Velib: The Story Continues (or at least it limps forward....)

This story at the French newspaper Liberation brings us up to date on the Velib, that ingenious idea of public transport that has taken hold of Paris, Lyon and other cities of France. Rumor has it that even Chicago is interested.

At first, everything was beautiful in the best of worlds. People lined up for subscriptions to this inexpensive and innovative way of getting around the city without having to find a parking space for a car and without polluting, except for one's own CO2.

See the story behind the Velib in chronological order, at:

- This post
- This post
- This post
- This post
- This post

Just last week, I heard about the first death, a woman who was clipped as she turned a corner and didn't survive the squeeze with a large truck.

Now, we get this Liberation story:

"Never content, those Parisians? Defective Velibs, overloaded parking stations, problems by the dozen... The grey bicycle is still popular, but the discordant notes are beginning to irritate. There's some serious grumping going on at the Velib parking stations.... This one looks full... but in fact, it's empty. Typical scenario, although subject to multiple variations: you take a bike from its stand and at the first push on the pedal you realize that the chain has been torn off. You wait a few moments for the system to recognize that you've replaced the bike in its stand, all the while massaging your tibia bruised by the brutal snapping back of the pedal. Next try, the first few yards all goes well, but on the first straightaway another failure, you discover that the wheel is bent. Or maybe it's the gear shift that is broken. Or the tire flat, the headlight busted, the brakes worn out... Discouraged, you push your bike back to the station, hook it back up, turn the saddle backwards to signal the problem according to the unwritten rule, and then, nonplused, you turn to your old standby, the subway...."


[Thanks to liberation.fr and DR for this photo.]

Now, only a few months after Velib's heralded debut, there are enough gripers to have their own website.

Paris's City Hall and Monsieur Decaux, the partners in this venture, have hired 200 technicians to repair all the little problems. In Lyon, 10% of the bikes are put out of service each year. In spite of this, there are 130,000 subscribers and 6.7 million users in Paris alone.

This story isn't over yet.

Talkin' Tough: "We'll give you your 25 points, but don't expect any more."

This is what the Fed is trying to communicate in its FOMC statement release, just now appearing in my e-mails.

The crucial language is this:

"The Committee judges that, after this action, the upside risks to inflation roughly balance the downside risks to growth. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act as needed to foster price stability and sustainable economic growth."


[Thanks to Colbert and theweeklydonut.org for the photo.]

Let the markets be forewarned.

On the other hand, how much would you like to bet that the Fed will pony up any credit the whiners need, as soon as push comes to shove.

A Case in Point Against Price Controls

One death so far in China, where price controls have created a volatile situation in gas lines. Lest we ever forget, we must read this Reuters article about the latest example of what happens when markets are not allowed to function freely.


[Thanks to matrix.millersamuel.com for the photo of a past US price control situation.]

For those who are still upset at the oil companies, please look at this example closely. You will see the workings of a shortage caused by price controls close up and personal.

Even the Chinese themselves are aware of the cause of the problem:

" 'The crux of the problem is the state-owned enterprises... you see the remaining contradictions of the state sector in the market economy,' said Joseph Yu-shek Cheng, political science professor at the City University of Hong Kong.... Underlining the key role of pricing in the shortage, shipping companies in badly hit Zhejiang province said they had no problem securing supplies if they were willing to pay above-market prices to independent traders.... With current retail prices most plants only break even when crude is around $65 a barrel or lower, so soaring markets have forced many independents out of the market.... But a Sinopec official told Reuters on Tuesday that its largest refinery will switch off a crude unit in November and process 3 percent less crude than the previous month, sending a signal to Beijing in a move that could worsen the shortage." [Why should they continue to lose money?]

It looks for now like the US population gets it and is not crying out very loudly for price controls here. But even if the price at the pumps goes above $4.00, we should simply look here in China to see why this is not price gouging.

What is the cause of the rise in price? Turmoil in oil-producing countries and exploding demand from developing nations. Both are temporary situations, and as supplies catch up to demand, prices would be expected to return to their normal level just as they have in the past. Another factor is the devaluation of the dollar, otherwise stated as the excessive increase of the American money supply over its usefulness in the marketplace, due to central bank intervention in the credit markets.

This last is where we should direct our anger, if my suspicion of such mismanagement is borne out by the evidence. But this is a subject for a separate post.

Oh, So That's Where They're Getting the Mortgage Money

If you're like me, you've been wondering: Okay, if credit markets have seized up, where are these new mortgages and refinancing deals getting the money? Why isn't Countrywide going bankrupt? I know they've received a $2 billion infusion from Bank of America, but that can't be enough.

The answer is, it's coming indirectly from you and me. Our tax dollars have just become collateral behind newly created bonds that the government has made available to the likes of Countrywide.


[Thanks to solomonsrose.com for the image.]

When companies like Countrywide found in August that they could no longer continue their operations for lack of funds to borrow, the government got busy trying to find a way to unlock the situation, and they found one. The solution they hit upon is to open the wallets of the Federal Home Loan Banks and of two semi-government entities, Freddie Mac and Fannie Mae.

These banks and mortgage institutions are basically government-guaranteed semi-private companies that deal in mortgage loans. Heretofore reticent lenders believe that the government (i.e. your tax dollars) are behind these companies. This means that these entities will manage to sell bonds to these reticent lenders, whereas other market operators won't be able to. With the cash in hand from these bond sales, the government can offer hard-to-find money to the real estate lenders who need it, backed by your and my guarantee. Without this deal, Countrywide might be dead by now.

This brings us to the question of whether or not the government should be saving the hind end of those like Countrywide who made bad business decisions. Personally, I think not, because it creates what economists call "moral hazard." In other words, the government is acting on what we believe to be good intentions (saving the general economy), when in fact we all might be better off if they just let Countrywide (and numerous others) bite the bullet (perhaps the economy could withstand it, and even should withstand it).

But the government does not like to be in power when things go awry; so they fix it, get the credit for fixing it, and then allow a changing of the guard, so that the next government can take the blame for the more long-term fallout (potentially: inflation through excessive credit creation, the survival of unsavory business practices like the poor-quality lending that went on up until 2007 and the housing boom/bust, and a flight from the dollar).

The details are explained in my previous post, and in this article at Bloomberg by James Tyson and Jody Shenn.

Other problems can also arise from two different sources: First of all, the semi-governmental companies who are doing the lending were themselves already overextended before this new lending began. All of them have been readjusting their accounting and books to correct severe past mistakes, and are only recently back in the clear (or at least we believe they are).

Secondly, if the new loans default, the only remedy will be for the government to spend your tax dollars to cover the hole.

Opinions differ about the degree of risk involved; but personally, I hate it when someone promises to pay their debts with my money, don't you?

London Sees It; Why Don't We?

Why is it that we get good sense out of England, but not from here? This Economist article says pretty much what I think and have been saying for months.

1. The Fed's monetary policy was too loose, too long.

2. The Fed's macro models should take asset prices into account.

3. The Fed did a rotten job of policing mortgage broker policy and bank risk-taking, even though they saw this coming.

Frustrating.

Kroszner's Testimony before Congress: Just Jawbone Exercise

Federal Reserve Board Governor Kroszner always manages to say something annoying. In his congressional testimony in support of the Mortgage Reform and Anti-Predatory Lending Act of 2007 (Congress's idea of "doing something" about the subprime mortgage mess), Kroszner says a few things that cry out for my commentary. Here are a few examples:

"As I have discussed, the [Federal Reserve] Board supports the goal of ensuring that consumers do not receive unaffordable and abusive loans." Well, isn't that a relief? That's all we need, a Federal Reserve in favor of foreclosing all of America.

"The Board firmly believes that lenders should give due consideration to a borrower's ability to repay a loan, before the loan is extended." Oh, I hadn't thought of that. Shouldn't every Tom, Dick and Harriet be able to own a home, no matter what their financial circumstances? (For those of you who would answer yes to that question, I'm being facetious.)

"A nationwide registration and licensing system for all mortgage loan brokers would help limit the ability of bad actors to move to a new state after having run afoul of regulators in other states." I doubt that. Milton Friedman makes a better case than I can here against licensing arrangements. See his Capitalism & Freedom, Chapter IX. Kroszner should read it.

"The Mortgage Reform and Anti-Predatory Lending Act of 2007 would require originators to present borrowers with loans that are appropriate to the borrower's circumstances." Is Kroszner saying that we need legislation for this? He must be joking.... No, he's not. That's the scary part.

"The Mortgage Reform and Anti-Predatory Lending Act of 2007 would hold securitizers and loan purchasers ('assignees') liable for the actions of mortgage originators." Aha. But here we have the crux of the matter. Who's responsible? Who should be left holding the bag?


[Thanks to ferretrescue.ca for the image.]

Securitization [the bundling of loans into bond-like assets that can be sold on the open market] is the best thing since sliced bread, there's no doubt about it--with maybe one hitch. I have always questioned whether it doesn't introduce too much distance between loan originator and ultimate investor. Securitization unlinks the creator of the loan from the responsibility for the loan's reimbursement, thereby removing all incentive to do the job correctly. It puts too many intermediaries into the equation.

It used to be that a family would approach a local bank, present their work documents and credit history, go through an interview, and fill out an application to receive a loan from that same bank for the purchase of a house in the neighborhood. The future income of that bank used to depend upon the family's timely reimbursement of this loan with interest. Therefore, the bank had every incentive to see that the family could indeed afford the home based on a solid job, good credit, and sufficient income relative to the price of the house.

With securitization, you take away the loan originator's incentive to limit lending to good risks. In fact, today anyone can sell loans to anybody, and the loan seller can resell this loan to investors through complicated legal instruments that obfuscate responsibility. Banks and mortgage brokers' loan repurchasing customers don't sell the loans themselves; they have set up intermediaries that dilute responsibility for the repayment of the original loans, plus the securitized loans are then resold, and perhaps resold again to the derivative markets, a highly speculative environment where risk is the name of the game.

The end investors have no idea what precise amount of risk is involved with the mortgages they are purchasing. The naive ones accept the loan originator's assurance that the risk is minimal, and the speculators don't really care because they believe that they can sell the instruments before anything bad happens.

By removing the consequences from the actions of the loan originators through the securitization process, the loan salesman has no incentive whatsoever to do his homework. Once he has sold the loan to the intermediary who will sell to an investor, his work is done, his commission is paid, and he can go on vacation in Hawaii.

This is the fundamental problem with securitization. Congress would now like to legislate this problem away; but they cannot defy market rules. Too much distance between the ultimate holder of the mortgage and the mortgagor prevents normal market incentives from doing their job and now will require great government expense to police and adjudicate. The sad part is that the market would do all this for free, if the liaison between mortgagor and ultimate mortgagee were tighter.

And why did securitization of loans begin in the first place? Because banks are so regulated by the federal government that they can't function anymore. There is little competition in the industry at present, and banks can't offer sufficient interest to attract much investment. The open market, however, can, and so securitization looked like a neat way for banks to get back into the lending business. (But that's another topic for another day.)

What's Wrong with Core CPI?

Bernanke says the following in a recent speech:

"[A]lthough energy prices have been volatile, indicators of the underlying inflation trend, such as core inflation, have moderated since the middle of last year."

Yes, central bankers are watching core CPI at 2.3 percent, more closely than CPI itself, which is at 3.6 percent. (Source.) I disagree with their assumption that core CPI is a more valid measure of price movements and hence of the soundness of monetary policy.

Aren't they forgetting a principle of economics? As Milton Friedman has pointed out several times, people have a fixed amount of disposable income, and they can save some of it (at the moment, there is very little saving going on), or spend it. This means that the disposable income spent on stuff like gasoline, computers, health services, clothing, entertainment, etc., is a zero sum game.

In other words, when gas prices rise, and unless a consumer decides to cut down on gas consumption--and he doesn't always have this choice, he'll have to spend more on gas and will then have less to spend on other things (the core CPI items), which will put downward pressure on the price of those items.

If the Fed is reading core CPI instead of CPI, they are reading a distortion, i.e. only half of the story, without taking into consideration the pressure from the other half.

How easy was that? I just shot a hole through our Federal Reserve's monetary policy.


[Thanks to winsdartboards.com for the image.]

Where Have I Seen This Before? Remember Hoover's National Credit Corporation?

Reuters published this article on October 15, that brings back memories of the 1930s. According to the article, "Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said." The article says that Citigroup, JP Morgan Chase, and Bank of America are in on these discussions, as are government regulators from various countries including the US.

The funds would be used to "bail out" SIVs ("structured investment vehicles," complicated financing instruments that would scare the pants off any CPA, but that some of our biggest banks have been trading with abandon).

According to a document published at the American Institute for Economic Research back in 1995 (EEB, September 1995), Herbert Hoover tried to get banks to do likewise in 1931 and form a private corporation (the National Credit Corporation or NCC), "to help banks in need and to loan against the assets of closed banks, so as to melt large amounts of frozen deposits and generally stiffen public confidence." [Quoted from Hoover's memoirs about the 1929 Great Depression.]


[Thanks to historicalvoices.org for the photo.]

Unfortunately, Hoover didn't stick to his guns about keeping the government uninvolved, but rather opened Pandora's Box by suggesting that, if his NCC idea didn't work out, he might restructure the WFC (War Finance Corporation) so as to take over for the NCC if necessary.

Well it didn't and he did. He restructured the WFC as the Reconstruction Finance Corporation (RFC), and that got warped by the New Deal into some of our back-up lender-of-last-resort institutions of today (the FDIC, PBGC, etc.)

What Hoover let out of that Pandora's Box was the Genie of the taxpayer as the ultimate payor of the errors of legislators and bankers. They will find it difficult to get that bad idea back into its box.

The G-7 is meeting this weekend. Will they discuss the present credit crunch? You bet. Is this making the markets nervous? Yup. Dow's down 350 points. That, plus the Pakistan, Kurdistan, and Iranian unrest is making for some unsettling times.

Thank goodness, the business cycle is still relatively strong, and all of this does not coincide with high unemployment and a negative GDP. But in the end, no one can predict this one, just as they couldn't predict any of the past sticky situations. We'll just have to ride it out like all the others.

Big Day Ahead Tomorrow for France

Just when I thought I had the latest news about Velib (France's new public transit system, consisting of bicycles you can use all around Paris, Lyon and other cities, for a monthly fee and a small usage charge), I now learn that Velib personnel may go on strike with the rest of France tomorrow, according to Les Echos.


[Thanks to assoc.orange.fr for the photo.]

I'm exaggerating; not all of France will be on strike. In fact, according to the polls, 55% of the country is against this one, and only 45% for it, especially because it involves transportation and will immobilize everyone in the main cities. It's a real nuisance. Trains, subways, and buses are all stopping tomorrow.

President Sarkozy's election and platform have riled the unions, because it makes them Public Enemy Number One, and rightly so. The unions control much of the public sector and are able to blackmail the country every time the government even thinks about taking away some of their unrealistic privileges (early retirement, fantastic pensions and benefits, etc.)

Sarkozy tried to sit the leaders down for a reasonable discussion back in the spring, but that didn't work; so this summer he upheld his promise and pushed through some badly needed legislation that will put a crimp in their style.

On August 21, 2007, the Parliament passed a law with the following terms (see the original French write-up):

1. Reinforcement of dialogue between the parties. Employers and union members must negotiate before a strike may be declared. The unions have until the end of 2007 to draw up the terms of any such future negotiations.

2. Minimum guaranteed service. Local transport authorities will determine what minimum transportation services must be provided during any strike. Employees that wish to strike must declare their intention at least two days before; and after eight days of strike, striking workers must have the option of voting by secret ballot whether or not to continue.

3. Notice. The law provides that a transport company must inform customers of any forthcoming strike, and the company may be held liable for reimbursement to customers if an "adapted transportation plan" is not put in place (whatever that is).

4. End of workers' indemnification. Days of strike will no longer be paid. (Can you believe that strikers are paid a daily stipend in France?)

This pretty much puts an end to the abuse of the striking privilege by French labor unions.

Tomorrow will be the big day. Watch the news. I wonder how Sarkozy will handle it. It's his first and biggest test. If he wins this one, he can do anything.

More on the Velib Story

The plot thickens. I originally reported on this new idea--what I thought was a French one--for reducing congestion and pollution in larger cities. It's called "Velib." This is the first post, and this the second.

It's basically the introduction of a new mass transportation system in Paris, whereby you can rent a municipal bicycle for a euro or two, take it pretty much anywhere, and leave it at another bike stop.

Now I learn here that this idea was actually developed by Clear Channel, a company based in Texas, back in 1998. They started it in Rennes, France. Then they went into Norway and Sweden. Then Dijon, France. And most recently Barcelona, where's it's called "Bicing".


[Thanks to bicing.com for the photo.]

And what's next? Washington, D.C.

Monsieur Decaux, their French competitor, has now gotten "Velib" into Paris, Luxembourg, Vienna (Austria), Cordoba, Gijon and Sevilla (Spain), Brussels (Belgium), Lyon , Aix-en-Provence, Marseille, Mulhouse, Roen, Besançon, and Toulouse (France). He is now claiming to be Number One. He had said in a video I watched that it was his original idea. Now I see there is debate about that.

Clearly, this has become a race to see who can capitalize first on metropolitan visibility. (Both companies are into mass marketing.) With the participation of the municipal governments of each city, there's no way these projects can fail; however, they can become subject to government mismanagement and disappear, just the way they came.

I hope not. Their private-sector partners will probably see to it that things are done in an orderly fashion, at least as far as the bike services go. They will eventually end up with a monopoly of all of the prime-location signage on the bike service stations, just as they now hold all the signs in the subways, bus stops and other municipal spots all around the world. We know they'll take care of that aspect of it, which is, after all, where they'll make their money.

Although I love the idea (who wouldn't like cleaner cities and a little exercise at the same time?), I can't rid myself of an uneasy feeling that two giants are maneuvering themselves into the city-government bird's seat here, with our blessings through our elected state officials. We'll all win, I guess; but some more than others. The big payers will not be the bike riders; it'll be the city dwellers. This is what always happens when you have collusion between the state and a private cohort. (Think cable TV companies, hard-line phone service companies, water and power companies, public works companies. In California, you can add earthquake insurance companies, gas companies, electricity providers, and what am I forgetting?)

Stay tuned for the next update.

What Is There About an Island that Encourages Freedom?

Here we are, Americans most of us, thinking that we live in the most economically emancipated country in the world. If you are not American, and something other than British or French, you know this; if you're British or French, you contest this, because you think Britain or France is the most emancipated country in the world.

I am, of course, writing fingertips-in-cheek. For some cold, hard statistics and real scientific parameters, let's look at this article over at Cato. It makes us jump right off our high hat.

The study is called Economic Freedom of the World, and we learn that the most economically free countries are:

1. Hong Kong
2. Singapore
3. New Zealand
4. Switzerland
5. A tie between Canada, the UK and the US


[Thanks to cyborlink.com for the image.]

The first four are tiny islands of a sort, if you can count land-locked Switzerland as an island in the middle of that sea of European Union members. And actually Hong Kong, too, is not just the island itself--detail that I had ignored up to this moment. The whole territory is called the "Hong Kong Special Administrative Region" and includes Hong Kong island, Kowloon, the New Territories, and the Outlying Islands. But you get my point.

Now I know my blog wanderings are not scientific; still, I wonder if there might be some explanation for this. Yes, the scientists are going to interrupt me in my ramblings to point out the examples that disprove my implied hypothesis. Cuba is not even mentioned in this study because it is the antithesis of freedom (a hermetic dictatorship) and therefore no data could be obtained to study it. Brunei and Bahrain are kingdoms. Japan only made number 9. But still.

So I continue. Here are the questions that come to mind.

1. Do freedom-minded people move to islands? Definitely true in the case of Hong Kong and Singapore; maybe also of New Zealand. Switzerland, no; because up until fairly recently, they were very tough on immigration, and these past few years a xenophobic minority is increasingly vocal.... But wait. How was Switzerland formed? Weren't they a mountain people able to survive by their own wits, some of whom, resenting the increasing proximity of other-minded folk, retreated higher and higher to be among themselves? There's something to this....

2. Do freedom-loving people tend to resist encroachment? Definitely true for Hong Kong and Switzerland, and maybe the other two.

3. Do people who prefer to benefit from less-free but more generous government policies tend to leave islands and move to those more generous countries, to become citizens there and vote for even bigger governments? That's too complicated to answer, but it would be fun for some geek to research it. The answer is not a given. On the contrary, it would seem that having the gumption to get up and move takes initiative, entrepreneurship and a yearning for freedom from something.

4. Do the powerful of surrounding nations find a reason to allow these small "islands" to exist in peace, for their own profit? Hmm. Definitely true of Hong Kong and Switzerland, and probably Singapore. Monaco comes to mind, but the Report doesn't include them, probably because they're almost part of France; and there are others.

I'll stop here, but you get the idea. I'd love for someone to research why other countries have done better than we have at preserving the very notions that were the basis for our creation as a nation.

Citigroup Sees Gold Above $1,000

For the obvious reason (its dollar price just hit a 27-year record), gold is back in the news. As far as I'm concerned, it never went out of fashion, even though it did go out of the news.


[Thanks to midstateoffice.com and blogmd.samblackman.org for the image.]

Read this article by Jason Hamlin at Seeking Alpha. It quotes a Citigroup statement, in turn quoted by Ambrose Evans-Pritchard at the Telegraph.

For me, it's just what I've been hearing at the gold-bug websites for months; but to get it from Citigroup puts a whole new shine on it.

Remember my mantra:

You can take gold out of the standard, but you can't take the standard out of gold.

We actually have a de-facto gold standard, even though governments tried to take away their stamp of approval in 1971. It's just there; it won't go away in spite of the money managers' efforts. It will always be a haven for poor management of currency. And it looks like the managers are screwing up again.

Central banks have been selling their gold reserve stocks, but the people have been buying it up faster than the central banks want to sell it, or than the existing miners can mine it--and this in spite of the fact that physical gold pays no interest (on the contrary, you have to pay sales tax when you sell it), ETFs (physical gold funds) have management fees, and gold stocks pay very little dividends.

So why would people buy it? Because they fear the old Boogeyman Inflation is coming back to town.

How high will gold go? That depends on whether the central bank money managers can get their credibility back.

Can they? The answer depends on which writer you read.

Some are saying that the US dollar cannot ever drop out of favor as the world reserve currency, for the reason that the US is still the most ... well, if not free, at least wealthy and powerful capitalist market in the world (although Singapore, Hong Kong and Australia are stronger contenders in the freedom department, according to the 2007 Heritage Foundation Freedom Index).

And we don't know what the Fed will choose to do. It may not feel obligated to lower rates much more. If it doesn't, it would regain the world's confidence.

Others are saying that the Fed will continue to lower rates and pump credit into the system, which will cause another flight from the dollar like the one we saw in 1980. Eventually back then, the US straightened things out; but being as this is a repeat performance, this second time around the world could lose faith in the US capacity to stick to the straight and narrow any better than its nearest competitors.

As Evans-Pritchard says, however, the other relatively strong currencies (the euro, the pound, the Australian dollar, the Swiss franc, and a few others) aren't in much better shape and have problems of their own. So what we may get is a race to the bottom with currency devaluations (caused by excessive lowering of target rates) all over the world. In that case, the US dollar might regain its status through its comparatively quicker recuperative capacity; but that would be after a pretty nasty world event.

Fascinating times we live in.

"Good Morning. Your Bank Has Just Gone Bankrupt."

That was the message a friend of mine received today, when he went on line to do a transaction. Seeing that his Netbank website fell into the Ing system, he telephoned his bank immediately, only to be told the above news.


[Thanks to sheff.net.uk for the image.]

Nice way to drink your latte, no? Thank goodness, he didn't have over $100,000 in that bank, although his friend did. The friend can now look forward to hassling with the FDIC to get about 50% of what exceeds the $100,000.

This bank was apparently so small as to make little waves, which I think is a very good thing, given the times.

Whew.

And anyway, because Netbank didn't have any agencies in the street, there could be no videos of lines of worried depositors to send all over the TV. They have apparently suffered in silence, so to speak (if you can call that loud angry voice in my ear "silence").

I'm willing to bet that if they had been an ordinary bank, you'd have seen much, much more about this. Bernanke must be thanking his lucky stars, and hoping the damage stops here.