Philip Greenspun’s Weblog

After a helicopter flight this afternoon, I ran into a friend in the hangar. He works for the biggest air taxi (airplane charter) company in Massachusetts. “We just laid off two thirds of our staff,” he noted. “We’ve returned most of the airplanes to the lessors.” Driving home, I passed by Mattress Discounters. They had a “going out of business” sign out front. I stopped in to ask why. “They’re closing all of our New England stores,” said the manager.

We have cold weather, per-capita tax expense roughly double New Hampshire’s (compared to other states), and extremely high housing costs. Young people keep leaving to build careers in the more rapidly growing regions of the U.S. Still, I would have thought enough of us oldsters were still here to need a comfortable mattress…

[I did my share for the Massachusetts GDP this week. A crack appeared in my car’s windshield and the whole windshield needed to be replaced. This expanded GDP by at least $500. Maybe if we all smash each others’ windshields we can make the GDP numbers for Q3 look good…]

[Correction: The air taxi company has slimmed down on turboprops, from 6 to 3, partly due to the seasonality of business up here. They’re keeping their 4 Eclipse jets, but not counting on them for any revenue due to the fact that service and support for the Eclipse is almost non-existent. One serious problem with the Eclipse is that, although the plane in theory can be approved for flight into known icing conditions, in practice it is impossible to schedule an existing plane for the required retrofits. The Eclipse remains a jet that can flown only in clear and/or very warm weather.]

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The HVAC guys who have been maintaining the central air conditioning in my apartment here in Cambridge came over today. I had called them on Friday to see when they could show up. For the last ten years the answer has been “we’re flat out; maybe in three weeks.” This year it turned out to be “next business day”. Business is very slow, according to the technician. People aren’t installing new systems and are deferring maintenance. An air conditioner that broke in August, and would formerly have been fixed immediately, won’t be fixed until May.

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The Wall Street meltdown continues and people are asking themselves “How come we have to pay $700 billion to bail out firms that collectively spend more than $700 billion every year paying their employees?” In recent decades Wall Street has grown from 6 percent of the U.S. economy to something like 10 percent, while providing the same basic menu of services: taking companies public, selling bonds, managing investments. The bailout angers taxpayers because anyone who can do arithmetic can see that more than $700 billion was taken out of Wall Street in the form of employee bonuses during the years of the real estate/mortgage bubble. The people who created the bubble, in many cases engaging in frauds of various kinds, were rewarded handsomely and are now relaxing in their Greenwich, Connecticut mansions deciding whether to take out the yacht or the private jet. Wall Street firms did not retain their exceptional profits during the years of fraud, but rather paid out almost all of it to the executives and rank-and-file employees who engineered the fraud. (Actually if they had retained some of these profits they wouldn’t be needing a bailout!)

The anger is easy to understand, but what is tough to understand is why the middleman’s share of the U.S. economy has grown so much. When houses were cheap and people lived in them for 20 years, the realtor’s 6 percent commission wasn’t a huge slice of the economy. Houses became very expensive and people flipped them quickly, which has raised realtor commissions to roughly $60 billion per year. We have a huge sector of the economy mostly doing stuff that wouldn’t need to be done if Americans would get a little more organized in their use of Google Maps and other Web sites (see this New York Times article on Madison, Wisconsin, where “for sale by owner” houses sold for about the same price as realtor-sold houses). The realtor commission was only the beginning of the feast for middlemen during the real estate bubble. Somehow Americans weren’t able to find mortgages on their own, so every town was filled with mortgage brokers making $100,000 to $150,000 per year. Local banks weren’t able to sell mortgages upstream without, apparently, giving tens of billions of dollars in fees every year to Wall Street firms.

The Internet was supposed to make markets more efficient, yet since the early 1990s, when Web access became universal, the American people have devoted an ever-larger share of their paychecks to middlemen.

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Today’s New York Times carries an article on federal and state tax dollars paying for pensions and disability to retired Long Island Rail Road workers. Some interesting stats from the article: 97 percent of retired LIRR workers in a recent year applied for and received disability payments; one married coupled is sucking down $280,000 per year in taxpayer funds; workers who start relatively young with the railroad can retire at age 50.

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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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