubt many rich people read the PNAS journal, but the authors caught hell after their paper was published. I think it's pretty hard to be totally uncaring (sociopathic), so deep down even the biggest rich jerks probably realize they are doing wrong, but as I said their incentive structure compels them to knowingly do wrong. They don't like being reminded they are being bad, so of course they lash out or make excuses. And it's no help that our tax-legal system heavily favors the rich and is chock full of loopholes. They use it as a cop out. My business ethics prof said something like, "Legal does not guarantee ethical. If you measure your actions by the law alone, you're in trouble."

But maybe all this stems from our society's value system. Money is the literal currency and also social currency for status (which gives you access to pretty spouses, creature comforts, fame, and other perks). We don't celebrate the kindest or meekest or most generous among us. We celebrate the richest, biggest jerks who take what they want and don't care about anyone else. In fact we suck up to, idealize, and emulate them - even post Recession. I am fairly sure such phenomena would not occur in cultures where materialism, egotism, and such are not as valued, like Amazonian tribes or Tibet before China's ethnic cleansing. This comes back to the "selfish gene" argument. The animal side of us needs to be selfish and dominant to propagate our genes. But we are social beings too; if we are too sociopathic, then we will alienate ourselves, which may imperil our progeny. So kindness in a sense is a form of selfishness, but I think too much kindness is a better problem to have than too much greed.

The rich are just doing what their culture enables and compels them to do. Maybe the fault lies with the 99%. The rich are always outnumbered. Starving, abused peasants burned and hung the rich when they went too far in Europe and Cuba. We just take it in America, because our goal is not to have a more just society of "liberty, equality, fraternity", but to join the ranks of the rich one day and lord over the 99%. So that is the problem. We don't fight inequality and abuse because we are totally fine with such an unjust system, as long as we eventually get to the top. But obviously that is a pipe dream for the vast majority of us. But that is the evil genius of the system, it traps us in our own unrealistic ambitions and hopes. Maybe the "new" American Dream (where the goal is to be the man, not just middle class) is actually bondage rather than emancipation. It tells us if we commit ourselves 100% to our careers (work almost to death), comfort, fun, wealth, status, and all that can be ours. But that won't happen for everyone, even if all they do is work. And all that effort in vain actually serves to make the execs and investors (who have already made it) richer. Talk about a scam.

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I always wonder what is really being measured in these studies.  Is the car really correlated to wealth or spending?  If i CAN buy a luxury car but don't am i less likely to be an A-hole? 

And who cheats at games with no reward or really cheat at all?

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Re: luxury cars, of course not all purchasers are actually rich, and as you said, plenty of rich don't feel the need to buy them. It's maybe a self-selection phenomenon. The ones who drive them are more likely bought into the image message, and therefore may be predisposed to act like a "typical BMW driver."

Re: cheating, we've all used cheat codes in video games right? No actual reward there, but it's an easy way to progress in the game and enjoy the winning feeling. I suppose if there are no consequences (the comp won't refuse to play with you next time), why not? The people who don't cheat may feel that cheating only hurts them, so they're rather face the challenges and push themselves to master the game and win properly.

Sorry I forgot to add in the OP, by no means am I saying that armed revolt is the only way to make things better. We just have to hold bad behavior to account, and change the incentive calculus. We have to make it so costly to behave badly that even jerks will have no choice but be civilized (whether insider trading or not yielding for pedestrians). Criminal penalties may be a start, but the rich control the legal-judicial process. We could also stop idolizing rich jerks, and instead celebrate the ones who "do it right". Here's a crazy idea: why don't we idolize the folks in the Apple commercial instead of the folks that run Apple? And please let's stop emulating Kardashian, Zuck, etc. And when we see bad behavior on the streets (by rich or otherwise), we should call them out on it. Maybe they are beyond reproach, but at least others will take notice that such conduct is detrimental and won't just be blanket condoned. Racism, sexism, xenophobia, and homophobia used to be tolerated (and even encouraged) in US society. But gradually we used education and alternative role models to shame those ideas to the margins and private thoughts. We can do the same for "richism" too, but it's a bigger challenge because it's more pervasive. But we have little choice. Imagine if our society was actually 99% rich instead? What a horrible place to live!

Even worse... crazy rich Asians!!! http://www.amazon.com/Crazy-Rich-Asians-Kevin-Kwan/dp/0385536976

Bill Maher on The Great Gatsby and the modern wealth gap

http://www.youtube.com/watch?v=8DKD0O-owNM

America's bizarre fetish for romanticizing the leisure-class, mega-rich, Guilded Age types like the Buchanans depicted in Gatsby is especially peculiar today considering what we have (or haven't) learned from the Great Recession, as well as recent the populist backlash against US plutocrats.

The sad irony is the rich would be better off with less income disparity and a more flourishing middle class. Clearly when basic needs are more securely met, people feel more comfortable to consume, which benefits most of the economy and trickles up to the wealthy. Well, the rich got around that issue by expanding credit (pay day loans, adjustable rates, even tax refund loans).

The rich complain that they already pay the lion's share of the nation's taxes. While that is numerically true, maybe we can reframe the issue. When employers and other the powers that be give people quality wages and benefits, they will be healthier and less of a burden on health services. When education is more democratic and affordable, people will make better economic choices and become more productive, which will increase GDP, lower demand for public services, and reduce the "tax burden" on the rich. When we don't fight wars or adopt bad taxation and trade practices just to give special interests more profits, then that also reduces the need for taxes. So if the rich are tired of paying so much tax (even though marginal rates are much lower today than the 1960's), then reduce the wealth gap and make the market more free and democratic.

And when workers are not stressed out and distraught over neighborhood crime and horrible commutes (caused by defunding public services/infrastructure to support tax breaks), rising health care, real estate, and education costs (driven by the irrationally high willingness to pay by those who can afford it), uncertain retirement (brought on by the cutting of pensions, the Fed's low rates pushing people to equities, and market volatility due to risky speculation, manipulation, and fraud), and the omnipresent threat of layoffs/outsourcing/downsizing, then they are actually able to concentrate on their jobs and become more creative, productive, and valuable to the company and its stakeholders. When employers treat their staffs well, they are less likely to be a workplace cancer, a slacker, a defector to the competition, or new competition (launching their own venture). It's strange that the rich, who love to congratulate themselves for being so clever and superior, can't grasp this simple concept.

But here is the circular problem: political corruption allows some companies to enjoy economic advantages. They out-compete all the mom & pop shops without the Washington connections (yes I know companies succeed on their own merit too, but far too many cheated to get to the top and secure their standing). Other firms witness this "recipe for success" and follow suit, because now it's too risky to try to win the old-fashioned way. This Darwinism leads to the "survivors" of the dog-eat-dog market often being the biggest jerks. So now we have fewer and nastier employment choices, and the % of Americans working for public companies is at an all-time high. Employers know they have the leverage, so they cut benefits and make the workers more dependent on investment income (for the minority who can even afford to invest). More and more, our survival is tied to the stock price of our employer and our chosen securities. So for the few shareholders who actually vote, they want boards and execs who are the shrewdest SOBs around - to make the stock appreciate. And for passive shareholders, they are just happy when the price goes up, and they don't want to know how. So public companies are making our lives hell, yet they are also our only potential salvation from hell, so we make a Faustian bargain with them. It is paradoxically in our economic best interests to support those who harm us. 

When people are not desperate, they are less likely to steal or kill or revolt (yes, it has come to that). As Maher said, you can only squeeze people so far before they push back (especially when the squeezers are a tiny minority). It's not as bad as the starving peasants in monarchic France or Russia, but there will be a point when the masses won't take it anymore (see the Arab Spring, which started as an economic uprising). Or look at the angry youth and public workers in much of Europe now. When that stuff happens, it's no good for the rich either (unless you are like the Shah and can loot Iran before you flee to posh exile - not trying to give Lloyd Blankfein any ideas). So wouldn't they rather share a little more of the pie in order to preserve the good thing they have going? They say that love knows no bounds, but really selfishness and greed (even to the point of self-destruction) is America's most abundant resource. Well, one could argue that greed is a twisted form of love - just loving the wrong things.

The Wall Street rescue, through the eyes of an economics novice

I guess by now our leaders have done a decent job explaining to us why the bailout package is a "necessary evil". It's not just a blank check to Wall Street at the expense of Main Street. For better or worse, we're like symbiotic organisms; our fates are tied and Wall Street credit is the lifeblood that sustains Main Street activity. Though many times (including now), it seems that Wall Street calls the shots and we are just along for the ride. They tell us it's all about credit availability. Small businesses and local governments need loans to buy raw materials or even pay their workers, not to mention the private citizens that seek car/college/home loans. But is credit the answer for everything, and does it have to play such a crucial role in modern economies? Must we do "whatever it takes" to insure a free flow of credit forever, or face worldwide panic and recession like we see now?

Despite the uproar from some GOP leaders and talk radio of all stripes, America is not "dead set" against this bill, and I bet the House will approve version 2 today (oh, I just now see on BBC that they did), especially with time running out in this Congressional session. All 535 of their asses are up for re-election on November 4 (but only a few incumbents are ever really challenged), and voters/investors are running out of patience for political posturing as the Dow sinks to 10,000. I guess the new bill is 90% similar to the previous version, except for the FDIC insurance limit is increased from $100k to $250k (that's really great news, since most of us have like $240k in our savings accounts and were getting nervous), and about $100B in new tax breaks were included to persuade the holdout Republicans, with no mention how debt-laden Washington will recover that revenue of course. Clearly Main Street, Wall Street, and Washington have problems with borrowing responsibly.

Some of the included tax breaks are pure pork and quite laughable: http://www.taxpayer.net/resources.php?category=&type=Project&proj_id=1429&action=Headlines%20By%20TCS.

Many gripes about the bailout are justified and it won't be a panacea, but unfortunately there's not much room left for further debate. If asked, "Would you risk half a trillion in tax dollars to help Wall Street recover from its mistakes?", most people would instinctively answer "no" without the benefit of additional context. So one can understand why our initial reaction to Bush's plan was skeptical at best. But recent Pew Research poll suggests America is now split roughly 50-50 over the plan, though few Americans are well versed in macroeconomics and fiscal policy to really understand the repercussions either way. If geniuses like Bernanke and Greenspan are grasping at straws, that doesn't bode well for the rest of us. People might not want to throw their tax billions at Wall Street, but they also don't want to see their investments evaporate and commerce dry up around them (and in many cases it already has). When push comes to shove, we'll go to bed with the devil to save ourselves.

That's what really frustrates me about this crisis - it demonstrates how easily Wall Street can manipulate us like a puppeteer. Big firms and private citizens alike made big bucks during the loose credit housing boom, but some got in too deep and hung around too long until they got burned. And all along, the Fed tried to prolong the binge instead of trying to cool off an obviously oversupplied and overvalued housing market. Many huge banks have seen their holdings lose over 50% of their value since 2007, causing financial panic or ruin to millions. So at every mention of a government rescue (despite many economists' concerns), the Dow surged, and when the House balked on the first bailout proposal, the tempermental Dow responded with a record point drop. Was that due to millions of Average Joes going on E*Trade in unison to cut their losses and sell their 50 shares of blue chips, or rather the high-rollers and big fund managers dumping their vast numbers of shares in favor of safer commodities like gold? It may not be deliberately punitive, but it's still blackmail.

Banks might be drowning in debt, scared to invest and lend to each other and us, but they are still sitting on billions of good, liquid assets. They could try to reverse the slide if they wanted, and some have, like the European Central Bank injecting billions into the credit market and Warren Buffet looking for some bargains. But instead they tighten up even further, because why should they risk their money when Washington might do it for them? It's like the "welfare mom with 6 kids" that Newt Gingrich types loved to villify. Why should she make an effort to get a job when Uncle Sam will cut her a check every month? Wall Street said, "OK Washington, if you don't give us the money, we're going to execute hostages until you do." Economic terrorism, right? Ordinary citizens saw the unlucky 777 point drop, and feared even more for their 401(k)'s and other investments. Maybe some who were previously opposed to the bailout changed their minds and started to lobby the bickering Congress to act. Anything to protect our money, right? Maybe I'm just full of crap and don't understand how the market works, but it sure seems like a scam to a simpleton like me.

The selective rescues or facilitated purchasing of some troubled GSEs and financial institutions by our government was huge economic news already. Maybe some people were already musing about a government repository for toxic securities as a potential next step, but the Bush-Paulson plan must have still taken America by surprise, as well as their demand for immediate implementation (hence the huge Dow swings in the last 2 weeks). I guess Congress and citizens had a right to be skeptical of a back-of-the-envelope plan crafted by Treasury, that gives Treasury god-like powers, and promoted by an administration with an unprecedented track record of augmenting executive powers (sometimes in defiance of the Constitution and common sense).

I am tired of hearing Harry Reid-type blowhards stressing the need to work together and pass this bill now, yet blame colleagues like John McCain for "interference", and proclaim that all 100 senators could have written a better bill. Then why didn't they? Don't give us a turd decorated with fancy wrapping paper and a $700B price tag, then expect us to congratulate you. I hate the fact that we have left the disease unchecked for so long that our best course of action left is to cut off our arm before the infection spreads. We've cornered ourselves. Many people in Washington and Wall Street seem very eager to get us to do a bad thing quickly, because the alternative is worse. I suppose that constitutes leadership these days. At least Lyndon Johnson had the dignity to not seek re-election after failing to deliver victory in Vietnam. If the Fed, Treasury, SEC, and Congress had an ounce of self-respect left, half of them should have resigned by now in shame. After Bush's speech to sell the plan to America, PBS had a couple chaps from the House Financial Services Committee on for analysis. At times they were actually smiling and joking about the situation to each other! Millions of Americans are in trouble and getting ulcers from worry, and they, who are in the eye of this storm and maybe contributed to the crisis, are hamming it up. Talk about out of touch; this is why revolutions happen.

A lot of people blame this credit crisis/housing bust on unbridaled personal and corporate greed and irresponsibility coupled with poor government oversight. While that may be partially true, greed and poor oversight have been and will always be a part of human civilization. There's no way around it unless we all become monks and peasants. But maybe the trick is to reduce the opportunities for reckless, greedy bastards to be reckless and greedy, and reduce the policing duties of the government to give them less chances to drop the ball. Yes, less regulation is fine as long as the credit markets and other financial systems are organized in ways where excess and fraud are not just illegal, but impossible. Maybe I'm just dreaming, but what are we paying all those PhD's for? Can commerce be free, but also with failsafe mechanisms? Can we create more ideal markets where human nature is less able to make a negative impact, without sacrificing productivity and efficiency too much? We all operate out of self-interest, and our behavior is affected by external carrots and sticks. Obviously the sticks weren't big enough to prevent even smart people from taking stupid risks in pursuit of very juicy carrots. But incentives and punishments only go so far, especially to powerful entities that think they can dodge accountability/consequences, and often they're right.

Maybe a good first step is reducing our dependence on credit. I know borrowing is necessary for some up-front costs of large investments like businesses and homes. But why can we not spend what we don't have? And do we have to exploit every last dime by loaning it out or investing in others? Can we reinvent economics with less emphasis on credit, because clearly the status quo has some pitfalls. I'm not saying we should bury our cash in the backyard, but there has to be some restraint and moderation. Otherwise, we'll keep getting market panics and crises like this one, except maybe worse and worse as financial institutions become "too big and interconnected to fail". It has gotten so complicated that we don't even know where the money in our savings account really goes, nor the true value of our investments. We are so dependent on large, predatory credit entities - it's too dangerous and unfair. They are the "landlords" and we are the "tennants". They dictate terms to us and only exist to take a piece of our labor and creativity. Microfinance has helped millions out of poverty in the Third World, even if it has its share of criticisms, such as very high interest rates to justify the investment risk. Maybe instead of relying on corporate America to keep our local economies going (where their interests may be quite different than ours), we can form more credit unions and municipal cooperatives. Share and spread the accountability and prosperity, with the goal being collective stability and security, not individual profit. People pay into and withdraw from a general fund based on their economic situations and financial preferences. Members vote on who gets loans and the conditions of those loans in a transparent, democratic fashion. But maybe that's just crazy socialist talk?

In closing, I find myself thinking about my few months as a student in Europe in 2000 (when the dollar was kicking the Euro's butt, so it was great timing). Obviously Paris is a modern metropolis with its share of problems too, but people from many walks of life were not obsessed with money, advancement, and acquisition, as we are. Of course there was plenty of greed and evil, though life was so different. It was a fast-paced, turbulent city, but somehow life seemed saner and more people-centric also. Maybe nostalgia is a rose-colored lens, but the differences were too large to be imagined. Every little neighborhood had several bakeries, convenience stores, and boutiques. Sometimes they would have no customers all day, yet they were still in business, paying the bills and providing for their familes. In America, it seems that all but the best small businesses are hanging on by a thread, while the rest of us whores have to attach ourselves to corporations for career development and financial survival. It is hard to get fired, and even harder to work more than 50 hours a week, yet unemployment was at 10% (though no one was starving to death). Companies weren't merging or going under left and right. Workers left their work at the office and could actually relax at home, often having two-hour long dinners together with the whole family. Maybe they didn't have a big home with a white picket fence, big screen, and station wagon, but they seemed quite happy and comfortable.

No one worried about saving up for tuition, child care, or retirement, because the state assumes most of those burdens. In America, we get nickel and dimed into poverty with "maintenance fees" on our retirement investments and college loan scams. Same goes for medical insurance, obviously, as France's system perennially ranks in the top 5, while ours is about #30-40 near Estonia. Middle-class people went on month-long vacations and could afford it. My uncle was on unemployment insurance for years and no one accused him of being a deadbeat. Taxes run about 50%, but many consider it a patriotic duty in order to maintain their society and quality of life. Maybe that welfare state lifestyle is going the way of the dinosaurs, with an aging populace and rising costs of basic goods and services. There is plenty of evidence for that, with conservatives like Sarkozy coming to power. However, other socialist nations have rejected their Bush-allied conservative leaders in favor of leftists, like Australia, Spain, and Japan. Maybe there is a chance. There has to be an alternative to this insane, and I mean literally insane, American way of life and commerce. Oh yeah, and mainland Europe isn't saddled with war expenses and the accompanying political blowback either.

Some interesting links:

http://www.iht.com/articles/2008/10/01/opinion/edbuchanan.php (using computational models to better understand/predict economic activity)
http://news.bbc.co.uk/2/hi/business/7646863.stm (have banks share more information and maintain accountability for their lending)
http://www.newsweek.com/id/161199 (the menace of the booming 'credit default swap' market and how it could be regulated)
http://baltimorechronicle.com/2008/092908Lendman.shtml (a big economics rant that I haven't even finished reading yet)

This section in italics is pretty lame, so please skip it over unless you want to ridicule my ignorance:

[The market and the past decisions of financiers have left us little alternative. We need to restore confidence and flowing credit in the markets, or the whole machine grinds to a halt. Credit is the "lubricant" of our economy, but does it have to be so? Liberal capitalism is roughly defined as private ownership and exchange of products/services/investments/etc., with prices determined by a free market. Credit is not inherently essential to market economies, but of course in our current industrialized, globalized economy, it is. We already know the dangers of relying on or abusing available credit. Our government is in record debt to foreigners, which contributes to our weak dollar and makes some struggling companies ripe for the taking by offshore competitors. Hyper-consumers with little self control keep taking out new credit cards to cover spending beyond their means, as well as their previous accumulating debt. Yet some of those people were offered huge mortgages without having to provide evidence that they were able to afford them. And sadly, many vendors almost rely on and tailor their business models in expectation of customers over-spending. We know all this already.

But why does our economy need to revolve around credit? I know borrowing and lending are as old as the pyramids, but it's probably no coincidence that usury is a sin in most religions. Micro-finance aside (a relatively recent invention), very few of us possess the vast capital and/or means of production necessary to provide substantial credit to would-be borrowers. So instead, investments and assets are pooled into vast multinational corporate financial entities that become umbrella lending hubs. Millions of people entrust their savings to them, hoping it will grow, and millions others depend on loans from them for various large purchases. Heck, even non-finance related companies make a good portion of their revenues through lending (GE and insurance companies like State Farm to name a few). GE makes jet engines and toasters - why venture into financial services? I think it's because the money is easier. They have all this surplus cash lying around - why not lend it out for a higher return, even if it gets them in hot water at times? It's hard to provide a tangible, desirable product or service to the marketplace, such as a new software application, home appliance, medical therapy, or even a cup of coffee. You have huge development and production costs, may need to file for patents (which could take years), conduct extensive safety and reliability testing, study consumer tastes, and comply with government regulations. And if things go wrong, you had better have deep pockets and some good lawyers/lobbyists. With lending, all you need are a few PCs and MBAs. I know I'm being simplistic, but you can't deny that the infrastructure needs of a company like Citi are much less than ExxonMobil or Toyota.

I know economics is all about maximizing efficiency, so in a sense it rewards "easy money". I guess that is why we may never totally expunge financial "gimmicks" from our society, and it seems that regulators are always playing catch-up as new scams emerge just as the old ones are finally contained. I guess this is the price we pay for freedom and democratic capitalism. ExxonMobil has to search for new oil fields, build wells, pay royalties, and find ways to get the product to buyers in a safe, legal, and cost-effective manner. Investment banks just move numbers on a board, albeit through very ballsy, high-stakes, and heavily-researched transactions. Easy money? There must be a reason why the median salary at places like Goldman Sachs is higher than even highly respected, productive companies like Google or Amazon. A neurosurgeon or Silicon Valley engineer might make good money, but it pales in comparison to the next innovative investment vehicle or shady tax shelter conceived by Wall Street. Maybe that's why the financial sector is the most powerful in our economy, even though it doesn't really do anything tangible. Everyone wants more money, and to grow the money they have. Surely there is a large demand for their services, which is why they exist, but I don't know how we can justify the power they wield. No other industry can bring global commerce to a halt and billions of people to their knees with a simple error.]