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David's Macro Blog

Analysis and commentary on business, economics, real estate, financial markets, and other fun topics


Category: Economics

During the height of the 2008 credit crunch, Lehman Brothers, led by CEO Dick Fuld, was not bailed out by the government. Instead, it was allowed to fail and become the largest bankruptcy in history.

How did this 150-year old firm that survived the Civil War and the Great Depression fail?

The short answer is, the firm was obsessed with growth so it chased returns with little regard for prudent risk management.

Their business model during the 2000’s economic growth period relied upon:

  • Excessive leverage (40 to 1): a couple percent drop in asset prices renders the firm’s balance sheet without equity.
  • Being the largest securitizer of sub-prime real estate mortgages.
  • The overnight repo market to fund daily operations.
  • Accounting gimmicks such as Repo 105 to make the balance sheet look good for quarterly reporting.
  • Unrealistic modeling with faulty assumptions such as real estate prices only go up and the overnight repo market is always liquid.
  • Believing “this time is different” and not preparing for the inevitable market cycle to reverse course.
  • Retaining ownership in some securities they created to increase their profits.
  • Incorrectly believing they would get a bailout from the government like Bear Sterns (after rejecting a bailout from Warren Buffett before late 2008).

What lesson can individual investors learn from this?

Be wary of investments requiring excessive leverage and market conditions remaining the same in perpetuity.

Barry Ritholtz – Dick Fuld’s Fantastic Revisionism!

It seems like a sure victory for proponents of Initiative 1098, a state ballot initiative that would subject a few wealthy individuals to a state income tax for the first time. Washington is one of only seven states without an income tax.

The initiative, if passed, would tax the wealthy Washingtonians like Bill Gates, Jeff Bezos (founder of Amazon), and other very successful corporate leaders. Who could possibly vote no, especially in a state known for left-of-center politics and home to the liberal urban epicenter known as Seattle?

The Washington Examiner has an excellent piece on the wisdom shown by voters who defeated the initiative by a wide margin.

Here are a few select quotes from the article.

The political math was simple and should have been fool-proof: Proponents of a high-earner income tax in the state of Washington needed only a majority of voters to approve a tax on a tiny minority of their peers.

After all, Initiative 1098, which would have imposed a 5 percent tax on the adjusted gross income of individuals who earn more than $200,000 — or $400,000 for couples — and a 9 percent tax on the AGI of individuals who earn more than $500,000 — or $1 million for couples — would have affected barely more than 1 percent of the state population.

But this week, more than 65 percent of Washington voters cast their ballots against I-1098.

“The voters overwhelmingly agreed that this tax would likely be expanded,” said Scott Stanzel, Defeat 1098 campaign manager. “The fundamental issue in this fight was that people didn’t trust the politicians to not expand it to them.”

“The public very much wants to see governments try to get their fiscal house in order on the spending side and just make really concerted efforts at that before they tackle the tax side,” he said.

Washington voters showed rare political acumen in rejecting Initiative 1098. Politicians have proven incapable of leaving taxes at one place and always expand them. For example, millions of Americans are now subject to Federal AMT (alternative minimum tax) that was originally designed to tax a couple hundred wealthy citizens living off dividend and interest income.

Hopefully political leaders across this country recognize their constituents’ interest in reducing government expenses and taxes.

By the way, Washington attempted passing an income tax by ballot initiative in 1932, but it was ruled unconstitutional by the state supreme court in 1933!

Here is the main ad in favor of the initiative:

Here is the main ad opposing the initiative:

The economy during the Great Recession rivals the collapse during the Great Depression. Never has the economy contracted this much and the recovery been this slow. Millions of Americans resorted to unemployment benefits to make ends meet, many for the first time in their lives.

The most shocking aspect of the Great Recession is the slow recovery and the length of time people are unemployed. In fact, Congress extended unemployment benefits to 99 weeks.

60 Minutes interviewed the “99ers” in San Jose, California, the high tech capital of Silicon Valley.

Many of the 99ers are people in their prime earning years of 40’s, 50’s, and 60’s. They should be stocking away excess earnings for their children’s college fund and their retirement. Instead, they are liquidating their 401 K’s and IRA’s to pay their mortgage and grocery bills.

The economic crisis in Silicon Valley is so severe that many people with PhD’s, Master’s and college degrees find themselves unemployed for the first time in their lives. Instead of saving for retirement and paying payroll taxes to fund the government, they are drawing benefits from the government, resulting in a trillion-dollar annual budget deficit.

One of the best quotes:

[The 99ers are] too young to retire, but too old to rehire.

After watching this video, ask yourself these questions and comment on your thoughts below:

  1. Who would you hire of the people profiled?
  2. Do you believe these people will ever again make $70,000, $100,000, or $200,000 per year?
  3. This the high unemployment college educated workers due to the global economy?
  4. Is $100 billion on 99 weeks of unemployment benefits money well spent by a government with over $10 trillion in national debt?

Source: 60 Minutes – Unemployment Benefits: The 99ers

Swedish academic researcher Hans Rosling uses augmented reality to demonstrate the growth in health and wealth in regions and countries over the past 200 years. His engaging presentation takes all of 4 minutes, yet there probably isn’t a better description of health and wealth per country as measured by the life expectancy and income of its people.

Using 120,000+ bits of data and augmented reality, the energetic professor takes us through the last 200 years of global history. Our recent past is filled with spurts of growth, war, and political repression or freedom, all of which lead to health and income disparities fluctuating over time. No one else makes statistics quite as awe-inspiring as Rosling.

Rosling has continually struggled to find new ways of presenting data that speak to and engage the audience. This is one of the best graphical illustrations of stats I’ve seen. It is a must watch.

Hans Rosling’s 200 Countries, 200 Years, 4 Minutes video is part of a program on BBC Four called The Joy of Stats. The Joy of Stats takes viewers on a fascinating ride through the wonderful world of statistics to explore the remarkable power stats have to change our understanding of the world.


If you ever wondered about Quantitative Easing, how it works, and how it affects us, just watch this 7-minute video: Quantitative Easing Explained in under 7 minutes in a way anyone can understand.

My favorite quotes:

“Why do they call it quantitative easing, why don’t they just call it printing money?”
“Because printing money is the last refuge of failed economic empires and Banana Republics, and the Fed doesn’t want to admit this is their only idea.”

“Because they say we have the deflation and the deflation is very bad.”
“What is the deflation?”
“The deflation is when prices of the things we buy go down.”
“Isn’t that good. Doesn’t it mean people can buy more of the stuff?”
“Yes, but the Fed said this is bad!”

“The only thing that I can see that is deflating is the Fed’s credibility.”
“Did they have a lot of credibility to start with?”
“Because the Fed has been wrong about every major economic development in the past 20 years.”

“So the Goldman Sachs can front run the Fed and give them the worst possible price on the Treasury Bonds?”