Hedge Funds, why you should know more about them...

I know, I know, your eyes glaze over and you want to fall asleep when someone even mentions for the phrase hedge fund. I am sure you have heard it and most of you have no idea what they are and why they exist. While I am no expert, I will do my best to explain what they do and why they are important. Basically, hedge funds are largely unregulated investment vehicles used by large investors (investment banks, the super rich and such).

The good part is that they can make huge amounts of money, but they can also be very risky. Here is the problem, there is an incentive for many of these institutions to invest in hedge funds because of their very large returns. This increases risk in four ways: 1. Many of these investments are not well understood even by the investors. There is a huge amount of risk to our financial system by mainstream institutions being too heavily invested (think 1920's stock market crash). 2. The vast amounts of money and secretive nature make them more conducive to market manipulation. 3. They are basically unregulated. 4. There is pressure from institution to institution to be competitive. If one bank sees a 20% return a year over 5 years by using a risky hedge fund, it becomes increasingly difficult for other institutions to continue to invest more conservatively.

The other problem is that they are running out of large investors to invest in their funds and are starting to look at upper middle class people to fuel continued growth. This presents huge problems...

Here is the key, don't think of hedge funds like a mutual fund. They can literally invest in anything, which means they can invest in things like subprime mortgages (AZ Republic). Look at the example of Conseco Insurance which went bankrupt because of risky subprime lending(although this is not hedge fund related per se, it shows the danger of these schemes). Of course, who can forget when Orange County California went bankrupt because of derivitives investing, which is used in a lot of hedge funds. How about the case of Metallgesellschaft AG of Germany and Barings PLC of England both losing over a billion dollars in the derivatives market in a very short time. At Barings, the trader hid the loses for fear of losing his job... derivatives can be highly profitable, but extremely risky. Derivatives can be almost anything and are frequently so complex that you need a math professor to explain them (seriously...).

This quote from the AZ Republic article sums another area of risk:

"Wall Street firms and money center banks financed the leveraging up of hedge funds that purchased the exotic and illiquid fixed-income securities produced by the very same Wall Street firms and money center banks," he said in a note to
clients.Given the already apparent fallout in the subprime mortgage market, lending standards have shot up and the market for such investments has deteriorated. But that won't erase what already is out there, which is ugly and could get worse.

At the heart of this is a difference of opinion between the belief that market is inherently rational or whether society has an interest in protecting the public from some of the irrational behaviour that crops up from time to time that could disproportionally hurt unsuspecting members of the public. There is also the issue of bailouts paid with tax dollars that would be sought after a meltdown.

There are a few things here that I think are germane: 1. The market can be irrational in the short-term which can cause a lot of pain to the general public. We should do a cost/benefit when considering regulation of markets with a bias towards the public interest. 2. Industry cannot seek to kill regulation and expect bailouts when they lose a bet. 3. There is a national security aspect to this that is not being addressed. Many of these hedge funds are being heavily funded by people like the Saudis and the Chinese are entering the private equity market. Investment is good, but we should do our best to control risks to our economy.

That is it for my borefest of an entry...

Arizona is not last, WOO HOO!?!?!

I have a running joke about how every state I have lived in (4, so far) has been last in education (some at the same time). I am normally very skeptical of rankings for a variety of reasons:

1. News organization seem to be willfully ignorant of how statistics and data work.
2. Studies are at times willfully misleading.
3. People misconstrue or take studies out of context
4. News organizations only seem to cover the state ranking when we are near the top or near the bottom.

Having said all of that, these rankings for health care by state seem to be pretty good. Arizona is near the middle which is what I would expect... I still cannot believe that Arizona is last in anything (everybody knows the Alabama and Mississippi are last in everything, but literacy, life expectancy and church attendance, btw I am from the South so I reserve the right to make fun of my beloved home. Seriously, I kid Alabama and Mississippi, but I love Tuscaloosa and Gulf Port).

At any rate, if you are sick Hawaii seems like the place to be (it is probably the place to be no matter what).

Flores and why the Right are a bunch of hypocrites

The Arizona Republic has this article about the Flores case. I am not going to rail against the stupidity of the legislators over this case, although it is rail worthy. What struck me as I read this was how the right ignores reality and pushes toward hypocrisy.

For example, on teenage pregnancy they don't want sex education (where they actually teach about sex), they insist on abstinence only education (fantasy land). On abortion, for the most part the right-wing doesn't actually want to take actions that would decrease the number of abortions (like supporting children and single mothers or providing adequate birth control). Instead they just want abortions to stop (fantasy land). We are clearly losing the war in Iraq, but instead of admitting mistakes and adjusting (not now, 2 years ago), they just think they can will victory through some combination of getting tough, taking the gloves off, sending more troops or praying to Jesus (fantasy land). I could go on...

I know this idea of the right being divorced from reality is not new, but how do we as a community combat it (or explain it and understand it)? The petulance of our legislators is just another case of this divorce from reality. They want English to be the official language. They insist that immigrants are not doing enough to learn English, so what do they? Shut down adult language education and under fund programs for kids trying to learn English (don't even get me started on deporting 12 million people). They always say they want to run government like a business, but no business would operate this way and survive...

Trying to Save our 'Flagging' Educational System

This article in the Arizona Republic addresses the law passed by the legislature requiring all classrooms 7th grade and up to display the American flag, the Constitution and the Bill of Rights. So what is wrong with that you ask? Nothing really... The irony is that it was passed as an unfunded mandate. Arizona spends less per pupil than every state except Utah and now we have to spend money buying flags and documents for every classroom.

If this is so important, the state should pay for it. One other problem I have is rather than just displaying them, why not require civics classes every year through college graduation? I think it is that important...

Imagine a world where nearly every kid in high school could explain the intricacies of the electoral college or why the Fourth Amendment is important or even better what the courts have decided is the true meaning of the Second Amendment (btw there is no constitutional right to bear arms unless you are a well regulated militia). That is practically paradise ;)

Lies, Damn Lies and Statistics

There are many times that I wish I had more free time for research. This article from the Arizona Republic goes into a dubious on its face analysis of wage figures in and out of the Federal Government (they did not see it as dubious btw). Basically, the article compares salaries in the private sector (the entire private sector) against wages through the Feds. Surprisingly, with the help of the Heritage Foundation (wink, wink) they found that government employees make vastly more money than private sector workers.

On its face, this is wrong in sooo many ways. First, comparing the entire economy of an area to Federal employees is dubious at best because many lower level government jobs have been outsourced. There are very few janitors (or landscapers or dishwashers or cashiers...) working for the Federal Government. That is obviously not true for the private sector. Second, the article cherry picks areas around the country with highly skilled workers in professions like engineering and compares them to the whole economy.

More than half the workers in Martin County, Ind., for example, are employed at a Navy base that specializes in developing high-tech weaponry. The average $67,478 federal salary there is more than twice the average private-sector pay for that county.

Well I can't imagine why that would be?!?!?! I can't image a bunch of engineers and scientists making 67 k a year, that is unprecedented. So, should we pay them much less than that? Don't we need high-tech weaponry in places like, ahh I don't know, Iraq?

Well I have a counter example, I did an analysis of the salaries of a group of people belonging to the Business Roundtable. Interestingly, my analysis found that the average salary of their membership was 400 times the average salary of American citizen. Using that data to extrapolate out, all employees of private business must make vastly more than people in the private sector ;).

Interestingly, in the area where they claim to do job title to job title comparisons (which is extremely difficult to do BTW), they give hardly any information. Certainly not enough information to see how they calculated the salary information.

Here is my favorite quote:

Overall, high government salaries can be a drag on the economy if they attract rank-and-file workers who may be productive elsewhere, said Sherk of the Heritage Foundation."Wages are the way you allocate labor to what needs to get done," Sherk said. "But when government comes in and offers higher wages, then you mess up those economic signals. You direct workers to those occupations, to where their skills are less needed."

The idea that government does not need good people is ridiculous on its face. I want good and highly paid engineers working for the Army Corp of Engineers. I want qualified Project Managers and planners working for FEMA. Regardless of what these right-wing morons think, we need a government that works. Government is necessary for the long-term stability and well being of our nation. We are now competing in a world economy where government, labor and business communities are working hand in glove to make their countries more competitive. We cannot starve our government institutions and expect that we will continue to thrive with only 1/3 of the equation left.

There are lies, damn lies and statistics... And then there is analysis done by the Heritage Foundation.... How does kind of blatant propaganda make it into the newspaper?

Changing Clean Elections

This article in the Arizona Republic outlines some of the changes to the Clean Election law. I don't know about you, but I don't trust the legislature when it comes to making changes to the Clean Elections law. It is no secret that Republicans have wanted to kill the law since voters approved it.

However, (and this is all the information offered) it is supposed to increase the amount of money for state-wide candidates and increase the contribution limit. Without more information it is hard to determine whether this was done right, but both things were probably necessary.

Immigration or slavery?

This article from the Arizona Republic has an interesting bit about some nice white Canadians who might be asked to leave when their visas run out. The immigration issue is particularly hard to talk about and I usually like to avoid it.

I am torn about the issue. On one hand, I live in a neighborhood that is about 50% Hispanic and some are clearly undocumented. As far as I can tell, the ratio of jerk to nice is about like anywhere else.

The problem I have is that we should have a rational policy outlining both what we want and what is realistically possible. I don't think it is healthy for large scale immigration to happen quickly. It causes far too much stress on communities. How do we manage that and still treat the people coming here like human beings who deserve respect?

The really interesting thing in the article for me is the provision in the new immigration bill that makes immigration merit based. I think this is generally a good idea... We should steal the best and brightest from around the world whenever possible, but does that mean that the rest of the immigration will slow down? I don't see how.

Perhaps the scariest thing (this is where my title comes from) is how businesses want immigrants tied to them. I have seen this in action with H1B visas. It is not a good system. I worked with two employees on H1B visas at a previous job. They are what I would call high-end slaves. They are paid below market and made to work longer hours because they do not have options since their employer helped to establish their immigration status.

I cannot imagine how bad it will be for people picking fruit, working construction or processing chickens. The H1B workers are generally doing clerical or technical work. They have a low risk of injury even when they are exploited, but manual labor workers are put in real danger. There is also the problem of no paid time off for people working in kitchens or working with food of any kind. A lot of people get sick because of the poor line cook at Applebee's that doesn't get a sick day...

Tying workers to businesses is a bad idea... How about letting legal workers operate in the labor market like everyone else? Oh, I forgot that would mean businesses could not suppress wages artificially and leave plenty of cash for huge executive compensation packages.

A reader posted this link on H1B visas. This is fascinating and scary stuff. Everyone should take a look...

Republic Resident Robb Misguided toward Reid

I apologize for the alliteration, but I couldn't resist. So our resident dying breed moderate Republican, Robert Robb (Arizona Republic) wants to blame Reid for the failure of the immigration bill here. It is an interesting theory and by interesting I mean wrong and kind of stupid. Maybe (I don't want to go out on a limb here), it is the fact the Republicans are apoplectic about immigration in general? Maybe it is the fact Mr. Robb, that your party is filled with extremists that long ago stopped being rational actors intent on improving their country. Maybe, Reid would not have to pull the bill if a couple more Republican votes could be wrangled, but we all know the chances of that... Your party would rather operate in the world of myth: evolution is just a theory, global warming doesn't exist, deficits don't matter, we are winning the war in Iraq and we will just deport 12 million people because they are "law breakers". Your party's simplistic view of the world is the problem. Instead of attacking Harry Reid for trying to do the right thing and carry your President's water on the issue (because Republicans could not pass it during nearly six years of one party rule), maybe Mr. Robb you should look inward. The Republican Party is broken and to use the parlance of your party, bad for America. This was not always the case, but certainly is now...

Maybe there should be a law?

I found this amusing (I am clearly easily amused..) So, Jan Brewer's son was fooled into signing a petition for a ballot initiative under false pretenses. If the SoS's son cannot be educated about these things, maybe, just maybe there is a bigger problem or flaw in our system. Note to Jan, I know you are not the most adept public official, but this is what legislation (pronounced legis-lay-shun) was designed for... I know it is hard to believe but there are a group of people who can make these special rules that make it so people are punished when fraudulently collecting signatures.

Jan, we know you are trying your best over at that big office... Hang in there your term is almost over and you won't be elected Governor, so the confusion will soon end.

Just kidding...I kid the our Secretary of State, I am sure she is a fine woman (and not litigious).

Sorry for the Paris reference..

I apologize in advance for referring to Paris Hilton in anyway, but this article brought to mind some interesting thoughts.

I am outraged that she would get out of jail so quickly, but that is not my point. The thing that is interesting to me is how people are surprised that she would get out early. Why are they surprised? Are they surprised because of her celebrity and wealth or is there a disconnect between the people we elect and policies that they advocate and how the policies affect the criminal justice system. I suspect that most people assume she is getting special treatment and maybe she is, but from what I have read it is not unusual for people to only be incarcerated for 10 to 15 % of their sentence. California's system is overcrowded and she is not a signficant danger to anyone except maybe paparazzi.

What I am getting at, is that there is a big disconnect between ideology and reality. Everybody wants to be tough on crime (except criminals, I suspect), but what does that really mean from a policy perspective. There is a constant tension between mandatory minimum sentences, tougher sentencing guidelines, increases in the number of non-violent drug offenders in jail and finite funding for prisons.

Here is the problem, we cannot put everyone in jail because we cannot afford it. I am frustrated that voters and politicians don't think through the consequences of specific policy prescriptions. I used to think politicians knew better and were avoiding complexity for soundbites and getting relected, but increasingly I think that most politicians are ignorant of the true affects of their policies.

How many people know what percentage of our taxes dollars go to prison building? How does spending on prisons compare to educational spending? Would people rather keep a non-violent drug offender in jail or have more money per student for education (or a bigger tax cut for you supply siders out there).

As I always talk about, policies have consequences and there are always winners and losers. How do we install in the electorate the concept that many problems are intractable, like fighting terrorism or a war on drugs or poverty? We still must address these problems, but they cannot be solved, only managed. How do we bring realism to our policies? Is it even possible? Wow, this is a long way from Paris... Have a fun time in jail BTW...

Crime rate up, but I already knew that...

This article in the Arizona Republic presents both sides of the crime statistics debate. While it is good to see a newspaper that gives a balanced view of statistics, it has been my experience in the last year that crime in Phoenix is up. For me, (and yes this is anecdotal) the increase in crime is palatable.

My neighborhood and most of central Phoenix have seen major increases in small property crime and graffiti. I think these are the early signs of the increased gang activity mentioned in the article. Last week, I saw several instances of graffiti in the Arcadia and the Biltmore areas, both pretty swanky areas. My middle income neighborhood has seen a major increase in graffiti and small property crime. This has been a battle for several years. The graffiti goes up and city tries to paint over it. Unfortunately, the city seems to be falling behind. For the most part in previous years, Phoenix was able to get rid of graffiti in 48 hours. I am now seeing the same graffiti for weeks.

This is the kind of butter and butter issue that government needs to address and quickly. Studies have shown for sometime that one way to combat violent crime and property crime is to avoid blight. Well, this is a reelection year for the Phoenix Mayor and City Council, what is your plan? How do we address this issue before it gets worse?