Electraglide

  I lit out of Orchard City, Colorado, on a black Electraglide Harley.  Orchard City isn’t really a town, much less a city.  It’s the kind of place where you have to watch out for gravel on the blacktop because none of the side roads are paved.  Anyway, Scotty and Becky live in Orchard City, so I stop by whenever I can, and we visit and work on motorcycles and share life, and I’ve been visiting long enough that I have a lot of friends in that part of the country.

            I cut out of there about 9AM.  I had a denim shirt on and my jeans.  It was cool enough, because it was early, but not cold because I’d burned off a lot of altitude the day before coming across McClure Pass out of Aspen and Carbondale.  There’s a curious pocket of sweet humidity, just a touch, right in that part of the Western Slope in the early autumn.  It’s curious because the rest of Colorado doesn’t have any humidity, but the stretch there by Olathe, between Delta and Montrose, has just enough to grow that famous sweet corn that they do; and I looked out across the almost-dewy rows in the clear sunshine as the bike and I found our rhythm and the tires warmed up to the road.

            I came out of Montrose there where the highway curves back to the East, and I’d put my coat on against the wind and the clouds building over the mountains.  I screwed on the throttle a little bit and blasted through the welcoming, rolling flatness of the Uncompahgre River country near Ridgeway.  It’s kind of a sweet, rolling little breaks country whose whole purpose seems to be to smooth the transition between the gently sloping farms of the Western Slope and the startling ruggedness of the Western San Juans, which rise like a battlement there, above Ouray sitting like a jewel in its jagged little slot of a box canyon.  That little stretch of the Uncompahgre is almost mesmerizing the way it blends the welcoming gold of the winter wheat with the soft green of the cottonwood leaves.  It’s the kind of place you get the feeling it’d just be great to be a deer - to be built for running and have time to forage.

            Few things are built for running like a Harley, so I soon arrive in Ouray, and I stop to use the bathroom there in one of the prettiest public parks in the world, right between the hot springs complex and some newer condos, across Mineral Creek from an old trailer park, and looking North at a big mountain face that rises right from the road so steep that the trees grow sideways out of their roots just to stay upright.

            I leather up and grab a handful, leaning the bike into the graceful switchbacks of Red Mountain Pass just hard enough to get a couple of sparks from the footboards every now and then.  I blow by a slow armada of campers and pickups towing trailers – hunting season’s pilgrimage – staying in the left lane until I pass them all, and taking great satisfaction from rolling on the throttle to glue the rear end down as I accelerate out of the lower pass’s upper turns with no one ahead of me on the road. 

            Mineral Creek is yellow ochre the whole way up with God knows what in it, but Red Mountain is true to its name, looking down on me like a giant incarnation of Dr. King’s “red hills of Georgia” in the misty, windy distance.  I run hard across the grassy stretch of river flat by the old miners’ cabins, fast - like 80 – in the top of fourth gear, and life, and my past, and my future seem to be in balance, as the country reminds me of where I’ve been and who, and who I am now and why.

            The hunters mostly pass me in the upper switchbacks when I have to stop to put my rain pants on, but I’ve already got what I came for, and now I’m just travelling.

Carnage in the Markets

Written October 12, 2008

Both Wall Street and Main Street are Bloody, and Probably Deserve It

            Time for some hard truth, folks.  We have been living in superheated markets, we tried to dodge a painful correction, and now we have a panic.  After the 9/11 attacks, Rudy Giuliani said “come to New York and buy stuff.”  Ed Leamer proposed the same tonic two weeks ago.  Perhaps they both should have qualified the statements with “pay cash.”  During my lifetime, we Americans have lived by the mantra “growth is good,” and we have led the rest of the world down this path with us. 

According to the precept that “more is better,” we have encouraged as much growth as possible, and expected our political and fiscal leaders to support these demands.  We have always seen a slow economy as a bad thing.  Basically, we’re greedy.  This demand for ever greater consumption for everyone (we’re a democracy) got us addicted to the “juiced” return that a heavy dose of leverage provides.  We cheer when consumer spending is “strong,” and corporate profits are “record-breaking,” conveniently overlooking the fact that virtually all of our growth since 2001 has been the product of increased leverage. 

The U.S. has become what economist Hyman Minsky calls a "Ponzi unit."  This means that we are unable to repay principal or even to pay the interest due on outstanding debts by our own income. We depend on borrowing or on selling assets even to meet our interest bills.  This is true of our government, our personal finances, and, it appears, our major financial institutions.  U.S. consumers, long saving a mere 2% of their personal incomes, have engaged in net borrowing since Q3, 2005. 

Meanwhile, our financial system has employed armies of slick MBA’s to invent new instruments to introduce liquidity into the market.  The problem is that all of this liquidity is illusory because it is based on borrowing.  The whole system works because house prices have been appreciating at an artificially high rate since the tech bubble burst in 2001.  Prices have risen because there were lots of buyers, but they were all leveraged buyers – many of them had no business buying a home in the first place.  In a market where there is no credit available in the U.S., there are no buyers in the U.S.  This is why the government is frantically trying to resuscitate the credit markets – without borrowing, we are out of luck, because we have no savings.  Corporations are going under because they cannot obtain overnight financing and do not have sufficient capital reserves.  Consumers are cutting spending because they cannot spend their rapid-growing home equity because it’s gone, and that’s where the spending power that drove this last cycle came from.  This crisis has been a long time coming, but the borrowing orgy that has spiraled out of control from its beginnings in the first credit cards of the late 1940s has come to an end.

We are scrambling for a bailout plan now because we don’t want to face the music. We are in a situation where arbitrage has been mistaken for value creation, liquidity has masqueraded as adequate capitalization, and diversification and insurance have been substituted in place of conservative underwriting.  On the borrower’s side, homebuying has been seen as an investing activity, refinancing has been used as a cash machine, and credit has been mistaken for wealth.  We will not see a return to strong and stable financial and housing markets until we accept and embrace the uncomfortable truth that we cannot live on credit alone.  Years of failing to discipline ourselves into greater saving and less leverage have backfired.  The result is the violent de-leveraging currently wrecking the global capital markets.  My main hope is that a similar fate does not befall our ever-borrowing government as it continues to pour good money after bad.  The question to MBA’s is “how are we going to rebuild the system in a more sustainable way?”

Let the Pain Do Its’ Work

Written July 9, 2008

  The United States has interfered with economic natural selection for too long, and we are beginning to pay the price.  Rather than accepting the situation as a natural (and overdue) market correction, the Congress is furiously trying to pass a housing bail-out measure that would drag all U.S. taxpayers into the worsening cycle of mortgage-related losses to which only some voluntarily exposed themselves.  Our politicians are delighted to have a giveaway in this election year.  These politicians, abetted by the media, are only too eager to tar and feather the lenders, who are relatively few in number (of votes).  Meanwhile, they pander to the larger numbers of borrowers by attempting to legislate them out of a financial mess which they brought upon themselves to begin with. 

The push for a mortgage bail-out overlooks a fundamental reality of human life which is a key driver of natural selection: we only learn from our mistakes when we suffer their consequences.  In order to have a healthy financial sector, those firms that originated, packaged, sold and bought loans that were insufficiently collateralized by the underlying assets and/or were made to unqualified borrowers should suffer the financial consequences of their lack of diligence in underwriting.  The worst ones will, and should be, driven out of the market.  Careers will be ruined, and rightly so. 

The same reasoning holds true for the borrowers who entered into those loan agreements to begin with.  “The man at the bank said it was okay” is not a valid excuse for not having exercised restraint, judiciousness and discipline in one’s financial affairs.  The common argument made on behalf of borrowers who are underwater on aggressive home loans is that they were financial amateurs, and were taken advantage of by savvy loan officers who should have known better.  While this was true in some instances, there are plenty of consequences to go around. 

Few citizens are expert mechanics, but that generally does not cause us to accept used car salesmen’s word at face value.  Careful people seek qualified third-party advice.  Those who do not get expert advice get burned, causing them to stay out of the market in the future.  If the government paid for repairs on secondhand cars, there would be no incentive for people to seek out the good deals.  Home loans are no different, except that they are larger and more important.  Predatory loan officers and the institutions that employed them are paying the piper now for their short-term focus on originations and fees, as are the institutions that bought those loans.  The borrowers need to be held accountable for their own actions as well, otherwise we perpetuate a situation in which such large numbers of people make irresponsible financial decisions that the whole economy is destabilized.

If the Congress drags Fannie and Freddie further into danger by forcing them to assume or guarantee more risky mortgages and then the lenders fail, the U.S. taxpayers will likely have to assume their obligations.  This would take the “selection” out of  “natural selection” by making every taxpayer in the country responsible for a portion of the losses incurred only by those who took ill-considered financial risks.  Since the borrowers who need rescuing would hardly have shared any upside gleaned from their risky loans, why should everyone share in the downside with them?  There is no reason why a taxpayer who pays his mortgage faithfully, or one with no mortgage at all, should bear any of the burden caused by mortgage defaults and their related securities.  An undeserved safety net would remove the incentive for borrowers to be careful about what they commit to.  Moreover, by limiting or eliminating the consequences of the careless use of credit, we keep risky, careless players in the housing market.  The market will never return to stability and strength if we do not allow it to make a genuine correction and drive the worst participants out. 

Our housing and financial markets have been an easy place to make money lately, and as a result the markets have become bloated with unskilled players, so that the markets themselves have become inefficient and overburdened with poorly underwritten risk.  On the lenders’ and investors’ side of the table arbitrage has been mistaken for value creation, liquidity has masqueraded as adequate capitalization, and diversification and insurance have been substituted in place of conservative underwriting.  On the borrower’s side, homebuying has been seen as an investing activity, refinancing has been used as a cash machine, and credit has been mistaken for wealth.  We will not see a return to strong and stable financial and housing markets until we accept and embrace the uncomfortable truth that lending, borrowing and investing are risky activities that require careful study, conservative judgment, and a high degree of discipline to be safely undertaken.  Left unmolested, the market will dish out enough pain to the parties involved to return us to a healthy respect for risk.  A genuine correction will occur, our collective memory will be refreshed, and the risk involved in real estate and its related instruments will be reincorporated into loan prices, underwriting policy, and security ratings.  To the degree that we bail out borrowers or lenders who overextended themselves in the housing and debt markets, we prevent such a correction and assure ourselves a repeat of the present economic crisis.