Q&A on Health Care and Electricity

Q. How have we managed to live with highly-regulated “socialized” electric power since the 1930s?
A. Very comfortably

Q. How many U.S. households did not have electric service in 1930?
A. One-third.

Q. How many rural households in the U.S. did not have electric service in 1930?
A. 90%.

Q. How many U.S. households do not have electric service today?
A. A statistically insignificant number; in other words, zero.

Q. Why do we all have reasonably affordable electric service today?
A.Some obvious reasons, including the following:

a. Urbanization: in 1930, fewer than 60% of Americans lived in cities; in 1990, more than 75% of Americans lived in cities, in some measure because rural electrification contributed to major increases in agricultural productivity and allowed millions of Americans to move to higher value-added employment;

b. Technological improvements, from generators and transformers to appliances and electronics;

c. Federal government initiatives through agencies such as the Rural Electrification Administration (“REA”) and its myriad progeny of rural co-ops; the Tennessee Valley (“TVA”) and Bonneville Power (“BPA”) Authorities; the Federal Power Commission (“FPC”) and its successor, the Federal Energy Regulatory Commission (“FERC”).

Several generations ago, we Americans somehow collectively decided that access to electric power was a necessity not a privilege; and that the private sector could not complete the country’s electrification on its own. Perhaps many of the good consequences of this “socialist” plot were unintended but it would be hard to not acknowledge that the policy has made huge contributions to our national security, our standard of living, our quality of life and to the growth of our capitalist economy.

Substitute "health care" for "electricity". It’s déjà vous all over again.

Under the Influence

I just started taking Zyrtec-D (cetirizine and pseudoephedrine) to deal with an allergy-induced sinus infection. At about four this morning, I started thinking about how best to relate human behavior to that of the financial markets. Here's the product:

Do We Really Want Mob Rule?

Steven Pearlstein's take on the AIG bonus riot.

The next shoe...

...but are we dealing with a centipede?

Oil v. Gold

Oil v. Gold - a good arbitrage?

How About This, Rush?

"I should like to see the Republican Party reorganized. ... I don't think there is any room in this country for an old conservative party. . . . Abraham Lincoln and Theodore Roosevelt were liberal leaders. It doesn't take long to shake off what you call conservatism. . . . There was a vast amount of reaction against the New Deal, but what were the people offered? . . . People can't eat the Constitution." ...Thus Senator Borah [Republican, Idaho], speeding to Washington, summarized his feelings about the election.

-Time, Monday, Nov. 19, 1934

Not Ponzi Schemes; Just Sketchy CDO Schemes

So where did Bernie Madoff's and "Sir" Robert Stanford's investors' money go? This wasn't intuitively obvious to me until a few days ago. Neither of these guys, particularly Madoff, could have spent that much money on personal lifestyle, nor do I believe that was their primary motive. Rather, it was a cheap source of financing to support their own personal investments in trees that were growing to the sky, a strategy that worked until the markets collapsed. A recent New York Times article might give some clues.

On February 28, the New York Times Business Section ran a story entitled, "Stanford Accused of a Long-Running Scheme", complete with a perp-walk photo of Sanford's Chief Investment Officer, Lisa Pendergest-Holt. The article described the general structure of Stanford's $8 billion portfolio in terms of "tiers". There were three tiers, with each of the first two at ten percent while the third tier comprised the remaining eighty percent of the portfolio. Tier I was cash; Tier II was invested with "more than a dozen managers worldwide", all of whom presumably were legit. Tier III consisted of "more than $3 billion in real estate holdings and $1,6 billion that turned out to be a 'loan to shareholder," believed...to be Mr. Stanford'."

Using the Stanford example, it appears that the first tier was maintained to provide immediate liquidity, in other words the triple-A tranche of a collateralized loan vehicle. This probably was the safety net intended to fund current distributions and redemptions as well as unexpected contingencies. The second tier was the triple-B tranche, less liquid and more volatile but still relatively stable; and the third tier was the unrated tranche that bore the brunt of the risk from investments in which Stanford or Madoff probably stood to benefit as the equity owners. Thus, Stanford's and Madoff's investors were merely providing cheap financing for the sponsors' own portfolios, which undoubtedly were further levered.

This or something like it was a great bull market scheme until the shit hit the fan, and the third-party lenders to the third tier assets pulled the plug, leading to near-instantaneous implosion. Sic transit gloria mundi.