A Different Way to Fund Housing

I have said before that buying a house is a little bit crazy.  If I went to the bank and said "I want to borrow four times as much money as I have, so that I can put it all in Amazon.com stock", the bank would laugh before they threw me out.

So...why will the bank let me leverage up 5:1 to speculate in real estate?  I am not a professional real-estate developer.  All my risk is concentrated in one property.  And owing that much on one property is terrible diversification.

We've seen two things happen at the same time which have changed the nature of home ownership in the US in a bad way.

• At least over the last 5 years, home owners were allowed to put a lot less money down - that is, they had higher leverage in buying houses.
• Home prices have become volatile.

Let's look at those two things in slightly more detail: when you write a loan that is backed by an asset, you want the owner (the person with the equity stake) to put enough money up that even if the asset goes down in value, its new value is less than the loan amount.  If you don't do this, the owner is "under water" and the loan isn't secured.  By making home owners pay a 20% down-payment, banks would protect themselves from a 20% decrease in house prices.  

That was a very wide margin back in the day, but the price swing we've seen of late is larger than that in some states.  Furthermore banks have been allowing down payments to get smaller, via piggy-back loans, seller-pays-closing costs, and all sorts of other weirdness.

I think these two trends may be related: the more houses are financed, the more housing prices are influenced by interest rates (because without cheap financing, the demand for housing goes down).  And the more houses are financed, the less housing prices have to change to put people under water.

it occurred to me that we don't have to use debt to finance housing.  I'd like to suggest a different model: equity mortgages.  (I realize that the logistics of this virtually impossible, but I still think it is interesting as a thought experiment.)

Under a "debt" mortgage (i.e. what we have now) the home owner owns the house, the house is collateral on the loan, and the home owner gains or loses all fluctuations in the price of the house.

Under an "equity" mortgage (i.e. what I am proposing) the hmoe owner owns part of the house, and the bank owns part of the house.  The home owner and the bank split gains or losses due to changes in the houses price.

How does this change things?

• A home owner can't be underwater; as a home decreases in value, the mortgage shrinks proportionally.  If you own 1/5th of your house, that is true no matter how the market fluctuates.
• A home owner has a smaller exposure to house prices.  If you put down a 20% down payment, you are exposed to house price changes only on that money.  Since the down-payment is put up in cash, you can think of this as speculating in house prices with some of your own money, but not the banks.
• Banks are exposed to both the upside and down side of house price changes.
• Banks are no longer exposed to default risk due to house price changes.  Because the owner can't be underwater, the home owner always has motivation to make payments.

These bullet points reveal a question: how does the mortgage get paid off?  In practice co-ownership of the house becomes very tricky.  Does the bank get to say whether you can renovate the bathroom?  Do you have to buy out the bank's share?  If so, do you have to do it on a schedule?  Can the bank sell its share to someone else?

I don' think equity mortgages are something we'll see any time soon, but I think they do illustrate some implications of debt-based housing finance that deserve closer inspection.

John Stewart vs. CNBC

John Stewart vs. CNBC. Of course, CNBC is a useful tool for making financial decisions - you just have to do the opposite of whatever the loudest pundit says.

Here's a chart of crude for the last two years...speculative bubble, anyone?

Tim Geitner's Secret Plan

Treasury Secretary Geitner did an interivew on the Planet Money podcast.  My first reaction was "man, that's the dumbest thing I've ever heard, this guy must be a complete idiot."  Fortunately for the markets, before I posted any of that, I did some thinking on the subject, and I think I have discovered Mr. Geitner's secret plan.

Liquidity vs. Solvency

At the heart of the debate over banking, the housing market, and the economy is the question of whether the problem is liquidity or solvency.

• The problem might just be that there isn't enough money, credit, and confidence to go around.  When everything settles down and the credit crisis is over, our house prices will recover, the mortgages on them will be backed by real collateral, and therefore the banks' balance sheets won't be swiss cheese.  The only problem is that right now, temporarily, there isn't enough money.  In other words, we have a problem of liquidity.
• On the other hand, house prices from 3 years ago might have been a delusional speculative bubble.  Houses are not going back up to that price because they were never worth that much, and only reached that value due to tons of easy credit.  Houses aren't coming back, the mortgages aren't coming back, ergo the banks aren't coming back.  The banks just owe more than they have, because their mortgages aren't worth squat.  In other words, we have a problem of solvency.

While I don't think that the real answer is 100% clean cut, I do believe that solvency is the major issue here.  I don't think housing prices are coming back any time soon.  To reach the housing prices we reached, we had to have a speculative mentality among buyers (e.g. "I'll buy the biggest house I can, because houses always go up") and easy money from banks (NINJA loans and all the rest).  The crisis has burned people bad enough that we're not going back there.

So when Geitner basically said "this is a liquidity" crisis during the interview, I raised my fist at the computer and did my usual ranting and cursing.  In particular, the treatments for solvency and liquidity are very different.  If the problem is liquidity, loaning money to the banks is just what we need; cure the symptoms and cure the disease.  But if the problem is solvency, every dollar we loan is a dollar flushed down the toilet, and one that just delays the day when the system is solid and functional again.

The Secret Plan

It was then that I realized that while my personal view of the crisis is the complete opposite of Geitner's stated public position, the current plan of action is exactly what I would do.

Treasury is working on a "stress test" - basically they're going to look at the banks books in detail and find out how screwed up they are.  Supposedly they will then think deeply about how the bank would do in a crisis, and offer them "credit support" (read: loans) if they need it.

Here's what I would do, e.g. "the secret plan".

1. Conduct stress tests, learning lots of interesting things about how sick the banks are.
2. In secret, prepare a nationalization plan/task force for all the banks that will need it.
3. Nationalize them all at once, suddenly, and without warning.  Surprise!
4. Immediately cut out and sell off the functioning parts.
5. Dump the rest of the toxic crap into something like a resolution trust corp to get unwound later at a loss that's hopefully not too ridiculously huge.

One of the problems with nationalization (or any market assistance plan) is that people will try to "front-run" it, or guess what is going to happen and try to make money speculating on that event.  So if you nationalize only the sickest bank, there will be a run on the second sickest bank.

Perhaps the current "stress test" provides the cover needed to really explore who is alive and who is already dead, and to prepare to take over and unwind any banks that really aren't solvent.

Sorry About That

Blogging can have many purposes - to provide a "subscription" service without the readers having to provide personal information, to create a web-searchable repository of information, as a form of creative expression. In the case of my rantings on finance, the purpose is for me to "get it out of my system" so my dear wife doesn't have to listen to me rant about how dumb AIG's management was.

At least, that's what I thought I had here - a harmless place to blow off steam - a microphone that was off...I was pretty sure that no one was paying attention.

So I write one post loosely in favor of bank nationalization and look what happens when the markets open: the Dow down almost 300 points. Citigroup down 20%. Clearly blogs are really, really important.

In summary: um, sorry about that.

Next week: Tim Geitner's secret plan! Better hide your cash under the mattress!

AIG Analogy

Here's a good three part article on AIG in the Washington Post.  How did this happen?  Why are we (the tax payers) shelling out billion after billion to clean up the corporate equivalent of the Titanic?  To draw two analogies:

• AIG Financial Products was like an insurance company that insured against earth quakes but had never actually seen one - they didn't really believe that earth quakes existed, so they considered the risk that they might have to be cover one to be tiny.
• AIG Financial Products was like an insurance company that insured against earth quakes but wrote all of their policies for San Francisco.

Combine these things and you can see how it only took one big earthquake to completely knock them over.

If ever there was a company that made money by picking up nickels in front of steamrollers, AIG was it.

Taxation Without Representation

Being the congenital liberal I am, when people say "we shouldn't nationalize the banks" I go "why the heck not?"  William Isaac provides some good reasons not to nationalize in an interview with Planet Money.  To summarize his arguments:

• Banks need investment to function normally.
  
• Investment is predicated on the bank growing or at least continuing its business.
  
• Banks make money off financial risk.
  
• A bank that's been nationalized has by definition taken on too much risk.
  

And thus the conclusion is unfortunate: the process of nationalizing the bank to lower its risk profile to protect tax payers inherently goes against its normal functioning.

But I sure am wondering whether this is really as bad as the other option: shovel money into the banks hand over fist and hope that this somehow helps us.

If there's just one idea that I think summarizes the entire financial disaster we're in, it's asymmetric risk.    Any time we have a heads-I-win-tails-you-lose game in a financial market place, the resulting behavior from the people involved is 100% predictable, and we have to ask ourselves "why did we make the rules this way."

John Bogle talks a lot in his books about the critical role that owners play in making capitalism work.  The owners of a company have skin in the game - for them, they win when the company wins, but they lose when the company loses (by losing their investment completely).  Contrast with the managers of the company, who win (perhaps to a much smaller extent) when the company wins, but are not nearly as exposed to losses.  If Citi loses $8 billion dollars, Citi's CEO doesn't personally lose $8 billion.  (And stock options don't fix this - stock options are totally asymmetric!  One might argue that they just make the problem worse.)

Simply put, owners are the ones who have skin in the game - they put up money which can be lost completely, so they're the ones who are supposed to make sure that the managers who work for them are not being complete morons.  In Bogle's calculus, one of the biggest problems with America's financial system (his books were written before the crisis, but I think the systemic problems he describes are still fair game) is that today's owners are not keeping today's managers from looting the bank.

Managers have asymmetric a risk-reward situation, so we can't trust them to do the right thing. We need owners with skin in the game to make good decisions.

I can't think of a bigger heads-I-win-tails-you-lose situation than us (the tax payers) saying: "hey senior bank management, we know you need money, so we will give you lots and lots of money.  But don't worry, we won't fire you if you continue to screw up."

If there is one threat to our free markets bigger than having the government come in and derail economic activity via a series of arbitrary political decisions about capital deployment, it's having the government  come in and completely derail economic activity by providing free capital to the management of the largest, least-well-run institutions without imposing on management the discipline that owners must impose.

If They Are Both Right, We're Screwed

The 1.5 trillion dollar question (or whatever we're up to now) in Economics is: who is right...Friedman or Keynes.  Is spending money going to break a brutal self-reinforcing downward spiral of economic contraction, or just waste so much future production that we'll have another "lost decade"?

The Friedmaniacs would say the Keynutjobs* will cause stagflation - if we spend a huge amount of money in a way that isn't efficiently allocated, that claim on future production is a weight around our neck.  (That is, we just don't have a trillion dollars to spend, and when the stimulus is over, we still won't.)

The Keynutjobs would say the Friedmaniacs don't have a tool to increase demand - management only from the supply side is incapable of dealing with a self-reinforcing drop in aggregate demand.  (That is, lowering taxes and interest rates does no good if we are all too scared to shop.)

What if they're both right?  Each camp describes a real weakness of the other's, and these weaknesses have been seen in practice at times of extreme dislocation.

What if there is no middle-ground.  What if there is no spending pattern large enough to break a cycle of decreasing output that won't also have long term fiscal repercussions?  Then we're really screwed.

(My gut feeling is that we're screwed by design.  A stimulus package, if it is going to have the psychological effect of convincing people that we aren't in deep doodoo, has to be absurdly big. That is, markets get built in expectations, and if they expect too much, you have to really clock them on the head.  But the political process is only going to take a huge package and make it even bigger.  So what can Obama do?  If he intentionally low-balls the stimulus in an attempt to counter-act all the pork that gets added on, the market immediately gives him a vote of no confidence, and then any super-sizing of the package has to be even bigger.)

* I found the term "Friedmaniacs" somewhere on the web...I think it has a bit more ring than Keynut-jobs, which I just made up now, having not found any good derogatory terms for Keynsianism after 2 minutes of Google.  I think there are ideologues in both camps that take a single policy to enough of an extreme to warrant a goofy name.

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!

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...

You so STU-PIIIIIIIIID!

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!

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.

Turning Crimson

So apparently Harvard's going to take a hit in the economic crisis.  Having put international exposure into my 401k (and watched it get killed) I suppose it is reassuring to know that the best and the brightest got hit the same way.

But wait -- first, these guys had a 23% ROI for 2007.  A 30% hit isn't much fun, but it's only rolling the clock back about 18 months.

But wait -- why are we even asking these questions?  If you are into emerging markets, your time horizon should be really long and your tolerance for volatility should be really high.  I've got this stuff in my 401k - it's about 33 years too soon to be asking the question "how'd we do"? Harvard's been doing this for a long time, and probably isn't looking to liquidate the endowment and cash out any time soon.

If there's a point to this rant it is only this: we (investors) seem to have become obsessed with whether stocks have gone up or down over short term periods (one year, five years, or worse, even months and days).  Have we all forgotten what a stock is?  A stock is a claim on future cash flow from now to the end of all time.  Stocks exhibit enormous volatility and reasonably good long term returns.  If we care about how the market moves, we may not be in the market for the right reasons.

Economics Isn't Science

So first, this clip is just fun to watch.  I have said before that perhaps the best indicator for how to invest is to do the opposite of whatever the talking heads on CNBC are saying to do.

(And I do have to call out the left wing media where it is full of crap -- the idiotic boosterism being put out on these shows is not particularly "right wing" and this is not a right-wing media issue or a Fox News issue...this is a Wall Street industry issue.  Heck, I've heard both Democrats and Republicans try to blame each other for the current financial mess - I don't buy a word of it. For a blow up of this magnitude, everyone has to screw up at once.)

But while Peter Schiff did seem to call the crash correctly, I don't think that his proposed solution is a very good idea (even though he is right about borrowing money to live beyond our means). His idea is to cut government spending, and the fact that he thinks that this is a good idea reveals a major ideological divide within economics between the Keynesians and the Friedmanites.  (These schools of thought do often correspond with left wing and right wing politics...so from a political perspective, Schiff's economics are conservative, or more accurately perhaps libertarian.)

The Keynesians would point out that as everyone braces for a recession, demand is going to fall, and demand falling will cause supply to fall, causing a feedback loop.  I know I might get laid off, so I stop buying corn flakes...now the guy who works at General Mills gets laid off and stops buying X-Plane and now I am laid off - because I prepared for that event - a self fulfilling prophecy.  The Keynesians say that in this circumstance it is important for governments to spend money to help break the feedback loop.

The Friedmanites would argue that efficient economic activity cannot resume until prices have normalized - in order for us to have real growth, we can't have incorrectly priced (too expensive) houses, etc.  Therefore the best thing the government can do is get the hell out of the way, let prices fall until they make some sense, and only then can we get back to having a productive economy -- until that point, investment will be going in the wrong places and be wasted investment, hurting our long term future growth.

The problem is that the Keynesians and Friedmanites, while both probably at least partially correct, have completely opposite prescriptions about what to do.  You can't really do both. And we can't do an experiment where we try both separately to see which advice works better. This is why no one can agree on which theory might be correct (or at least more correct): we can't do the experiment to disprove the theory.*

How do we reconcile these?  Benoit Mandelbrot points out that market pricing isn't the stable equilibrium we think it is - free market prices simply go completely nuts sometimes.  Behavior Economists are starting to explore why this might happen, but one thing is clear: prices sort themselves out eventually, but in the interim they can show periods of extreme weirdness.

So I would say that in looking at housing prices, government policy has to consider both sides of the economic coin:

• Housing prices may become very wrong for periods of time.  We saw our houses become very highly overvalued.  I believe they will swing the opposite way and become highly undervalued.  Buyers have a lot of (partly irrational) fear of buying before we "hit bottom"; this means that the bottom of housing prices will be lower than their natural support level and will then bounce back up, as buyers refuse to buy until they see the bottom.
• On the other hand, houses do need to eventually hit a sane level - there is no other way to have a functioning economy.  No policy that preserves housing prices as they were can make any sense.  (We don't need any more houses - any policy that artificially raises the price of houses and causes more to be built is wasting investment and hurting future useful economic growth that should be happening in other areas.)

I don't think there can be a really good solution to the housing problem, because the only real solution would be to go back in time and stop people from making a number of poor decisions based on incorrect pricing and incorrect assumptions.  But the money has been spent, the houses have been built, and we're stuck where we are.  So all we can do is be pragmatic and try to make the situation as not-bad as possible with very limited tools and a lot of constraints.

* Being a congenital left-winger I am more sympathetic to Keynesian than Friedmanite theory...in particular my complaint is this: because in Friedmanite thinking a central bank fundamentally screws up economic equilibrium, Friedmanites will be able to blame the Federal Reserve for all ills, even if Friedmanite policy is enacted, thus their theory can never be proven wrong by actually trying it.  That is, unless we get rid of the Federal Reserve.

Haggling

I've posted a lot about the roads, because they're one of the first things a Westerner notices in India. (India's driving surpasses China's -- the Chinese stop at red lights.) Before I can really describe some of the other things that happened to us, I need to describe India's pricing system and haggling.

Basically in India, every price is negotiated - imagine that everything is priced like cars in the US. Some goods have an MSRP, which would be the price you should never pay because it's way too high, but most goods are entirely unlabeled (the store has no indication of potential price). The only things that we did not haggle for were restaurant bills and plane tickets. (We even ended up in an argument about what to pay for a metered cab, but that's another story.)

To further complicate things, the merchant can make a pretty good guess about how much money you might based on how you look. Being white, Lori and I scream money to an Indian merchant - whether we're from the US or Western Europe makes no real difference. But our friends in India (who are Indian, but look like they are upper class, with white collar jobs) have the same issue: they go into the negotiation with a handicap. The implications of what it means to have money in India (whether you live there or as a tourist) are complicated enough that I'll devote a separate blog post to them.

Our friend Tanmay has a good rule of thumb: whatever price they offer you, counter with about 1/4 of what they are asking. We had trouble pushing that low, but we were usually able to ask for about 1/3. What we actually paid varied by the situation, was virtually always too high compared to local prices, but was usually a good deal compared to US prices.

A lot of the time I enjoyed haggling, but I think this is because I could haggle while it was novel, then go home to the US and price shop online...having to haggle every day would wear me out, and there were definitely times when we thought "oy, we have to haggle now."

There are some cases of fixed price shopping, but they are invariably expensive by local standards. In some cases it's worth saving the hassle. For example, at a lot of tourist sites, people will offer to be a guide. How much do you pay for this? With strong negotiation you might get a very good price. At some sites the guide rate is posted -- the rate is invariably higher than you would pay if you were a local who could haggle, but it is usually lower than you would pay if you are a foreign tourist who isn't used to pushing on prices all the time.

(For example, the guide rate at many Rajasthani monuments is 100 rp, which is about $2. Guides making $2 for a 30-60 minute tour are doing very well for themselves by Indian standards, but if you're an American you're going to have a lot of trouble getting much below 100 rp, and even if you did, is it worth having an extended haggling session before each monument to save 50 cents?)

I realized a few things about shopping while in India:

• I really don't know what most things should cost...I am used to getting my pricing information from the context of the store dong the selling.
• To shop for negotiated items, you really need to be an expert at what you're buying...there are only a few items that I could really haggle for if I wanted to. Our friend Pooja told us that if you want to make a large purchase in India, you need to rely on a web of trust - that is, friends who know more about the material, and merchants with whom you have some relationship.

My favorite haggling moment was when I managed to get under the skin of the manager of a tourist gift shop at a hotel part-way to Jaipur.  Our driver was having lunch and Lori was browsing the gift shop, trying to haggle down the price of a small purse.  I got into an extended discussion about pricing of flash memory for cameras with the manager, and then sprung my proposal: to trade a card that I had (incorrect for my camera) for another, less valuable card. He would owe me about 300-400 rp, but I was willing to make the trade for only 100.

The manager had no desire to take my second-hand flash card (even though it was in plastic), but I kept working on him, pointing out what a great deal it was, until finally I got under his skin enough that he yelled "No Buying!  Only Selling!"  Having been driven nuts by people trying to sell us tourist crap we didn't want for the previous four days, it was a small victory.

Eventually my rantings about the economy and state of finance and my India posts will end up merging, but that can wait a few more days. There's still a lot more to write about! (I did get the camera off-loaded today, so I will try to post some pics soon...we took 764 pics and movies...)

7.4 Trillion Is Not That Much

In a past post I suggested that $700 billion is not that big of a number when compared to the usual cost of bail-outs relative to GDP.

People are now suggesting that we're at $7 trillion +.  That's a big number, but I think it's a "nominal" number, like when people talk about $47 trillion of derivatives.*  Bloomberg has this nice interactive chart showing who has committed what.

Now 7 trillion is a big number, but a lot of that money isn't going to actually get spent.  For example, 4.4 trillion comes from the Federal Reserve, which is guaranteeing low-risk things like commercial paper and money market funds that aren't really at risk in the first place.  To understand how much of this money we might really lose, we need to look at:

• Panic money: investors are so freaked out that they don't even think the sky is blue anymore...money is earmarked in the unlikely event that the sky is green and investors calm down.  Since the sky is in fact not green, I don't think we have to worry about this money going anywhere.
• Screw-up money: companies made really bad investments, and Uncle Sam is guaranteeing them to prop the institution up.  This is where we could really get in trouble, but no one really knows by how much.  Most of this spending is under Treasury, bailing out CitiGroup, AIG, Fanny Mae, etc.

Even if we ignore the panic money and only look at screw-up money, it's still a lot.  As a final thought on this: we have an immovable object (massive spending) pushing the dollar down and an irresistible force (fear) pushing the dollar up (via a flight-to-safety).  I suspect that when the dust settles, we'll lose our fear but still owe a few trillion in bail-outs, and that's going to make for a rough time for the dollar.

The "Lonely Planet" Problem

Lori and I are in Goa now - Palolem, to be more precise, and we are again seeing the "Lonely Planet" problem. (It's really not a problem for us here, but the principle still holds.) The Lonely Planet problem is this: when the clever folks at Lonely Planet find some wonderful undiscovered nook in India and write about it, approximately a gajillion tourists all go there and discover that the nook is now no longer undiscovered. Doh!

We first hit this in Jaisalmer with camel safaris. The Sam sand dune became overrun with tourists, so people started going off the beaten path to Khurie. Now Khurie is crowded too - we didn't find that out until we were in Jaisalmer - it's hard to plan everything by remote, but we were able to set up a safari using Ganesh Travels. (They're in Lonely Planet too...)

Palolem is one of the southernmost beach villages in Goa - it's a beautiful beach, maybe 1/4 to 1/2 mile long, with two roads nearby filled with a combination of shops and restaurants and some hotels. Near the beach are thatched huts, which provide the lowest comfort (but probably also lowest environmental footprint) lodging. The lonely planet issue is: Palolem used to be an escape from tourists, but now it is just another tourist beach village.

That's okay with me though; seeing seven cities in ten days was exhausting, and the pace in Goa is a lot slower - it's not crowded like Rajasthan, Mumbai or Delhi. After all the traveling, a few days on the beach is just about right.

Why Did the Cow Cross the Road?

Well, the answer is: it didn't; cows actually have excellent lane discipline -- they tend to go where they are going and not change directions too much. (Goats are much lses predictable.) And it's a good thing, because cities in Rajasthan are pretty much filled with livestock.

If the first thing an American notices in India is the driving, the second thing is the presence of animals everywhere. Cows are simply left to roam free range - both wtihin the city limits and outside; while driving between cities we had to stop several times to let a shephard and his goats cross. There is something very surreal about the whole experience.

The Rajasthani forts are very impressive - they are like the Grand Canyon, I think, in that they are so big and imposing that even if you've seen a lot of pictures, the real thing is awe inspiring due to shear size and improbable location.

As helpful as the Internet is in planning a trip like this, it is difficult to understand the "situation on the ground" without being here - I will try to write up some travel tips once I get back, so that perhaps others who are trying to use Google to plan a trip can have a slightly better picture of what to expect.

Greetings From Udaipur

As I sit down to write this, an elephant just walked down the street past this cyber-cafe. Now that is remarkable for two reasons: first, it was an elephant, for crying out loud. We have seen lots of dogs, goats, and mainly cows in the roads, but this is the first elephantwe've seen go by. Second, the streets here are very, very narrow, so getting an elephant (or a car) down one of these streets is no small matter.

We read an article in the paper on the flight from Mumbai to Udaipur where a Russian dignitary described Indian drivers as "very skilled" - and they are - in that they navigate a road network without any kind of lanes, street signs, or anything else to direct traffic. The first reaction any American has coming to an Indian city (Mumbai and Udaipur have both been like this) is that it is truly a crazy driving situation. Driving here makes China look safe and boring and the beltway look like the Queen's tea.

With that in mind, Udaipur is an amazing city - the palaces are all fantastic - I'm not quite sure what to say about them. The city itself looks quite idealic from across the lake in the evening. The streets of the old city are a bit daunting - narrow, crammed with people and shops and cows and motorcycles and rickshaws...to an American, it is a constant assault on the senses. Fortunately we started in Mumbai with our friends, which helped a lot. Compared to Mumbai, Udaipur is not so crowded, and our friends live in Mumbai and were able to give us a lot of situational awareness.

As we travel around India, I am constantly reminded of China - while they are very different, they are perhaps more like each other than either is like America. The density and crush of people, the buildings, often packed so close together, often barely standing. I will have to describe Mumbai in a separate post - it is its own beast.

A final note: it is heartening that everyone here knows Obama. :-) It is great to have a president that I do not have to be embarrassed about when traveling.

New Chandelier

Lori's parents were in town last week, and as always, did some really wonderful work on the house. Here is our old chandelier, which came with the house. If it looks sort of cheap, that's not because of the picture.



Lori's dad in action!



CC is alwys helpful, particularly when there are heavy things, electricity, and ladders.



The new chandelier:

Warning: Extreme Cuteness Follows

After their morning hyperactivity and bad behavior, CC and Nublet like to snuggle. They both get very sleepy!