Obama's staffing problems

Four months past the election, Obama’s basic problem with staffing is that he doesn’t know many people — not in the sense of having worked closely with them on a successful project so that he can tell who is effective and who is an empty suit. He’s not exactly Dwight Eisenhower, who came to office with a list in his head of the strengths and weaknesses as managers of hundreds of potential appointees. How many successful projects has Obama been part of other than his own self-advancement? The Chicago Annenberg Challenge? That didn’t do anything for test scores. Getting (some) asbestos out of a public housing project? Woo-hoo!

So, Obama has mostly been appointing four kinds of people: Chicagoans he knows, ex-Clintonites he read about in the newspapers during the 1990s, campaign aides, and random people who sound cool. He doesn’t know anything about economics or business, so his weaknesses at staffing Treasury are particularly glaring.

My published articles are archived at iSteve.com -- Steve Sailer

Everything is different in Canada. Well, not really ...

A reader writes:

I thought you might be interested in the Toronto School Board's parent census. They surveyed parents in Toronto and tied the results of the survey to the child's Grade 3 and Grade 6 standardised test performance. Basically no surprises here. Math performance goes something like this... East Asians, Whites, South Asians, Latin Americans, Blacks. Generalissimo Franco is still dead.

http://www.tdsb.on.ca/wwwdocuments/about_us/media_room/docs/2008ParentCensusK-6SystemOverviewAndDetailedFindings.pdf

The funniest graph is Table 28 where parents answer whether the amount of homework assigned is just right, too little or too much. Most parents answer Just Right, and the rest are fairly evenly split, but the East Asian parents vote 38% to 2% for Too Little over Too Much. (There's no word on what East Asian children think about how much homework they're getting.)

My published articles are archived at iSteve.com -- Steve Sailer

The deep roots of the "Obama Bear Market"

Now that the bloom is starting to come off the rose, I'm back to explore the President's emotional attitudes toward business in my new VDARE.com column.

On the last day of the ill-fated Bush Administration, the Dow Jones average stood at 8,281, down catastrophically from its 2007 peak—yet still almost 25 percent higher than the Dow’s close on Friday, March 6, 2009 of 6,627.

You might think that George W. Bush would be an easy act to follow. After all, he was inept enough to overlook the basic rule of politics that kept the Bush family’s friends in Mexico’s PRI party in power for so many years: Make sure the economic collapse happens right after the election, not right before.

And yet, what is now technically the "Obama Bear Market" shows that Obama may be down to the challenge of being Bush’s successor.

It’s important to understand that Obama was never a Depression Democrat who worries that the capitalist system can’t produce enough wealth. Obama didn’t run for President to help Americans earn more money. By upbringing, he’s more a Sixties person who assumes that businesspeople will continue—in their unseemly way—to produce plenty of riches, which a better sort of person (such as, say, himself) should redistribute in a more equitable and refined fashion.

When Obama began his campaign in early 2007, this worldview made a certain amount of sense. In early 2009, however, it’s obviously out of date. We aren’t as rich as we thought we were before the bubble burst.

More

My published articles are archived at iSteve.com -- Steve Sailer

How random is admission to charter schools?

You often read articles about charter schools whose students do wonderfully on standardized tests even though admission is by random lottery. The implication is that all we have to do to Fix the Public Schools is to do in all the other schools in America whatever it is that works so wonderfully at this one school with its (presumably) representative student body.

Of course, the parents who choose to apply their children to charter schools tend to be a notch above the average in the first place.

But there's another question I've never seen asked: Who says the admissions lottery is completely random?

The charter schools say their admissions are totally random.

But why would you believe them?

A few years ago, I applied my son to a new charter high school founded by the best teachers from his public middle school. Admission was by random lottery. I dropped by the office and nervously asked a teacher, who had been at my kid's junior high school the year before, if my son's application had been chosen.

He picked up the list, "What's the name again?"

"Sailer."

The teacher looked at me. "The kid who got a 5 on the AP Biology test in 7th grade?"

"Uh, yeah. That's him."

He put down the list without looking further. "He got in."

"Well, could you check to make sure he's on the list of those who were picked in the lottery?"

The teacher gave me a look that said, "How can a smart kid like that have such an idiot for a father?" and repeated. "He's in."

I looked blank.

He patiently reiterated, "Don't worry about it. He's in."

"Oh," I said. And then I smiled.

He smiled back, happy that he didn't have to spell it out any further.

My published articles are archived at iSteve.com -- Steve Sailer

Interethnic marriage declining for Asians and Latinos

A couple of years after I wrote about Qian and Lichter's study here, Annie Gowen reports today in the Washington Post, "More Young Adults Are Seeking Partners of Same Ethnicity:"

But scholars delving into the U.S. Census have found a surprising converse trend. Although interracial marriages overall have increased, the rate of Hispanics and Asians marrying partners of other races declined in the past two decades. This suggests that the growing number of immigrants is having a profound effect on coupling, they say.

The number of native- and foreign-born people marrying outside their race fell from 27 to 20 percent for Hispanics and 42 to 33 percent for Asians from 1990 to 2000, according to Ohio State University sociologist Zhenchao Qian, who co-authored a study on the subject. The downward trend continued through last year, Qian said.

In 2007, I blogged:

Back in 2000, I wrote an article for VDARE.com entitled "Immigration Is Retarding Interracial Marriage." That's visible in Southern California, where Asians used to be widely dispersed all over the suburbs, and thus tended to marry the whites around them. Now, however, Asians tend to cluster in the San Gabriel Valley, and you see a higher proportion of Asian-Asian couples than you did a quarter of a century ago. This has implications for assimilation.

Now, a new study of Census data fro 1990 and 2000 confirms that trend:

Immigration played a key role in unprecedented declines in interracial and inter-ethnic marriage in the United States during the 1990s, according to a new sociological study. The findings, published in “Social Boundaries and Marital Assimilation: Interpreting Trends in Racial and Ethnic Intermarriage,” suggest that the growing number of Hispanic and Asian immigrants to the United States has led to more marriages within these groups, and fewer marriages between members of these groups and whites.

“These declines in intermarriages are a significant departure from past trends,” said Zhenchao Qian, co-author of the study and professor of sociology at Ohio State University. “The decline reflects the growth in the immigrant population during the 90s; more native-born Asian Americans and Hispanics are marrying their foreign-born counterparts.”

I imagine that the clustering of Southern California's Asians in the San Gabriel Valley is motivated in part by Asian parents hoping their children wind up with Asian spouses.

My published articles are archived at iSteve.com -- Steve Sailer

Why did Asians end up in San Gabriel Valley rather than in San Fernando Valley?

When I was a kid in the San Fernando Valley, the huge suburb northwest of Los Angeles, Asian-Americans were widely distributed all over Southern California. Over time, though, they came to congregate in the huge San Gabriel Valley, a suburb northeast of Los Angeles. Thus, Asians seem no more common in the San Fernando Valley today than 30 years ago.

I've been wondering why Asians picked the San Gabriel Valley rather than the San Fernando Valley. If you live in one of them, it's easy to come up with a long list of rather trivial differences between them. But to the man from Mars (or even from Minneapolis), they would seem close to identical -- except for all the Asians now in the SGV.

The first evidence of an Asian predilection for the San Gabriel Valley was the formation of a New Chinatown in Monterey Park, in the southeastern San Gabriel Valley in the early 1970s. So, perhaps the die was cast then and everything else just followed from path dependency.

Or maybe it had something to do with smog. The SFV had bad smog in the 1970s but the more inland SGV had terrible smog. Perhaps the Asians didn't care as much about smog, or perhaps they had it all figured out that the new emissions controls would largely fix the smog problem, driving up home values in the SGV relatively more than in naturally less smoggy areas.

But, I think I've got a better idea. From an Asian family's perspective, the main difference between the San Fernando Valley and the San Gabriel Valley was that the former is almost all part of Los Angeles and the latter is made up of numerous independent municipalities. Even more to the point, most of the San Ferndando Valley schools are run by the giant LAUSD. In contrast, the San Gabriel Valley is made up of small independent school districts. So, Asians can concentrate enough numbers in an obscure SGV suburb like Arcadia to dominate school policy. More homework! More AP classes! More gifted classes! School orchestra!

This year's senior class at Arcadia H.S., a public school that's about 70% Asian and 20% white, has 35 National Merit Semifinalists.

In contrast, Asians have no hope of getting enough numbers in LA to motivate the LAUSD into doing much of anything for them.

(Here's a detailed map of Los Angeles County with LA City in white.)

My published articles are archived at iSteve.com -- Steve Sailer

Holder tells other minorities they belong in the back of the bus

A pundit tries to be faster than those who are better than him and better than those who are faster. Dennis Dale isn't faster that anybody, but he may be better than everybody.

At Untethered, Dennis explains a key point of Attorney General Eric Holder's "nation of cowards" speech:

What is more interesting is the unintentional but more revealing subtext, inaccessible to the author, incapacitated as he is by status, position and, appropriately enough, chauvinism. Holder's speech revealed the potential conflicts facing a civil rights movement-turned-industry by Barack Obama's stunning, rapid rise.

Those who most fear the reality of a "transformation" to a "post-racial" America are those who've most benefited from the decidedly racial nature of recent American politics--again, embarrassingly demonstrated with Obama's success. The end game of affirmative action and discrimination-through-litigation is revealed as long overdue. The intent of the "conversation" about race, now more than ever, is to delegitimize that challenge by declaring it unfit for conversation.

If we should start taking seriously the "post-racial" nature of Obama's rise, we might start asking that it mean something beyond assigning a professional and political premium to certain individuals based on Obama's myth of "race and inheritance." But the obvious advantage that race played for the inauthentic son of slavery and segregation contradicts the myth. The notion of a white American jackboot forever on the neck of our culturally most powerful--black Americans--was questionable before Obama's remarkable campaign and the ecstatic reception of his inauguration. Now it is farcical.

But it isn't only that Barack Obama renders the white/black reparations dynamic absurd. The nascent Diversity State finds itself too soon and too totally triumphant. The bogey of white oppression threatens to become no longer plausible, and those groups assigned varying stature within the hierarchy of grievance are already eyeing one another uneasily.

The order now threatened by diversity is not pre- but post-civil rights. That minority became synonymous with oppressed, and "underrepresented" synonymous with denied, once only enhanced the power of the dominant minority, which extracted concessions from a still comfortable majority (that could still afford them and held an expectation of final conciliation). Smaller minority groups were content to follow the leader and accept a subordinate position. But what happens to that dynamic in a "post-racial" ("post-white") America where the majority of individuals have a birthright claim against the white plurality and no sense of obligation toward a black population that is culturally dominant, politically favored and stubbornly lagging in professional and scholastic achievement?

It was therefore Holder's purpose to preclude any challenges to black America's position atop the hierarchy of grievance. Black equality is more than simple equality. Holder is here to defend the primacy of his faction as the vanguard of a revolution now triumphant:

In addition, the other major social movements of the latter half of the 20th century -- feminism, the nation's treatment of other minority groups, even the antiwar effort -- were all tied in some way to the spirit that was set free by the quest for African American equality. Those other movements may have occurred in the absence of the civil rights struggle, but the fight for black equality came first and helped to shape the way in which other groups of people came to think of themselves and to raise their desire for equal treatment. Further, many of the tactics that were used by these other groups were developed in the civil rights movement.

By more false accommodation he allows that feminism, anti-war protests and other minority rights movements "may" have happened without the black civil rights movement--insinuating that they probably would have not. When Holder goes on to assert that black history is too little studied, and that "African American history is American history", he declares that black history is more than American history, and greater than any other group's American history.

More

My published articles are archived at iSteve.com -- Steve Sailer

Foreclosure rates in exurbs vs. cities

By the way, one thing that should be borne in mind in thinking about the high foreclosure rates in new exurbs compared to in old cities is that part of this is an inevitable function of the newness of an exurb. Compare a brand new development in an exurb 80 miles outside of San Francisco that opened up in 2005 to Russian Hill in San Francisco.

Why is there a much higher percentage of defaults in the new development? First, because practically everybody in the new development has a mortgage. Nobody has lived there long enough to pay off their mortgage because it didn't exist 30 years ago. Some families in Russian Hill paid off their mortgage after Great-Great-Great-Grandfather Jeremiah (whose portrait in oil glowers down upon the drawing room) cornered the sasparilla market in 1859.

Second, if the development didn't open until 2005, that meant everybody bought in at the top of the bubble, whereas Russian Hill is full of people who bought in in 1987 or 1998 and thus have reasonable mortgages.

After you take all that into account, you'll still see big differences in default rates, due to the fact that people buying into exurbs on the distant margin of metropolitan areas tended to be only marginally creditworthy, typically coming from the stressed second quartile of the population. The highest default rates in LA County, for example, are way out in the high desert, where people worried about their kids slipping into the underclass tried to buy into a little more house than they could afford to get into a little better school district. But, due to easy credit, so did everybody else (and many turned to renting their speculative houses to people who couldn't even qualify for a zero down liar loan, due to excessive neck tattoos or whatever), so it all came crashing down.

My published articles are archived at iSteve.com -- Steve Sailer

The MSM start catching on

One of the frustrating things about the Mortgage Meltdown is how little basic factual information, such as where it actually happened, has been conveyed to the public. That embargo is finally starting to break down.

Brad Heath reports in USToday in "Most Foreclosures Pack into a Few Counties:"

More than half of the nation's foreclosures last year took place in 35 counties, a sign that the financial crisis devastating the national economy may have begun with collapsing home loans in only a few corners of the country.

Those counties, spread over a dozen states, accounted for more than 1.5 million foreclosure actions last year, a USA TODAY analysis of figures compiled by the real estate listing firm RealtyTrac shows — more than were recorded in the entire United States just two years earlier. They were the epicenter of a wave of foreclosures that have left leading banks teetering and magnified the nation's economic problems. ...

In other parts of the country, the foreclosure wave was barely a ripple — at least until it started swamping major banks that had invested heavily in mortgages. Banking giant Wachovia Corp., for example, was hammered after California and Florida customers of one mortgage firm it bought began defaulting at high rates. The risks of such lending were spread so broadly among financial institutions that, when the loans went bad, it drove the national credit crisis, says Christopher Mayer, who studies real estate at Columbia Business School.

A few of the 35 counties leading the foreclosure boom are in already-distressed areas around Detroit and Cleveland. But most are clustered in places such as Southern California, Las Vegas, Phoenix, South Florida and Washington, where home values shot up dramatically in the first half of the decade, then began to crumble. ...

The worst-hit counties are home to about 20% of U.S. households, but accounted for just over 50% of the nation's foreclosure actions last year, driving most of the national increase. And even among those places, a few stand out: Eight counties in Arizona, California, Florida and Nevada were the source of about a quarter of the nation's foreclosures last year. In more than 650 other counties — about a fifth of the nation — the number of foreclosure actions actually dropped since 2006.

But median prices were so high and median incomes so low in those eight counties that they probably accounted for half or more of the dollars defaulted. Lucy and Herlitz estimate that 87% of the home appreciation in America happened in the four Sand States between 2000 and 2006, so it's likely that a similar fraction of the downturn in home values happened there.

Nevada had the worst 2008 foreclosure rate at 7.3%, followed by Arizona at 4.5%, Florida at 4.5%, California at 4.0%, Colorado 2.4%, Michigan 2.4%, Ohio 2.4%, George 2.2%, and Illinois 1.9%.

In the four expensive states at the top of the list, people were betting on immigration-driven population growth to continue to drive up housing prices indefinitely. But the immigrants turned out to be unable to pay for expensive houses and their influx lowered property values in neighborhoods where they congregated, and made homes unaffordably expensive where they didn't.

Cool graphics here and here.

A lot of people tell me that we shouldn't pay much attention to the causes of the Mortgage Meltdown because that was just the trigger for the global financial crash and something else would have caused it eventually. Okay, but, in fact, something else didn't actually set it off, so let's at least try to figure out what did.

When a Lockheed-built plane would crash, my dad would get a call in the middle of the night and he'd be on the 8 am flight for Italy or Miami or Fiji or wherever to traipse around in a wheat field or a swamp or a jungle for weeks picking up shards of metal (and bone). They'd lay out the metal they found inside an aircraft hanger in the shape of the airplane, like a giant jigsaw puzzle. Eventually, they'd figure out why all those people died.

Of course, that didn't stop planes from crashing. But, the more they learned from crashes, the less often they crashed.

My published articles are archived at iSteve.com -- Steve Sailer

The Great California Pyramid Scheme Mania of May 1980

An almost-forgotten incident in American economic history was the pyramid scheme that swept Southern California during the stagflation of May 1980. Yet, now that we know that about 2/3rds of the Housing Bubble of 2000-2007 took place just in California, it's worth reviewing incidents from California's long history of financial manias.

I missed out on the late May 1980 climax of LA's Pyramid Fever because I got back to LA on May 16, 1980 after graduating from Rice, then left on May 20 for Europe. I recall reading about the early days in the local newspaper with amazement.

When I got home a couple of months later, nobody ever spoke of it again.

The difference between a pyramid scheme and a Ponzi scheme is mostly that the machinations of the pyramid scheme are out in the open. Time Magazine's June 16, 1980 issue describes the mechanics of the Great LA pyramid scheme:

For $1,000 each, 32 newcomers buy slots on the bottom row of a pyramid-shaped roster. Each new player pays half of his $1,000 to the person at the pinnacle, who ends up with $16,000. The new player also pays his remaining $500 to the person directly above him on the next tier, which contains 16 people. Since each person on that tier gets paid by two of the newcomers, he ends up with $1,000, thus recouping his original investment. As more people buy in, the players move up the chart. In time, theoretically, each person reaches the top—and $16,000.

The scheme caught on as only a California hustle can. Pawnshops did a booming business, as players hocked stereos to raise the initial fee. Most players, however, were middle-class suburbanites out to fight inflation. Everyone seemed to know someone who had indeed won $16,000. There were runs on local banks for $50 and $100 bills to be used in the night's gaming. Dentists reported patients, even with mouths full of cotton, soliciting them to join the club. Games were held in unlikely hideaways, including Hollywood sound studios, chartered buses and the Grand Salon of the Queen Mary at anchorage in Long Beach.

The wild thing about this 1980 outburst was that it was the most blatant pyramid scheme imaginable, combining the usual pyramid scheme mechanics with a New Age cult of the Power of the Pyramid.

Back in Gov. Jerry Brown's California, "pyramid power" was a popular New Age concept. (Although there's never anything new about New Age in California -- the lovely coastal mountain village of Ojai has been a New Age center since the 1800s.) In 1977 I went to a fashionable Westwood hair styling salon where for a few bucks extra you could get your hair cut in a special chair under a pyramid dangling from the ceiling. The pyramidal aura was supposed to help you avoid Bad Hair Days or something. (I declined. But, now that I think about it, I did have a lot of BHDs ...)

In May 1980, a vast multi-level cash exchange craze developed in California that explicitly invoked the mystique of pyramids. Every night there were hundreds of house parties hosted by people who had gotten in earlier on this multi-level scam (perhaps the night before). My vague recollection from newspaper reports is that you'd go over to a higher-up's house and sit with him under his pyramid while you gave him cash in return for your very own kit for building a pyramid out of wire and fabric. The Ancient Egyptian emanations from his pyramid would ensure that you'd get even more cash back from the suckers you'd recruit to buy your pyramid kits from you while sitting under your pyramid.

Perhaps I don't have the details right, but pyramid imagery was central to the experience, which made this Pyramid Power pyramid scheme hard to debunk. It was already pre-debunked. Anti-fraud authorities would go on the local TV news to denounce the pyramid schemes as "pyramid schemes," which just served as good advertising. "Well, duh, of course it's a pyramid scheme," participants would laugh. "How do you think those Egyptian pharaohs got so rich that they could afford those giant pyramids? Through tapping the secret energy of Pyramid Power!"

Here are summaries of articles from the Los Angeles Herald Examiner from May 21 to June 1, 1980:

"Get-rich-quick 'chains' multiplying too fast to stop." May 21, p. A3.
[California pyramid schemes. Participants a "cross-section". Los Angeles: hundreds of calls a day asking about legality; at least 100 clubs (c. 30 persons each). Parties busted. Alameda County High school pyramid: ounce of marijuana to buy in, pay-off a pound.

"Pyramids: 'Brother can you spare a dime,' 1980-style." May 22, p. A1+.
About 40,000 attend "pyramid parties" in Los Angeles last night (est. 150 to 400 parties). Accounts of arrests. Most common ante $1000, win $16,000. Studio employee: "Studio people are talking about nothing else." ... Some brought to meetings blindfolded. "I never saw anything like it in all my experience as a bunco detective, completely beyond the scope of my imagination." P. A15: "A pyramid winner tells how she won her money." Elizabeth Kyger, free-lance writer, 24, tells of splitting $16,000. "I've made great business contacts because of this." Says Ventura freeway westbound jammed in evenings because of pyramid parties.

"Mood of pyramid participants turning ugly." May 24, p. A5.
Two accounts of anger at Burbank pyramid party site. Out-of-towners now predominate. State Attorney General's office investigating possible links to organized crime. P. A1+ "Ante goes up to $5,000" Celebrity attendants to day-time pyramid party attempt to deceive or intimidate reporter upon leaving. Photo (p. 1): Policeman holds up "Pyramid Power" T-shirt confiscated in a raid. Letter "A" of "PYRAMID" forms pyramid

"500 rally at Griffith Park to promote money scheme." May 27, p. 1+.
Sign at rally: "Business Concept Power Happening." Attendants defend scheme, claim winnings, exchange pyramid gossip (meeting with 237 buys, a $100,000 ante game). Ventura county brings felony conspiracy charges. Lawyers address crowd - urge no guilty pleas. Petition circulated to DA. Citizen's Individual Rights and Collective Legal Expression (CIRCLE) distributes fliers criticizing police and media. Photo: Bearded man in pyramid power T-shirt, $ sign between the two words.

"I really feel like a sucker." June 1, p. 1.
Young printer's account of collapse of pyramid. Printed 300 pyramid charts. Went in with 3 others at $250 each. Meeting at 8 PM sharp, door locked, a letter was read asking law enforcement and tax collection personnel to admit role. Another person explains pyramid and asks for buy-ins. Last meeting: only people who had lost were present, talk of violence.

My published articles are archived at iSteve.com -- Steve Sailer

Albania's 1996 Ponzi scheme frenzy: So, what's America's excuse?

One of the more lurid and instructive events in recent economic history was the wave of gigantic pyramid schemes that plunged newly de-Communized Albania into chaos in 1997.

Even before Enver Hoxha's xenophobic Communist dictatorship took power at the end of WWII, Albania was the back of the beyond. During WWII, a couple of American soldiers drove their jeep up to a remote Albanian mountain village, where they were invited in for dinner by the locals. When they came out, they found their jeep upside down. The yokels explained that they had flipped the vehicle over because they just wanted to see whether it was male or female.

When Albania started to open up around 1990, one of the first foreign journalists into the country was asked by a couple of Albanians who spoke English, "What are 'microwave ovens'?"

He responded, "Well, where have you heard of microwave ovens?"

His interlocutors broke into the chorus of Dire Straits's "Money for Nothing:"

We gotta install microwave ovens
Custom kitchen deliveries
We gotta move these refrigerators
We gotta move these colour tvs

That's where'd they heard of microwave ovens: on Italian or Greek radio. And they'd been puzzling over the lyrics ever since.

So, it was hardly surprising that practically everybody in newly capitalist Albania fell hard for that recurrent disease of capitalism known as pyramid (or Ponzi) schemes.

From the March 2000 issue of IMF's quarterly magazine Finance & Development:

The Rise and Fall of Albania's Pyramid Schemes
Christopher Jarvis

During 1996-97, Albania was convulsed by the dramatic rise and collapse of several huge financial pyramid schemes. This article discusses the crisis and the steps other countries can take to prevent similar disasters.

The pyramid scheme phenomenon in Albania is important because its scale relative to the size of the economy was unprecedented, and because the political and social consequences of the collapse of the pyramid schemes were profound. At their peak, the nominal value of the pyramid schemes' liabilities amounted to almost half of the country's GDP. Many Albanians—about two-thirds of the population—invested in them. When the schemes collapsed, there was uncontained rioting, the government fell, and the country descended into anarchy and a near civil war in which some 2,000 people were killed. ...

The wide appeal of Albania's schemes can be attributed to several factors, including Albanians' unfamiliarity with financial markets; the deficiencies of the country's formal financial system, which encouraged the development of an informal market and, within this market, of the pyramid schemes; and failures of governance.

When Albania started the transition from central planning to a market economy, it was the poorest and most isolated and backward country in Europe. For centuries, Albania had been largely unknown and inaccessible, and, from 1945 to 1985, its isolation was compounded by the rigid communist dictatorship of Enver Hoxha, which eliminated almost all forms of private property and virtually cut the country off from outside influences and information. When transition began in 1991, the country had been reduced to desperate poverty, and the vast majority of its population was unfamiliar with market institutions and practices.

Although Albania's transition to a market economy was rapid and quite successful, financial sector reform was very limited. Albania's formal financial system was rudimentary. There were few private banks. The three state banks, which held 90 percent of deposits, offered positive real interest rates but had growing portfolios of bad loans, prompting the Bank of Albania to impose tight credit ceilings on them. With the banks unable to satisfy private sector demand for credit, an informal credit market based on family ties and financed by remittances grew. The informal lending companies were initially regarded as benign and even as making an important economic contribution. Operating alongside them, however, were deposit-taking companies that invested on their own account instead of making loans. These companies were the ones that turned into pyramid schemes.

There were also governance problems, both in the financial sector and more generally. The regulatory framework was inadequate, and it was not clear who had responsibility for supervising the informal market. Even after the approval of a banking act in February 1996 that appeared to give the Bank of Albania the power to close illegal deposit-taking institutions, the central bank could not obtain the government's support. Indeed, the government was supportive of the companies: senior government officials frequently appeared at company functions, and, in November 1996, even as the pyramid schemes began to crumble, the prime minister and the speaker of the parliament accepted medals in honor of the anniversary of one of the companies. During the 1996 elections, several of the companies made campaign contributions to the ruling Democratic Party. There were allegations that many government officials benefited personally from the companies. ...

Some of the Albanian companies meet this definition exactly: they were pure pyramid schemes, with no real assets. Other cases are more ambiguous. Some of the largest of the companies—in particular VEFA, Gjallica, and Kamberi—had substantial real investments. They were also widely believed to be engaged in criminal activities—including violating United Nations sanctions by smuggling goods into the former Yugoslavia—that were thought to be the source of the high returns they paid.

Much like how many of Bernie Madoff's investors presumably believed he was illegally "front-running" as a NASDAQ market-maker, and they wanted in on the action.

... The proliferation of schemes had baleful effects. First, more depositors were drawn in. Although VEFA had the largest liabilities, it had only 85,000 depositors. Xhafferi and Populli between them attracted nearly 2 million depositors—in a country with a population of 3.5 million—within a few months. ... By November, the face value of the schemes' liabilities totaled $1.2 billion. Albanians sold their houses to invest in the schemes; farmers sold their livestock. The mood is vividly captured by a resident who said that, in the fall of 1996, Tirana smelled and sounded like a slaughterhouse, as farmers drove their animals to market to invest the proceeds in the pyramid schemes.

On November 19 [1996], Sude defaulted on its payments, and the collapse began.

Sude's collapse shook the public's confidence in all of the companies and new deposits dried up. An attempt by VEFA, Kamberi, Silva, and Cenaj to convince depositors of their soundness by lowering monthly interest rates to 5 percent failed. In January 1997, Sude and Gjallica declared bankruptcy, triggering riots. The other schemes soon also ceased to make payments. The government belatedly took some useful steps. First, it refused to compensate depositors for their losses, which made achieving economic stabilization after the crisis much easier than it would otherwise have been. Second, it began to move against some of the companies. ...

By March 1997, Albania was in chaos. The government had lost control of the south. Many in the army and police force had deserted, and 1 million weapons had been looted from the armories.

Which led, bizarrely enough, to Bill Clinton going to war in 1999 against Serbia (technically, still Yugoslavia at that point).

Because Albanian soldiers and policemen weren't getting paid, they looted weapons (and as Ephraim Diverloi case and that giant fireball explosion last year outside Tirana showed, Albania remained stuffed to the gills with weaponry due to Enver Hoxha's paranoia and feeling that he must be able to fight off America or the Soviet Union single-handedly.) The most willing and convenient buyer for these stolen guns were their fellow Albanians across the border in Serbia's province of Kosovo. Albanian Kosovars had long been waging a mostly peaceful civil rights protest campaign against Serbian control, but suddenly the Kosovo Liberation Army emerged as a well-armed rebel fighting force. About 2000 people died in the subsequent fighting between Serbs and the KLA, causing Clinton and other NATO leaders to start bombing Serbia. The Serbs responded by starting a mass expulsion of Albanians from Kosovo, but eventually gave up after NATO bombed Serbia back to the industrial stone age.

Evacuation of foreign nationals and mass emigration of Albanians began. The government was forced to resign. President Berisha agreed to hold new parliamentary elections before the end of June, and an interim coalition government was appointed.

The interim government inherited a desperate situation. Some 2,000 people had been killed in the violence that followed the pyramid schemes' collapse. Large parts of the country were no longer within the government's control. Government revenues collapsed as customs posts and tax offices were burned. By the end of June, the lek had depreciated against the dollar by 40 percent; prices increased by 28 percent in the first half of 1997. Many industries temporarily ceased production, and trade was interrupted. Meanwhile, the major pyramid schemes continued to hang on to their assets, proclaim their solvency, and resist closure.

Despite the many obstacles it faced, the interim government, aided by the international community, made impressive progress in restoring order and stabilizing the economy. Winding up the pyramid schemes proved to be more difficult. ...

Few studies have been done on the macroeconomic effect of pyramid schemes on the scale of those in Albania, which, fortunately, are extremely rare. The closest analogy to such schemes is the asset bubble, whose economic impact is due to changes in perceived wealth. As a bubble expands, people believe themselves to be better off than they actually are, and their demand for goods and money increases, leading to a deterioration in a country's external current account as well as increased output or accelerated inflation or both. If the bubble attracts foreign investors, capital inflows might be sufficient to fund the current account deficit. After the bubble bursts, perceived wealth falls dramatically. Demand for goods and money, as well as output and inflation rates, can be expected to decrease, while the current account balance is likely to improve.

Some of these effects were observed in Albania but appear to have been limited and short lived. Although the current account of the balance of payments (excluding official transfers) deteriorated by about 2 percent of GDP in 1996, to 9.1 percent of GDP, because of a 35 percent increase in imports, this consumption boom seems not to have been the main factor driving inflation. The impact of the schemes' rise on output, which grew at nearly the same rate—9 percent—in 1996 as in the previous three years, is also unclear.

The collapse of the schemes seems to have had a major short-term economic impact, but the most damaging effects came from the civil disorder it precipitated. ...

The long-term effects of the pyramid scheme phenomenon are likely to be limited, reflecting not only the resilience of the Albanian economy but also—and, perhaps, most important—the government's adjustment efforts and its refusal to bail out depositors. Prices and wages are extremely flexible in Albania; as a result, the government was able to cut real public sector wages substantially in 1997 (by leaving nominal wages unchanged), and the economy suffered no loss of competitiveness when the lek appreciated. The new government's willingness to tackle the budget deficit and undertake long-overdue structural reforms was also crucial. However, the social effects were profound. In addition to the loss of life, thousands of people were impoverished either by their unwise investments in the pyramid schemes or by the destruction of their property in the ensuing violence. Less tangible, but also significant, are the effects on confidence in Albania. The resilience of the Albanian people is considerable and has been more severely tested in the past. But the pyramid scheme phenomenon was a sobering setback.

Albania's experience contains some important lessons for other countries. There are steps governments can take to make the growth of pyramid schemes less likely. These include establishing a well-functioning formal financial system, setting up a regulatory framework that covers informal as well as formal markets and has clear lines of responsibility for supervision and action, and tackling general governance problems. Although preventing pyramid schemes is not the most important reason for establishing good governance, the Albanian experience is a powerful reminder of the social costs of unchecked criminality.

When pyramid schemes emerge, they should be dealt with swiftly and firmly. Companies believed to be operating pyramid schemes should be investigated. By definition, the liabilities of pyramid schemes exceed their assets, and the schemes fund payments to investors out of new investment inflows. To determine whether a company is operating a pyramid scheme, it is necessary to find out if it has real investments and if these investments are likely to be sufficient to cover its liabilities. The investigation can be conducted by the police, a government ministry, or the central bank. The key point is that the investigators should be able to recognize financial fraud and also to assess the value of company assets. If such expertise does not exist in the country, then the investigation can be conducted by outsiders; the IMF and the World Bank should be prepared to help governments find qualified outsiders, if necessary, either from other governments or from large international accounting firms with expertise in this area.

The investigation should be swift. If a company is found to be operating a pyramid scheme, it should be closed immediately. Allowing schemes to continue will result only in more inflows of deposits and greater losses. ...

If there is a strong presumption that companies are pyramid schemes, the government should freeze and, if necessary, seize their assets during the investigation. Once an investigation of a pyramid scheme has begun, the operators will try to steal as much of the assets as possible before the truth comes out. ...

Once a scheme is closed, all assets should be seized and turned over to administrators, who could be government accountants or, if these officials do not have sufficient independence or expertise, accountants from an international firm with an insolvency practice. Legislation may be needed to void contracts made by the companies in the last several months (to prevent theft by transfer to associated parties) to give administrators full control over the assets of the companies and protect them from legal challenges.

The government should make it clear from the outset that it will not compensate depositors for their losses. If this is not done, the fiscal costs are likely to be ruinous, and the moral hazard considerable.

I'm sure I'm just feeling paranoid, but please explain to me why those last paragraphs don't apply to a number of major American financial institutions.

My published articles are archived at iSteve.com -- Steve Sailer

Has anybody estimated lately what 2009 tax receipts will be?

Obama say he can finance his dreams from his father by taxing the rich at higher rates while cutting the taxes of 95% of the public, but has anybody made a new estimate of how much adjusted gross income the rich will have in 2009 and 2010?

For example, baseball players' salaries are coming down. Bobby Abreu, a very consistent player who made $16 million last year while hitting .296 with 20 homers and 100 RBIs, could only get a one-year $5 million dollar deal this year. I suspect that the real damage to baseball contracts will get done next year after a lot of skybox contracts aren't renewed this year.

Is Wall Street going to be handing out huge bonuses again this year?

Are oil companies going to be making vast profits?

So, there's no way Obama can cut taxes on the bottom 95% without running up huge deficits. Of course, those "unexpected" deficits will be redefined as additional "stimulus" due to the financial crisis. But that level of spending will then get built into expectations for the future.

My published articles are archived at iSteve.com -- Steve Sailer

UPDATED: Bubbles and Sex

Michael Lewis visits Iceland for ten days for Vanity Fair to develop A General Theory of the Icelandic Financial Crash.

The subtext of his article is that Lewis, who wrote a bestselling memoir in 1989 about his few years on Wall Street, is suddenly so much in demand again as a financial journalist that he's getting rapid-fire assignments on topics about which he knows nothing.

The resulting article is a wonderful example of how reporters parachute into some place unknown and create general theories based on trivial travel incidents. When his plane lands, an Icelandic man bumps him while getting his bag out of the overhead bin (ICELANDIC MEN ARE MACHO). The airport passport control has one line for both foreigners and natives (ICELANDERS ARE EGALITARIAN), etc. At times it sounds like something that one of the foreign correspondents in Waugh's Scoop would write after two days in Abyssinia.

After visiting a museum devoted to Iceland's bloody medieval sagas, Lewis eventually arrives at the theory that Iceland went hog wild financially out of excessive machismo. Because everybody knows that Icelandic men are just as bloodthirsty today as in Viking times.

Well, actually Lewis's theory blames excessive machismo and excessive cultivation, since Icelandic men were also too genteel to be fishermen or aluminum smelters, the main jobs Iceland is suited for, so they became investment bankers.

From there, Lewis develops a general theory of bubbles:

Back in 2001, as the Internet boom turned into a bust, M.I.T.’s Quarterly Journal of Economics published an intriguing paper called “Boys Will Be Boys: Gender, Overconfidence, and Common Stock Investment.” The authors, Brad Barber and Terrance Odean, gained access to the trading activity in over 35,000 households, and used it to compare the habits of men and women. What they found, in a nutshell, is that men not only trade more often than women but do so from a false faith in their own financial judgment. Single men traded less sensibly than married men, and married men traded less sensibly than single women: the less the female presence, the less rational the approach to trading in the markets. One of the distinctive traits about Iceland’s disaster, and Wall Street’s, is how little women had to do with it. Women worked in the banks, but not in the risktaking jobs. As far as I can tell, during Iceland’s boom, there was just one woman in a senior position inside an Icelandic bank.

Of course, this theory also completely explains the much more important American Housing Bubble, since women play virtually no role in buying or selling homes in the United States. Just think of how many poor American wives were badgered by their husbands until they reluctantly agreed to spring for those granite countertops and extra-large walk-in master bedroom suite closets that their menfolk had always had their hearts set on.

In Lewis's defense, he's admitted elsewhere that he's trying to cash in quick on the fact that he's one of the few brand name journalists who can write readable prose about finance. I certainly don't blame him, and he's been on a hot streak lately (with me linking to several of his articles over the last few months), but diminishing marginal returns appear to be setting in.

UPDATE: A reader writes:

The paper by Barber and Odean is really concerned with trading behavior (specifically, they push the notion that overconfidence drives such counterproductive behavior). Barber and Odean (in my view to their credit) have made a virtual career out of that data set and also show that it is trading in general that seems to drive the poor returns. That is, the more you trade the more your losses (male or female, married or not), and men tend to trade more than women.

In other words, as a lot of guys found out in the spring of 2000, day-trading is an exciting but expensive hobby unless you have inside information or an elaborate arbitrage system. In the long run, transaction costs get you.

The Icelandic blowup was largely the result of holding paper assets that sank in value vs. liabilities that increased in value, not trading per se.

Also, based on the Icelanders I have known, they would hardly compare to say the blustering macho men of Mexican or South American variety. In fact, I would find the macho angle to be completely counterproductive.

Banking is a particularly dumb specialty if you live out in the middle of the ocean, and thus can't conveniently check out borrowers. At least Swiss bankers can take the train to visit the companies they are lending to. Hawaii would be a nice place to live if you were rich, but rich bankers rarely live in Hawaii. Heck, Wall Street turned out to be too far from Southern California to notice what was happening in the mortgage market.

The Icelandic banking follies sound like a higher-brow version of how newly capitalist Albania succumbed to pervasive pyramid scams in 1997.

4) The real story should be that Iceland is the proverbial canary in the coalmine (largely because they are small). They are essentially the first country in the current catastrophe to see its economy undone by excessive debt (and poor risk taking generally). That is, the reason it essentially went bankrupt is fundamentally similar to many Eastern European countries about to go belly up, and eventually the U.S., Japan, etc. In short, they are holding or have issued too much debt that cannot be paid back at the original terms. Essentially, the Austrians are correct.

My published articles are archived at iSteve.com -- Steve Sailer

"Milk"

An excerpt from my review in The American Conservative of the Best Actor and Best Original Screenplay winning film "Milk:"

“Milk” is a repetitious biopic about the 1970s political career of the self-proclaimed “Mayor of Castro Street,” following Harvey Milk as he grinds through five election campaigns on his way to becoming “America’s first openly gay elected official.” Director Gus Van Sant (best remembered for 1989’s “Drugstore Cowboy”) manages to make even San Francisco look unattractive in his haste to get back to the gerrymandering at Milk’s camera shop.

By the way, what kind of camera store is used as a political clubhouse? Camera shops are normally the worst meeting halls imaginable because they’re crammed with fragile and expensive merchandise. Yet, Milk’s “Castro Camera” is depicted as a shell with little inventory other than orange Kodak film boxes. (My guess: it was mostly a drop-off for amateur photographers who wanted their gay porn pictures developed discreetly -- an easy little business that left Milk with plenty of time on his hands for politics.)

A great tragic story could be made about how Milk’s gay liberation movement unleashed its own nemesis. Within two decades of Milk’s arrival, gay rights had transformed Castro Street into the plague spot of the Western world, with AIDS killing its 10,000th San Franciscan in 1993.

Mentioning a little thing like how industrial scale promiscuity set off the worst American health catastrophe of the last generation wouldn’t be On Message, however, and “Milk” sticks to its political talking points with the same tenacity as its namesake did. ...

Most strikingly, if “Milk’s” screenplay weren’t so relentlessly hagiographic, Sean Penn would be on the hot seat over his stereotypical caricaturizing of a homosexual. Penn’s performance is so flamingly effeminate that you have to wonder whether he got Harvey Milk of Castro Street confused with Harvey Fierstein of Broadway.

During television appearances, Milk came across as a calm, moderately masculine presence, with only slight gay mannerisms. In contrast, Penn’s flamboyant act sets your gaydar clanging like the meltdown siren at a nuclear power plant. That’s important, because Penn’s decision to play Milk as utterly unable to pass for straight robs Milk’s story of much of its interest. The real man, who had served without incident as a Naval officer, chose to come out of the closet.

Here's a clip of the real Harvey Milk from the 1984 documentary "The Times of Harvey Milk." This scene is reproduced word for word by Sean Penn in his Oscar-winning role. If you've seen "Milk," you'll note how much Penn gayed it up compared to the original. The documentary shows that Milk had a bit of the "hissy S" sound that is found more often in male homosexuals than in the general public, but Al Gore, who has a passel of kids, has it worse, so you might not guess. Sean Penn, in contrast, plays Milk somewhere between Paul Lynde and Liberace.

Perhaps Milk was as histrionic in private as Penn portrays him as being in public. I don’t know. If so, shouldn’t there be some mention in the script that his public persona was a facade? Watching Milk wrestle with his conscience over whether to drop his on-camera butch act might at least have provided the film with some hint of self-conflict.

My published articles are archived at iSteve.com -- Steve Sailer

Has Obama killed nuclear power?

It looks like Obama's budget intends to give up on implementing the Yucca Mountain nuclear waste repository. (Congratulations, Senate Majority Leader Reid (D-NV).

So, nuclear waste would continue to sit around nuclear power plants. Which means nobody is going to build anymore nuclear power plants in the U.S. ever. And since we'll be cutting back on carbon emissions, that will leave, uh, wind and solar power. And don't forget tidal power. Or maybe photosynthesizing bacteria.

Factor that into your long range economic growth projections, then see where the Dow should be.

My published articles are archived at iSteve.com -- Steve Sailer

Yanqui go home!

From WFAA:

Some Mexicans fear threat to way of life with rapid growth of American residents

Not everyone is rolling out the welcome mat to Americans. Many Mexicans complain about the rapid growth of the American population in their neighborhoods, the threat they see to Mexican culture and language, and the possible drain on Mexico's inexpensive health care.

In San Miguel de Allende, the group Basta Ya is protesting the erosion of the language and the rising cost of living generated by the infusion of dollars into the local economy.

"They think Mexico, especially San Miguel de Allende, is an extension of their country," group member Arturo Morales Tirado said of the Americans who call San Miguel home. "It's not and won't be, no way."

Well, they've certainly solved the problem of too many Americans in Rosarito Beach, the once popular tourist resort 30 miles south of Tijuana.

I have to say, though, that I've come to appreciate Mexican anti-Americanism. It has helped keep two countries that share a 1,952 mile border quite different.

My published articles are archived at iSteve.com -- Steve Sailer

Churn and Burn

A reader writes:

In 1996 my wife & I bought a small twin house in a modest but decent neighborhood near Philadelphia. Our neighbors were contractors and young professionals saving for bigger homes later. One by one they and their families all moved on.

When our next door neighbors moved they sold to a single mom with two teenaged daughters, the older of whom had a baby. The younger one who was about fourteen when they moved in would very often have groups of rowdy teens gather in their back yard which was separated by a fence from our own. We often awoke to find chip bags and other litter thrown over our side of the fence. ...

We decided it was our time to move on and we began house shopping. This was in 2005. ...
Here is the point: I wonder if a significant amount of the real estate activity of that time was driven by people like us who were motivated to move to escape neighborhoods that had become less livable due to the influx of home buyers whose lifestyle choices would previously have not allowed them to buy a home at all. We would have moved eventually, but might well have stayed on a while longer.

I do not know if our neighbors were beneficiaries of CRA-type lending, but I will bet that many of the home buyers who received such loans made less than perfect neighbors, thus prompting flight from otherwise pleasant neighborhoods. This would then put still more upward pressure on prices.

I think of it as just another way our government is making our country a better place to live!

Who profits from rapid turnover in neighborhoods? Realtors, mortgage brokers, developers, etc. Who are most active in and concerned about local politics? Realtors, mortgage brokers, developers, etc.

So, every politician who starts out in politics at a lower level than, say, Dwight Eisenhower, has a retinue of real estate types: e.g., Barack Obama and Tony Rezko.

My published articles are archived at iSteve.com -- Steve Sailer

Obamanomics = More Hair of the Dog that Bit Us

The dreams from his father are coming true.

All his father wanted was political control of businesses in Kenya -- a modest ambition compared to what the son is achieving.

From the New York Times:

U.S. Likely to Keep the Reins on Fannie and Freddie
By CHARLES DUHIGG

Despite assurances that the takeover of Fannie Mae and Freddie Mac would be temporary, the giant mortgage companies will most likely never fully return to private hands, lawmakers and company executives are beginning to quietly acknowledge.

The possibility that these companies — which together touch over half of all mortgages in the United States — could remain under tight government control is shaping the broader debate over the future of the financial industry. The worry is that if the government cannot or will not extricate itself from Fannie and Freddie, it will face similar problems should it eventually nationalize some large banks.

The lesson, many fear, is that a takeover so hobbles a company’s finances and decision making that independence may be nearly impossible.

In the last six weeks alone, the Obama administration has essentially transformed Fannie Mae and Freddie Mac into arms of the federal government. Regulators have ordered the companies to oversee a vast new mortgage modification program, to buy greater numbers of loans, to refinance millions of at-risk homeowners and to loosen internal policies so they can work with more questionable borrowers.

What could possibly go wrong with more lending to more questionable borrowers?

Lawmakers have given the companies access to as much as $400 billion in taxpayer dollars, a sum more than twice as large as the pledges to Citigroup, Bank of America, JPMorgan Chase, General Motors, Wells Fargo, Goldman Sachs and Morgan Stanley combined.

Regulators defend those actions as essential to battling the economic crisis. Indeed, Fannie and Freddie are basically the only lubricants in the housing market at this point.

Interestingly, in Southern California, homes have started to sell again in the hardest hit exurbs. The secret? Foreclosures and price cuts of fifty percent or more. Nothing is selling in Santa Monica, where homeowners continue to believe that they just plain deserve seven figures for their four room shacks. (Santa Monica has some very small houses, along with some big ones -- affluent people moving to Southern California before the invention of antibiotics preferred the dry Pasadena area to the damper beach). But out in the high desert, realism has returned and the number of sales has bounced back somewhat.

But those actions have caused collateral damage at the companies. On Monday, Freddie Mac’s chief executive, David M. Moffett, unexpectedly resigned less than six months after he was recruited by regulators, having chafed at low pay and the burdens of second-guessing by government officials, according to people with knowledge of the situation.

Fannie Mae has also experienced a wave of defections as people leave for better-paying and less scrutinized jobs.

Last week, Fannie Mae announced that it lost $58.7 billion in 2008, more than all its net profits since 1992. Freddie Mac is also expected to reveal record losses in coming days.

Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.

“Once government gets a new tool, it’s virtually impossible to take it away,” said Representative Scott Garrett, a Republican of New Jersey and member of the Financial Services banking subcommittee. “And Fannie and Freddie are now tools of the government.”

One reason that Fannie and Freddie will never return to their earlier forms is simple mathematics: to become independent, Fannie Mae and Freddie Mac must repay the taxpayer dollars invested in the companies, plus interest. Even if the firms achieve profitability, it could take them as long as 100 years — or longer — to pay back the government. And almost no one expects the companies to return to profitability anytime soon.

Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.

“There is a commitment to restructure these companies, and we are going to want to retain a hand in the things that matter, like affordable housing and making sure that the housing economy doesn’t become a threat to the entire economy again,” said Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee. “Some of what these companies did will be returned to the private sector, and some of it is going to remain with a public entity.”

The more the government demands "affordable" housing, the less affordable it gets.

Your Lying Eyes has more on the Big Picture:

The persistence of a few huge zombie banks, completely dependent on the Obama administration for their existence, will provide the streams of "capital" to fund administration-approved "private" ventures - the various health "insurers" and green "entrepreneurs" that will spring up in Obamaland. Any income that might have been dumped into savings in the past will now be redirected to "investments" in education and infrastructure. (Can I use any more scare quotes?)

Granted, this was not Obama's precise plan back when he and David Axelrod decided he should become president. Obama envisioned that as POTUS he could harness this incredible wealth-making machine that is the USofA to accomplish all the things he would have liked to have accomplished as a community organizer if being a community organizer didn't totally suck. You know, like back when he was still talking about how "white folks' greed runs a world in need". So what to do when the white-greed machine blows a serious gasket?

My published articles are archived at iSteve.com -- Steve Sailer