Current Events

Economics of the Surge

Posted by Deepish Thinker on September 12, 2007
Current Events, Economics, US Politics / No Comments

I just came across this intriguing article on using the dollar auction as a model for understanding the war in a Iraq. This is not the only applicable economic model. For example, you could gain insight into the administration’s decision making on Iraq by considering the Asset Substitution Problem.

Imagine a firm that is mostly financed by debt. The bondholders of the firm will tend to prefer that management adopt a conservative strategy, in order to maximize the chance that the debt will be paid off.  However a conservative  strategy has little appeal for shareholders, since low risk implies low return and thus low net profits.  For this reason the shareholders will tend to prefer higher risk/higher reward strategies, since these increase the probability that there will be something left over after the debt has been paid.

Since the shareholders control the firm, they can have management adopt a strategy that increases the chance of losses for the bondholders in the hope that there will be some return to the shareholders. In effect, the shareholders can choose to gamble with bondholder’s money.

Applying this model to the situation in Iraq, the American public are the bondholders while the the administration takes the role of shareholder.

At this point the President’s reputation is pretty much shot. If he adopts a conservative strategy in Iraq, say phased withdrawal, his administration will almost certainly be remembered as one of the worst in US history. If however he adopts a riskier strategy, like continuing the surge, there is a slight chance that the situation will turn around, which in turn might redeem his standing.

From the President’s perspective there is nothing to lose, his reputation already being shot, and everything to gain. A small chance at redemption is very much better than no chance at all. It should thus not come as a surprise that the President is vigorously opposed to any admission of defeat in Iraq.

It should also not be surprising that the American public, who will ultimately carry the cost of the much more likely negative outcome of gambling in Iraq, are less than enthusiastic about doubling down.

In the commercial world bondholders control the gambling tendencies of stockholders through including covenants (contractual limitations on management) in debt agreements, which is generally effective.

In the political sphere, Congress is supposed to counter any executive tendency towards gambling with the lives and treasure of the nation. However, with the focus on not appearing soft in the run-up to the 2008 election, there seems to be little stomach in Congress for reigning in the President. For the moment it appears that our only alternative is to hope that the President’s gamble pays off.

Against the Death Penalty

Posted by Deepish Thinker on August 16, 2007
Current Events, US Culture, US Politics / No Comments

It recently came to light that everybody’s least favorite Attorney General, Alberto Gonzales, has acquired new powers to “fast track” death penalty cases in federal courts. While the headline may play well with the Republican base, which remains infatuated with the death penalty, the measure itself is extremely limited and probably won’t make all that much difference to the rate at which death row inmates meet their ends.

The death penalty itself remains intensely controversial and thus politically useful. Support for the death penalty is the tough, god fearing, law upholding, capital “C” conservative candidate’s favorite way of distinguishing himself from all those namby-pamby, soft on crime Democrats who like nothing more than pandering to criminals and recklessly compromising the safety of honest Americans.

Not being particularly enamored with the culture wars, I would like to propose a solidly conservative argument for dispensing with the death penalty and it’s accompanying political, legal and media circus. My hypothetical pragmatic Republican candidate might make an argument something like this:

“I have not one single shred of sympathy for the inmates on death row. They are undoubtedly the vilest of criminals and thoroughly deserve to be put to death.

Nevertheless I oppose the death penalty, not because it is cruel, but because it is far too kind.

Consider what happens when a convict is placed on death row. For a start he is handled with extraordinary care by his jailers least some incident provide grounds for appeal, or the psychological stress of his situation render him medically unfit to be executed.

Once comfortably installed on death row the convict is practically overrun with sympathetic media types and bleeding-heart liberal lawyers, who explain to the convict, in the most understanding tones, how he is really the victim.

This wouldn’t be so bad were it not for the glacial pace of the legal system. Our laudable desire to ensure that no innocent citizen is ever put to death has resulted in a near endless menu of legal avenues by which liberal lawyers can seek to delay or subvert the course of justice.

On being convicted of a capital crime the criminal knows two things. He will enjoy at least 15 years (probably many more) of the most comfortable accommodation the prison system can provide while the appeals process plays out. He will also receive attention, understanding and sympathy that he absolutely doesn’t deserve and may even achieve a measure of celebrity. What is absolutely not certain is whether he will ever be executed.

Is it any wonder that the death penalty isn’t much of a deterrent?

The people who really suffer in a capital case are the victims. Ignored in the outpouring of concern for the criminal, the victims are deprived of any sense of finality or justice. Through the years, as appeal follows appeal, the victims can be called back any number of times to reiterate their testimony, always knowing that one slip in testimony or error in memory may be enough to allow their attackers to escape punishment.

For the sake of justice, for the sake of the victims, I call on all true conservatives everywhere to write to the president and ask that he commute the sentences of every death row inmate to life with hard labor and no possibility of parole. We may not be able to make the death penalty work, but we can sure as heck make our worst offenders wish they were dead.”

Shocking News

Posted by Deepish Thinker on August 02, 2007
Current Events, Economics, New Zealand / No Comments

This week the New Zealand stock exchange ‘shockingly’ came out in favor of looser monetary policy. The main reason the NZX is pushing this ‘bold’ reform appears to be that interest rates are inconveniently high.

The NZX50 has essentially doubled since 2003 despite New Zealand consistently having some of the highest interest rates in the OECD. Unsatisfied with this very solid performance the NZX has apparently been watching the low interest rate fueled Dow over the past couple of years and come to the conclusion that things could be even more fun if only those killjoy central bankers weren’t so fixated on controlling inflation.

Of course Wall Street hasn’t looked so hot over the past couple of weeks. The resulting panic has also knocked around the NZX, which suggests a second reason that NZX management may be interested in monetary policy reform. They may be trying to create a kiwi version of the ‘Greenspan Put’. Essentially a Reserve Bank that takes a ‘balanced view’ would chop interest rates whenever the markets take a tumble, helping to mitigate losses. Such a policy reduces the risk inherent in the share market and thus tends to increase valuations, which wouldn’t upset the NZX in the slightest.

While a ‘balanced’ monetary policy may well be in the best interests of the NZX, a come what may attitude to inflation has some serious downsides. Contrary to some reports inflation is very far from dead. In fact it is likely to be back about thirty seconds after we conclude it doesn’t matter anymore. To paraphrase a famous quote, ‘The price of stable money is eternal vigilance’.

An Indycar Opportunity?

Posted by Deepish Thinker on May 28, 2007
Current Events, Private Equity / No Comments

Sunday saw the 90th running of the somewhat faded crown jewel of American motor sport, the Indianapolis 500 (New Zealander Scott Dixon came second). While fan interest has rebounded over the last couple of years, thanks largely to the participation of the eminently marketable Danica Patrick, Indy car racing is still a pale shadow of its former glory.

It all went horribly wrong in 1994 when Tony George, owner of the Indianapolis Motor Speedway, founded the breakaway Indy Racing League. Since then the US has had two supposedly premier open wheel racing leagues, IRL and CART (now the Champ Car World Series), neither of which have enjoyed anything like the popularity of CART before the split.

The rump CART organization even declared bankruptcy in 2003 and had to be rescued by a consortium of team owners. Meanwhile rival NASCAR has grown to become one of the most popular sports in the US, with TV viewership second only to the NFL.

Ironically, the reasons for the split are now largely irrelevant. The IRL has come to be dominated by a few of the same elite teams whose hegemony over the old CART series helped motivate the split. Meanwhile, in order to control costs and promote competitive racing, the Champ Car World Series has abandoned its Formula 1 style technological arms race in favor of nearly standardized cars, similar to the system used by the IRL.

All of which suggests that there is a significant investment opportunity. Open wheel racing was once very popular in the US. There is no reason that it couldn’t be again if only the warring sides could be persuaded to bury the hatchet.

Is there a private equity group out there with the cash and, perhaps more importantly, the diplomatic skill required to put humpty-dumpty back together again? If this isn’t a merger and rationalization opportunity, I don’t know what is.

The End of Imus

Posted by Deepish Thinker on April 12, 2007
Current Events, US Culture / No Comments

Yesterday the “Imus in the Morning” show was canceled after a prolonged and entirely predictable insensitive comment scandal. The well known ‘as long as you don’t offend anyone’ clause of the first amendment was invoked and formerly popular radio host Don Imus lost his job. Chalk up another victory for over the top moral outrage.

Ordinarily I wouldn’t care, but this particular case got me thinking, how should the Rutgers basketball team have responded to Mr Imus’ mortal insult?

This is the news conference I would like to have seen:

“Ladies and gentlemen of the press, on behalf of the Rutgers women’s basketball team I would like to formally respond to the comments made by Mr Imus.

I believe I speak for the team, the coaches and the fans when I say that nobody at Rutgers gives a damn what that cantankerous old fool has to say. We are too busy celebrating a fantastic run in the NCAA championship to spare even a moment’s consideration for the asinine opinions of a washed up radio hack.

This is a free country, which means that Mr Imus is perfectly entitled to hold and express any dumb ass opinion he likes.

And we are free to treat that opinion with the contempt it so obviously deserves.

Sticks and stones may break our bones, but the moronic ramblings of aging radio shock jocks will never hurt us.

While we would like to thank Jesse Jackson for his interest, he can take his moral outrage dog and pony show somewhere else. We are not fragile little flowers in need of his protection. Rutgers University takes pride in turning out strong confident young women who aren’t going to wilt in the face of a few unkind words.

If Mr Jackson is really interested in supporting the team he is more than welcome to purchase season tickets.

Regarding Mr Imus’ specific comments about the appearance of our team we will make one comment only. They were somewhat ironic, coming as they did from someone who has, to be brutally frank, a great face for radio.

I will now take questions about basketball.”