Life: Under Construction

A Leopard Doesn't Change Its Spots

via www.nydailynews.com

Albert Gonzalez was at one time an informant to the Secret Service who greatly needed someone of his expertise, that is, someone who had first hand knowledge of the hacking underworld. Unfortunately, a leopard doesn't change it's spots and the Secret Service became wise to the fact that while he was feeding them information, he was also back at his old tricks.

The streamlining of credit cards and their billing process makes our lives more convenient but those same companies also make distinguished targets. Gonzales was just charged with stealing 130 MILLION credit and debit card numbers. I'm sure Gonzales is patting himself on the back for attempting such an enormous feat and other hackers are probably aware that the bar has just been raised. Credit card theft, like insurance fraud, is one of those crimes that the perpetrators can convince themselves hurts no one. They can tell themselves that the people whose credit cards were stolen will not have to pay for the charges, instead the credit card company will take care of it and hurting an enormous corporation isn't a bad thing, they have loads of money.

False.

While the credit card companies may initially pay the price, they are in their business to make money and at the very least, their revenue must cover their costs. With credit card theft so prevalent, credit card companies must spend millions trying to sort out fraudulent charges, launching investigations and trying to protect themselves from further breaches of security. All these costs then get passed on to the consumer whether if it's in fees, higher interest rates or more fine print.

I think it is pathetic that hackers are so insecure and in need of attention that they are drawn to hurting all credit card and bank users. What losers!

A Ponzi Grows in Brooklyn

via www.nydailynews.com

The problem with any Ponzi scheme is that at a certain point, the mastermind will no longer be able to gather enough new investments to pay all his previous investors the interest payments that they have come to expect. Whether this scarcity of new funds occurs because the economy shrinks or because the mastermind has run out of people to swindle, a Ponzi scheme is like a house of cards that because of a slightly breeze or shake collapses to the ground. The victims of the swindle are then left to try and pick up the pieces.

A group of about 40 of Philip Barry's investors sued him for stealing their money when he had told them that he was investing it. While Barry maintains his innocence and pledges that he just needs time to liquidate property that he invested in, a Brooklyn Federal court judge has ruled in favor of the plaintiffs and ordered Barry to pay hundreds of thousand dollars in damages. While this is a moral victory for his victims, it will do little to ease the financial hardships that they are now facing. Most of the people that walked into Barry's grubby storefront were retired, investing their future in Barry. That future now looks pretty grim.

This is yet another reminder to all of us to be careful. Buyer Beware! The only riskless asset out there is something like a T-bill issued from a reliable government (like the US) that promises to pay out X-amount on a specific schedule. For any asset or person that is offering you a return greater than what you would get on government issued debt, there is risk involved. If someone is telling you that they can guarantee you 10% on your investment, at the very least take it with a grain of salt. Ask yourself how they are able to guarantee something like that. Consider that most large mutual funds that are hopefully optimally diversified will not guarantee you anything. Instead they will show you what their performance has been in the past.

While the shrinking economy has exposed some of these crooks, I have no doubt that there are plenty more out there. Please, be mindful and be careful with your money...it is your future.

China gets slapped on the wrist, too bad it won't hurt!

The New York Times reports today that the WTO has ruled against China in motion brought by the United States which argued that China's regulation over the importing of books and movies was in violation of the free trade agreement. The ruling means that China will have to sell American and European DVDs and books along side the domestic versions. While this may be a small win for the US, it does not level the playing field. Currently, even when American DVDs are allowed into the Chinese marketplace, they cannot compete with the cheap pirated versions of the same movies. Chinese consumers are used to purchasing DVDs at exceptionally low prices. It is not clear whether American sellers will be able to match those low prices. If they cannot, it will not matter that if American DVDs are placed on a shelf next to Chinese DVDs. Since they are perfect substitutes, consumers will go with the one that costs less and importers into China will not be afforded any additional market share. Until China honors movies and books as copyrighted products, the US will not win this war.

This feels like a clear sign that, for the first time in a long while, the US is not dictating the terms of international trade. It's China's party and they'll cry if they want to!

You Can't Tax Something If It Doesn't Exist!

Whether it is the arrogance or the ignorance of politicians, they frequently make the blunder of assuming that taxpayers will continue to make the same decisions even if their incentives change. The case in point is the tax on commercial property in England. Previously, unoccupied commercial property received a tax break on account of the property not bringing in any money. British politicians looked at the tax reprieve, starting rubbing their hands together and figured that could raise the taxes on unoccupied commercial property so that it was equal to the tax on occupied property and make a nice bundle of money. So they raised the tax on unoccupied property.

The owners of unoccupied property now faced a different set of choices: with the higher taxes it was more costly to hold onto the property. Some owners could not even afford the taxes and so they began to look for ways to avoid the tax. They discovered that if there was no property, there was no tax and so demolishing buildings became increasingly popular. Perhaps the government had been hoping that landlords would lower the rent they were asking for, or redevelop the property for other uses. Instead they created a situation that caused owners to destroy capital. Hopefully the tax will the rescinded as the government views the level of destruction they have caused.

Ethanol is NOT our savior

On my way in to work I stop by the newsstand outside of my subway station and buy a newspaper...I'm always torn because on the one hand the New York Times has more cultural features than the Financial Times but on the other hand, it is so incredibly biased. Whichever I choose, I have to make my decision quickly because the newsstand attendant fancies me and extra moments spent crouched over a newspaper only open me up to potential creepiness. This morning I went for the Times because I felt like reading something other than financial news and equally to the Times' credit, today's paper was not as ridiculously thick as it sometimes gets.

With my paper in hand I walked down into the sauna which is the subway. I began reading the front page as I stepped onto the F. It was somewhere between 14th and 23rd that my jaw dropped so far, I can only hope the ten second rule applies to subway carriages...the Times, the unabashed mouthpiece for Obama support actually ran an article on the front page that suggested that Obama's energy policy would favor special interests and might actually prove a detriment to the economy. Of course, their analysis was not nearly as vehement as mine would have been...this is why:

There are many different ways to produce ethanol, the most well-known and the most pertinent to this discussion is fermentation. When yeast metabolize sugar in the absence of oxygen, ethanol and carbon dioxide are produced. The main input for the production of ethanol is the source of sugar, in the US we favor corn. Corn producers are all for ethanol as an alternative source of fuel, because increased demand for ethanol will increase demand for corn and that will increase the price of corn...happy days for them.

But what about the rest of us? True the use of ethanol as fuel produces fewer carbon emissions which causes people (like Obama) to hail it as the environmentally friendly fuel. But this estimation completely ignores the fact that fuel is used in the production of corn...it is used as a fertilizer, it is used to fuel farming equipment, it is used in the transportation of corn. Let's not even get into the fact that this corn is most likely being grown with the use of stringent pesticides, who knows what they do to our environment?! Corn is not an environmentally friendly crop...therefore anything derived from corn will likewise carry an environmental toll.

So, ethanol does not have significant environmental benefits but it does carry an additional cost. If demand for ethanol increases, the price of corn will go up....across the board, whether corn is being used for fuel, as feed for livestock, or as a grain for consumption. The result is that by subsidizing ethanol production domestically and siphoning off corn for this use, we are putting upward pressure on food prices. Not only are Americans feeling the pinch of higher food prices, it is being felt worldwide. While our country may be able to withstand higher food prices, our infatuation with ethanol pushes higher food prices onto other countries who can least afford it.

I think it is our desire to have an easy fix to the problem of global warming that makes us susceptible to be hoodwinked by special interest groups. The fact that our politicians have an incentive to cater to special interests groups, all the while making it seem as though they are acting in our best interest, makes it all the more necessary to think on our own two feet (and find independent news sources).

Smut Tax

It would be great if we existed in a Utopia where no central authority was required, no law enforcement was necessary and we were all so blissfully happy that economic redistribution was not necessary. We do not live in such a world and so, in order to keep the peace, we have government. Yes, our government has expanded substantially but its basic aim is to look after all its citizens by protecting all of us and attempting to make sure we all have food, water and shelter. It costs money to provide these public services, hence the need for taxes.

How to tax is a difficult question. If we tax people's income or the profits from their business we provide a disincentive to work, this is not good for the economy. On the other hand we could tax people's purchases, this would not affect their labor decisions. We could tax everything that is sold...the only problem with such a plan is that poor people will be paying proportionally more tax than higher earners because poor people are forced to spend most of their income to feed and clothe themselves. So if there is to be a sales tax, we would ideally like it to on items that are luxury goods in that they are the sorts of things that people indulge in only after their basic needs are met.

The tax that has just been proposed in California is an ideal sales tax because it will not affect people's ability to feed and clothe themselves. Lawmakers would like to tax the sex industry. This would include adult film producers, adult cable channels and the stores that stock and sell pornographic material. Of course the businesses that will be affected by this tax are protesting. Smokers already pay a hefty tax on their cigarettes to compensate society for the health costs of smoking, why shouldn't pornographers be taxed just the same? They impose a cost on society culturally and should be held accountable.

Expectations Take On Debt

On the first page of Nan Mooney's new book, (Not) Keeping Up With Our Parents, she quotes Barbara Ehrenreich as saying 'Middle class couples, earn enough for home ownership in a neighborhood inhabited by other members of their class; college educations for their children; and such enriching experiences as vacation trips, psychotherapy, fitness training, summer camp, and the consumption of 'culture' in various forms.' This quote is from back in 1989, since then our finances have changed but our expectations are pretty much the same.

Perhaps this is why revolving consumer credit grew more than 7.5 percent in 2007. According to the Federal Reserve, total revolving consumer credit now stands at $952 billion. Taking on debt is a way of spreading consumption over your life span: you borrow from the future today, and then have less money in the future. Now one assumption for the amount of debt that Americans are taking on is that they expect to have much more money in the future. But given the uncertainty of the economy and the sheer magnitude of debt, this does not seem like a sensible decision.

Instead of making decisions based on what consumers can realistically expect to afford, consumers seem to make decisions based on what they expect to be able to afford. We've been fed these images of college-educated people who have 9-to-5 jobs and can afford the SUV, the nice clothes, the luxurious vacations and all the little everyday treats that we give ourselves. It's a tough reality to face, that we can't afford this dream, but it's a reality we have to face in order to have a decent future to look forward to.

Credit card companies, mortgage providers all advertise their lending instruments as if they are free money. Car companies and furniture sellers offer 'buy now, pay later' deals as if it is a gift. In our rational moments we know these are only loans and that one day they will have to be repaid. The problem is that our expectations seem to rule our economic choices. We have a decision to make: we can either get real now or get real in the future, postponement will only make it harder.

Check Out Nan Mooney's Website For More Information On Her Book!

Regulate China? You Canute Be Serious!

This is the second installment of 'You Canute Be Serious!'. For part one click here. To briefly summarize, King Canute ordered his throne be taken down to the beach where, being the great man that his was, he would command the tide. The throne was move, the King sat down, the order was given to the tide and the tide didn't listen. Whether the king had a god-complex or was trying to teach his courtiers a lesson is disputed but nature made her point: there are forces in this world much greater than the will of man...namely, the market.

It was in the 1990's that consumers became aware of the poor working conditions in many factories world-wide. We can all remember the stink that was stirred up when it was discovered that Kathy Lee Gifford's clothing line for Wal-Mart was produced using child-labor and forced over-time. Similarly, Nike had to face the music when it became known that their sneakers were assembled in toxic sweatshops. As consumers we felt horrible, because by buying these products we had been implicitly endorsing slave labor.

As the outrage swelled, America brands that produced overseas tried desperately to rescue their tarnished corporate image.  There was only one thing for it...they would have to stop using suppliers that operated under such grueling conditions. But using suppliers that avoided harsh working conditions would be more expensive and as much American corporations didn't want to pay more, American consumers definitely didn't want to face a higher price. We were all spoiled by the China price and despite our moral disgust, no one really wanted to let it go.

The solution? Rather than offering their overseas suppliers financial incentives for improving conditions for workers (i.e. paying them to make those improvements), they decided to just slap some regulations on their suppliers. As we saw in the case rent control, regulations are what policy-makers resort to when they want a cheap solution. Don't worry about fixing this problem with your own money, just regulate it and force the cost onto someone else.

So American corporations joined together and formulated a laundry-list of requirements for an ethically desirable workplace and they presented it to their suppliers...you must adhere to these in order for us to work with you. Chinese manufacturers were torn in two different directions: on the one hand their was fierce competition to deliver the lowest price possible, on the other hand they were now expected to achieve workplace standards that were increase their costs. They were in a catch-22: if they didn't adhere to the requirements they would lose business and if they did adhere to the requirements and subsequently raise their prices, they would lose business to someone who cheated on the requirements to achieve a low price. The equilibrium in this situation is that everyone cheats...Chinese manufacturers bring specialists in to help them appear as if they are paying at least the minimum wage and keeping their workers to a limited schedule while they are really running the same old ship complete with low wages and long hours.

In truth nothing has changed except for the fact that we sleep sounder having been fed this image of respect for workers by big corporations.  When the day comes that  we, consumers, really want to improve workplace standards, we will put our money where are mouths are and fund the changes. Until then we will continue with the status quo.

For more on China as well as information on this great book I am reading, click here.

Rent Control? You Canute Be Serious!

The courtiers of King Canute (Knut) lauded compliments over their ruler, regarding him as the mightiest being in existence. They even claimed that the king was so great as to be able to command the tide. The king decided to check his courtiers' admiration. So he ordered them to move his throne down to the beach, where he sat on it as he ordered the tide to stop its advance. The tide obviously did not hear him because it continued to ride in with the result that the king's ankles got very wet. The point of King Canute's exercise? To show his subjects that there were forces much greater that one man.

Organizations, whether private or public, would do well to remember King Canute's lesson when they are dealing with the force of the market. It seems in this city there are constantly complaints from people in rent controlled apartments claiming that their landlords are trying to push them out. The landlord is always portrayed as an evil miser sitting on his pot of gold while poor people suffer. No one ever blames the politicians who implemented this policy.

No one is arguing that there aren't people in this city who cannot afford housing. No one is saying that they should be pushed out on the street. Similarly, house and apartment prices continue to increase. Meaning that current residents can no longer afford their homes so they are forced away from the city center; their commute increases and their quality of life declines. This is a brief summary of the problem.

The best solution would be to subsidize housing for people facing this problem: providing them with the money to help pay their rent. But of course this optimal strategy requires funding, so either another city program is nixed or taxes are increased. Neither of these options is popular so policy-makers take the cheap and easy route of regulation. Like Canute trying to hold back the tide, policymakers say 'You cannot increase the rents you (the landlord) charge, you must keep them at the current level.' They essentially put in a price ceiling. What happens when the market price for a rent-controlled apartment rises above the price ceiling? The landlord has an incentive to replace that rent-controlled tenant with an un-regulated one. The landlord's incentive does stem from the fact that he would like to maximize his return but I think it's incorrect to assume that landlord is being vindictive as he follows the money. The revenue he makes from rent-control may not be enough to fund up-keep of the building. Equally, why should he alone bear the cost of supporting these people? That is the state's job.

(I will add that tenants of rent-stabilized apartments are often not those that most need them. My old employer has a rent-controlled apartment in New York that she keeps for occasional trips because she now lives on the West Coast. Her financial situation does not require help from regulation and yet she receives it. And while we're still in parentheses I will additionally add that my concern with Barach Obama is that he is the sort of over-confident policy-maker that thinks the government can solve any problem-insert derisive laughter here!!)

It is time that policymakers realize the limits of their power and it is time for the rest of us to start thinking for ourselves instead of falling for our politicians' fall guy.

Food To Fuel Pinches The Pocket

According to the Financial Times, Congress is currently considering so-called 'food to fuel' mandates that would require the US to use 9 billion gallons of ethanol this year. I know environmentalists isolationists may be bending their knees, preparing to leap for joy at this news but I would ask anyone inclined to do so to hang on one moment while I gag in horror.

Ethanol is produced when yeast metabolizes sugar in the absence of oxygen. This method of production is known as fermentation as the most common way to produce ethanol to be used for fuel. The input for this fermentation process is cereal grains. While pure ethanol is not a recommended source of fuel (at least for cars), ethanol added to gasoline reduces ground level ozone formation (if you'd like the science involved check out Wikipedia). In addition to reducing carbon emissions, ethanol can also be produced domestically. So far ethanol seems like the answer to our environmental and political prayers...why am I so against ethanol?

The reason is the input: grains. In order to make ethanol, we must divert grains that would otherwise be used for consumption. This decreases the supply of grains for consumption and this, in turn, increases the price of grains. In the current economic climate, with food prices steadily climbing, the last thing that we need is to add to the expense of food. America is an economic leader, where it's prices go, other economies follow. While for us an increase in the price of bread just means we have less to spend on getting our nails done, in less-developed countries this increase in price can be the different between squeaking by and starvation.

Requiring that the US consume a certain amount of ethanol would act like a price floor on the grains market...the price of grains would be kept artificially high. Of course this is good news grain producers, they would love to receive more money. This is why the farmers (and we are talking intensive farming, not your mom-and-pop establishment) lobby politicians to enact these mandates that transfer money from consumer to producer. Why do we allow this? Because the cost to consumers of this mandate is highly dispersed whereas the benefit to producers is very concentrated.

Luckily is seems that Congress is listening to the critics of this mandate that say that it will drive up the price of corn, wheat and other grains. I am keeping my fingers crossed that politicians heed these warnings so as to not exacerbate an already difficult, in some places dire, food situation.