Archive for October, 2006|Monthly archive page

Foreign Investment in Subprime Home Loans

The last paragraph suggests the extent of foreign participation.

Whitehouse, Mark. 2006. “As Home Owners Face Strains, Market Bets on Loan Defaults: New Derivatives Link Fates of Investors and Borrowers in Vast ‘Subprime’ Sector.” Wall Street Journal (30 October): p. A 1.

“Over the past decade, though, a convergence of factors has emboldened banks to lend where they wouldn’t before. For one, the development of the Internet and advances in computing technology have made it much easier and cheaper to process and package new loans …. And robust demand from investors — both in the U.S. and abroad — has given banks a big incentive to lend, because they can easily turn around and resell the loans in the form of bonds, reaping a tidy profit.”
“As a result, both the volume and variety of subprime loans have boomed. Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.’s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.’s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of “affordability” products such as “piggyback,” “interest-only” and “no-doc” loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan’s early years, and state their income without supporting documentation. Subprime loans’ actual interest rates are typically much higher than those on more traditional “prime” loans.”

“Foreign investors have played a big role in making money available. Analyst Mike Youngblood at investment bank Friedman, Billings, Ramsey & Co. estimates foreigners snapped up about a third of the $2 trillion in subprime-backed bonds issued since the beginning of 2002, often through investment vehicles known as collateralized debt obligations, or CDOs. These divvy up pools of bonds into slices with different levels of risk and return.”

Bubbles and Rapacious Behavior

Yesterday, I posted some material about the rapacious nature of finance capital. My own understanding of the economy is that profits from new physical investments are relatively low except for industries that enjoy protection from competition, such as a monopolistic structure or intellectual property rights.

At the same time, class power is holding down wages creating massive profits for the very rich, who are looking a high rate of return. At the same time, unsophisticated investors from abroad are also contributing to the rapacious investments, such as subprime housing loans.

This economic configuration pours money into hedge funds, which reinforce the existing situation by squeezing corporations, as I described yesterday, and by holding down wages, which restricts the profitability of potential real investments.

I cannot be certain but this kind of bubble may prove more intractable than a typical stock market crash.

The US Finally Investigates the Risks of Electronic Voting

The U.S. is finally investigating the risks of electronic voting because of a Venezuelan takeover of Sequoia Voting Systems. Ironically, from what I understand, this is the best of the systems being used by the US.

see Golden, Tim. 2006. “U.S. Investigates Voting Machines’ Venezuela Ties.” New York Times (29 October).

Rapacious Finance Capital At Work

This very interesting Business Week article details the rapacious behavior of private equity firms. One nice touch: DynCorp was among the companies that the vultures hit.

Thornton, Emily. 2006. “Gluttons at the Gate.” Business Week (30 October).

“Three weeks after giant private-equity firm Thomas H. Lee Partners agreed to buy an 80% stake of Iowa Falls ethanol producer Hawkeye Holdings in May, Hawkeye filed registration papers with the Securities & Exchange Commission to go public. The buyout deal hadn’t even closed yet, but Thomas H. Lee was already looking forward to an initial public offering expected to generate a huge profit on its $312 million investment. The firm didn’t just cross its fingers and wait, however: It took $20 million from Hawkeye as an advisory fee for negotiating the buyout and a $1 million “management fee” — and will soon take about $6 million to meet its own tax obligations. All told, Thomas H. Lee will collect payments of around $27 million by yearend — despite Hawkeye’s having earned just $1.5 million in the six months through June.”

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Elsevier Journal Price Gouging

Elsevier has made a fortune with excessive costs for its journals. Here is a protest about its envolvement in the arms trade:

From time to time, a few people take actions about excessive journal prices. Here is one example.

Shapiro, Gary. 2006. “A Rebellion Erupts Over Journals of Academia.” New York Sun (26 October).
“The nine members of the editorial board of the Oxford University-based mathematics journal Topology have signed a letter expressing their intention to resign on December 31. They cited the price of the journal as well as the general pricing policies of their publisher, Elsevier, as having “a significant and damaging effect on Topology’s reputation in the mathematical research community”.”
“But according to Elsevier’s Web site, in 2007 the cost of a single year (six issues) of Topology, in all countries except Europe and Japan, will be $100 for individuals and $1,665 for institutions.”

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Oracle, Red Hat, and Open Source

It appears that Red Hat stock is in freefall now that Oracle announced that it would offer identical services at 50% the cost. I don’t know enough to understand how much Red Hat contributes to the open source movement, but I am suspicious that anything good can come from Red Hat tactic.

I await enlightenment for more informed sources.

Please Be Confident in Electronic Voting

The Sacramento Bee has an opinion piece today by Paul DiGregorio, illustrious chair of the US Election Assistance Corporation, which is not on the paper’s website. The thrust of the story is that rumors of defects in the electronic voting equipment will discourage voters from participating in the elections.

This stance is interesting in two respects. First, he implies that people should be confident in the same voting machines, which have performed so poorly — except, perhaps in pushing elections in favor of Republicans. Second, the Republicans have been going out of their way to discourage participation.

My sense of irony is overwhelmed.

Illusions of Capitalist Efficiency

In recent days, newspapers and network broadcasters have been announcing massive layoffs in gathering news. No doubt, such measures will help to improve efficiency — at least the way efficiency is measured in a market economy.

Quality may suffer, but no matter. In the media, news is fast becoming little more than an opportunity for product placement. Democracy may suffer, but we have precious little of democracy anymore when elections depend upon media manipulation and after the elections the political process follows the whims of the most powerful lobbies. We are fast entering the age of one dollar, one vote.

The media are not alone in slashing costs. Hospitals have been trying to reduce the number of nurses by replacing them with less skilled employees. So long as the media or the hospitals can charge the same amount such measures constitute an increase in efficiency.

Airlines are following the same route. The Wall Street Journal reports that JetBlue has been experimenting with extending the hours that pilots can fly. Some pilots are flying 10 or 11 hours at a time.

Pasztor, Andy and Susan Carey. 2006. “Pilot-Fatigue Test Lands JetBlue in Hot Water.” (21 October): p. A 1.

From the time of Karl Marx, people have understood the benefits of extending hours of labor. Indeed, so long as the company can avoid any mishaps, efficiency will improve (disregarding any negative consequences for the pilots’ quality of life).

The article reports: “The National Transportation Safety Board has cited pilot fatigue as an increasingly important factor in aviation accidents.”

Given the long-forgotten doctrine of consumer sovereignty, however, one might have thought that JetBlue might have informed its passengers that they were participating in the experiment. But we have long passed into the age of corporate sovereignty with a rather narrow concept of efficiency.

Colbert on the Economics Nobel

Well, not Colbert, but a guest.  But this still is worth considering.

Stephen Colbert interviewing Dr. Peter Agre of Scientists and Engineers for America

Stephen Colbert: “You said ‘anyone who grew up on a farm knows that evolution exists’. OK, are you saying a monkey can milk a cow?”

Peter Agre: “Well, if I can milk a cow I suspect a monkey as smart as I am can milk a cow.”

SC: “Are there monkeys as smart as you?”

PA: “I’m sure there are quite a few, quite a few.

SC: “Oh really? Mmhum. Do they give a Nobel prize for throwing your own feces?”

PA: “……..That’s the Economics prize, I think.”

New Interview With Michael Perelman

Seth Sandronsky has published an interview he did with me.