Chinese Language Notes 001

Today, we have four characters:

丿
piě (also) – Left radical. This is only a radical or part of a character and does not appear by itself.

人
rén (also) – man; person; people.

丨
gǔn (also) – number one; line; down stroke radical. As a radical, this is only part of a character and does not appear by itself.

亻
rén (also) – man radical or side-man. As a radical, this is only part of a character and does not appear by itself.

National Review, October 20, 2008

Another Recap of the Financial Crises

While not increasing general price levels, and while the housing bubble was not universal, loose monetary policy inflated housing markets. Land-use regulations made the bubble worse in some parts of the country. Two more elements were necessary to achieve a level of pain beyond the standard: 1) the addition of new financial instruments (slice, dice, and leverage), 2) the push by government to promote homeownership among people with high credit risk — the Community Reinvestment Act (CRA) which forced banks to meet lending quotas in these target groups. Finally, adding Fannie and Freddie to the mix as a collecting tank of pain took the situation from painful to disastrous.

The Bailout

The U.S. Treasury intervening in AIG (taking an 80% equity stake and extending a loan at 11.3%) pushed investors holding stock in other financial firms vulnerable to similar interventions to sell their shares. While these firms held the same debt as before, the debt-to-equity ratios became much worse which, in turn, led regulators to increase their capital requirements and caused their credit rating to be downgraded . This made it impossible for these firms to raise capital (by either selling new shares or floating bonds).

These initial case-by-case steps by the U.S. Treasury had the secondary affect of making the situation worse. By late September, “Wall Street” was gone. The surviving four investment banks were either absorbed or transformed into commercial banks. Lehman was allowed to go bankrupt.

Paulson’s proposal is not in the same league as the Smoot-Hawley tariff of 1930 or Nixon’s wage-price freeze in 1971. The plan is certainly less frightening than his initial case-by-case attempts. The core idea was to buy mortgage-backed securities at a deep discount. These could likely be sold later at profit and earn income in the meantime. But, that point is now moot as the protections Congress added would require bank executives to impoverish themselves and their stockholders before dealing with the Treasury. Only companies in dire straits would participate which thwarts the purpose.

Much of the plan that Congress actually passed made little sense. Republicans, forgetting the cost of insuring savings-and-loan depositors in the 1980s, insisted on fee-based insurance. The fee becomes a tax on the safest securities to subsidize the riskiest. And, there isn’t enough data to determine what such a fee should be anyway.

The Emergency Economic Stabilization Act (EESA) also demanded that the Treasury acquire warrants. Conservatives who expressed fear about mortgage-backed bonds as well as critics of derivatives were both strangely enthusiastic about warrants which are a riskier derivative equity position similar to long-term call options. The Treasury is given virtually unlimited power to confiscate the wealth of stockholders of any company foolhardy enough to play this game. Ironically, the warrants would make it more expensive for the Treasury to buy mortgage-backed securities, and therefore make it less likely those securities to be resold at a profit for taxpayers.

The Wall Street Journal, November 10, 2008

Crestor

A statin drug by AstraZeneca, Crestor, reduced the risk of heart-related death, attacks, and problems by 44% compared to a placebo. This will probably change the health strategy employed over the last ten years.

Dell

Compared to its competitors, Dell is late with new products.

Radio

Radio Stations have been historically durable in both up and down times. But, now after a 18-year consolidation period which left many radio companies heavy with debt, the sector is out of favor — its ad revenue is being squeezed. Valuations are at fire-sale levels.

The Wall Street Journal, November 8-9, 2008

Porsche

The vast majority of Germans disapprove of hedge funds and short-selling. Starting in 2005, Porsche used cash-settled options to acquire shares in Volkswagen. As the price rose, these options generated cash for Porsche which it used in turn to buy more cash-settled options. By March 2007, Porsche had acquired 30% of VW. By mid-September of 2008, it had acquired just above 35%. By October 24, it owned 42.6% as well as options linked to an additional 31.5%. This carefully-timed announcement put the squeeze on hedge funds as they all ran to cover their short positions. Essentially, an auto manufacturer beat hedge funds at their own game.

Economy

Unemployment in October rose to 6.5% and non-farm payrolls declined 240,000. Non-farm payrolls for August and September were revised down significantly. The effects of the downturn are becoming more broad-based. Education and Health-Care were the only sectors to add jobs. Familiar companies are gone. Others that remain are surviving with austerity measures.

Japan is facing deflationary risk.

Robert Byrd

Sen. Robert Byrd steps down as Chairman of the Appropriations Committee. Sen. Daniel Inouye, 84, will succeed him.

New York

Mr. Bloomberg plans to meet falling city revenues with spending cuts and property-tax hikes. In the sixties, the city missed a chance to avoid near bankruptcy — instead raising taxes for new spending. It kept raising taxes until it lost half of its one million manufacturing jobs and half of its large-company headquarters. The new spending squeezed out basic services including police cutbacks. Crime spiraled out of control. New York benefited from good mayors like Ed Koch and Rudy Giuliani, and luckily an expanded financial sector.

Now, the financial sector could be at the beginning of a long-term correction. New York’s budget is overly dependent on revenue from Wall Street.

Guns

People are buying more guns — some with the expectation of changes during an Obama-administration, some for investment purposes because of changes during an Obama-administration, and some with the expectation of an increase in crime during an economic downturn.

The Wall Street Journal, November 7, 2008

Economy

In every part of the world, central banks cut interest rates in an effort to get ahead of the global economic downtown (predicted to be the worst since World II), but investors are placing their bets that banks will quickly run out of options and leverage. Companies large and small are taking austerity measures to survive. In the third quarter, hours worked fell 2.7% and non-farm output (a measure of productivity) fell 1.7%. U.S. unemployment is expected to rise from 6.1% to above 8%. In 2009, the IMF predicts the economies of the 31 most advanced nations will contract by 0.3%.

For Congress’ part, Speaker Nancy Pelosi has proposed a two-stage response: 1) spend $60 to $100 billion now, and 2) cut taxes next year.

The Wall Street Journal, November 6, 2008

Mr. Obama is picking his team including Mr. Rabm Emanuel as Chief of Staff. Challeges mount — from Russia, Afghanistan, and Democratic leadership in Congress.

Business

His choice of business-friendly advisers suggests Democrats will go slow on controversial labor and regulatory issues.

Health Insurance

Health Insurers are expecting to benefit from expanded federal programs to cover low-income children and adults even while the federal government cuts reimbursements made for private Medicare plans.

Labor Unions

Labor expect Mr. Obama to drive their agenda. At the top of the list is the Employee Free Choice Act, which would make it harder for companies to fight union-organizing drives. Unions failed to move major legislation under either Clinton or Carter.

Race

Black power brokers are ready to rise in power with Obama.

Abortion and Gay Marriage

Anti-abortion measures fail everywhere. Measures banning gay marriage pass everywhere.

The Wall Street Journal, November 5, 2008

Sen. Barack Obama was elected the U.S.’s 44th president and the nation’s first African-American president. Democrats control both House and Senate by wide margins, and will probably co-opt one or two Republicans in the Senate to control the 60 seats necessary to overcome the threat of a filibuster.

The rest of today’s issue discusses other election result, the anticipated forthcoming agenda, and calls for governing from the middle. I’ll pass on the predictions and deal with the agenda as it comes.

The Wall Street Journal, November 4, 2008

Myths about the Great Depression

Herbert Hoover was a doctrinaire, laissez-faire, look-the-other-way Republican who clung to the idea that markets were basically self-correcting. No. Far from a free-market idealist, Hoover was an ardent believer in government intervention to support incomes and employment. FDR didn’t reverse course. He went further down the path that Hoover had blazed. It was Hoover who initiated the practice of piling up big deficits to support huge public-works projects. Hoover championed many of the basic ideas — such as central planning and control of the economy — that came to be known as the New Deal.

The stock market crash in October 1929 precipitated the Great Depression. No. The crash precipitated wrongheaded policies that did major damage to the economy — a retreat into protectionism with the Smoot-Hawley tariff causing the internation economy to collapse. Some have argued that the increasing likelihood of Smoot-Hawley passing was a major contributing factor in the stock market collapse.

Where the market had failed, the government stepped in to protect ordinary people. No. Exports accounted for about one-third of U.S. farm income which were lost with Smoot-Hawley. This devastated the agricultural sector. Following in Hoover’s footsteps, FDR tried to raise farm income with quotas and paying farmers to remove acreage from production which caused higher prices for hard-pressed consumers and had the effect of lowering productivity and driving farmers off their land.

Greed caused the stock market to overshoot and then crash. No. The real culprit (as in the housing bubble) was a speculative fever induced by excessively easy credit and broken by the inevitable return to realistic valuations. The last thing Hoover wanted to do upon coming into office was to rein in the stock market boom by allowing interest rates to rise to a more normal level.

Enlightened government pulled the nation out of the worst downturn in its nations history and came to the rescue of capitalism through rigorous regulation and government oversight. No. In disregarding market signals at every turn, Hoover and Roosevelt were jointly responsible for turning a panic into the worst depression of modern times. Government was responsible for a lost decade of economic growth.

The Wall Street Journal, November 3, 2008

Another almost-election-day issue. Last minute articles by both Obama and McCain.

The Wall Street Journal, November 1-2, 2008

The last weekend before the election, and not surprisingly, the emphasis is on politics: An interview with Palin, and an opinion piece discounting the expected Obama win, “This election is not a mandate for Democratic policies. Rather, it is a wholesale rejection of the policies of George W. Bush, Republicans, and to a lesser extent, John McCain.”