How Much Blame To Throw At the CRA?

Some experts and some non-experts have pointed a finger at the Community Reinvestment Act as part of the reason behind the housing bubble bursting and setting off an economic crisis.  I afforded it due consideration, but when all is said and done holds minimal blame in the grand scheme.

The failures in government regulation undoubtedly played a part in the economic crisis.  However, compared to other government action, the CRA accounts for a tiny share of the pie in more ways then one.  It was a mistake to change CRA compliance requirements to be measured on a quantitative basis and away from a qualitative value judgement.  This forced lending institutions to require meet an annual lending quota or risk jeopardizing government benefits.  The CRA most definitely encouraged lending to those who could not afford.

But looking at the percentage what the government qualified as CRA loans pales in comparison to the total share of outstanding subprime loans.  Between 1993 and 1998, only $467 billion dollars qualified as CRA loans – a tiny slice of the trillions and trillions of dollars in outstanding home loan mortgages.  Present day estimates indicate that CRA home mortgages only account for about 20% of all home mortgage loans.  Even taking into account the higher default rates of subprime loans, a 9% default rate on CRA loans doesn’t even begin to approach the aggregate value in total defaulted home mortgages.

Numbers aside, it’s questionable whether or not a repeal of the CRA would have stopped the subprime lending spree.  In fact, two other government actions greatly encouraged subprime mortgage practices far more then the CRA.

Combined, Freddie Mac and Fannie Mae has either bought up or issued nearly half of all outstanding home mortgages by buying up loans from other lending institutions.  Freddie Mac and Fannie Mae were able to begin buying up large amounts of outstanding home loans because they could now sell mortgage backed securities.  Prior to the passage of the Gramm-Leach-Billey Act(which repealed the Glass-Steagall Act), banks were prohibited from offering investment services.  But now Freddie Mac, Fannie Mae, and all banks could begin leveraging their outstanding home mortgage loans to raise additional capitol.

It was a new way to raise capitol revenue and a new way to increase profits.  It’s natural for all businesses to exploit their profit margins while managing risks.  However, the risks of mortgage backed securities were lessened by the nonbinding understanding in the financial sector that the government implicitly guaranteed the securities issued by Freddie Mac and Fannie Mae.  The federal government has long provided these two instutitions with tax breaks, subsidies, low interest loans, and a reduction in capitol backing regulations.

Believing the mortgage backed securities issued by Freddie Mac and Fannie Mae would always be liquid, believed, to some degree, that the risk of subprime lending were offset by the implicit government backing.  With the ability to leverage loans as capitol and the perceived invunrability of Freddie Mac/Fannie Mae, fueled an increase in subprime lending.  It was a fantastic short term way to spur growth in the housing market, but miscalculated the risk involved based on assumptions.  It was not the need to meet CRA requirements that caused banks to make high-risk loans, it was the incentive to raise capitol.  The CRA could have been nonexistent and lending institutions would have still pursued those avenues which appeared profitable.

Government missteps played a role in where we are today.  Banks should have never been allowed to enter the investment market through government deregulation.  And the government never should have allowed Freddie Mac and Fannie Mae become the lynch pin in the home mortgage market.

Instead of pointing our finger at a single, politically self-serving source lets all grow 90 more fingers, so we can point the blame in all directions where it rightly deserves to be.  This wasn’t the CRA’s doing.  This was a confluence of events ranging from government to free market to populace none of which are to be used to gain the political upperhand.

Playing The Wrong Kind of Politics Dooms The Bailout Package

Question.  What kind of recipe do you get when you have a Congressional election year, a financial crisis, and misinformed voter anger?  A recipe for disaster.

And now our politicians in Washington are, for all intensive purposes, are sitting on their hands by voting down the $700B bailout package in the House today.  In response the stock market had it’s worst day in history in points lost and it’s worst percentage drop since 1987.  All of this following on the heels of the beating Wall Street has suffered since September 18th.

We are witnessing a colossal tragedy unfolding if it continues.  What is occurring in Washington, alongside an angry populace fuming at the “greed” of Wall Street, is the equivalent of driving a car with your eyes closed down a winding mountain road.  There is a confluence of forces playing their part in this Shakespearean tragedy, none of which are constructive to our future economic health.

I expect when our elected officials to cast their vote on any bill, especially a bill that of such critical importance, to decide based on the merits of the bill.  Any other factors that enter into the decision making process are unacceptable.  Yet, today some House Republicans blamed “blamed Ms. Pelosi for a speech before the vote that disdained President Bush’s economic policies, and did so, in the opinion of the speaker’s critics, in too partisan a way,” to explain their nay votes.  Republican Jeb Hensarling said the bailout package would the nation on “the slippery slope to socialism,” and added that saddle taxpayers with “the mother of all debt.”

Democrats of course fingered Republicans in the typical partisan merry-go-round that has become standard practice.  In the end, all Washington accomplished today was politicizing the most important event of a generation.

Understanding why the vote became politicized is so perfectly simple, yet infuriatingly frustrating.  All it requires is a look at the vote roll.  Another reason opponents of the bailout package gave for voting no was that they had “encountered too much hostility for the bill among their constituents, and were worried that a vote in favor would be political suicide.”  Not surprisingly, in an election year, political suicide can be onset by taking action that might jeopardize your reelection.  Don’t rattle the cage too much.  People might get scared.

I came across the Robot Pirate Ninja blog today which had an interesting article on this very topic.  The post linked to FiveThirtyEight were political suicide is explained in the most simpliest of terms.  38 incumbent Congressman who are in tightly contested races voted on the bailout package.  Only 8 of the 30 voted in favor.  That’s a .211 average.  Of those not in a contested election race, 197 voted for and 198 voted against.  Almost a 50/50 split.  Is this just a statistical anamoly or did 30 elected Representatives decide their vote on what’s best for keeping them in Washington?  I’ll take the former and run with it.

Following the introduction of the bailout package by President Bush, a Gallup poll showed 78% of American’s supported some form of bailout package.  But only 22% of voters favored Bush’s proposal while 56% favored a different plan other then Bush’s.  Clearly, most American’s favor some form of a bailout package.

I contend that the 56% of voters who favored something other then the proposed plan responded on their deep distrust of Bush(note his 22% rating in polls), and a backlash reaction to the idea of using tax payer dollars to rescue Wall Street.  Bush sits as a lame duck President with an unbearable approval rating.  Any proposal he makes is going to be met with such ferocious backlash it’s destined to fight an uphill battle.  That hill has about a 78% incline.

Combine that with a misconception among the populace that the $700B in taxpayer money is going straight into the pockets of corrupt, greed driven corporations, it creates an irrational fear that the bailout package is the epitome of Wall Street excess and irresponsibility.  It’s an emotional reaction, and these types of reactions incite a disregard for analysis.  Logic bows in the face of feverish passion.  I have read so many blogs that are a mouthpiece for a blinding rage pointed at Wall Street.  I’ve talked to many people who ardently contend that they should not be spending their dollars to save money hungry con artists.  The bailout package has become something deeply personal for many people.

Times of crisis are one of the few times our elected officials start taking the pulse of their constituents.  They have almost assuredly taken note of the wrath that’s resonating throughout our country.  They are certainly not going to poke an angry bear.  It just might bite.

Some of this would be alleviated by an American populace that viewed the bailout with less theatrics and with more understanding of the economic implication in having a massive bank failure in this country.  What we face is not a singular, isolated event.  There is a cascade of dominos that follow if we allow banks to crumple.

Banks holding trillions of dollars in illiquid assets amass massive debt.  Without capitol reserves, banks drastically reduce corporate loans.  Corporate entities unable to raise needed capitol investment scale back their production.  The supply and demand equilibrium becomes unbalanced and price delfation sets in.  Existing assets lose their value sending businesses scrambling to stabilize their capitol reserves.  Lacking necessary capitol reserves and unable to sustain operations, some businesses shut down completely.  Existing business hoard capitol reserves and make severe cut backs.  The unemployment rate spikes upwards.  Lost home income translates into a plummet in consumer spending.  Supply and demand ratios become more imbalanced and deflation continues.  With reduced loans, banks start calling in their loans.  Borrowers, already struggling to meet their own capitol needs, default further reducing existing banks ability to lend.  Squeezed with minimal capitol reserves and debt either are unable to pay their loans.  A further string of bank closing occur.

The vicious cycle that unfolds goes on and on.  This sort of cycle has taken place once before in this country and that was the Great Depression.  Understand that bailing out the financial institutions that are now treading water is to put a stop to the falling domino’s – to stop this country from experiencing a massive bank failure and the subsequent evaporation of the necessary capitol to keep the economy functioning.  $700B is a small amount of money to potentially to minimize a catastrophic risk.

Handcuffed by political preservation, the gears have ground to a halt.  Let us all hope that there are enough of our elected officials in Washington who aren’t driven by partisan politicization, and can hash out a needed bailout package.  In the end, I do believe some sort of package will go through.  Yes, our tax payer dollar will go to corporate America.  And yes, it’s going to save them from running aground.  But it’s also going to save our jobs, our health insurance, and our retirement benefits.

This isn’t the first time the government has had to save the free market.  It happened once before but not before plenty of foot dragging.  In if helps, last time this happened the government came out recouping our tax dollars and then some.

The Rolaid Bills

Buffalo sports fan are lovable losers.  We’re perpetual pessimists scorned by a history of failure.  Our expectations never fail to account for the worst possible outcome.  Every dramatic moment our teams have been a part of invariably end with us being on the short end of the stick.  “Wide Right” and “No Goal” are part of our sports lexicon.

So after two straight dramatic come from behind victories, I sat down Sunday to start that football watching ritual with trepidation, fully expecting the worst.  And when, after trailing yet again, after three quarters, I was cursing and yelling at the Buffalo Bills as if my deriding comments would somehow spur on another comeback victory.

And once again the Buffalo Bills didn’t fulfill their fans prophecy, mounting another victory earned in the last quarter of play.  Not quite as dramatic as the last two, but making a game versus an overmatched opponent wasn’t helping my sports indigestion.

The last three weeks haven’t been the self fulfilling prophecy I’ve become accustomed too – the Bills will make a turn and lead me down the path of disappointment.  As much as I want to criticize the play of Jason Peters as not being in Pro Bowl form, I’ve been left with a different feeling three weeks in a row now.

I can’t escape the feeling that I’m watching Trent Edwards mature into an NFL superstar.  With only 13 starts under his belt and four comeback wins already, it begs the question – how much better can this kid from Stanford get?  The answer my Buffalo sports pessimism wants to give isn’t materializing.  Instead, this strange sense of hope and anticipation keeps getting in the way.

Now, it’s on to week 5 with the Bills taking an undefeated record into Arizona to battle the favored Cardinals.  I’ll be cheering on my team but this time focusing on everything that could be, and not dangling over a precipice waiting for that twig I’m clinging to to snap.  I’ll still have a roll of Rolaids by my side just in case though.

Breaking Down The First Presidential Debate: Lead Question #2 – Economic Policy

Rather then discussing how Barack Obama and John McCain presented themselves to the American public in their first presidential debate, an examination of the content of the debate is far more productive, in terms of mapping policy issues then impulse, surface impressions.  With that in mind, I will explore each leading question and give an analysis of what was said by each candidate.

Economic Policy

The initial lead question to differentiate each candidate on their economic policy, specifically how each would lead the country out of the current crisis and back to economic health.  Both candidates focused on their long term economic policies, and oddly did not mention the short term measures for immediate stability.

McCain opened with stressing a reduction in earmark spending citing that Obama had asked for $932M in pork barrel spending during his service in the Senate.  He compared earmarking to “a gateway drug” that eventually leads to Congressional corruption.  Citing his record in fighting excessive spending and corruption, McCain pounded home his mission to reduce the size of government and stop “the largest increase in the size of government since the Great Society.”  He also spoke to his intent to reduce the business tax which he has previously stated would be shrunk from 35% to 25%, as well as his desire to give every American a $5,000 health care tax credit along with increasing the child dividend to $7,500 per dependent.

Obama concurred with McCain on the need for fiscal responsibility, but outlined his contention that more needed to be done including a tax cut for 95% of families while raising taxes on those with an income over $250,000.  Closing corporate loopholes, stopping tax breaks for businesses, and provided health care to Americans was also laid out by Obama as part of his economic plan.

Both were short on the details of their plans, and instead spent a majority of the time attacking proposed policies of their opponent.  Unfortunately, most of the attacks by each candidate fell woefully short in both accuracy and effectiveness although some managed to stick, particularly on the ones coming from Obama.

McCain, attempting to cite an example in pork barrel spending, mocked federally funded research into the study of bears in Montana at a cost of $3M.  In fact, the research was an exploratory look to see if Montana grizzly bears had reached a population level to remove them from the endangered species list which would then open new business opportunities in the logging and energy sectors.  It’s a repeated and hollow attack by McCain on a small research project that would spur job creation and state revenue far in excess of it’s price tag.  He’d be better served to find another example to prove his point.

The pork barrel issue was a reoccurring point for McCain who stated that earmark spending had increased by three fold in the last five years.  While it has increased over that time span, it actually dropped from $29B in 200 to $13B in 2008(Notice the increase from 2007 to 2008.  I’d attribute this to increased spending during an election year to court state voters).  His policy that corruption in Washington was out of control and needs to be stamped out falls flat on it face here.  It’s clear work is already being done to reduce political excesses by both candidates, and Obama correctly attacked McCain’s ancillary focus on pork barrel by putting into perspective the minuscule amount $18B is in relation to total government spending.  In addition, McCain’s contention that earmarking leads to corruption is fundamentally flawed.  It’s in versed logic.  Excessive spending does not corrupt, but rather corruption causes excessive spending.

Obama’s rebuttal to the $18B figure was to criticize McCains proposed $300M tax cut.  Obama portrayed the tax cut as giving “CEOs of Fortune 500 companies getting an average of $700,000 in reduced taxes, while leaving 100 million Americans out.”  I can’t help but point out that a $700,000 for 500 CEOs equals out to $350B – $50B more then McCain’s tax cut.  Stretching the numbers aside, Obama attacked a weak point in McCain’s tax cut policy.  When McCain rebutted Obama’s tax plan, he stated that Obama “voted in the United States Senate to increase taxes on people who make as low as $42,000 a year.”  This is technically untrue.  McCain is refers to a non-committal recommedation to allow the Bush tax cuts to expire in 2011 which in turn would raise tax levels for those with incomes almost across the board.

In terms of voter appeal and in light of the the countries economic woes, McCain’s tax cut plan fails horribly compared next to Obama’s.  The average American is already rattling their sabers at the income inequalities highlighted by the market crash.  Coupled with a bail out package that’s going to take tax payer money to rescue the jobs of those at the top of the income ladder, McCain’s tax cuts for those earning more then $600K only adds fuel to the fire.  Conversely, Obama proposed tax increase on the top 5% of earners could be perceived as a vengeful, spiteful attack back at the rich.  With Mccain’s tax plan practiculy ignoring the bottom 60% of the tax bracket, Obama’s tax plan is a sure win in the eyes of voters.

The entire earmark point McCain decided to make a hallmark of his economic policy during the debate only gets more shakey when you look at earmark spending by state.  Alaska, the homestate of McCain’s VP pick Sarah Pailin, has lead in ear mark and pork barrel spending per capita since 2000 when the CAGW began tracking data.  Pailin has been roundly criticized for her hypocritical stance on the infamous “Bridge to Nowhere”.  There’s a clear contradiction here towards excessive spending on the Republican ticket.  When McCain gives visibility to ear marks he rightly deserves the scrutiny.  McCain certainly has rightfully earned his reputation as a champion against pork spending, so he deserves credit where credit is due.  Obama’s $932M far outstrips the few loan ear marks McCain has put forth in his much longer tenure in the Senate.  So, despite having misnomer in Pailin on his ticket, McCain has the advantage on teliminating pork.

The debate over economic policy turned to tax cuts for businesses in concluding the second lead question.  This was McCain’s only area where he had any real monocrom of success.  McCain noted that the US had one of the highest business taxes in the world at 35%(and curiously cited the hot bed of overseas US job migration of Ireland at 11%), and indicated his desire to reduce the business tax.  While not particularly articulate, McCain has previously proposed cutting the business tax to 25%.  In order to pay for those tax cuts, McCain returned back to the elimination of pork barrel spending citing the tax revenue lost due to the cut would be offset by less ear marks.  Additionally, although not specifically mentioned, McCain wants a tax credit for reseach and development, as well as a tax break on equipment and technological investments.  As a long term economic policy, it’s a traditional winner.  When business tax breaks are applied ethically(read small to medium sized businesses), they spur investment and job creation.  Additionally, there is no greater engine to driving the economy then innovation.  McCain’s desire to encourage research and technology will open up new business sectors.  There’s no better example then the design and evolution of the Internet at how technology can change our economy.

Obama attempted to chide McCain on his business tax cut accusing him of giving oil companies $4B in tax breaks.  This is true, but all companies would be getting some amount in tax breaks.  The oil companies will be getting $4B based on what they are currently taxed just as every other business in America would under McCain’s plan.  While being factually true, it’s not an additional tax break for oil companies as Obama portrayed it.  The attack was an oversimplified one that missed it’s mark.

Health care was a topic of debate that I felt, restricted to teh debate, McCain met Obama head on.  McCain propsed a $5k tax credit for all American families.  Obama never once mentioned any details concerning his health care plan aside from the need to provide it.  That might be because according to Obama’s campaign site, it states that his health care plan would “save a typical American family up to $2,500.”  Both want to make health care affordable except through different means – McCain through tax credits and Obama through regulation.

Purely on the numbers, McCain’s health plan keeps pace and surpassed Obama’s.  However, Obama’s provides better access and greater coverage then McCain’s.  Obama did attempt to point on the accessibility difference saying that under McCain’s plan ” if you end up losing your health care from your employer, you’ve got to go out on the open market and try to buy it.”  Attacking McCain’s taxing the employer for provided health care benefits fell a bit short as it’s a way to remain fiscally responsible paying for his tax credit by passing the cost of to employers rather then taxpayers.  However, it runs somewhat contrary to the intent of McCain’s business tax cuts to provide businesses with greater capitol investment fund.

This leads the attack leveraged by McCain that Obama has $800B in proposed new government spending. While true(although I’m not certain where the figure arose from), it runs contrary to Obama’s previous statement where he acknowledged due to the bail out package, new spending will have to be postponed.  In light of the bail out package, both candidates economic plans have to have an astrerik beside them and suddenly become circumstantial.  The sizable bail out package makes any new spending or tax cuts a fiscal risk until the budget is back on stable ground.

Overall, McCain’s decision to make ear mark spending and Washington greed his central theme of his economic policy and his predominately baseless counterattacks on Obama came off as bad policy and bad debating.  Instead of concentrating on a fiscal blip in the federal budget, McCain would have been better served to address issues American voters were concerned about rather then trying to play the all encompassing greed card.  That’s better left to an advertisement.

Obama, on the other hand, left out many details, but provided enough sensible arguements and rebuffs to McCain’s policies to present a cohesive and tangible economic plan.  His points where concise and direct in contrast to McCain’s economic tangents.  Once again, Obama outperformed and laid out a more workable economic plan then McCain.  Advantage Obama for lead question #2.

Reexamining The Presidential Debate Lead Question #1: The Bail Out Package

Following my initial examination of the Presidential Debate lead question #1 on the proposed bail out package, I came across an eye popping video on the ChenZhen blog comments section.  Considering that a large amount of talk was devoted to deregulation during the debate, I researched the subject prior to making my analysis.  I came across the Community Reinvestment Act.  I made note of the support Democrats put behind the CRA.  However, I did not push my research far enough.

In 2003, President Bush proposed an overhaul of the regulatory standards governed by the CRA that would increase oversite of Freddie Mac and Fannie Mae.  Democrats opposed the bill arguing the two institutions “are not facing any kind of financial crisis.”  While a change in regulation practices proposed in 2003 would not have been a guarantee to reverse the impending housing crash(much less effect it in any appreciable way), it raises serious credibility issues and that the finger pointing should be making it’s rounds – Obama included.

A sizable portion of knowing where to point the finger is in understanding to what degree the CRA fueled the explosion of subprime loans and a coinciding explosion in home values.  I will research that topic a bit more when time permits, and depending may have to severely adjust my analysis on the debate bail out package.  If the CRA shares considerable blame then Obama’s claim that the market crash is a result of ill conceived Republican economic policies turns into a point of hypocrisy.  Without having dug deeper, I want to pass this off as more political finger pointing and lean on my previous research that the crisis was fundamentally caused by the internal operating practices of independent lending institutions.  But I’ll save judgement until after I’ve looked farther into the oppositions claims.

Below is the video that brought additional information to light.  It is, no doubt, pro-McCain.  Despite it’s advertisement tilt, it contains information worth exploring, specifically in answering the question I posed above.  I urge you to watch it, digest it, and do your own research to test the accuracy of the data it presents.

Breaking Down The First Presidential Debate: Lead Question #1 – The Bail Out Package

Rather then discussing how Barack Obama and John McCain presented themselves to the American public in their first presidential debate, an examination of the content of the debate is far more productive, in terms of mapping policy issues then impulse, surface impressions.  With that in mind, I will explore each leading question and give an analysis of what was said by each candidate.

The Economy – Bail Out Package

Although the first presidential debate was scheduled to cover foreign policy, the first half was devoted to the economy which, given the current crisis, was not unexpected.  The first question concerned the candidates stance on the financial bail out package.

Obama centered his arguement around the deregulation policies towards Wall Street, and placed the blame squarely on the shoulders of “eight years of failed economic policies promoted by George Bush, supported by Senator McCain.”  He always made a point to relate the economic woes to the American voter.  On occassion these closed loops were unrelated, such as the several attempts Obama linked the current state of health care to our economic woes.  Never-the-less, Obama made a concrete connection with the average voter and expressed his overriding desire that the “middle class is getting a fair shake.”

McCain, in response, attempted to shift blame to the failure of the regulatory agencies in doing their job through the lack of accountability.  Rather then pinpoint the blame on the reduction of regulation, McCain called for greater scrutiny of “various regulatory agencies that weren’t doing their job.”  He also acknowledged there are “fundamental problems in the system” while giving a pep talk to the American voter with phrases like his “belief in the goodness and strength of the American worker.”

While neither candidate expressly gave their support to a bail out package, each acknowledged it’s necessity.  However, McCain was walking a slippery slop on the topic of a bail out package, and could have very well buried McCain on the issue.  Earlier in the year, McCain said in March of 2008 that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”  He even tried to distribute part of the housing market problems on the American home owner when they “bought homes they couldn’t afford, betting that rising prices would make it easier to refinance later at more affordable rates.”  For whatever reason, Obama passed on the oppurtunity to give a stark constrast between his concern for the average American’s economic plight by supporting a bailout package against McCain’s previous statements intimating that he would not support a bail out package.

There are holes in Obama’s line of reasoning albeit minor.  Politicizing Wall Street deregulation was off base.  The two primary deregulation laws passed that are widely attributed to the conditions that lead to the home mortgage securities crash are the Commodity Futures Modernization Act and the Gramm-Leach-Billey Act. Both bills were introduced by Republicans, but both laws were both eventually supported by Democrats and signed into law by Democratic President Bill Clinton.  In fact, the Gramm-Leach-Brilley Act was agreed to by Democrats on the condition that the Community Reinvestment Act by strengthened.  The CRA purpose is to ensure that banks and lending institutions offer credit to all possible borrowers, specifically those that typically underrepresent low and middle income families.  More over, in 1995 Clinton and Democrats amended the CRA to relax capitol-to-investment backing requirements that Freddie Mac and Fannie Mae.

Both parties share a certain level of blame in the deregulation debate, but McCain specifically championed the passage of both the CFMA and the Gramm-Leach-Brilley Act.  Politicizing aside, McCain bears a greater responsibility for deregulation then Obama.

My other minor qualm with Obama’s stance is his proclaimed foresight into the oncoming housing disaster.  He stated that two years ago we were “going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.”  Obama actually gave his warning in August of 2007, one year ago.  This was well past the height of subprime loan issuances which began in 1999 and eventually peaked in 2004.  Obama was not a leading edge opponent of subprime loans.  Experts and media outlets were already reporting in 2005 of the subprime loan risks.  The causes that lead to the eventual market crash began nearly a decade ago – the popularity of subprime loans, deregulation leading to the trading of mortgage backed securities, and the historical rise in housing values.  The table was set years before Obama made his concerns, and it was years too late to make any difference.  All the compenents were in place for a historic crash, and was only a matter of waiting for housing prices to take a precipitous drop to bring us to where we are now.

Despite having a couple holes in his handling of the first lead question, Obama offered up a considerably more anayltical perspective, where as McCain offered little to the matter.  McCain spoke in such pluralities that there was little to disect.  He was essentially handcuffed on the issue because of his previous, contrary stances on the issue.  All he could do was toss around nonspecific banalities, and pray Obama didn’t throw a knock out punch by citing McCain’s voting record and comments in opposition to a bailout package.

Obama shined, as expected, in addressing, what has become the biggest voter concern, the economic bailout package.  He clearly resonated with the audience much more then McCain’s generalizations about greed and responsibility.  Obama’s clarity and concise points give him the advantage in the first, and most relevant, lead question in the debate.

Impressions of the First Presidential Debate

I was expected a complete and utter lingual domination of John McCain at the hands of Barack Obama.  Surprisingly, thats not what I came away with after watching the debate.  My impressions are based soley on “appearance” i.e. who did and didn’t look like a mumbling, stumbling, bumbling fool.

From an informative perspective, it offered very little.  I often found myself wondering what the original question was as the McCain and Obama would often dive into a rambling oratory on one topic then exit with a completely unrelated one.  I particularly remember towards the end of the debate when the question concerned US foreign policy towards Russia that Obama somehow ended with the need for alternative fuels without ever tying the loose end back to Russia.

It was, as expected, alot of campaign speech without definitive specifics from either candidate.  There was a tremendous amount of finger pointing on past voting records, monetary numbers, and what the other one said.  I’m eager to see the oncoming fact checking wave that’s going to flood across the blogosphere tomorrow.

Another thing I came away was the inordinate amount of time a foreign policy debate ended up being a domestic economy debate.  Given that the consensus is that McCain holds the advantage in that area, I thought Obama held his own and came off quite decisive on foreign policy matters.  Still though, McCain and his camp has to be fuming that a debate topic playing to his strengths ended up not being the main point of discussion.  Can McCain ask Jim Lehrer for a refund?

Now, we get to look forward to the Vice Presidential debate.  And maybe Sarah Pailin will surprise me just like McCain did.

Telecommunication Companies Gouging Via Text Message

When Comcast announced it’s plan to begin instituting a bandwidth cap, the tech community was in general consensus that bandwidth limits was not consumer friendly, and sparked considerable outrage from some consumers.  But there’s something else that should infuriate you about your data much more then how much your allowed to use every month.  Namely, how much your paying for what kind of data you send and receive.

Our data works on an astronomic pay tier, and to illustrate this lets do a little math.

Your average home internet bill is probably around $50.00 a month.  If your a Comcast customer your allotted 250 GB per month for your monthly payment.  Your paying Comcast $0.20 for every GB of data.  That equates to you paying paying $0.0000019 per kB of data transferred.

Telecommunications companies like AT&T and Sprint charge $0.10 for each text message sent and received.  The average text message data size is 10kB.  1 GB holds 1,048,576 kB.  104,857 text messages would consume 1 GB of memory.  At an average cost of $0.10 per text message, you are paying $1,048,570 per GB of text messages.

There’s a 524,285,000% cost increase from wired data to wireless text message data.  Show me another industry where you’ll encounter this sort of price increase for the same product?  Now, it’s understandable that wireless data infrastructure requires more investment then a wired infrastructure, but to this degree?

Wireless telecommunications companies are gouging it’s customers for text message data transmissions, and you rarely hear any outcry from consumer advocacy groups much less government officials.  What’s even more perplexing is that while our wired data limits are being restricted, our wireless data transmissions via text messaging continues to explode according to a CTIA report.

Regardless of the fact that text messages account for a minuscule proportion of the data we send and receive, it’s absolutely unethical for this kind of tier pricing for data to exist.

Financial Risk Management: The Problem With Applying Statistical Models To A Random System

Having digested more then my fair share of reasons behind the market crash from television to radio to print to the blogosphere, I’ve been saturated by the common theme of corporate greed and corruption.  I don’t buy it as anything other then a compulsory and secondary component to a free market economy.  This is, of course, beyond obvious.

Add to the equation profitable longevity, and the greed/corruption arguement becomes less credible.  If I gave you the option of taking $5000 right now or $1000 for the next ten years which option would you take?  Profitable longevity is not a difficult concept to understand, yet it seems lost on the relentless pounding being doled out on anyone remotely associated with the market crash – market traders, business executives, and government officials.

While there are certainly businesses that run counter to profitable longevity, i.e. Enron, this is not an isolated incident of a single lending institution engaging in suicidal greed.  The problem spans entire business sectors including lending institutions and trading firms.  From a logical perspective, it’s difficult to assume that two entire business sectors concurrently decided to knowingly engage in practices fueled by excess at the cost of self-destruction.

The need to balance profit and longevity within the financial sector following the Great Depression, the concept of stock and bond risk management was born.  By the 1950s, financial risk management evolved from a concept into a full fledged theory centered around mathematical diversification.  A decade later risk management theory adopted stochastic calculus in order to better account for the inherent randomness involved in stock trading.  Today the financial corporations are littered with what are known as quantitative analysts, otherwise known as quants.

The role of a quant is to develop sophisiticated mathematical and statistical models designed to simulate stochastic processes and it’s potential impact against illiquid products.  Uneffected by supply-and-demand price fluctuations, illiquid asset management depends entirely on these quant models to determine value.  Another tool employed by quants is the process of statistical arbitrage that relies on quantitative data mining in order to determine the expected value of an asset.  These two quant instruments are the foundation for the risk management techniques finicial corporations employ today.

Stochastic calculus attempts to deal with multiple outcomes and given an array of possible initial values, marks the possible outcomes for multiple initial conditions.  While it accounts for a wide possibility of paths, it determines which paths are more probable and which ones are more improbable based on the probability of the initial conditions being present(whose sheer numbers can be exponentially mindnumbing).  Statistical arbitrage relies heavily on gathering statistics over time, in order to create a computational value based on the expected outcome where multiple outcomes exist.

These two systems are attempting to deal with and account for rogue events.  It is in trying to deal with events which have never occurred previously that a fundamental flaw becomes apparent.  These two systems, particularly statistical arbitrage, relies almost exclusively on the collection of event data.  These statistical models derive their accuracy from the amount of data collected.  Hence, the more finite a time data is mined, the less accurate the model becomes.  In order for either of these models to be bulletproof, it would require an infinite amount of time to aggregate data.

Here we have two systems employed by the financial sector to determine the improbability of events and conditions which have never occurred.  The problem exacerbates itself when you consider how the data that is amassed is disseminated.

In order to map these probable and improbable events, statistical analysis employs the use of the Gaussian curve.  It’s a bell curved shaped graph illustrating the probability density of all potential values.  The Gaussian curve bends downwards at it’s edges towards improbable events and upwards towards the probable.  The width of the curve correlates to the weight of those probable events against those improbable ones.  Basically, it charts the normal distribution for events, and giving an indication of which events are more probable then others.

The Gaussian curve is essentially a median value for all possible events.  And that is where it fails.  A model cannot really account for and give the proper value to a rogue event, the most improbable of occurrences, when it gives greater value to standard, the most probable of events.  It fails in calculating the impact of heavy swings against the normal distribution value.  A singular, yet improbable event, will hardly impact the height or width of the curve against the statistical weight of a multitude of those that are likely.

To better illustrate this take 100 middle class American households, and calculate the average income.  Now put every name of every adult in the United States, and put them in a hat.  Randomly draw one name from the hat.  Now take that persons household income and recalculate our income average.  99% of the time you would have selected someone close to the median US household income of $40k.  The average will not make an appreciable movement upwards or downwards.  You could have selected the poorest household in America and the number would hardly have budged.  Let’s say you draw from the hat again, but this time you pick out someone in the top 1% income bracket out of the hat with an improbability factor of 298,128,548 to 1.  Recalculate the average again.  A massive swing upwards in the average will occur.  An event that has a 0.01% chance of occurring will appreciable change our end value, where as 99.99% of possible events will not.

One singular, blip on the Gaussian curve can drastically effect our end value.  But the curve itself doesn’t properly adjust for that highly improbable, rogue event.  Combine this massive swing due to random events with quant statistical models that are ineffectual in mapping these Gaussian blips, and you can begin to see where the problem might lie.

Let’s throw these inadequate models in bed with profit longevity, and it becomes a sticky situation.  Financial corporations have a tricky balancing act to perform.  Faced with reams of data pointing at the normal distribution of the Gaussian curve coupled with the blind spots for events which have never occurred in stochastic calculus and statistical arbitrage, conclusions have to be made as to which path to follow.

Taking the path of improbability would severely limit potential profits.  Under performing profit margins threat longevity.  Following the road towards the probable, gives some assurance in profits and promotes company longevity.  The decision making process cannot even account for rogue events which the statistical models fail in forecasting.

The historical housing market rise and fall would, at it’s very least, qualify, as an most improbable event.  A case could be made that it was a rogue event incapable of being calculated by the quants models.  Instead of tossing around the idea that corporate greed was at the center of the economic crisis our country now faces, let’s consider that, at best, the financial sector was presented with misrepresented data by a fundamentally flawed model.  And, at worst, their models simply were not able to account for never before seen event chain.

Either way, the quant risk management system might be to blame, and desperately needs to be reexamined to better account for those improbably catastrophic occurrences.  No amount of money infusion will turn failing statistical financial models into pinpoint accurate prediction machines – if that’s even possible.  Or maybe we should just learn to accept certain levels of risk that randomness carries with it rather then constantly acquiescing to the fat cat blame game.

McCain’s Perfect Storm

Prior to the collapse of Wall Street that began on September 15th, John McCain held a 2% point lead over Barack Obama according to a Gallup Poll.  A lead McCain has held to varying degrees following the Republic National Convention.  McCain’s convention bump was considerable and noted by a Gallup study:

While the increased vote share a candidate receives following his convention usually diminishes, candidates who lead after the second convention usually remain the leader a month after the convention. This is based on a review of historical Gallup data since 1964 — the first year for which Gallup could reliably measure convention bounces. The only possible exception to this general pattern occurred in 1980, when Jimmy Carter had a slim one-point advantage after the Democratic National Convention but he and Ronald Reagan were exactly tied one month after Carter was nominated for a second term.

However, following the market collapse the opinion polls began to take a turn.  This can be directly attributed to McCain’s handling following the stock market fallout.  Most are familiar with McCain’s perceived gaffe at proclaiming that “the fundamentals of our economy are strong.” While not a technical error, it was a lingual mistake that resonated to the public that McCain is a man out of touch with what was transpiring.  McCain was also lambasted by the media for at first criticizing the bailout package presented by Treasury Secretary Hank Paulson in a speech, and then later saying he supported the package in a 60 minutes interview.

Considering McCain’s comments in total, he doesn’t come off as indecisive or clueless.  But in the political arena, where soundbites and snippets are king, McCain commited a serious err.  The combination of an economic collapse coupled with the political mishandling on McCain’s part may very well thrust Obama into the White House.  According to an ABC poll, American’s have considerably more faith in Obama’s ability to handle the economy then McCain.  In conjunction with the economy now the most important topic to voters, the economic fall out is shaping up to the perfect storm for McCain, and the sole reason we may be electing Barack Obama into office come November.