Monday, November 13, 2006

Leveraging America's Prosperity

Leverage is not a dirty word. It increases returns to shareholders. Modigliani & Miller showed that you can have as much of it as you want, and it doesn’t matter because your capital structure doesn't affect cashflows to the firm. Sophisticated investors, when they believe they can manage the variance in returns and avoid bad scenarios, can’t get enough of it. Leveraged buyouts are all the rage right now because they make tons of money for the equity holders. It can make a trade that is otherwise not worth an investor's time into a very profitable one. Long Term Capital Management would have had pitiful if it wasn't for their immense leverage, but instead they had returns that exceeded 50%.

So why is leverage bad when the U.S. government engages in it? Much ado is made about our ballooning deficit, and to me it just looks like we're leveraging the United States. We're increasing the returns to our shareholders (citizens) by piling on debt. If the government borrows more, and spends more, its citizens enjoy a higher quality of life (in other words their equity in the country has a higher return).

Now, of course, this necessitates either higher tax rates in the future to pay the debt or constant tax rates with faster growth to generate more revenue. This is the point where the purpose of those borrowed funds becomes important. Not all spending was created equally. Investing those borrowed funds into education, R&D, and infrastructure allows the country and everyone in to be better off. Investing those funds into things that yield no increases in productivity and no increased growth in the future makes later generation worse off, but probably makes us better off today. And after all, isn’t a dollar today worth more than a dollar tomorrow?

Leveraging (deficit), and investing those borrowed funds into something that allows us to increase growth can do more harm than good if the right investments are made. If however, the money is invested into depreciating assets (such as missiles, which have a salvage value of 0 when they blow up) then the deficit may be bad (but will still increase prosperity today).

Some would even argue that it would be an act of gross mismanagement for our country not to leverage when the cost of funds is low (interest rates that by historical standards are still extremely low).

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Wednesday, November 08, 2006

Et Tu Brutus?

It seems like everyone has turned on Secretary of Defense Rumsfeld, including long-time supporter President Bush. However, I have to question the logic of what seems a like a punitive move by the adminstration.

Lets be frank, Rumsfeld was not the most well-liked figure. It's fairly obvious that Bush asked for his resignation, this was not Rumsfeld's idea. But why didn't Bush ask for his resignation before the elections? A resignation by Rumsfeld prior the elections might be seen as an acknowledgement by the adminstration that there are problems in Iraq, and that the adminstration wants to resolve them. Many voters cited the Iraq war as a major reason for their displeasure with the Republicans.

Why fire Rumsfeld after the damage has been done? Bush may have been seen as "changing the course" but I think many Americans would take this as a welcome sign of an adminstration that wants to correct its shortcommings. Instead, President Bush staunchly supported Rumsfeld, while people's displeasure with him and the war in Iraq mounted, culminating in last night's defeat.

Would the Repulicans have benefitted from ousting Rumsfeld prior to the elections? Comment below.

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Democrats Mudslide Into Power

Well, the Democrats have taken the House and most likely the Senate. Does anyone have any predictions for how the next two years will pan out? I think a graph of President Bush's use of his veto stamp would look something like this:

My prediction is that these following two years will prove more difficult for the Democrats than the last two. They control the legislature and will be expected to achieve results, a difficult task if Bush vetoes every bill coming out of Capitol Hill. More dangerous, is that they could easily get mired in the politics of revenge. The Republicans refused to engage in bipartisan law-making over the last six years, can we fairly expect the Democrats to forgive, forget, and embrace bipartisanship? Doing so will be a bitter pill for the Democrats to swallow given the complete lack of bipartisanship in the past six years. You won’t find very many bills where almost all Republicans did not vote along party lines.

And this lack of legislative progress can have very real political consequences for the Democrats two years from now. If no significant issues or problems are addressed until the 2008 election, it’s almost certain that the GOP will try to paint the Democrats as ineffective. The GOP will claim that they were given a chance at power, and didn’t accomplish anything! How can we vote for them again in 2008? They’ll conveniently ignore the impossibility of passing laws over a constant veto.

So while they’re stuck in the coming mire, if they want to have any hope of maintaining their majorities, and possibly winning the presidency they need a strong platform with strong rhetoric. What is the Democrats’ plan? We usually expect the victor of our elections to stride arrogantly onto the stage proclaiming their plan for the next two or four or six years. Why haven’t we heard any agenda yet from the Democrats? It’s never too early. They have the House majority, they’re likely going to have the Senate majority. America wants your ideas, your plan, Democrats. If you stride towards great achievements and stymied by the executive branch you can at least tell us you tried. But, if you want to repeat 2006 in 2008, you better show America your plan.

On an unrelated question, anyone think the Democrats will try to field a Clinton/Obama ticket?

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Monday, November 06, 2006

When Did We Stop Being a Free Country

I have a question that has been bugging me. Has America stopped being a free country? Our freedom is defined by our collective ability to shape the course of our nation's history through our electoral process. Presumably, if we do not like the way the country is going, we show our disaffection with our elected officials by voting them out of office if they don't change their act. If we lose this power we are no longer free, instead subject to the whims and wants of our representatives.

In our haste to modernize, we've put the fate of our elections into electronic voting machines that have proven all too easy to manipulate and subvert. You can see just what the fuss is about here:

This popular tech blog chronicles the problems with electronic voting machines that range from being able to access their memory cards with a standard mini-bar key (I wonder if I can get a soda too while I'm at it!), to the machines picking their own candidate for you (troublesome when all the major electronic voting machines have strong political ties), to the ability to hack these babies in 4 minutes flat.

The most worrisome aspect of these inept machines is the aforementioned Republican ties of the companies supplying the machines. Prior to the 2004 presidential election, Walden O’Dell former CEO of Diebold (an e-voting machine manufacturer) said that he is "committed to helping Ohio deliver its electoral votes to the president next year." Mark Crispin Miller, an NYU professor, has spoken vocally on the topic of stealing elections. Anyone interested in finding out more can do so by googling Mark Crispin Miller or Diebold's political ties to their heart’s content.

My point, however, is not to rehash old news about election impropriety. It is to offer a pragmatic solution. Engaging in election tomfoolery or outright fraud should constitute treason. Electing our representatives is the fundamental principle underlying the United States of America. If we cease to be “a government for the people, by the people” then the U.S.A. itself ceases to exist. And those who take away this right from Americans are guilty of destroying our Union. Anyone interested in tampering with an election, whether they be a poll worker or a corporate executive, will think twice knowing they can be charged with treason.

Finally, I’d like to leave you with a question and a quote. Election misconduct is an act as old as elections themselves (see Deliver the Vote: A History of Election Fraud, an American Political Tradition-1742-2004 by Tracy Campbell). So my question is, have we ever been free? The quote that I leave you to ponder as you head to the polls tomorrow is:

"Those who cast the votes decide nothing. Those who count the votes decide everything." -- Josef Stalin (Attributed to Stalin, but probably never actually uttered by him, a powerful thought nonetheless)

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