Goldman Sucks, Financial Reform, and the Obaminator

In the NYTimes today: Goldman Sachs messages show it thrived as economy fell. Why is this a story at all?

I would expect that the banks with the better talent would have weathered the housing bubble burst better than others. In fact, smart people often make lots of money during massive market corrections by betting the opposite direction when it becomes clear that's where the market's going. I would certainly expect smart corporations to do so - after all, it wasn't like people didn't see the housing bubble coming. Further, the really successful investors (the ones who have become partners at Goldman now) probably proved themselves during the last major market correction, which most of us seem to be forgetting was less than a decade ago. Heck, less than 12 years ago Russia defaulted and Long Term Capital collapsed - experienced traders definitely have seen bubbles burst. Personally, I'm glad that some banks survived the housing apocalypse - it means that shit wasn't as bad as it could have been, right?

So why then do I get the sense that this article is meant to incite and inflame? I mean, I know that Goldman has this whole "Abacus" thing going on right now, but honestly - compared to Madoff, or Bear Sterns and Lehman Brothers, or the aggressive lending practices that made these mortgages so much riskier than they should have been, is this really that big of a deal? So far, in my eyes, Goldman has been perhaps the most responsible big bank. They're not perfect, but honestly, what bank is? Do most Americans not have a realistic understanding of how their investment institutions actually are run? The current Goldman bashing I see in the media has all the flavor of a celebrity sex scandal - hypocritical moral outrage on the part of the masses for a transgression that, quite frankly, is actually the whole reason we love celebrities/athletes/banks in the first place.

Personally, I don't think its at all coincidental that this whole Goldman thing is hitting the media the moment America's financial institutions actually started performing well again, at least according to market consensus. I think the typical American's simplified story of the debacle must have gone something like this: Wall Street got themselves into a major mess and lost a lot of money, which caused America to go into a depression so that everyone lost a lot of money; America bailed the banks out, but things were so bad it was really touch and go for awhile - it wasn't clear that even with the bailout the banks would survive. However, everyone definitely knew: the banks would have died without the bailout. Thus, on some level, I think most Americans really believe that the banks owe them something. As evidence, notice the trend of debt forgiveness by big banks like BoA - most recovering banks are actually proactively rebuilding their public image through such programs, the same "we owe you something" programs they were staunchly resisting less than half year ago.

But Goldman? Unfortunately, they're a horrible exception to an otherwise perfect story. They didn't place bad bets - in fact, they took out levels of insurance appropriate to the situation, and because of that they didn't need to be bailed out. Goldman was very open and proud of this fact, too. Of course, the American People continued to insist that Goldman actually did need be bailed out, and thus Goldman was bailed out. Note that it was about this time (Q3 of 2007) that Goldman stopped emphasizing their success and started spinning the same stories of heavy housing losses as every bailout recipient. Given the first opportunity, Goldman then promptly paid back their bailout money, thus relieving themselves of any outstanding debt with Uncle Sam. At this point, I would expect the firm to be lauded - they were the only ones behaving in a fiscally responsible way and had continuously proved themselves before, during, and after the crisis - but instead, they have now become the villain. Why? Because they didn't need to be saved by the bailout, and thus now America can't hold anything over them. Because this directly challenges so many American's simplified story-like understanding of the economic events over the past 5 years, people react in the emotionally predictable way: they get angry.

Now, don't get me wrong: I'm not saying that those Abacus deals don't sound kinda fishy - at least not when described by semi-liberal news organizations whose goal is to push anti-Goldman sentiment right now because right now its selling like hot cakes. I'm curious to hear about what happened, and if there was any wrong doing I hope there's a lot of really draconian FCC laws brought to bear on whoever attempted to deceive others financially for their own profit. But, at least from what I've heard so far, Goldman was basically just taking out counter positions - insurance, basically - on financial instruments that its clients wanted to buy. Taking out insurance to mitigate risk is the whole way that banks make money. Yes, its unfortunate that in the financial markets this insurance takes the form of profiting from someone else's "loss" - most of the common people of the world have a very visceral, emotional reaction to such ideas, and will just write such things off being completely morally wrong. This is somewhat similar to how ancient Catholics considered usury (and thus Jews) morally wrong for some bullshit theological reasons, or humanity's general aversion to middle men in general. However, the fact remains that this is not wrong - all involved parties agreed to the stakes going in without coercion, so why is the way fate plays out wrong? The very same people who would blame Goldman for "betting against investments they sold" have massive hard-ons for cold-hearted Texas Hold'em tournaments where one person ultimately profits massively at the expense of thousands - especially considering that Goldman was just balancing their risks like any good bank or poker player should, how are these two situations at all different? Why don't people appreciate the dog-eat-dog game of high-stakes risk taking that is our modern financial system the same way they appreciate the exact same type of game when played with 52 cards on a green felt table? The answer is simple: plain old cognitive dissonance manifesting in irrational anger; compounded over a substantial portion of the population, and you get news stories like this.

At the same time, it could be that stories like this are actually the work of a very powerful Obama-based media machine, publishing with the intent of fomenting anger towards Wall Street, specifically the only powerful player on the street that the Government doesn't have much political sway over: Goldman. By playing up the already present emotional sentiment of the people, Obama and the Democrats can definitely win big in the polls with their current focus on big reform for Wall Street. Goldman will suffer in the media for it and temporarily lose a lot of political sway, but ultimately it will remain a ridiculously lucrative corporation and in a couple of months America's capricious focus will be somewhere else again - after the reform legislation has passed without any corporate opposition. This seems like another winning strategic play by the Obaminator and company (the O-team?), so in the end I'm going to have to attribute this Times article and the entire irrationality in the public discourse that I've ranted about today to one thing and one thing only: the stone-cold sexy political machine that is the Obaminator. God bless America.

The facts are clear: there's a definite irrationality in current American public sentiment, and there are definitely parties benefiting from it. However, the question remains: did the parties that benefited from it engineer the situation from the outset, or did they just happen to benefit from an unpredictable turn of events? Wow, I was talking about Obama there, but it also sounds a lot like a summary of the core issues at stack in the Goldman Abacus case... well, I guess that's not surprising at all, is it?

RE: Nuclear Game Theory

I am very pleased with Cobra's efforts in the Nuclear Game Theory post.  I honestly think your analysis is spot on when it comes to the options of non-nuclear nations.  Specifically, you outline the following and main point:

"Now, obviously a deal like this is just extremely poorly disguised bullying - no reasonable, self interested state would every agree to something like that, nor would they expect anyone else to either.."

unless you are...

"if you're the type of country who would never ever want to attack Cylon Russia China, then this deal is great - you save on having to build your own nuclear program while still getting nuclear protection, plus you get that nice warm fuzzy feeling of playing nice with everyone. Or perhaps you're a country that doesn't feel all that great about the CRC, but fears being nuked by someone else - if you don't have any hope of acquiring your own nuclear arsenal within sufficient time to adequately deter such an attack, it would probably still be in your best interest to sign a nonproliferation treaty."

I think it's important to point out how much of the general punditry is dedicated to the single minded idea that nuclear weapons are meant to be only in our hands because we're the good guys.  That line of thinking totally omits the game theoretic approach and simply relies on bias.

But now here is my challenge to Cobra... without mentioning names or labels.  In your model, you depict the game between countries, states, state leaders, etc.  What about rogue organizations, extremists, who do not have the same value system as states (survival as a goal, for example) but can obtain these weapons from states?? should we not deter such states from having the weapons on the basis of not allowing such organizations to obliterate their enemies?  Personally, I'd believe no state would give weapons to extremists, but is this really set in stone? I guess you can build a model where the action of supplying weapons to extremists is equal to getting nuked (that may be essentially what would happen).  I think this is where nuclear politics get murky.

Nuclear Game Theory

Let's talk about game theory and nukes for a second. Consider the relatively simple game that exists between two nuclear-capable states: each side can either use their nukes or not at any given time. In game theoretic terms, the payout matrix would look something like what's at right. To get into the swing of things, imagine that its your country versus another, much more evil country. Your payouts are in virtuous green, meanwhile theirs are in evil red. Anyway, as you can see from the graph, if both sides choose "no nuke", everyone is slightly better off (we didn't die!), but things are more or less the same as they were before. Meanwhile, if both sides choose to nuke, everyone dies and suffers a massive -10 points - each. Sad times all around. However, if one side chooses to nuke first, they gain moderately (their evil enemy is destroyed!) while the other side suffers massively - as reflected in the numbers, I consider this an even more massive -11 points: -10 from being nuked, and a further -1 from knowing that your enemy got away with it, too. So while one side celebrates its victory, the other side can treat its radiation sickness.

The astute among you would recognize this payoff matrix as the same as that for the classic prisoner's dilemma game. And as we all know, in a single iteration of the prisoner's dilemma, the only Nash equilibrium is mutual defection - both sides nuke, and both sides puke. From radiation sickness, from the bombs. And then they die. The ones who die in the initial blast are the lucky ones. Anyway... the even more astute among you will wonder - if game theory predicts that everyone nukes the frack out of each other, then why aren't we living in a nuclear winter wonderland? Is game theory wrong?

Ha ha - don't fool yourself! Game theory, like any mathematical science, can't be wrong - it can simply be applied incorrectly by people. Notice how mutual defection is only a Nash equilibrium in the single iteration case. Assuming that both countries can exchange multiple nukes in an iterated version of "nuke or be nuked", we can suddenly see how when iterated over several hundred missiles each capable of delivering thousand megaton payloads, all those little "+1 we didn't die!" points really can add up. Alternatively, a single defection will result in a final score that's way lower than what you would have gotten if you had simply not launched nukes. So the sensible thing to do here then is simply never launch at all - unless your opponent launches, in which case you launch back and let the holy fire of justice rain down from the sky. But, assuming that each player in the game is at least pursuing their own self interest and wants to maximize their points, mutual cooperation suddenly becomes the name of the game here, especially if we make mutual defection both assured and costly. And this, my friends, is precisely the current state of affairs between modern nuclear equipped states, more or less: each has arsenals large enough to ensure complete destruction of their opponent should they need to use it. In terms of points, that's like a kraken-sized -100 - and, since world leaders generally would rather keep their jobs, everyone avoids nuking each other and we all live together peacefully. A bit uneasy, sure, but peacefully.

This simple breakdown of nuclear strategy is known as mutually assured destruction (MAD), and although I know quite a number of you may balk at its Machiavellian efficiency ("Why can't we all just disarm?!" you may ask), but the fact remains that MAD's cold calculus has proven effective - humanity has not used a single nuclear weapon in over 60 years, despite the rapid proliferation of its capability to do so. Hell, even Pakistan has nuclear arms, now! So how does MAD keep the peace so well?

Well, like any stable, sustainable treaty between multiple parties, MAD has a couple key qualities: 1) it is individually beneficial for both parties to participate regardless of what the other side does, and 2) it is enforceable - any involved party will suffer consequences for renigging on the deal. Specifically, as I argued earlier, in an iterated nuclear game, the individually optimal thing is to not initiate global thermonuclear war. You can always react to one - its the same outcome for you either way, and since this type of logic applies for all players, everyone concludes that its better not to launch, 2) unless they are launched upon first. This is the enforcement part of MAD - by publicly being known to have nuclear arms, participant states readily communicate to each other the consequences of renigging and launching first.

Now, this isn't rocket science, nor is this crazy shaman magickry - this is cold hard game theory here. It is for this reason that I think the Nuclear Nonproliferation treaty will fail. Its not that I want it to fail - quite the contrary; I want it to succeed, and that's why I'm so quick to point out its one major flaw: it is not mutually enforceable. Yes, the current nuclear states are more than capable of enforcing it should other states deviate - both with forced inspections, embargos, political pressure, and eventually invasion. From the United State's point of view, the treaty is definitely enforceable. However, who's going to force us to hold up our end of the bargain?

Think about it from a non-nuclear state's perspective. Specifically, imagine if you're some poor modern state that doesn't have nuclear arms yet, and someone big who's words are backed with NUCLEAR WEAPONS (like Russia or China) comes along and asks you to sign their Red version of the Nuclear Nonproliferation treaty - essentially, they'll agree never to nuke you first, as long as you agree to not build nuclear weapons (and prove it to them). Now, you don't really trust this weird Russia/China hybrid state, but you want to play nice to try to get along with them, so you decide to go along with it and agree to their demands. What else can you do? They were just going to invade you if you didn't agree, so what could you do?

But now, let's go back to our good old friend, the payoff matrix (at left). This time, because you didn't build nukes, you don't have the option to build nukes. Do you see what can happen now? You have no choice in the matter - you have to pick "no nuke". However, the other side has a choice to either nuke or not nuke. If they hold up their end of the bargain, they can collect an easy, assured +1 points each round. However, they could just as easily go "nuke" and get +5 points - and honestly, what can you do to stop them? You're going to be too busy watching your insides melt from radiation sickness. I mean seriously, did you ever see Battlestar Galactica? You know how it opens up with the evil Cylon robots nuking the fuck out of the entire human race, with humanity essentially sitting by, impotent to stop them? Yeah, that would be you here - should Russia/China/The Cylons choose to renig on their end of the bargain and nuke you anyway.

Now, obviously a deal like is just extremely poorly disguised bullying - no reasonable, self interested state would every agree to something like that, nor would they expect anyone else to either. So there's a extra sweetener added to the deal - should you be nuclearly attacked by someone else, Cylon Russia-China will come to your aid and nuke the bajeezus out of them for you. Thus, against everyone else you get all the best elements of MAD without having to build a nuclear stockpile of your own. Isn't that just great?! Even better, The CRC agrees the less severe attacks like some biological weapons and crippling cyberattacks will not count as being worth nuclear retaliation - essentially, you can agree to this agreement and still fight the Evil Red Cylons should it be necessary! You just have to make sure you use the right biological agents - perhaps you there's a committee you need to clear your attack with?

Of course, if you're the type of country who would never ever want to attack Cylon Russia China, then this deal is great - you save on having to build your own nuclear program while still getting nuclear protection, plus you get that nice warm fuzzy feeling of playing nice with everyone. Or perhaps you're a country that doesn't feel all that great about the CRC, but fears being nuked by someone else - if you don't have any hope of acquiring your own nuclear arsenal within sufficient time to adequately deter such an attack, it would probably still be in your best interest to sign a nonproliferation treaty. In these cases, fact that the treaty isn't mutually enforceable isn't a huge concern - in each case, you benefit by trusting the CRC, so its in your best interest to pursue the treaty regardless of what decision the CRC makes - literally, no matter what the Cylon's advanced Bayesian networks compute to be optimal, you're always acting in your best interests.

However, let's say that you're a country who's main enemy is Cylon Russia China. What happens then? Well, suddenly you stand little to gain from getting MAD insurance - the country who you most fear will attack you is precisely the same one vowing to defend you. Can you say conflict of interest here? Without that extra bit of incentive, the deal effectively becomes political bullying, and as we've clearly seen before, no country in their right minds would accept such a deal. Worse, its insulting to think that they even would.

Now, I've avoided using any real country's names in this article (well, Russia and China, but I meant it more like the countries that exist as vague "enemies" to the USA in seasons of 24, not the real countries we have to deal with in our daily lives - plus, I called it Russia/China, which is clearly some alternate history creation and not a real country. Yet). However, we can't help but draw metaphors and parallels between what we read and what we see happening around us in our daily lives - which countries did you project onto this article? When you thought about being a country who's main enemy is the CRC, which real world country's shoes did you put yourself into? Just think about it for now, and try to ruminate on the truth behind the basic game theory here - I want to let it sink in before using it to argue a very controversial but also very correct conclusion.

Any thoughts or opinions about what I've said before we go further?

WHO are the tea baggers??

We love the Tea Party movement here at the Snake Pit and it is lame that neither cobra or I have shared our views on such a topic.  We differ, however, in how we see the Tea Baggers (as we love to call them).  Cobra is much more interested in explaining them, while I am much more interested in bashing them (like a good liberal communist).  As the movement began, however, Cobra and I got into heated discussions over who these people were.  Cobra did not believe my assertion that they were overwhelmingly white and NOT suffering from dire economic conditions.  Cobra's main argument was that they were reacting emotionally to the recession.  I agreed with the emotional part though - albeit after some long arguments with Cobra (who fights just as hard as me to defend his opinions, hehe).  ANYHOW, today I sent him a poll that FINALLY gets at the demographics of the tea baggers.  They were EXACTLY what I thought: mostly middle aged/old, educated, EMPLOYED, white men.  After all, as I had pointed to Cobra, you can't possibly be unemployed or in dire economic situation if you have TIME AND MONEY to be traveling the country in your "tea party express".  So below is a copy and paste of Cobra's email to me this morning, in response to the article (which is available at the end of the post!).

Cobra:

"18% of Americans identify themselves as Teabaggers.  Interesting - like we discovered in that earlier poll, I'm guessing half of those are "do nothing" teabaggers who are only willing to talk about their political views, not act on them.  Honestly, they really seem like very conservative versions of my parents.  And despite being "college educated", they're clearly not that smart.  I mean seriously, look at some of the quotes:

---------

“I just feel he’s getting away from what America is,” said Kathy Mayhugh, 67, a retired medical transcriber in Jacksonville. “He’s a socialist. And to tell you the truth, I think he’s a Muslim and trying to head us in that direction, I don’t care what he says. He’s been in office over a year and can’t find a church to go to. That doesn’t say much for him.”

---------

Some defended being on Social Security while fighting big government by saying that since they had paid into the system, they deserved the benefits.

Others could not explain the contradiction.

“That’s a conundrum, isn’t it?” asked Jodine White, 62, of Rocklin, Calif. “I don’t know what to say. Maybe I don’t want smaller government. I guess I want smaller government and my Social Security.” She added, “I didn’t look at it from the perspective of losing things I need. I think I’ve changed my mind.”

---------

Wow.  Like, wow.  Seriously?  These people are clearly the hyper conservative among us - even worse, a lot of them apparently aren't quite sure what they think.  Like, they want to "make the government smaller", but they don't want to cut Medicare or Social Security - when asked about how to make government smaller while still keeping those two programs, they talk vaguely about "eliminating waste".  Quite honestly, these people just seem angry and afraid - afraid at having a black president.  Afraid about the economy.  Afraid about things for no good reason - I mean come on, apparently most Teabaggers haven't lost their jobs, but they apparently "know someone who has".

I still maintain - the Teabagger movement is fundamentally a splintering of the Republican party.  Again, this poll reiterated what we knew from the previous one months ago: Teabaggers are Republican; Democrats aren't losing anything here.  These people weren't ever voting democratic to begin with.  I'm very curious to see how this fracture in the Republican hegemony plays out - because note, although most people blame the Bush administration or "Wall Street" for the current economic issues, these Teabaggers apparently blame "Congress".  Not Obama.  Not the Democrats.  Congress.  That includes incumbent Republicans.

One key issue going into this coming November is exactly how the economy will play out.  The markets seemed to handle Greece pretty damn well (the general consensus?  it was a great but brief buying opportunity), and quite honestly I think that as long as people's expectations remain low, they're going to be pleasantly surprised over the coming year.  As the poll indicates, Teabaggers are especially dismal about the general economic outlook.  But let them sit on health care for a few months without the world falling apart around them - they aren't going to have to pay any more right now than they did before (remember?  most are employed, well paid, and almost certainly have corporate insurance plans themselves), and after awhile they'll forget their fleeting emotional reactions and stop being so fearful about Obama and the Democrats.  However, given human nature, they won't forget who they blamed for this mess - congress, both Democratic and Republican.

Score one, liberals!"

Poll Finds Tea Party Backers Wealthier and More Educated

Michelle gets busy!!

The Snake Pit had to take a break in the past few days due to the fact that both Cobra and Black Mamba decided to take a 4 day weekend mini vacation at the same time, in the same place, hehe (wink wink!).

But we are back in action... or at least, Black Mamba is going to TRY to be back in action.  I do go to graduate school at a prestigious university (ho ho ho) and finals horror week is about to start.  In fact, this post is clearly a procrastination attempt! oops.  I'll be brief.

I want to say that I'm really loving Michelle Obama's first outing into the world as a first lady.  She first went to Haiti in a surprise visit - which reminds me, WHY HASN'T OBAMA GONE TO HAITI??? I totally did not even notice that! but that is not cool, come on Barry.  Anyway, then Michelle went to Mexico and that is what has me really happy.  So far the trip has been a success, they have received her well, she's getting a lot of positive PR.  It shows two things:
-that the administration is whiling to put Latin America at the top of SOME list.
-that Mexico is a really cool place right now.

To the second point, I speak with sadness at the current state of Latin American countries.  At this point, there are only a handful of countries that can actually be visited in this way.  Mexico? Brazil? Colombia? everywhere else is just brewing with lame animosity.  Bush is gone, man! get over it L.A! Venezuela beat America and Cuba as the most interventionist force in the region, so far.  The days that the leftist leaders speak of ARE gone.  So why continue with these counterproductive battles?

Sigh... Mexico is doing so well right now, EVEN with a massive drug related crisis, they STILL are doing better than Venezuela.  Sigh, that just hurts.

but on a less lamenting note...  not all politics is boring!! here's a link from the Huffington Post with some photos of Michelle's trip (and fashion, DUH).  I'm impressed that first lady Margarita Zavala is almost as tall as Michelle... damn those european descended latin americans.

see link:
Michelle Obama's fashion in Mexico

Crippling Cyberattacks from China?

Researchers trace data theft to intruders in China.

Woah. Apparently these guys stole some highly classified Indian security documents, among other things. And it was accomplished by some random criminal gang in Chengdu? Ha, amazing... even if that were true, its a testament to the basic hacking skill of criminals in China. But still - this yet another high profile hacking incident originating from within China, and yet again its associated with a prestigious Chinese military or cyberwarfare school.

Now honestly, I don't suspect foul play. I imagine that if the Chinese government were hacking into India, it would be too good to be caught. And honestly, cyberwarfare is precisely what a country like China needs to rapidly become good at if its going to maintain military parity with the rest of the world.

Speaking of which, did you all notice the language in Obama's new nuclear weapons usage policy (from the article, emphasis mine):

"For the first time, the United States is explicitly committing not to use nuclear weapons against nonnuclear states that are in compliance with the Nuclear Nonproliferation Treaty, even if they attacked the United States with biological or chemical weapons or launched a crippling cyberattack."

Woah... my gut tells me, China is beefing up its "crippling cyberattack" division, and by the looks of it they're out cutting their teeth in the real world. My main question is - what's the United States doing to maintain cyber-military parity? Why don't we ever hear about cyber attacks originating from within the US anymore? I'm actually a bit worried about this - what if China is developing a breed of super hacker? Could the United States stop them?

Final note: I have nothing but the utmost respect for China's hacking skills, especially those of its elite crippling cyberattack division. This post is meant to encourage Americans to take a lesson from y'all, not an attempt to incite you into stealing my identity and Gmail account...

The NYT says your home's value probably won't rise - what bullsh*t!

There's a general pattern to the general psychology of people. Essentially it goes like this: everyone will believe in some fact A, mostly because everyone else does; those who question A are at best ignored, at worst shunned. Then, something external happens that makes everyone requestion A - a conclusion is reached: A was clearly wrong, and we must no longer believe it at all; to do so would be naive! Thus we should believe some new fact B, which is usually just the converse of A.

Take, for example, the housing market. In this example, our fact A will be "real estate never falls in value". Up until a couple years ago, people truly believed this "fact", at least enough to build up retirement dreams and fantasies based on it. Then the housing bubble depression recession extravaganza happened, and now everyone clearly sees the folly of ever believing that housing prices couldn't fall. Unfortunately, just like most stupid people do, the masses are taking the wrong lesson away here.

Witness the NYTimes blog post today purporting to explain why your house's value probably won't rise. Wow, way to go, captain obvious. I understand you're posting to get the most eyeballs, and right now your target demographic of 30-60 year old liberals whose houses lost a lot of made-up value in the bubble is feeling nervous and upset, so you're feeding their anxiety by publishing posts like this. Or hell, maybe you're afraid yourself - I get it, its OK.

But let's be frank - your house's value will probably go up. It may not rise faster than inflation, but it will go up. Considering that inflation roughly halves the value of the US dollar every 12-16 years, assuming that your house doesn't lose real value proportional to others in the nation (not an unfair assumption, though I'll come back to it later), your house should double in value every decade and a half. Your house's value should clearly rise over time if only due to inflation. That's why you buy a house - and no housing bubble can change that fact.

Now, there are two caveats here. The first is that although your house is rising in value, you should only be expecting it to rise proportional to inflation - you won't be gaining any new buying power, but you also won't be losing any. Considering that by owning a home you also get to live there, this insurance against inflation is a very useful thing - however, its not an automatic road to riches like some people seem to believe. The second caveat that is much more pernicious - you should only expect your house's price to rise proportional to inflation if you made a good investment.

"What?!?" I hear you all screaming incredulously - you mean that investing in real estate and housing takes skill? Well duh. Now, like most investing, if you're just not dumb about it, then you can gain most of the benefits without being exposed to many of the risks. For instance, what's the easiest way to ensure your pick a house that will appreciate in value? Pick one you want to live in. Make sure there are good schools in the area. Make sure there are things to do. Make sure its close to places people work. Make sure it has easy access to transportation for short commutes. Try to get a nice view, and try to buy in a city or neighborhood that has lasting name-brand recognition (East Village in NYC, The Marina in SF, etc). Rental units near universities and colleges are great ideas. Make sure the unit has all the amenities you'd want in a place - after all, if it was good enough for you, chances are its good enough for someone else, too. As long as your house remains good enough for someone else, you won't lose money on it relative to other real estate investments.

Now obviously, you can lose money in real estate - its easy. Pick a location that has a very long commute (ex-urbs out west, anyone?). Pick an area that is completely dependent on one industry (ahem, Detroit). Get excited about rapidly rising housing prices in areas that can still field development (Miami, anyone?). And finally, a general downtrend in the market is going to artificially deflate your house's cost for the short term - this isn't because its worth less; its simply because demand for houses has gone down. Such occurrences may be scary, but they inevitably pass.

Investing in real estate is a lot like investing in the stock market - in the long run (decades) its almost certainly more profitable than anything else you can do, but sometimes in the short run (years) it won't quite pan out. There are things you can do to decrease your exposure to risk (keep a diverse stock portfolio, keep your debt low), but like any investment you will ultimately get out what you put into it. Now, the stock market has an easy, zero-effort way for people to ensure exposure to the long term benefits of the stock market - they're called Index Funds. But even with those, there's some risk involved - stocks may hit a slump for a number of years while your portfolio underperforms.

Anyway, my main issue with this NYTimes blog post is this: it substitutes one idiotic, black and white "truth" with another equally idiotic, black and white one. No, house prices will not always rise. Nor will they probably not rise at all. Both interpretations have the alluring attribute of being universal - they always apply. The animalistic human brain loves such universally applying rules; they're easy, and we're lazy. But just keep in mind: investing in real estate is investing, and when has anyone made money investing by being lazy?

but... why does Toyota have to pay the US government?

Thank you, Cobra! for raising an important issue currently circulating in the media.

I must say, I'm a little surprised at Cobra's reaction to this story!  Cobra is often much more pro-business rights than I am.  Although, Cobra IS very pro-american and I do suspect he is rooting for american car companies and the fact that they didn't cost american lives. Sigh... but... I shall present my surprising point of view (as a business hating liberal): why does Toyota have to pay the US government?  Personally, I feel like that 16million dollar bill is more the government showing that it wants to protect Americans from evil foreign companies - ie: it's more of a symbolic political reaction.  The right thing to do here is sue... sue the shit out of toyota!  And here is where my view converges with Cobra's: if you're gonna charge such a meager sum, why EVEN DO IT? don't!  Instead, make Toyota pay some serious compensation to all people involved.

I dunno.. I mean, I'm glad that the government is standing up to big business (such is my ideology anyway), but as Cobra points out, 16million is like 5 bucks for them, seriously.  Although, I will admit, the same article talks about a fine imposed on Pfizer and I realized I agreed more with that... which led me to do some introspection and a bit of analysis as to why I would want Pfizer to be fined and not care about whether Toyota gets fined or not.  I think... sadly... as the imperfect human that I am, I feel like Toyota is a good company, while Pfizer is on my hate list.  This lame mentality may show why some conservatives wouldn't trust government regulation on business (because of people like me)!! Thus, I am forced to conclude that if Pfizer got it, then Toyota should get it too - thank you American government, for not being as shady as me (or other governments of the world).  Sigh.

Speaking of government regulation... the reader and certainly Cobra, should read this article on a recent ruling against the FCC regulations of the internet!!  http://www.nytimes.com/2010/04/07/technology/07net.html?src=un&feedurl=http://json8.nytimes.com/pages/business/index.jsonp

Toyota only fined 16.4 million?!?

NYTimes - US is seeking 16.4 Million dollar fine against Toyota

Wow, all of that and the most that US could actually charge them was 16 million? My sense was that the Toyota debacle was America's opportunity to beat up competitor car companies a bit, because lord knows ours have suffered enough over the past year. Its nice to see that Japan is having problems, too - but still, only 16 million? For a mistake that cost 56 lives? And that was known about in Europe in 2008? Sigh... come on U.S. regulators - grow a pair and charge Toyota for its failure! Lord knows that congress already did it to American car companies like GM, Ford, etc...

Some might say that Toyota has suffered enough in negative PR, but quite honestly, in 3-5 years no one in America will really remember this incident. And for only 16 million, no one in Toyota will, either.

A Response to Cobra's Oil Lovefest

So Cobra and I got into it this morning about Oil... he wasn't born in a lame country that has been SCREWED by the devil's excrement, so he was giving me his american manifest destiny speech.  BUT, it was rather good... here's the excerpt:

Cobra: sometimes these price movements are meaningless

  its difficult to attribute reasons to them

  pundits and talking heads try to

  but that's only to keep their jobs - they have to

10:53 AM no one wants a news caster who says "stocks moved around randomly today for no real good reason"

  so who knows

  i mean honestly, there isn't that much oil in the atlantic

  sizeable amounts, sure, but its not going to upset the global order that much

10:54 AM its more a boon to those state's economies than it is a real market shifter

  i really need to just invest in some oil exploration stocks

  i've been intending to for like months

  they've been on my radar CONSTANTLY

  i just didn't quite trust them... because they were oil

  dude

  i reacted the same way as YOU

  gahhh

  see how fear influences you?

  and this is despite knowing... KNOWING

  that oil consumption will continue to grow

  and thus, so too must oil EXPLORATION

10:55 AM we need to keep finding and drilling new wells, and even though we feel or fear that somehow that has to end someday

  the fact of the matter is its not going to any time soon

 Black Mamba: sigh

  im JUST btw reading your post on oil

  thank you for the shout out

  this is a great way to start a conversation on blog ;)

10:56 AM sigh, i mean i guess you're right

  but the thing is.. which i argue

  i understand that oil is still there and will be for a while (NOT good news for venezuela)

10:57 AM i dont wanna be paying for their shit

  if oil is involved in the damn plastic bottle that i drink water out of

  sure, awesome

  but i resent high gas prices a lot

  like A LOT

 Cobra: most oil is...

 Black Mamba: it cannot be

 Cobra: do you have any idea how much plastic we use?

  as a society

  look it up

 Black Mamba: that at one point, gas was my biggest expense

  I KNOW

 Cobra: for YOU

 Black Mamba: which again, i understand

 Cobra: but most oil becomes plastic i think

10:58 AM Black Mamba: we should look that up

  but im pretty sure

  the biggest reason for exxon's profit doesnt come from plastic

  because i argue that gas is a much more lucrative part of oil use

  think about it

 Cobra: we can easily figure this out

 Black Mamba: oil has a monopoly on transportation energy!!!!!!!!!

10:59 AM nobody can compete with GAS

  it's GAS

  it drives our cars, airplanes, motorcycles

  even our vespas!

  haha

  the whole transportation system is dependent on oil

  that's fucked up

  i dont agree with that

11:00 AM therein lies my hate for oil IN AMERICA

  cause we're not even gonna go into my hate for oil in venezuela

11:01 AM Cobra: i mean sure

  oil is the only thing that has the energy content PLUS easy transportability right now

  lots of people feel like you

  hence the research into other forms of energy

  look at batteries for instance

11:02 AM hybrid cars are really propelling some amazing research into batteries

  which right now are one of the few really viable competitors to oil

  and after looking at exxon's annual report from this past february

  if you expand "gasoline" to include things like jet fuel and other petroleum derived products

  you're right

11:03 AM and you're right about the energy monopoly

  still, just because the resource has a monopoly doesn't mean that the industry is one

 Black Mamba: ehem

 Cobra: its not their fault that there's no other easily available cheap and flexible fuel source

 Black Mamba: i mean sure

  but

11:04 AM there is a monopoly nonetheless

  and i believe in opportunity

 Cobra: by who, exactly?

 Black Mamba: but now tell me

  would the industry REALLY like oil to stop being the monopoly over transportation energy?

  sure it wasnt their fault that their product is the only one out there to turn on a car

  but..

 Cobra: obviously not

  but they clearly see the writing on the wall

  look at their ads

 Black Mamba: you know their lobbies are buying up congressmen to inhibit growth of other shit

11:05 AM Cobra: energy companies are advertising how they're investigating cleaner solutions

 Black Mamba: yeah and everytime i look at those ads i laugh at them

 Cobra: they're getting behind clean energy

 Black Mamba: who do they think I AM to fool me

 Cobra: on some level, they have to

 Black Mamba: no they're not!

 Cobra: public opinion wouldn't support them otherwise

  yes they are

 Black Mamba: this is them trying to repair their image

 Cobra: they need to make oil cleaner if its going to remain competitive

 Black Mamba: i guess

 Cobra: they aren't fools

 Black Mamba: but

 Cobra: so they're doing like mcdonalds did

 Black Mamba: that's not gonna solve the problem

 Cobra: remember when mcdonalds rebranded itself?

 Black Mamba: the problem is they NEED COMPETITION

11:06 AM Cobra: from greasy fast food shit to awesome high class shit?

  that's like... healthy?

 Black Mamba: yeah and rebranding only has made it so that people go THERE MORE

 Cobra: it seemed so NOT mcdonalds 3-4 years ago

 Black Mamba: doesnt break THEIR monopoly on fast food

 Cobra: but like

  after awhile, it did become mcdonalds

  just watch... a company like exxon or BP isn't going to just lay down and die

  they're energy companies

  oil is still important

  and will continue to be

  but so are other methods

  and those companies are investigating those methods

  they want to get their first

11:07 AM because they KNOW

  whoever comes up with SUPER oil

  e.g. some easily transportable fuel source that has high energy content but is CLEAN and SUSTAINABLE

  that person will become ludicrously wealthy

 Black Mamba: well

  they already know brazil and other places are coming up with good ideas

  although ethanol here involves corn, ugh

11:08 AM but sigh

 Cobra: dude

  don't hate things just because you think the industries are evil

  corn is kinda awesome

  and so is oil

  the resource isn't evil

Re: will there be blood?

So after spending a few days mulling over Black Mamba's response to the Obama oil drilling plan, I've come to a few conclusions of my own that I'd like to share. Essentially, like the bite first, ask questions later snake that she is, Black Mamba's assessment and reaction is instinctive and emotional rather than cold and calculated like any good reptile OR politician should be. To wit, Black Mamba summarizes her position as follows:

I dunno how I feel about this. I resist this because of my natural aversion to oil and the anger I have towards it because yes, I want to see them fail. I am bitter.

Now to her credit, she at least admits her bitterness and uncertainty - this alone sets her apart from 99% of the voting masses who are unaware of just how much their instinctive emotions cloud their rational judgement. Specifically, let's make one thing clear: we are not going to stop using any time soon. Most liberals in America, Black Mamba included, want us to cut oil out all together, like a bad habit. The fact of the matter is, its more like a blood thinner - its not good, but right now we need it to live. All oil reduction plans talk about reductions in the rate of growth of oil consumption growth - this is a far cry from an actual reduction in consumption. Now, none of this is unreasonable - its not even emotional. Its just cold, hard common sense. We're probably going to keep needing oil for the next decades - hopefully not much longer, but unfortunately not much sooner either. And considering just how vital it is to the modern economy, we need to do everything we can to ensure we have access to it.

Now, consider this: if we have oil production that's closer to America, we'll actually spend less on boat fuel to transport it. Massively less. If our goal is to reduce oil consumption, and our constraint is that its hard for us to change the structure of our economy right now, then building oil supplies closer to America is a great way to achieve our goals in spite of our limitations. Quite honestly, this is the type of common business sense that I've seen as characteristic of the Obama administration - its so simple, it makes you wonder why you didn't think of it yourself.

Next, notice how the article points out that actual drilling won't occur for years - most likely long after Obama leaves office, even if he goes for a double term. Effectively, he won't ever suffer any real consequences for this decision. Quite honestly, doing such a thing takes balls - especially when its the right choice for America despite popular opposition on both sides of the aisle. Specifically, despite the fact that the drilling won't occur for years, the boost to the economy will be immediate and effective - oil exploration is a costly business that requires lots of expensive equipment and technology, as well as lots of luck. Further, oil rig constructions contracts, as well as the construction of other infrastructure for oil processing and shipping will create lots of new jobs in the short term, as well as long term jobs to run the show. Quite honestly, if these coastal states are going to be able to fund education, they're going to need oil money. I'd rather that money get paid to Americans than to foreigners in the middle east, and I'd rather pay it in cash (US dollars) rather than blood. God, I sound so conservative right now. I'm kinda turned on. But seriously - this plan is cheaper and more realistic than any energy plan I've seen from any previous administration, that's for sure.

Also, notice that most of the oil drilling will be done outside the state's borders, so they won't get control over the benefits - no wonder the coastal governors are against these things. Of course, the oil rigs will be wayyyyyy out at sea, so very little in terms of coastlines, views, etc will be ruined by this whole affair. Not to mention, we aren't barbarians - the Caribbean is still generally a wonderful ocean. I highly doubt Martha's Vineyard or the Outer Banks are going to be endangered by drilling. And honestly, when was the last time you enjoyed the outdoors of Alaska in a manner that didn't involve your television?

And finally, before any of you get your panties in a bunch, notice one more crucial piece of information: the cost of producing oil in these areas, right now, at current prices, is not profitable. No drilling will happen until oil prices rise. Now, when oil prices rise, that generally does bad things to the economy - bad things our barely recovering economy really can't handle right now, like increased energy and transportation costs, less vacationing, cutbacks on frivolous spending, and other recovery nightmares. However, if oil prices rise, these Atlantic fields will suddenly become viable - the price will be right, and we'll get a whole bunch of new oil being produced close to home at less than the going rate. Essentially, by allowing exploration of these areas, Obama is taking out an oil insurance policy - if oil goes up in price, at least the American economy will benefit in some way, and that will keep us on the road to recovery. Yes, unfortunately that person (or more specifically, market sector) who will benefit would be big oil. But honestly - they aren't evil, just greedy, like everyone else in this world. Greedy isn't bad.

Consider this: as much as you may hate big oil and want it to disappear entirely, do you really think the American economy could suffer the complete loss of companies like Exxon Mobil, which at a market capitalization of 315B (as of this writing) makes it the most valuable publicly traded company. The entire oil industry is worth trillions of dollars - as much as idealism makes us wish otherwise, the fact remains: we need them just as much as they need us. And quite honestly, that's not a bad thing - oil is the one drug we need to bring closer to home if we're going to be able to kick the habit. Which kinda makes me question the "oil is an addiction" metaphor, actually...

Finally, I want to comment that Black Mamba makes an excellent observation about the bipartisan reaction to the announcement: members of both parties were pissed, which I actually find kinda hilarious. I think that means Obama is doing his job effectively - walking the middle line between both brands of extremism and keeping America sane. And Black Mamba is totally right - considering just what a conservative move this is for Obama, the Republicans are stupid to respond negatively to it. Essentially, they're getting what they said they wanted only a few years ago - are they really opposed to it now? Considering just what a long term decision oil drilling is, I'm not entirely sure I want it being decided by a party that seems to change its mind on the issue with every election cycle. Kudos to Obama for taking a controversial but ultimately well thought out stand on a tough issue - its the type of big balled leadership America needs right now.