Those in government still don't get it!

Tim Duy writes:

From the wires:

15:30 *PAULSON SAYS MARKET TURMOIL WON'T ABATE UNTIL HOUSING REBOUNDS

Such comments always leave me with a sick feeling in my stomach — if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.

Again, price and affordability are inversely related. Those who want to prop up home prices essentially want unaffordable housing.

Terrorist behavior

How terrorists prepare and where they strike, by Prof. Brent Smith of the University of Arkansas:

Research has shown that traditional criminals are spontaneous, but terrorists seem to go to great lengths preparing for their attacks — and may commit other crimes while doing so. How long does this planning take? And do different types of terrorist groups vary in preparation time? ...

According to our analysis, almost half (44 percent) of all terrorists examined lived within 30 miles of their targets. ... When the types of terrorist groups are examined separately, however, the findings are much different.

International terrorists lived relatively near their targets, whereas right-wing terrorists lived in rural areas but selected targets reflecting the “pollutants of urban life” in nearby cities. Terrorists most commonly prepared for their attacks with surveillance and intelligence gathering, robberies and thefts to raise funding for the group, weapons violations, and bomb manufacturing. ...

Although the terrorists studied committed most of their preparatory offenses near their homes, they conducted robberies, burglaries and thefts much farther away — an average of 429 miles from home. This suggests that most environmental and international terrorists live near the selected target and conduct surveillance and other general preparation near their homes and the eventual location of the attack. Major crimes to procure funding for the group — like thefts, robberies and burglaries — however, are intentionally committed many miles away to avoid drawing attention to the group’s location and target choice. ...

We found that preparations generally began less than six months before the attack and ended with a flurry of actions a day or so before. This pattern varied by group type. Single-issue and right-wing terrorists engaged in substantially less preparatory crime over a shorter period... The planning cycle of international terrorists tended to be longer. ...

International terrorists, on the other hand, engaged in nearly three times as many preparatory acts per incident as their environmental counterparts. This may be due to the larger number of people usually involved in international incidents, the size and scope of the planned incident or simply a longer planning cycle. Comparing the 10 international terrorist incidents that occurred on American soil, we found that the average planning cycle for international terrorists was 92 days, as opposed to 14 days for environmental terrorists. Averages can be misleading, however, because of significant outliers...

For law enforcement agencies, the implications of these patterns are significant. Committing an act of terrorism will usually involve local preparations. Although much of this conduct will not necessarily be criminal, early intelligence may give law enforcement the opportunity to stop the terrorists before an incident occurs. Knowledge of the threat — for example, understanding how long environmental or international terrorists prepare for their attacks — will affect the manner in which local officials respond. Identifying preparatory actions by environmental extremists may signal that an attack is imminent, whereas similar behavior by an international group might suggest that an attack is still several months away.

Understanding that most terrorists “act locally” can be important to know as investigative agencies seek to prevent terrorism and arrest perpetrators. These local patterns may be used by agencies to more efficiently patrol known, high-risk target areas and gather intelligence on suspected actions within a specific distance from potential targets.

America's two auto industries

Via Barry Ritholtz:

Fantastic article in the WSJ today about the pending bailout plan to GM, Ford and Chrysler.

America has two auto industries. The one represented by GM, Ford and Chrysler is Midwestern, unionized, burdened with massive obligations to retirees, and shackled to marketing and product strategies that have roots reaching back to the early 1900s.

The other American auto industry is largely Southern and non-union, owes relatively little to the few retirees it has, and enjoys a variety of advantages because its Japanese, European and Korean owners launched operations in this country relatively recently. Their factories are newer, their brand images and marketing strategies are more coherent — Toyota uses three brands in the U.S. to GM’s eight — and they have cars designed for the competitive global market that exists today. ...

The New American auto industry employs about 113,000 people... The Detroit Three employ more than 200,000 people directly, and sustain nearly 3 million more indirectly.

Election of Obama reduces flag burning abroad

Johann Hari paints a picture of how the election of Barack Obama has changed the world's view of the United States:

I spent yesterday trawling the shops in here in London for Stars and Stripes to decorate my apartment for my Presidential election party — and across the city they were all sold out. One shopkeeper in the East End told me: "For the past eight years we've done a big trade in American flags because people buy them to burn them. This is the first time I can remember people buying them because they actually want to wave them."

Sarah Palin correctly blames Bush for election loss

Sarah Palin is not as dumb as some Republican political weasels claim. She knows why she lost:

“I think the Republican ticket represented too much of the status quo, too much of what had gone on in these last eight years, that Americans were kind of shaking their heads like going, wait a minute, how did we run up a $10 trillion debt in a Republican administration?” Palin told the Anchorage Daily News and Alaska’s KTUU Channel 2.

“How have there been blunders with war strategy under a Republican administration? If we're talking change, we want to get far away from what it was that the present administration represented and that is to a great degree what the Republican Party at the time had been representing. So people desiring change I think went as far from the administration that is presently seated as they could. It's amazing that we did as well as we did.”

Buffett stocks on sale

Warren Buffett is widely regarded as the world's greatest investor. His basic strategy is to buy great companies at low prices, and then hold them forever. Many investors try to emulate Buffett's investing method when making their own stock picks, but few can match Buffett's success.

However, one investing strategy available to ordinary investors is buying stocks that Buffett actually owns, when they fall below his original purchase price. Luckily, he lists his major holdings in Berkshire Hathaway's annual letter to shareholders. With a little basic math, you can figure out how much he paid for the stocks he bought.

Today, with the recent stock market sell-off, many of Buffett's holdings are selling for less than what he paid for them. This gives you the opportunity to buy them on sale. I have calculated the purchase price for his major holdings. Here are the ones that are currently on sale.

Stocks currently selling below Buffett's purchase price, and the price Buffett paid:

• ConocoPhillips (COP) — $59.34
• Kraft Foods (KFT) — $33.38
• Johnson & Johnson (JNJ) — $61.35
• Sanofi Aventis (SNY) — $43.21
• US Bancorp (USB) — $32.80
• USG Corporation (USG) — $31.40
• Wells Fargo (WFC) — $34.96

Stocks currently selling slightly above Buffett's purchase price, and the price Buffett paid:

• Burlington Northern Santa Fe (BNI) — $77.78
• Procter & Gamble (PG) — $61.14
• Wal-Mart Stores (WMT) — $47.23

Although this second group is slightly above his purchase price, a single down day in the stock market could push some of them below his purchase price.

Honestly, I don't know what he's doing owning USG. It's a no-growth company, paying no dividends, tied to the housing market. The others, however, would likely serve you well.

While the prices above are what he paid, according to his letters to shareholders, he also just recently bought more BNI at $79.65 per share.

A condensed version of I.O.U.S.A.

Video: I.O.U.S.A., condensed to 30 minutes:

What didn't cause the housing bubble

Via EconLog: Two recent popular scapegoats are not responsible for the housing bubble:

Robert Shiller wrote,

Dramatic home price booms since the late 1990s have been in evidence in Australia, Canada, China, France, India, Ireland, Italy, Korea, Russia, Spain, the United Kingdom, and the United States, among other countries.

He has charts suggesting that the Netherlands and Norway experienced greater booms than the United States. In his book The Subprime Solution, he has a chart that shows London house prices rising faster than prices in Boston.

What makes this a difficult fact is that so many explanations of the house price boom are U.S.-specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain.

Top contenders for U.S. Treasury Secretary

CNBC does some pondering on who may be the next Secretary of the Treasury under President Obama.

Here is my own list of top contenders:

• Tim Geithner, President of the Federal Reserve Bank of New York; believed to be a Democrat.
  
• Larry Summers, Harvard economist, former President of Harvard University, and former U.S. Treasury Secretary under Bill Clinton.
• Paul Volcker, the best Fed Chairman in history; Alan Greenspan's predecessor; appointed under Carter and reappointed under Reagan. He's the guy who ended the stagflation of the 1970s. Being a decade older than John McCain, his biggest obstacle is his age.
  
• Jon Corzine, Democratic Governor of New Jersey, former U.S. Senator, and former CEO of Goldman Sachs.
• Jamie Dimon, widely-respected CEO of JPMorgan; a financial contributor to many Democratic candidates.
  

Milton Friedman on the Great Depression

Video: The late Milton Friedman, a Nobel Prize–winning economist, explains a major cause of the Great Depression: