Philip Greenspun’s Weblog

England’s Prince William, who presumably has the wealth and connections to do whatever he wants to, has decided to become a career helicopter pilot: story.

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Dear Messrs. Paulson and Bernanke:

This is to request Federal assistance for East Coast Aero Club. We operate a flight school at Hanscom Field in the Boston suburbs. We are concerned that most of our customers have had a significant portion of their savings and retirement funds wiped out by Wall Street. These folks may not be able to afford flying lessons and aircraft rental anymore. Certainly the financial crisis has resulted in a drop in executive compensation. We are not able to pay our CEO the $50 million per year that he deserves, having kept the school in operation for more than 20 years.

Given that we have 27 airplanes and helicopters and a staff of five full-time mechanics, I think it is safe to say that we are regarded as “too big to fail”, at least by pilots at Hanscom (KBED). We believe an $85 billion loan would enable us to continue to operate, compensate executives appropriately, and give customers faith in our stability.

In exchange for $85 billion, we would be happy to give the Federal government warrants to purchase 80 percent of the stock in our company. We would promise to purchase our insurance only from the Federally-backed AIG and our ground vehicles only from the soon-to-be-Federally-bailed-out GM and Ford. We will rework our payscale to be consistent with Fortune 500 norms. Our flight instructors will therefore earn 1/430th of the CEO’s salary (source). As our CEO will be earning $50 million per year, this will give our CFIs enough income to take out a mortgage from the once-again-Federally-owned Fannie Mae.

Thank you for considering our request.

Philip Greenspun, Helicopter Instructor

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It is tough to keep the buy-and-hold faith these days. This chart of the S&P 500 over the last 10 years shows that had you bought U.S. stocks at any time during 1999 and 2000 you would have less wealth right now in nominal dollars than you did then, i.e., the index is lower today than it was 8 or 9 years ago. You would have received a small dividend yield during this time, perhaps 1.7% on average (source), but that is less than you’d have gotten in a money market or CD and less than inflation, which has been at least 32 percent since 1999 (source; uses the standard CPI, which underestimates cost-of-living increases).

Corporate revenues have grown hugely during this period, if only thanks to inflation. What happened to the investor’s share?

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I’ve drafted a new article on improving the safety of private flying by adding a ground-based copilot: http://philip.greenspun.com/flying/ground-monitoring

Comments would be appreciated.

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The news today was unsettling. Two of the nation’s largest investment banks, Merrill Lynch and Lehman, are to disappear, along with thousands of high paying jobs. AIG, one of the world’s largest insurance companies, is also on the verge of bankruptcy. All of this seems to have been caused by improper valuation of mortgage-backed securities. The brightest minds on Wall Street sincerely believed, apparently, that an old wooden house in Cleveland was worth $350,000 and that a guy whose job skills were limited to collecting welfare was going to start making big payments on that house just as soon as his one year payment-free grace period elapsed.

Could it be that we need smarter folks working on Wall Street? Let’s compare to 1987.

On Black Monday, October 19, 1987, the Dow Jones Industrial Average fell 22.6%. What were the consequences of this collapse? By today’s standards, there weren’t any. The stock market fell. The same investment banks and funds that had been operating on Wall Street continued to operate. Real estate, which had become a bit of a bubble, especially in condos, started to slide about a year later. Home prices in the Boston area did not return to their 1987 peaks until perhaps 1996, i.e., 9 years later. But by and large people kept their jobs and companies continued to function.

Back in the 1980s the smartest graduates of M.I.T. went to work in engineering and science. In our present decade, the brightest young minds with technical degrees are drawn to Wall Street where they develop elaborate can’t fail schemes to outperform the market. Apparently there were some risks that the bright quants failed to evaluate properly and now their employers are bankrupt.

Perhaps the answer is that we need fewer smart people on Wall Street.

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An article entitled “The Spending Explosion”, from yesterday’s Wall Street Journal, has an interesting chart showing federal spending growth, 2001-2008, in inflation-adjusted dollars.

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Two items arrived in today’s mail, both sent at a postage cost of 42 cents. They were identical notices from U.S. Customs and Border Protection saying that the Web site that one might use to order a customs decal (new one not necessary until January 2009) is going to be down for maintenance from September 18 through September 24.

An ordinary company might put up a “come back later page” with the same information as in this one-page letter. The federal government, however, can afford to send every possible user of the web site a hardcopy note in the U.S. mail.

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Cirrus, maker of the popular SR20 and SR22 piston-powered four-seat airplanes, has been forced to lay off 8 percent of its workforce due to declining sales (full story). Thanks to low Avgas prices, some favorable federal tax treatment for airplane purchases after 9/11/2001, and an innovative product, it looked as though Cirrus would defy the conventional wisdom that you’d have to be crazy to invest in a new piston-powered airplane company.

There is some hope for Cirrus, however, in that the company has been working on a single-engine jet that is apparently remarkably spacious and comfortable inside. The plane is limited to 25,000′ and is supposedly simple to fly. If everything goes smoothly with FAA certification, the plane should be ready in 2011.

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I came across a Wall Street Journal opinion piece titled “Bush Has a Good Economic Record”:

“U.S. output has expanded faster than in most advanced economies since 2000. The IMF reports that real U.S. gross domestic product (GDP) grew at an average annual rate of 2.2% over the period 2001-2008 (including its forecast for the current year). President Bush will leave to his successor an economy 19% larger than the one he inherited from President Clinton. This U.S. expansion compares with 14% by France, 13% by Japan and just 8% by Italy and Germany over the same period.”

Do we believe this is the full story? These growth figures are presumably calculated in local currency, albeit adjusted for inflation. The U.S. dollar has shrunk by about 30 percent against the Euro, so if measured in Euro, the total value of the U.S. economy has declined under the reign of King Bush II.

A lot of the growth in the GDP was from such unproductive activities as building sprawl, rebuilding from disasters such as Katrina, exercising the military, etc. If the Japanese built a factory and we built a housing development 1 hour from Phoenix, who has done better? Japan has almost no crime. Part of our GDP comes from replacing smashed windows and stolen GPS units.

Another factor to consider is deficit spending. We had ourselves a huge party of low interest rates and deficit-spending by the Federales. That made for good-looking GDP figures, but has saddled our nation with a lot of debt. For some perverse reason, probably because the CPI is fraudulently calculated , that hasn’t shown up in inflation that would erase the real GDP growth (if inflation is understated by 2.2% per year, all of the growth mentioned in the article evaporates). Investors, however, are harder to fool and the dollar is now worth much less.

The final problem with these numbers is that they don’t take into account population growth. The author compares the U.S., which every day welcomes more immigrants to its shores, to countries that don’t have much in the way of immigration or population growth (Japan’s is negative). One way to have GDP growth is simply to host more people and as long as they can scratch up something to eat or do child care for each other, that builds the GDP. It does not make Americans who were here before the immigrants arrived necessarily better off. In fact, we are probably worse off from all of the population growth because our roads are so clogged with traffic and housing has become so expensive.

We have inefficient local, state, and federal governments, high corporate taxes, enormous pension obligations to former employees of governments and big companies, and schools that are measurably worse than those of many other countries. Could it be that the developed nations mentioned in the WSJ article are even more inefficient than we are?

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This blog posting was created with Google Chrome, which seems to support all of the fancy Javascript interface for WordPress. Chrome also works with all of the sites that have failed to load on friends’ Macintosh Safari browsers.

In one day, Google’s programmers have conquered almost every obstacle on the Web… but not every obstacle. The FAA used to have a paper form, the 8710, that one filled out to get a pilot’s certificate. You’d spend 10 minutes filling it out and then the examiner would sign it after your checkride. To replace this simple paper form they spend millions of dollars on a Web application called “IACRA”. IACRA works only with certain versions of Microsoft Internet Explorer and only on XP and Vista. What happens on Google Chrome? You type your username and password into IACRA, hit return, and are confronted with a greyed-out screen.

Note to Microsoft and Apple: Google Chrome has its own Task Manager. This is a complete operating system disguised as a Web browser. A person who was a serious user of Chrome probably wouldn’t notice if the underlying OS were replaced with something free, e.g., Linux.

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