Jesse's blog

Money Creation

Tue, 07 Oct 2008 23:25:47 EDT

The internet is a wonderful place for bad information. It is nice to see a concise post on how fiat money is created and destroyed. Conclusion: defaulting loans destroy the money supply.

$700B

Sat, 27 Sep 2008 08:34:08 EDT

There has been tons of blogging on the proposed $700B bailout package. I particularly like the straight-up commentary by Sebastian Mallaby at The Washington Post. What the Fed is trying to do, as outlined by Mallaby, is jump-start the open market for certain types of assets by trying to price and bid for these assets and, if priced correctly, will stimulate market demand. The mechanism proposed is the so-called reverse auction where the lowest bidder gets its order filled.

A major flaw is that not all these assets are equal. It will take significant time to properly price the assets, if it's possible at all, and determine how much the government should pay. If the asset is opaque at the time of the auction nobody else will participate due to uncertainty. The amount of time it will take to make the assets transparent will take too long unless the government blindly bids (or pick assets that are more easily understandable).

The idea not mentioned anywhere that I can see is that these assets are pricing in the probability of a large-scale financial collapse. The upside of the proposed bailout is that this risk is lessened, effectively raising the expected present value of the assets. Without the government backstop of $700B (or whatever) these assets are inherently less valuable. This was the point Warren Buffett was making on an interview on CNBC.

Buffett indicated that the assets did have long term value in aggregate but with the specter of an all-out financial collapse the value is reduced. From the CNBC interview:

"BECKY: Are you buying instruments like these in the market?

BUFFETT: Well, I don't want to leverage up. No one wants to leverage up in this thing. So, if I could buy a hundred billion of these kinds of instruments at today's prices, and borrow non-recourse 90 billion, which I can't, but if I could do that, I would do that with the expectation of significant profit.

JOE: But the government can do that. You can't. And that's why the private sector can't, even you, can't save the system.

BUFFETT: I can't come close to it. But they have the ability to borrow. They can borrow much cheaper than I can borrow. They can borrow unlimited. They don't have covenants. They don't have -- I mean, they are in the ideal position."

The arguments for and against the bailout each have compelling points. What it comes down to is a massive deleveraging as asset prices return to where they cash flow again. The bailout, should it be passed, is merely a way of facilitating deleveraging either by catalyzing open market transactions at slightly better prices than is currently available or by taking on and eventually writing off this leveraged debt on the government's books.

This must be close to the largest gambit ever attempted. Scary times.

Edit: it looks like the bill is going to pass and, despite all the chest beating by Congress it is pretty much the same deal as originally offered. Nemo on self evident has a good executive summary of how 200 pages of window dressing still gives Treasury Secretary Paulson extraordinary powers over a huge amount of money. May the Force be with him.

Edit: I was wrong. May the Force be with... us?

Edit: They passed it. May the Force be with Hank again.

Baby

Wed, 09 Jul 2008 01:01:26 EDT

Jin and Jesse's new baby!

Specs:
Birth Date: July 5, 2008
Birth Time: 19:12 PST
Birth Weight: 3.705kg
Duration of Labour: 18.5h approx.
Labour type: epidural, mid forceps (OR)

David Baines is my hero

Wed, 02 Jul 2008 18:14:13 EDT

David Baines is one of the few reasons I read the Vancouver Sun any more. The guy is a muckraking machine, relentlessly exposing fraud artists in a province with what is probably North America's last bastion of rampant fraud.

His most recent article uncovered seedy dealings of the victim of a seemingly random pepper spray incident in the upscale city of West Vancouver. Turns out the victim has a history of pissing off people by losing them money.

Baines is what reporters should aspire to be. Most Associated Press plagiarisms give me nothing of value to read; I can find all this stuff online for free. David Baines, on the other hand, I can only find at the Sun. If the newspaper is looking for increased readership and differentiation from the rest of the interweb, I recommend hiring more David Baineses. If anywhere in the world needs more reporters like him, it's here in BC.

Insane Cribs

Tue, 06 May 2008 12:39:13 EDT

JF & I were looking for second hand cribs on craigslist and came across a doozy the other day (I can't find the post anymore tho). It was a designer crib that someone apparently paid in the thousands for and was offering it for the low low price of $750. Don't get me wrong, it was a nice crib but I'm always curious what makes it worth 10 times what other decent cribs are selling for.

It reminds of a scene from the '80s movie Trading Places:

Pawn shop owner: Man, that watch is so hot, it's smokin'.

Winthorpe: Hot? Do you mean to imply, stolen?

Pawn shop owner: I'll give you 50 bucks for it.

Winthorpe: 50 bucks! No, no, no. This is a Rochefoucauld, the thinnest water-resistant watch in the world. Singularly unique, sculptured in design, hand-crafted in Switzerland and water-resistant to three atmospheres. This is the sports watch of the '80s. $5000 retail.

Pawn shop owner: Got a receipt?

Winthorpe: Look, it tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome and Gstaad.

Pawn shop owner: In Philadelphia it's worth 50 bucks.

Winthorpe: Just give me the money.

Helicopter Mitt hits the kill switch

Thu, 07 Feb 2008 18:06:10 EST

Surprise! Mitt drops out. I thought, for a while, he was doing his patriotic duty to stave off deflation by spending his fortune on a fruitless campaign but I guess that was too much to hope for.

Tradesports cutting through it all

Fri, 11 Jan 2008 15:26:10 EST

Tradesports is predicting Republican and Democrat presidential nominees. What I found interesting is how low a chance Mitt Romney is being given, around 10.4% (about half of Giuliani!), but listening to media reports they make it sound like he's #2.

After digging into the primary procedure it's amazing how little information is presented in the media about the actual nomination process. The Democrat process is much easier to understand, but the number of delegates for each candidate sent to the convention in the Summer is proportional to the percentage of votes cast, not winner-take-all. When we hear about Clinton or Obama "winning" certain states, it is very misleading.

For example, Clinton received only 1 less delegate from the Iowa caucasus but media reports have her being handily trounced.

Other oddities in the Democratic nomination process has "superdelegates" that are made of congresspeople, senators, and other specific party people. Clinton has the decided edge there. See the Democratic presidential primary 2008 wiki.

4 more years

Fri, 06 Jul 2007 13:49:15 EDT

Russia was awarded the 2014 Winter Olympics by a 1 vote margin over Pyeongchang, South Korea. This marks the second time Pyeongchang has been beaten by a narrow margin.

I wonder if the same IOC members who voted against South Korea four years ago are the same ones who screwed them this time around.

"Pyeongchang's bid proposed that the games would help promote winter sports in Asia and potentially spark movement toward peace and reconciliation on the divided Korean peninsula."

Guess we'll have to wait another 4 years for that one...

The Sack of Sacto

Sun, 25 Feb 2007 21:36:28 EST

Sacto it getting destroyed.

NZ photos

Tue, 12 Dec 2006 07:13:44 EST

Just posted our photos from our New Zealand trip. Unfiltered.