Congresswoman suggests new tax for the billionaire

http://www.accountingtoday.com/news/Congresswoman-Introduces-Bill-Tax-Millionaires-Billionaires-57700-1.html

When the Fed starts to sell its treasury holding

Treasury yield is going to be higher after QE2 ends and the Fed starts to sell. The Fed's current plan is to start selling 7/1/2012 at a rate of 300 billion a year for a little bit more than 4 years.
Yellen

El-Erian thinks current growth rate hasn't reached escape velocity. A higher interest may cause US economy to contract again and people calling for QE3. Will there be a permanent monetization of debt? The biggest losers will be countries holding large dollar reserve, such as China, Japan, UK, Brazil, and Taiwan, because the purchasing power of the US dollar will be diluted.
US Public Debt

The Fed will probably consider the growth rate and escape velocity before selling. If growth rate is still slow by 2012, the selling may be done at a slower pace. That will have the same effect - a permanent monetization of debt.

Why do I think Goldman is responsible for the crisis of 2008

Goldman is a main buyer of Washington Mutual's Option Adjustable Rate Mortgage for repackaging into securities. Most Option ARM has a growing loan balance and borrowers usually default when home prices drop. Goldman must have known the risk of this product as evidenced from their buying protection from AIG. But they continue to buy these mortgages in bulk, repackaging and selling them to other long term investors such as pension funds and insurance companies. They probably also used their reputation and sophisticated model to influence the rating agencies on the securities they repackaged to get a good price. Their attitude toward these securitization is that as long as someone else is buying we don't care about the long term sustainability of the product. The same logic obviously doesn't apply if you are buying a car or an airplane. I see what Goldman did as a textbook case of moral hazard. Why would the expert of risk assessment not caring about the risk involved? Because that expert (read Goldman) intended to transfer it to others to make a handsome risk free fee income.


Option ARM:
http://www.mtgprofessor.com/tutorials2/option_arm_tutorial.htm

FDIC sue WaMu executives:
http://www.bizjournals.com/seattle/blog/2011/03/fdic-files-lawsuit-agains-wamu-execs.html

Investment - the Buffett Method

1. Look for highly profitable companies that generate cash.
(What to buy? A company with positive cash flow.)

2. Decide if the company's profitability is lasting. Look at its product and long term edge.
(New technology brings efficiency but the edge is fleeting. Destructive creation is continuous.)

3. Wait for the tide: when the business cycle turns grab the ones you have wanted for a long time. (When to buy? In the early Spring of a cycle - when snow just started to melt)

On Social Security

Social security is not just an investment vehicle, it is also an insurance scheme. The insurance portion is that annuity is paid until beneficiary's death, but not a month more. So people who die early subsidize those who live a long life. The law of large number says when the participant of an insurance scheme increases its variance will be reduced, so there is efficiency to be gained from mandatory participation – a smaller variance implies smaller surplus to absorb negative shock. With government as the sole administrator there is also savings compare to private insurers building multiple administrative system and staff for just a portion of the population. Since safety is at the heart of social insurance, pursuing superior investment outcome isn't desirable as it inevitably involves risk taking and will have winners and losers. The goal of all social security is to provide a basic safety net, not a luxury retirement, hence there is a cap on pay that is subject to payroll tax. There is also a small degree of wealth transfer – lower income people will see social security replace a higher proportion of their pre-retirement income, but higher income people will also see a larger check. The bottom line is that society will always have losers, who don't save enough when they are young, squandered their money in bad investments, or become victims of a crime. Social security system is to provide that basic safety net so as to eliminate the need for charity helping senior citizens struggling financially perhaps in the street. Without government mandate individuals cannot by themselves form such an insurance pool, especially considering the ones who need it most is likely the ones refuse to buy in the first place.

In debt to Keynes

The recent experience of the Great Recession 2007-2009, the ensuing fiscal stimulus package from government around the world, and the Fed's unprecedented monetary policy response, reminds me how much intellectually in debt we are to Keynes. There is no doubt in my mind that without these government effort the world would have plunged into a prolonged depression. Living standard around the world would have fallen so much that hardship and poverty would have been everywhere. This was what happened in the Great Depression. The amazing thing to me is the lack of opposition to these fiscal and monetary policies, other than a few rare but notable exception such as Robert Barro of Harvard. Economic policymakers around the world understand that in a severe financial crisis government should err on the side of doing too much, not doing too little. The mainstream laissez-faire attitude toward market evaporated in a short period of time. Governments around the world coordinated their effort. Policymakers know government directed investment will not be optimal or efficient, but if they don't reverse the tide of the confidence crisis, the loss in output and employment will be huge and ten times more wasteful than the relative inefficiency of public investment over private investment.

What changed the mind of policymakers since the Great Depression of 1930s? Over the past 80 years there is an onslaught of attack on Keynesian thinking. Friedrich Hayek called Keynesian thinking as “the road to serfdom”. Milton Friedman once said: “the great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.” Politician on the right is always calling for a smaller government. But I think deep down they understand Keynes is right on the cause of the Great Depression. They know Keynes is right on government response to financial crisis. Keynes wasn't advocating a central planning government in the sense of communism. He is saying, when you have massive unemployment as high as 25 percent of the population and rampant poverty, it is less wasteful to use the government investment on whatever endeavor than do nothing. Infrastructure building creates job. Scientific research creates job. Even pyramid building creates job. And after that pyramid or monument is built, private consumption and investment will return to normal. Isn't this what just happened since the last quarter of 2007?

Standing today in 2011 when economy is on path to full recovery, we are all in debt to Keynes. Without his insight and compelling argument policymakers around the world might have the wrong action and we would have been doomed for a generation. We shall never forget this important lesson.

Saving and Spending

Mom's personal finance strategy has always been "denying herself". She has crimped her consmumption her whole life. Is her frugality rewarded? Or just squandered by others? She doesn't have many friends, because she spent her whole life working and saving. Maybe it is time to be generous.

The hardest part of economic decision is that you have to not just save wisely, but also invest and spend wisely. How to spend your wealth takes as much effort and planning as how to build it. Do you spend it on travel, dinning, and making friends? $100M gift to the public library? $1B gift to eradicate malaria? It is no easy task to spend it wisely.

China and Japan's economic development path

Reading: http://mpettis.com/2010/11/what-happens-if-chinese-growth-slows

Michael Pettis pointed out several important things:

1. Chinese development is unbalanced, heavily depend on export and investment.

2. Chinese economic re-balance toward more consumption and less investment is essential for its own continued prosperity and will benefit not just China but economies worldwide.

3. A Chinese slow down in its GDP growth rate does not mean worldwide contraction. It may boost economic growth in other parts of the world by two ways: a higher level of Chinese consumption and a higher export share for countries other than China.

4. Chinese economic development model is very similar to Japanese, with probably a 20 to 30 years time lag. So China is on a cross road similar to what Japan faces in the late 1980s.

I think all these points are well argued and the history of Japanese decision could be a useful guide. I also think these arguments are mainstream in the US policy circles. Here is an evidence:

http://www.federalreserve.gov/newsevents/speech/bernanke20101119a.htm

There are several interesting theoretical questions being raised here by others. One concerns Say's Law and the Keynesian view: Does supply creates demand? Or Demand creates supply? I think a modern version of Say's Law should be: When a person finds a job he/she will have demand for consumption: housing, car, furniture, etc. Keynes's idea is that government spending/investment will create jobs, which in turn creates private consumption – a more sustainable demand. If we consider the economic development strategy in a poor country such as China in the early 1990s or Japan in the early 1960s or the US sometime in the 19^th century, the obvious truth is that household income is very low and aggregate demand is very weak. This low income is due to weak productivity that is true to any country pre-industrialization. There is a chicken and egg problem in the poor country: low level of productivity (supply) caused weak demand. That weak demand also creates an environment that suffocates productivity growth – no customer even if you build a super efficient factory with government funding. Japan and later China decided that they can rely on richer country's demand for their economic growth. First they will use their low labor cost and government funding to build factories for export. This will create jobs and savings in the household. Government and banking system will channel this saving back to the rich country (read US), so that rich country consumers can leverage their stronger balance sheet for more consumption and investment. This translates to more export for Japan and later China. I think it is a successful model for rapid industrialization. I also think this gives the US cheap financing, and cheap imported consumer goods, both fostered the unprecedented prosperity. Without Japan and China there is no doubt that interest rate will be a lot higher and consumer goods a lot more expensive in the US. Just imagine what would happen if China and Japan withdraw their combined 2 trillion dollars deposit from the US treasury. The US will also have to devote a much larger work force to low value added manufacturing, a high opportunity cost. My conclusion is that supply and demand are just like chicken and egg – it is meaningless to debate which one comes first. Keynesian idea is useful in the Great Depression of 1930s and the Great Recession of 2008. It is also useful in constructing Japanese and Chinese industrial economy when they were poor. Now that China is rich it should consume more and let other countries have a chance to industrialize. The Say's Law is also true: demand expansion through borrowing is unsustainable, regardless it is from consumer or the government. A healthy economy depends on the growth of high pay jobs. High pay job is a form of supply. It is also a source of demand.

How do big estates fight estate tax?

A rare chance to see how the super wealthy operate. Interesting.


http://money.cnn.com/2010/12/21/news/economy/estate_tax_lobby.fortune/?section=magazines_fortune

FOMC statement Nov 3, 2010

From the Federal Reserve's Federal Open Market Committee:
Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising, though less rapidly than earlier in the year, while investment in nonresidential structures continues to be weak. Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Sandra Pianalto; Sarah Bloom Raskin; Eric S. Rosengren; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Voting against the policy was Thomas M. Hoenig. Mr. Hoenig believed the risks of additional securities purchases outweighed the benefits. Mr. Hoenig also was concerned that this continued high level of monetary accommodation increased the risks of future financial imbalances and, over time, would cause an increase in long-term inflation expectations that could destabilize the economy.