Philip Greenspun’s Weblog

Finished reading The World Is What It Is: The Authorized Biography of V. S. Naipaul by Patrick French.

Born in Trinidad, educated at Oxford, and condemned to wander the planet, short of cash, for most of his life, V.S. Naipaul turns out to have led a more interesting life than the average scribbler.  He ended up needing two wives, an English one for literary collaboration and an Anglo-Argentine one for sex.  Due to the English wife’s infertility and the Argentine wife’s lack of formal status, he never had children.

From an early age, Naipaul was convinced of his own superiority and the fact that other people were put on this planet in order to serve him.  He had contempt for 1960s- and 1970s-style left-wing political sentiments, especially as applied to Third World countries.  He was scathing in his criticism of postcolonial African and Latin American regimes and where others saw hope for a bright future he saw cruel kleptocratic dictatorships ruling over people who could aspire no higher than mediocrity.  Naipaul’s sympathies were with people in postcolonial nations, not with the rulers or the big ideas.  His sympathies with the common man made him one of the greatest journalists of the 20th century even though he often had very little sympathy for close friends and family.

Naipaul wasn’t much fonder of liberal sentiments in First World countries.  Commenting on the rise of violent crime in Britain, he said “several generations of free milk and orange juice have led to an army of thugs.”  He voted only once and it was for Margaret Thatcher’s Conservatives.

After the Islamic revolution in Iran, Naipaul became concerned about Islamic fundamentalism, which he saw as a huge threat to the West and extremely destructive to everyone other than Arabs.  Naipaul spent 1980 traveling to non-Arab countries that had adopted Islam and writing Among the Believers.  Despite his fears that Islam would turn the entire world into a crummy place, he was not necessarily sympathetic to those who had run afoul of angry Muslims.  On page 434, French discusses Naipaul’s refusal to sign a petition supporting Salman Rushdie, sentenced to death by Ayatollah Khomeini.  “I found [his statements] usually left-wing and trivial and antiquated.”  The fatwa?  “It’s an extreme form of literary criticism.”  Despite Naipaul’s view of Islam as a destructive force for humanity, he married a Pakistani Muslim in 1996, following the death of Pat Hale, his English wife.

This book would be a great gift from a parent to a child who is interested in becoming a writer.  When Junior discovers that winning the Nobel Prize in Literature at age 69 entails spending most of one’s decades depressed, impoverished, ignored, and bitter, he will likely knuckle under and agree to pursue radiology.

Perhaps the best evidence of Naipaul’s fair-mindedness is that he authorized this biography by Patrick French.  The book is unsparing in its treatment of the subject’s petulance, whoring, abuse of and ingratitude towards those who had helped him, and other character flaws that most of us would wish to conceal.

Next:  Must read A Bend in the River and A House for Mr. Biswas, which are considered Naipaul’s greatest novels.

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I stopped by a friend’s house today to pick up Alex’s cousin, Roxanne.  How were things going?  “Better than last night,” Roxanne’s grandmother said, “when I had 12 members of the Cambridge Fire Department here.”  What was the problem?  “The Viking range caught on fire, some insulation internal to the stove,” she explained.

This is why a Viking costs ten times as much as a GE.  You eventually get a new house with the Viking.

[My parents saw this posting and wrote that their next-door neighbor moved into a dream McMansion with a brand-new Viking refrigerator-freezer.  It apparently required 13 service visits before they got it working.]

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Back in May 2008, federal, state, and local government obligations were estimated at $531,500 per American household (source:  USA Today).  This was a total of $61.7 trillion.  I’m wondering how the same numbers would look right now.  With more people jobless or involuntarily retired early it would seem that the obligations would have grown.  We also have perhaps $3 trillion for bailing out banks and stimulus spending.  If we were nervous about paying for these debts and entitlement programs a year ago, shouldn’t we be terrified now?  Presumably the obligations can only be paid for by private sector workers, whose ranks have been shrinking.  (You could argue that government workers pay various taxes, but their original salary all came from tax dollars to begin with.)

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October 2008:  Stock markets collapse.  A business that has some cash decides to sit tight because a stock market panic usually ends up correcting itself.

November 2008: Stock markets collapse some more.  Our example business holds onto its work force because (1) there might be some end-of-quarter orders, (2) the Obama Administration might have some great ideas, and (3) we don’t know how long this slow period will last.

December 2008:  You don’t want to lay people off at Christmas.  Obama has recruited some good people.

January 2009:  Unemployment and GDP numbers are in.  Things look terrible.

February 2009:  The Obama Administration policies have been announced and they aren’t going to do anything to make the U.S. a better place to do business.  S&P 500 below 800 and seemingly stuck there or below.  That’s back to early 1997 levels.  Cash is running low.  Maybe it is time to return the company’s expenses to early 1997 levels.

Does this scenario make sense?  A lot of businesses and individuals are slow to react to change.  They certainly wouldn’t want to fire well-trained people hastily.  We’ve been through about 4.5 months of steady downturn.  That seems like the right amount of time for a business manager to say “This depression is going to be enduring.  How many jobs do we need to cut?”  The Federal Reserve governors just this week revised their forecast for the coming years to predict a much deeper and longer downturn.  If it took the experts at the Fed 4.5 months to figure out that our trajectory was negative, you’d expect the average business manager to take at least that long.

What does that mean as a practical matter?  We’ve not yet begun to see layoffs.  So far only the weakest companies have fired workers.  In the coming 6 months, big companies will finally try to adjust to the changed economic reality.

What do readers think of this theory?  Are the job losses of the next 6 months likely to be worse than those of the preceding 6?

[On the topic of companies adjusting, my friend Max pointed out that the dinosaurs were doing great as long as there was a lot of food.  “They just ate and ate and ate.  If a mammal came near them they would step on him.  When the climate changed and there wasn’t as much food, the dinosaurs said ‘We need to downsize now.’  The Fortune 500 are going to be about as successful in downsizing as those dinosaurs were.”]

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If you’re wondering how the commuter airliner crash near Buffalo occurred, this NASA video on tailplane icing may be helpful.  A bit of background…  An airplane’s wings pull the airplane up into the sky.  The center of gravity is in front of the wing.  For stability, the tail surfaces push down (See figure 4-20 within the Pilot’s Handbook of Aeronautical Knowledge (FAA)).  If the tail were to stop pushing down, the nose would pitch down uncontrollably.  The video explains how extending flaps increases the angle of attack on the tail and, given ice accretion on the tail, that angle may be a stalling angle.

Some highlights… 11:00 they show how they attach simulated styrofoam ice to the tail; 13:00 they tell you not to try this at home; 15:50 unexpected tailplane stall, corrected by retracting flaps.

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One of my flight instructors had been a high school English teacher.  “Scott, how could you quit an $80,000/year union job to become an $8/hour flight instructor?” I asked. He explained that it was too painful to watch students being failed by the system of locking a class together for an entire school year.  “A student falls behind a little bit in French I.  Now the lectures are over his head so he gets a C for the year.  The next year he is promoted to French II.  Everything is way over his head, so his time in the class is a complete waste and he gets an F.”  How should it have been organized?  He thought that students should be reevaluated and reshuffled every 4-8 weeks, as they are at many adult language schools, so that a student was always in a class appropriate to his or her level.

Now it appears that one school district in Colorado has adopted his idea… story.

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[If registering for ASF 2010, you may want to avoid using a credit card.  A registration clerk, employed by American Securitization, quoted me a total fee of $35, which I agreed to.  Two and a half months after the conference, the company added an additional unauthorized $2495 charge to the same credit card.]

Every year the folks who made our modern world of finance gather in Las Vegas for the American Securitization Forum.  Banks that made loans in the good old days held onto the loans.  An officer of the bank would look a neighbor in the eye across a table and ask “Bill, how are you going to repay this [house, car, business] loan?”  If they guessed wrong about their neighbors, the bank would go bust.  There was a lot of friction in applying capital from distant locations.  The bank would have to prove its soundness to a wealthy company or individual in another city and borrow some money, which it could then lend out to local customers.

Starting about 25 years ago, banks began to package up and sell their mortgages, car loans, credit card loans as securities, which could be bought and sold in global markets like other stocks and bonds.  The investors in these securities relied on rating agencies, such as Moody’s and Standard and Poor’s, and the integrity of the originating banks, to judge the credit risk.  Once this system was in place almost anyone could issue a loan.  Two guys with no capital could start selling mortgages.  A car dealer could issue car loans.  A startup company could issue credit cards.  Investors from Saudi Arabia and China could be financing houses in the U.S. just weeks after the loans had been made.

The system broke down starting in 2007.  The rating agencies had been paid by the issuers and assigned ridiculously optimistic ratings to crummy loans.  Guys in Germany ended up owning home loans in Cleveland where the new homeowners had never had a job, never made a single mortgage payment, wouldn’t answer the phone, wouldn’t reply to mail, and wouldn’t answer the door.

The American Securitization Forum is where the investment banks, rating agencies, bond salespeople, risk analysts, lawyers, and, most importantly, investors, meet.

A friend who attended the conference a year ago said “Last year these guys were predicting Armageddon.  I guess they were right, so we should probably listen to what they have to say this year.”

Here’s a sampling of what I heard…

Sandra Thompson, a top official at the Federal Deposit Insurance Corporation, talked about her goal of preventing foreclosures by rewriting home mortgages.  Payments could be cut by 20 percent and a lot of people would be able to stay in their homes.  She expected a 40 percent re-default rate.  An audience member greeted her plan with derision.  “Have you driven around neighborhoods right here in Las Vegas?  Half of the houses are empty.  The ones that are occupied have six cars parked out front and you can smell the meth cooking.  Do you think that the meth guys are going to answer the phone and start making payments if you cut their mortgage by 20 percent?”

Scott Polakoff, from the Office of Thrift Supervision, said “what we need to do is reduce unemployment and raise housing prices.”

James Lockhart, the regulator of federally issued mortgages and Fannie/Ginnie/Freddie, noted that 35 percent of the mortgage market is now FHA/VA, i.e., money that is lent out directly by and owed back to the federal government.  This is up from a historical level closer to 10 percent.  He related his involvement in an attempt by the Bush Administration several years ago to prevent Fannie and Freddie from exploiting their lower cost of borrowing to take on a lot more risk and rack up enormous paper profits (and therefore executive bonuses).  Lobbying by Fannie and Freddie in Congress prevented the government-sponsored entities from becoming subject to additional regulation and they blew up in the fall of 2008.  Lockhart waxed enthusiastic about private money coming back into the mortgage market.  A audience member noted that the government asked private money to invest in Fannie Mae in September 2008.  Tens of millions was duly invested in preferred stock.  The agency was nationalized a few weeks later and the new investment was wiped out.  “What guarantees do we have that future private investors won’t be treated so shabbily by the government?”  Lockhart mumbled that a lot had happened since September 2008, including the failure of Lehman.

Mary Kane, an executive of Citigroup, made the most confidence-inspiring comments. She noted that consumer spending was 2/3rds of the economy. The consumer savings rate was near zero percent of income. Now it is trending up towards 7 percent of income.  That alone would be enough to shrink the economy.  She noted that consumers had lost $7 trillion in paper value on their houses and stock investments.  That’s equal to an entire year of national income.

Ralph Daloisio cast scorn on the government’s new TALF program.  The $200 billion being lent isn’t enough to move the $11 trillion asset-backed securities market.  The program applies only to new loans and securities.  “Why would people buy this new stuff anyway when they can get a 20 percent return on existing mortgage-backed bonds, even in the worst-case scenario?”  [A money manager sitting next to me noted that the worst-case scenario is that houses go to zero.]

Attendees were surveyed as to the date when the market would “return to normal”.  “Never” was a reasonably popular answer, but 2011 was the most common.  People expected the U.S. economy to continue to decline through 2009 and start to pick up in 2010.

Nobody proposed changing the way that bonds are rated.  Moody’s and Standard and Poor’s get paid by bond issuers to assign risk ratings (see this video for an explanation).   Nobody suggested ending this conflict of interest.

For most of the government officials and many of the market participants, the goal seemed to be to turn back the clock by 5 years.  Everyone was happy then and making good money.  Most Americans had jobs and house prices kept going up.

Las Vegas town report:  The city is littered with partially finished real estate development.  A 4000-room hotel/casino on the strip has 90 percent of its windows in place, a steel skeleton poking above, and very little apparent construction activity.  A new shopping mall near Summerlin is a steel shell with nobody working.  Tract housing has come to a halt.  Hotels and restaurants are about 70 percent of the usual volume and taxi drivers report that business is slow.  Valley of Fire State Park is a beautiful place to drive around and take some short walks with a camera.  I learned that a great way to get rid of an unwanted spouse is to pick up Hiking Las Vegas: 60 Hikes Within 60 Minutes of the Strip and try out the “Turtlehead Jr.” hike/scramble in Red Rock Canyon.  If your companion does not slip and fall 100′, a slight push should suffice.

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One of the things that struck me at the American Securitization Forum was the sheer number of governmental entities that regulate U.S. banks and financial markets.  The conference featured speakers from the following agencies:

• United States Treasury
• Federal Reserve Board of Governors (sets interest rates and other policies)
• the 12 individual Federal Reserve Banks (regulate some banks)
• Securities and Exchange Commission (ignores complaints about guys like Madoff, approved Enron’s mark-to-market accounting scheme back in the mid-1990s)
• Office of Thrift Supervision (savings and loan regulation?)
• Office of the Comptroller of the Currency (part of Treasury)
• Federal Housing Finance Agency (regulates Fannie Mae, Ginnie Mae, FHA, VA housing)
• Federal Deposit Insurance Corporation (has started to insure hundreds of billions of dollars in interbank loans, TLGP)

Each of these agencies has some power to compel a bank to maintain a certain capital reserve or a financial institution to make or deny certain loans.

The patchwork of regulation historically has created the problem of shopping by banks.  If a bank didn’t like how it was being regulated by the Fed, it could switch its charter and be regulated by one of the 50 states.  In the current environment the patchwork makes the enormous changes being contemplated rather risky.  The agencies may be acting at cross-purposes and it is impractical for all of the agencies to review a proposed new regulation.  Simply making all of these decision-makers aware of what is going on would require years of meetings and conference calls.

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I spent a few days recently in the company of some money managers with a total of about $2 trillion to invest, precisely the sort of folks whose confidence the government is currently trying to win.  How did they feel about all of the rule and policy changes coming out of Washington and the new more muscular government? Terrified.

The “real money” investors didn’t want to invest alongside the government.  Their concern is that if things go south, the government will take 100% of the value left in the bank or whatever and leave private investors, including recent ones, with nothing.   This is precisely what happened to recent investors in Fannie Mae.

The “real money” investors didn’t want to see judges modifying contracts, e.g., bankruptcy judges resetting mortgage payments at a lower level and reducing the principal owed.  As far as they were concerned, a central tenet of the U.S. Constitution is that people are free to make contracts.  Given how mortgages are split up among investors, a foreclosure is greatly preferable to these folks than a modification.  In a foreclosure the most senior investors get what they expected, i.e., their money back.  The holders of the most junior tranches, which carried a higher return and were known to be high risk, would get nothing.  This is also what they would have expected.  If mortgages are modified by government action, however, it is unclear how the obligations among the various private parties should be adjusted.

“What’s wrong with foreclosures?” some of these folks asked.  “The historical rate of home ownership is about 60 percent and we’re probably going to revert to that sooner or later so why slow things down?  How does it help the U.S. to have high housing prices?  Isn’t it better for housing to be affordable?  If we give a lot of money to people to prevent foreclosures in March, how is that fair people who were foreclosed on in January?”

Much of the justification for government intervention comes from the assertion that markets have failed.  One money manager scoffed at this idea.  “The markets are working fine, but they’re giving people answers that they don’t like, so people cry market failure.”  Stocks and bonds low?  That’s because investors are afraid of a prolonged depression and continued government interference.  House in a jobless region of Michigan worth almost nothing?  A place with 50% of its former jobs only needs 50% of its houses.  There are plenty of former steel towns where the price of a comfortable house stabilized at $20,000 decades ago and has barely moved since.

What did these guys want the government to do?  Nothing, basically.  “Back in the 19th Century, there were a lot of steep crashes, guys got wiped out, and the economy came back quickly.”  What’s different now?  The government is a lot bigger and more powerful.  Rich companies and people can put some of their wealth into lobbying and demand that the government prevent them from getting wiped out (or at least slow the process).

Barack Obama promised on Monday not to rest as long as this economic downturn persisted.  He promised to act decisively, change whatever had to be changed, spend whatever had to be spent.  This is precisely what worries the investors to whom I spoke.  They’d rather see the audacity of doing nothing.

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I just finished Chagall: A Biography.  The book is well-written, moderately generous with color plates, and reasonably timely.  Timely?  How can a book about a guy who lived from 1887 to 1985 be timely?  As our country goes through an economic upheaval, it is interesting to refresh one’s memory with the upheavals that faced nearly all European and Russian Jews during the 20th Century.  Chagall endured the challenges occasioned by the Russian Revolution, including a significant rise in Jew-hatred.  Chagall endured the hyperinflation of Weimar Germany.  He escaped the German occupation of Paris by fleeing to the south of France.  Chagall, thanks mostly to his fame and talent, managed to get rescued from the French-German round-up of Jews in Vichy France and escape to the U.S.  He endured not knowing whether or not his daughter was alive.  Chagall endured the death of his wife Bella from strep throat, which would have been easily prevented if not for a wartime shortage of drugs.  Chagall endured four years living in the U.S. without learning more than a few words of English.

This biography makes the events of history curiously more vivid by showing their effects on just one individual.

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