Saturday, December 13, 2008

I Love the Wok

Three thoughts on cooking:
  1. All prep must be done before cooking starts, and all shopping before prep. Exposing food to air or heat starts fundamental changes that cannot be stopped once they begin. Especially once heat is introduced, you're on the clock!
  2. It is obvious that too much heat can ruin a dish. Less obvious, but equally important: too little heat can ruin a dish. (Consider that too little heat means too much time in the cooking medium, which can be a problem whether it's air, water, or oil.)
  3. Non-stick is a specialty pan, not a default.
The wok combines all three of these, and then some!

Thursday, December 11, 2008

More Absurd Pet Pictures

Some more absurdly cute dog and kitten pictures...a few notes:
  • I do not pose them like this!  They just get in these positions on their own.
  • It's mostly the kitten's idea - that is, the dog usually lies down first, then the kitten finds her and joins in.
  • Where the dog has her legs around the kitten, this is not duress - the kitten just sleeps through it.
They pretty much do this every day...

Friday, December 05, 2008


Other shoes keep dropping as the credit crisis unfolds, but this one is really impressive:
Beginning in 1999, the Turnpike Authority entered into complex arrangements - known as credit swaps - with three investment banks as a means of raising cash to pay off rising Big Dig debt. Essentially, the banks paid the Turnpike Authority cash for the right to swap interest rates with the agency on future debt payments. The deals, while immediately raising $71.5 million in cash for the agency, left it vulnerable to fluctuations in interest rates.
So the Turnpike insured banks against interest rate changes?  Why would they do something like that?  They have no counter hedge.  Perhaps the Turnpike Authority has a death wish - an insatiable appetite for risk that can only be filled by taking outsized bets on global financial conditions.  (Or, as Bostonians might speculate, perhaps the Turnpike Authority is run by morons.) 

Wait...I've heard this before...the choice of a known quantity or some unknown that might be better, but maybe not...why does this seem familiar?  Oh yes!
Kuni: Ahhh, red snapper. Mmmmm, very tasty. Okay, Weaver, listen carefully. You can hold on to your red snapper...[Hiro-San emerges, carrying a table with a box]...or you can go for what's in the box that Hiro-San is bringing down the aisle right now!!! What's it gonna be? [Phyllis Weaver decides between the Red Snapper and the box. The audience points to the box]
Phyllis Weaver: I'll take the box. The box! [the audience applauds]
Kuni: You took the box! Let's see what's in the box! [Hiro-san opens the box, and the audience gasps: the box is completely empty!] Nothing! Absolutely nothing! STUPID! You so STU-PIIIIIIIIIIID!

Thursday, December 04, 2008

The Bloody Mary Approach

The Treasury Department has realized that the best cure for a hangover is...more binge drinking!

I was going to write a snarky blog post arguing about how that the government should bail me out instead of GM or CitiGroup.  But why am I against this plan?

If Treasury buys mortgages with the goal of bringing down rates, they are essentially subsidizing the price of housing.  Given that low interest rates inducing an overheated housing market is exactly what induced this mess, it seems like a step backward.

You can't undo the past.  We all collectively made a bunch of bad decisions about our homes based on temporarily distorted pricing information.  (This podcast has a pretty good explanation of what the implication for money is on our buying binge.)  Life can return to normal only once home prices make sense.

During the boom, plenty of homes we didn't need were built, because prices were artificially high.  If we prop up interest rates, two things happen, neither of which are good:
  1. We subsidize overproduction.  That's wasted economic activity.
  2. We pay the opportunity cost.  Buying down mortgage rates has no upside for the larger economy or tax payers.  At least with Citi we get a dividend.
The truth is that I'm being over-dramatic.  Housing prices are probably going to go below their eventual clearing level, since buyers are irrationally petrified of buying before the bottom and risk premiums on everything are through the roof.  

My issue here is the same as TARP - how do you set the level of arbitrary government intervention when there isn't shared success.  When we were going to buy toxic waste, the risk was that we overpay or underpay - only one of the banks or tax payers could win.  Here we have the same problem - based on the interest rates we pick, one of home buyers or tax payers will win.

There is one proposal I have seen that at least hopes to address the fundamental problem with the housing market: "property appreciation rights" (PARs).  Basically the idea is to allow home borrowers to sell their upside housing market risk to lenders.

Whoa.  That's a huge change in how houses are priced, and one that we should not take lightly. It has the potential to destroy the middle class and the American dream.

But housing has changed since 1978 - houses now price like stocks - they fluctuate.  It isn't appropriate for individual Americans to own that kind of risk exposure.  If I called my bank and said "I would like to borrow $400,000 so I can speculate in the stock market -- in fact, I am going to buy just one stock, I'll put in $20,000 of my money, and you can have a lean on the stock as collateral", well, I don't think my bank would say yes.  But if I say the exact same thing with a house rather than stock, I'm off to the races, and now I am leveraged 20:1 into a completely non-diversified real-estate position.

PARs would break the asymmetric risk we face today, where home owners get the upside of the housing market and lenders get the downside.  When the market eventually corrects, what we'll see is a tightening of credit as the market adjusts to the fact that home prices can fall.  (With a stock, you can margin about 50%.  Can you imagine having to put 50% down on your home?)  In some ways this whole mess was created by incorrect risk premiums - high leverage positions on homes based on the assumptions that the old rules apply...rules from before MBSs and CDOs and Reagen-era (leveraged) finance.

Under the PAR scheme someone (Government, business, whomever) can go in and refinance a pile of houses at cheap rates.  The up-side for the entity providing the money is the rights on future appreciation, which is the incentive for the borrower to "get of the respirator" and switch to traditional financing as soon as it's possible.  Without this, we have heads-I-win, tails-you-lose, which didn't work out very well last time around.