The Diverse Rewards of Being an Oblivious Investor

Imagine you set up an automated Twitter account called something like “Inside Investment Advice” and made it alternate every 24 hours between two tweets:

Oh God! Sell! Sell! Sell! Sell!

AND

Oh God! Buy! Buy! Buy! Buy!

You would probably accrue far more followers than you deserve. There seems to be endless demand for panicky, hyped-up advice to TAKE ADVANTAGE OF THIS STOCK TIP NOW OR ELSE YOU WILL BE SORRY!

That’s a reason I love websites like The Oblivious Investor, which recently featured this exchange between a reader and the website creator, Mike Piper.

Q: How often do you calculate your portfolio’s rate of return?

A: Never.

It’s also why I am grateful to Mitch Tuchman (see his investment advice here) who convinced me in the course of one conversation that the people who benefit the most from fund managers who emit a steady stream of advice to sell and buy are fund managers who emit a steady stream of advice to sell and buy.

I am not a financial guru by any stretch, but I am someone whose profession has learned a good deal about how human beings make decisions in the face of complex information under conditions of high emotion. To summarize a complex scientific literature simply: We stink.

That’s a key reason why investment experts like Mike and Mitch preach that you will almost always lose money over time if you jostle your investment portfolio every 20 minutes based on the latest tip, trend or tweet. As a psychologist, I can also assure you that in addition to losing you money, it’s a surefire way to make yourself a lot less happy.

Asking the Wrong Question about the Lehman Brothers Collapse

Asking whether we should have bailed out Lehman Brothers is the wrong question

On the 5th anniversary of the start of the 2008 financial crisis, Andrew Ross Sorkin is one of many people wondering “What if the U.S. had rescued Lehman?“. People keep asking this wrong-headed question for two reasons, one of which is entirely forgivable and the other of which is not.

Begin with the facts: Government’s reaction to the financial crisis did not start with the decision to let Lehman fail. It began six months earlier when the government chose to bail out a similar institution with similar financial problems: Bear Sterns. This signaled to Lehman that they could continue with business as usual and the taxpayer would be there to rescue the lions of capitalism whenever called upon.

Government policy was thus to bail out one investment bank and then six months later refuse to bail out a similar investment bank. Why do so many people only ask why the government didn’t bail out Lehman and so few ask why it bailed out Bear Stearns?

Let’s deal with forgivable reason first. Psychologically, it is easier to speculate about “what might have been” regarding something that did not happen than something that did. We know what happened when the government bailed out Bear Stearns; we will never know what would have happened if the government had bailed out Lehman. The absence of certain knowledge gives our imagination more running room. ‘Twas ever thus in the human mind, and therefore not to be castigated.

But the other reason is less forgivable: The sense of entitlement of the people who run Wall Street. In their world view, when they take risks for profit and end up losing, a taxpayer bailout is only right and just. The bailout of Bear Stearns thus requires no explanation, Indeed, second-guessing it would be an act of lese-majesty. On the other hand, if the government dares to hold the masters of the universe responsible for their stupidity and cupidity as it did at Lehman Brothers, then the bankers deserve an immediate explanation (accompanied of course with a forelock-tugging apology).

Quote of the Day

Five years ago today, Lehman Brothers filed for bankruptcy. In contemplation of what followed, today’s Quote of the Day comes from a speech delivered a little over five years earlier:

Macroeconomics was born as a distinct field in the 1940’s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and to save, not from better fine-tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management.

–Robert Lucas, in his 2003 Presidential Address to the American Economic Association.

The way we talk about prisons

Mike Konczal’s piece from the WaPo linking the economy with declines in the prison population caught my eye, too. Rather than echoing Keith’s point about the manifest falsity – or methodological futility, for that matter – of establishing the association, I’ll highlight a different aspect of the story.

In the five years since the economy tanked, there’s been a recognisable shift in the way people talk about justice policy. The Urban Institute’s John Roman put together a nifty graphic that illustrates how the policy recommendations of various interest groups have aligned in light of recent fiscal instability.

Screen shot 2013-07-29 at 00.37.36

Continue reading “The way we talk about prisons”

What Detroit means

The first thing I thought about Detroit is that the state’s appointment of a receiver demonstrated the Republican governor’s profound indifference to the democratic process of a Democratic city, not to mention a white governor’s profound indifference to a black city.   This may be true, but it’s also true that Detroit’s finances are such a catastrophe that, like New York in the 1970s, it seems to need an outsider to get its house in order. It helps that the trustee is African-American, though not very much: even temporary government without the consent of the governed should cause us alarm.

The second thing I thought about Detroit is that selling off the collection of the Detroit Institute of Art, which the trustee estimates would be sufficient to retire all of the city’s debt, is the best of a number of bad options. Museums nationwide are hyperventilating at the prospect, but they also think it’s sensible to keep on hand huge numbers of items that no one ever sees.  I don’t quarrel with the need to have a deep collection for research purposes, but I also don’t see why it’s considered bad form verging on unethical to sell the parts of the collection you’re not using in public to sustain the parts of the collection you ARE using in public, and at the same time not coincidentally making the sold pieces available to the public, albeit in a different location.

If there had been a Great Fire of Detroit, and the whole city destroyed, no one would argue that recreating the city’s art collection should take priority over food and shelter for the city’s people.  The years of financial mismanagement have incinerated Detroit just as surely as a physical fire; why shouldn’t we pay more attention to basic needs than to cultural institutions?

And isn’t the whole function of assets to provide financial security when income doesn’t suffice? Again, I wonder about the racial composition of those who champion the inviolability of the collection as against the racial composition of those who think it might be necessary to dispose of it. The state’s Attorney General has opined that the city may not sell them because they’re held in trust for the citizens.  But “The United States shall guarantee to every State in this Union a Republican Form of Government,” and I don’t notice anyone’s raising a ruckus about the loss of that part of our patrimony.

The third thing I thought about Detroit is that the bondholders’ interests are being given absolute priority over the interests of current and former employees, whose pensions are at stake. This is the case in Illinois as well, where at least some portion of the pension “crisis” could be solved by refinancing the debt and stretching out repayment but where that solution is not even considered because the bondholders don’t like it. I understand the value of the municipal bond market to cities’ ability to expand infrastructure but municipal bond investors are investors and should be prepared to accept some pain when they toss their dollars into what’s obviously a money pit.

And the fourth thing I thought about Detroit is that it’s Americans’ closest analogue to what’s casually referred to as “the European debt crisis,”  throughout which salvaging the Euro has meant satisfying bondholders at the expense of people who’d like to work or collect their pensions.   Very few commentators seem aware that the real crisis is one of self-government (or its destruction), or that the Germans have managed to do through economics what they couldn’t do through war, that is, run Europe.  When externally-imposed austerity hit Greece, all I could remember was the bumper sticker from the era of the junta: “Greece: Democracy born 508 BC, died 1967 AD.”  Or, this time around, “reborn 1974, killed again 2011 or -12 A.D.”  As the saying goes, same s**t, different day.

Back to Detroit: if I were trustee, I’d sell off DIA’s assets in a heartbeat and use the proceeds to protect employee pensions. If there was anything left for the bondholders, fine; if not, too bad: it’s the pensioners who paid their share and are entitled to what they were promised. Even after years of trashing public employee unions (brought to you by the Heritage Foundation and other fronts for wealthy people who don’t like to pay taxes or see working people make reasonable money), there must be some court somewhere willing to recognize that the obligation of contracts shall not be impaired.

Of course, I would never be chosen trustee, but that’s not the point. The point is, my solution is what would happen if Detroit were still governed by its people. Detroit: Democracy died 2013 A.D.

The Cypriot deal and Wiener-type obviousness

So it looks as if all the insured depositors get paid in full, and all the uninsured depositors, including lots of Russian mafiosi, are left sucking wind. That seemed like the obvious solution to me, but I was fully aware of my ignorance of what might else be in play. Now that it’s happened, I wonder whether the previous proposal was just a head-fake to make the necessary resolution more palatable on the island.

All of which reminds me of my favorite Norbert Wiener story. (Whether canonical or apocryphal, deponent saith not.)

It seems that Wiener was lecturing, and skipping – as was his wont – about four out of five steps in every demonstration. At one point he said “And therefore it’s obvious that … ” and wrote a string of symbols on the board. He then started to add “Thus we see …” when some thought brought him up sharp. He stared at he board for a few seconds, said, “Wait! Is that obvious?” stared at the board a while longer, said “Excuse me for a minute,” and left the room.

Twenty-five minutes later Wiener returned, drenched in sweat, with his necktie loosened, his collar unbuttoned, and clutching a sheaf of papers covered in scrawled writing.

Coming once again to the front of the room, he turned to the class, said, “Yes, it was obvious,” and resumed the proof of whatever he’d been proving.

No doubt my first instinct was “obvious” only in that extended sense. Any reader with actual expertise is invited to elucidate the problem.

Megan McArdle says The Thing That Is

Mere words can hardly convey the preposterousness of the debt ceiling.

Precisely:

Mere words can hardly convey the preposterousness of the debt ceiling. It is a stupid artifact of legislation that was hastily passed in the World War I era, and it creates a paradox at the heart of our budget politics: the law of the land commands the government to spend more than it takes in in tax revenue, and also, forbids the Treasury to borrow the necessary money.

[snip]

When I was reporting on Wall Street, I used to be told with some regularity that government was needed to counteract the short-term thinking of the business sector, who never thought much beyond the next quarterly earnings report. This now seems as quaintly adorable as picture hats and daily milk deliveries. An ADHD day trader with a cocaine habit and six months to live has considerably more long-term planning skills than our current congress.

Like other anti-Coiners, Megan doesn’t address the question of what the President is supposed to do if the Congress orders him to spend money it forbids him to raise, but she’s right to say that the Coin idea is a vicious satire on our current political situation, as created by the clownshow calling itself the House Republican Conference, with assistance from Grover Norquist, the Brothers Koch, and most of Red Blogistan. Which, for some of us, is the main point.

If not the Coin, then what?

If the President is sworn to execute the laws, and can’t obey both the Congress’s command to spend money and the Congress’s limit on borrowing money, and if minting a $1T platinum coin gets him out of that box, doesn’t he have to issue the coin?

Though I somewhat playfully supported the Platinum Coin fix* to the debt-ceiling problem during the last crisis – as the perfect non-solution to a complete non-problem – I’m sympathetic to Kevin Drum’s impatience with the idea.

The Coin may be within the text of the law, but it’s hardly within its spirit, and the national credit of the United States should not depend on legal shenanigans. Much, much better to have the Republicans in Congress grow up and authorize the President to issue debt to pay the bills already incurred, and still being incurred, by Acts of Congress.

Politically, it looks to me as if the Republicans know they have a losing hand – their Wall Street paymasters won’t hold still for default – and are prepared to throw it in, now that the President has said he won’t ransom the hostage. That’s another good reason not to give them an out.

Still, there’s a real question here. The President’s oath of office commits him to “take care that the laws be faithfully executed.” The law commands the President to expend appropriated funds, and gives him no authority either not to expend them or to withhold payment when the bills come in. (Not paying the debt when due is not only a horrible, terrible, awful, no-good idea, it might violate the 14th Amendment to boot.) But the debt ceiling forbids the President to borrow the money required to obey the command that he spend it.

So: if we imagine a situation where the Congress doesn’t lift the debt limit, and the President has to choose between the Coin and default, would default really be the better option? If default is preferred, on what principle should the President choose which bills to pay and which to refuse to pay? And by what authority would he make that choice? If you’re sworn to execute the laws, and your choice is between the Coin and not executing some of the laws, aren’t you pretty much stuck with the Coin?

* For those who haven’t been following, the idea is to take existing legal authority to mint platinum coins in any denomination by the horns and mint a trillion-dollar coin. You then deposit that coin in the Treasury’s account at the Fed, reducing the national debt by $1T. The authority to mint gold bullion coins – which don’t count against the statutory limit on paper currency – requires that they only be issued at their intrinsic value, but somehow that clause got left out of the legislation extending coinage authority to platinum.

Wall Street and the fiscal cliff

The Wall Street Bourbons: Ils n’ont rien appris, ni rien oublié. Except that they’re now Keynesians.

Four take-aways from this National Journal story:

1. Wall Streeters are “all Keynesians now.” (No Hayekians in hedge funds?) Like all sane people, they want the government, in a situation of prolonged inadequate final demand, to boost final demand, rather than shirinking final demand by raising taxes or cutting expenditures. None of them seems to be afraid of bond vigilantes. None of them is leaving coupons under his pillow for the Confidence Fairy.

2. They’re simply incredulous that anyone believes anything about the public interest firmly enough to motivate action, and they regard such beliefs – whether Red Team beliefs that the welfare state is economically unsustainable and morally degrading or the Blue Team belief that the richest country in the history of the world shouldn’t deprive dying poor people of hospice care to balance public budgets – as signs of immaturity, if not of an Axis I disorder called “ideology.”

3. Reporter Nancy Cook agrees with them on (2):

Part of the financiers’ amazement comes from the fact that politicians cannot to overcome well-worn ideologies—an idea foreign to the New York culture of deal-making, where the only true orthodoxy is the bottom line. … As long as Washington policymakers remain wedded to political ideology and positioning instead of facing the country’s big economic issues, New York will never truly get its sister city down south.

4. The Streeters’ direct responsibility for having crashed the economy through the reckless way they played with Other People’s Money hasn’t put any hole at all in their smug arrogance. Their job, in their view, is to pocket as much of that OPM as possible without actually going to jail, and Washington’s role is to get out of the way of their ability to do so. If Washington acts otherwise, that just demonstrates once again the moral superiority of the deal-making, bottom-line culture and those who live it.

I tend to agree with what I take to have been the Geithner-Larry Summers view that there was no way, in the situation of early 2009, to expropriate these expropriators without risking another Depression. Maybe there’s no way now. But that doesn’t make doing so eventually a less central policy goal.

Hoyer, McConnell, and hostage-taking

McConnell said it first: Congressional Republicans are extortionists.

The usual suspects are pretending to have their fee-fees hurt because Steny Hoyer compared the Republican debt-ceiling threats to hostage-taking. Two things to note here:

1. It was Mitch McConnell who originally made he comparison. The difference is that Hoyer disapproves of hostage-taking, while McConnell was bragging about it. As far as I can find, no wingnut complained about McConnell’s boast that the full faith and credit of the United States was “a hostage worth ransoming.”

2. If the GOP doesn’t want to be accused of extortionate tactics, perhaps it could consider not practicing extortion. And yes, I count threatening the nation’s credit and the national honor by forcing the federal government to default on obligations undertaken according to law as extortion. What do you call it?