If you're a liberal, you can easily make the argument for tax incentives to promote a "Green Revolution", but fiscal conservatives should appreciate the need for them as well.
The government has been providing a bias towards big oil by providing stimulus and tax incentives that are not eligible to green industries. Under normal conditions, one could argue that repealing these tax incentives/stimulus would be a good way to unbias the government's selection of big oil over green.
But what do we do in a recession like this one? Repealing stimulus/incentives (even to big oil) is an depressant to the economy. So, the best way to spur growth and unbias the playing field should be to provide the same incentives to green energy technologies.
A liberal would argue that the big oil incentives should still be repealed. The problem is that this again biases the industry. What should happen is that during the next economic boom, these incentives should all be repealed. This would allow the next wave of technologies to emerge if they are worthy.
Tuesday, March 3, 2009
Sunday, March 1, 2009
As home sales stall, there are 2 effects on the demand for mortgages - 1) the number of mortgage decrease and 2) size of the mortgages decrease (lower home prices). As a result, the overall dollars demanded should also decrease.
With lower demand for money, interest rates should drop until the point at which money becomes cheap enough to incent home buying.
Why then must the Fed control rates?
I assume that its because the Fed is already controlling rates. So if they keep the rates too high during a recession, then banks get squeezed until they stop lending. They need to lower rates to create a sufficient spread to incent banks to lend.
What if the fed didn't exist? What if it kept rates fixed at 0?% Would the market regulate itself sufficiently? Banks would presumably lend as much as they could at high rates. If the demand dropped, they would lower rates. What would the spread be? It would be whatever they would obtain equity at - so banks would be forced into long-term prediction of interest rates... which they do now - would they be better at predicting if there was more on the line?
With lower demand for money, interest rates should drop until the point at which money becomes cheap enough to incent home buying.
Why then must the Fed control rates?
I assume that its because the Fed is already controlling rates. So if they keep the rates too high during a recession, then banks get squeezed until they stop lending. They need to lower rates to create a sufficient spread to incent banks to lend.
What if the fed didn't exist? What if it kept rates fixed at 0?% Would the market regulate itself sufficiently? Banks would presumably lend as much as they could at high rates. If the demand dropped, they would lower rates. What would the spread be? It would be whatever they would obtain equity at - so banks would be forced into long-term prediction of interest rates... which they do now - would they be better at predicting if there was more on the line?
Saturday, February 28, 2009
$1 earned in a recession = $2?
Asset prices are incredibly low right now - DOW @ 7000, S&P @ 730, everything on sale, housing prices incredibly low, etc. These low prices make any income seem much greater than normal - since you can buy more for less and save/invest at low prices. For someone making 100,000/year who would typically save 20000/year - might now be able to save $30000/year without a change in lifestyle.
That savings of 20000 vs 30000 is also going into depressed asset prices - so when a recovery occurs, that savings will grow to be that much more.
This suggests that decisions to earn an income should accelerate - those who may have pursued other pursuits could arguably be more attracted to jobs because they pay that much more. Similarly, companies could afford paying less - not only because of higher unemployment rates but also because the value of the dollar as implicitly increased.
This reasoning is similar to that of why low beta stocks rise during recessions - because people prefer cash in recessions - not only because its safe, but because it can buy more.
That savings of 20000 vs 30000 is also going into depressed asset prices - so when a recovery occurs, that savings will grow to be that much more.
This suggests that decisions to earn an income should accelerate - those who may have pursued other pursuits could arguably be more attracted to jobs because they pay that much more. Similarly, companies could afford paying less - not only because of higher unemployment rates but also because the value of the dollar as implicitly increased.
This reasoning is similar to that of why low beta stocks rise during recessions - because people prefer cash in recessions - not only because its safe, but because it can buy more.
Friday, February 27, 2009
Defense Spending
Republicans generally argue for low taxes and limited government spending with the exception of defense spending. Generally, the argument is protection of individuals to live free and act as profit-maximizing capitalists. The defense spending is justified as a means to protection only, not economic stimulus.
Beyond the stimulus, defense spending seems to be particularly well-aligned with Republican economic ideas: 1) since government's are the sole purchasers of military equipment - they are best positioned to act in a utility-maximizing way, 2) The spending does not crowd out private investors, and 3) (related to 1 and 2) the money is a pure stimulus to the economy.
There are probably other reasons as well. I never thought of it this way - I suspect many others are the same. Thought I'd share.
Beyond the stimulus, defense spending seems to be particularly well-aligned with Republican economic ideas: 1) since government's are the sole purchasers of military equipment - they are best positioned to act in a utility-maximizing way, 2) The spending does not crowd out private investors, and 3) (related to 1 and 2) the money is a pure stimulus to the economy.
There are probably other reasons as well. I never thought of it this way - I suspect many others are the same. Thought I'd share.
Thursday, February 26, 2009
Other forms of Equity
There is a lot of literature that describes pension funds as a fixed income investment. And people generally know that investing in their own company is risky since it lacks diversification. Then why do bankers invest so much in equities?
It seems that a banker's bonus is heavily tied to the equity markets. When the markets are doing well, they get a big bonus; when they are doing poorly they get a small bonus and perhaps even get fired.
If you look at the first year VP as an example. This person is probably worth ~$1mm and their bonus in a good year can vary from anywhere as low as $300K to as much as $500K. That is a $200K difference (or 20% of the individual's net worth) that is heaving correlated with the equity markets.
If the difference between a good market and a bad market is 20% (say +/- 10%) - then, it would seem that this investor already has $1mm invested in equities by being a banker. As he thinks about asset allocation, it would seem that he should assume that 50% of his portfolio is already invested in equities.
A similar argument can be made for other groups whose income is heavily correlated with the market (university endowments, CEOs, etc)
It seems that a banker's bonus is heavily tied to the equity markets. When the markets are doing well, they get a big bonus; when they are doing poorly they get a small bonus and perhaps even get fired.
If you look at the first year VP as an example. This person is probably worth ~$1mm and their bonus in a good year can vary from anywhere as low as $300K to as much as $500K. That is a $200K difference (or 20% of the individual's net worth) that is heaving correlated with the equity markets.
If the difference between a good market and a bad market is 20% (say +/- 10%) - then, it would seem that this investor already has $1mm invested in equities by being a banker. As he thinks about asset allocation, it would seem that he should assume that 50% of his portfolio is already invested in equities.
A similar argument can be made for other groups whose income is heavily correlated with the market (university endowments, CEOs, etc)
Wednesday, February 25, 2009
Dividend Policy
When thinking about dividend policy, a company generally needs to decide if its marginal ROE is greater than its cost of capital. In recent months, many companies have cut their dividends.
These companies must believe that either their cost of capital has reduced or their ROE has increased. With increased risk premia and higher costs of debt, it would seem that costs of capital have generally increased. So does this mean that companies believe their ROE has increased?
More pragmatically, companies are obviously cutting their dividends to preserve capital so that they can avoid having to raise more cash later and bankruptcy costs.
How do we reconcile these two concepts? Well - its the ROE on this cash that is being distributed. If the company would have gone out of business, but this extra cash allows it to stay in business, then its ROE would be very high.
These companies must believe that either their cost of capital has reduced or their ROE has increased. With increased risk premia and higher costs of debt, it would seem that costs of capital have generally increased. So does this mean that companies believe their ROE has increased?
More pragmatically, companies are obviously cutting their dividends to preserve capital so that they can avoid having to raise more cash later and bankruptcy costs.
How do we reconcile these two concepts? Well - its the ROE on this cash that is being distributed. If the company would have gone out of business, but this extra cash allows it to stay in business, then its ROE would be very high.
Tuesday, February 24, 2009
Education Investment
Tonight, President Obama asked all Americans to spend at least 1 year in post-secondary school. And he said, that not graduating high school is no longer acceptable. He also set a goal of being the nation with the highest % of its citizens college graduates.
The nation has been heading this way for years with some support from government, but more because markets have created the necessity to do so. If you want a job making more than 50K/yr, you almost certainly need to work - and generally, that should be enough of an incentive to take on the student loans and loss of lower salaries.
It seems that government interference may cause a glut of over-educated people. Who will be the garbage collectors, the fast food employees, the mailmen? Who will want to go to college to end up with a low paying job? Will there be enough jobs to satisfy the college educated? While a more educated society sounds logical on the surface, what will be the effects on the supply/demand for jobs standpoint? Supporters must believe that a more educated society will cause the supply of jobs to increase as more value-add companies are created.
The nation has been heading this way for years with some support from government, but more because markets have created the necessity to do so. If you want a job making more than 50K/yr, you almost certainly need to work - and generally, that should be enough of an incentive to take on the student loans and loss of lower salaries.
It seems that government interference may cause a glut of over-educated people. Who will be the garbage collectors, the fast food employees, the mailmen? Who will want to go to college to end up with a low paying job? Will there be enough jobs to satisfy the college educated? While a more educated society sounds logical on the surface, what will be the effects on the supply/demand for jobs standpoint? Supporters must believe that a more educated society will cause the supply of jobs to increase as more value-add companies are created.
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