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Archive for December, 2011

Being an aging athlete is kind of a stinker. Partially it is because you know that your efforts, exertions, and dreams don’t matter much to anyone but yourself. Passion after all, is under rated at any age. As I watch my youth eclipse and my (limited) abilities fade, sporting participation miraculously remains one of the things that makes life worth living.

When I was boxing, I paid a few bucks to spar with real fighters, who mostly worked on their defense and tried not to hurt me. I had tried to get into the Golden Gloves competition, but was too old. So a couple of other white collar pretenders and I from Gleason’s Gym signed up to fight 4 round prelims at Madison Square Garden for $100 per round at the Friday night fights. We were gonna be contenders! The Monday before the event, I got a middleweight up and comer as a sparring partner. In front of his friends, I hit him with a terrific combination that knocked him down. Of course, he got right up, and knocked me senseless. I woke up with the endswell pressed to my nose wondering what the heck had happened. There followed not one, but two operations, to repair the septal hematoma and fracture that ended that phase of my crappy athletic odyssey.

Forget that I am not a naturally gifted athlete. That just doesn’t matter. I have tried to achieve a high level of competence in multiple sports. During my skiing phase, I went to race camp with the Mahre brothers, who won gold and silver medals at the Sarajevo Olympics in 1984. As Phil said to me, “you have world class attitude; it’s too bad you have virtually no talent!” When I tried to bet him $100 he couldn’t beat me by 2 gates on a race course; he wouldn’t take the bet. In the actual event, he beat me easily by more than 3 gates.

I decided to take up tennis again. It’s a sport that I excelled at as a Public Parks kid. Perhaps it might not be life threatening? I won the consolation doubles at the National 45s indoors at Snowbird. OK, it was like 5th place, but my partner and I had to win several tough matches to win that cheap crystal ball trophy. The next day, basking in a euphoric afterglow, I went skiing in nearby Park City. I  jumped off the moguls on double black diamond runs to dance in the sunshine of a spectacular Utah Bluebird Day. Unusually, I fell over. No problem, it happened occasionally. But this time, I fell across my Telemark non-releasable binding, and fractured my fibula right through the hard plastic boot. Ughh! That required a plate and six pins to repair.

Two seasons later, I was playing the National 35s grass courts (they were being held near where I lived, and I thought I might get lucky and steal a match). While serving for the first set against a pretty good local teaching pro who was not familiar with the grass court surface, I stretched for a backhand and…ouch! It felt as if someone had hit me in the leg with a racquet. My opponent came to my side of the court looking at me sadly as I said I was OK. “Sure you are”, he replied, just before I defaulted the match because of a ruptured Achilles tendon that was operated on two days later.

Now I was determined to play it safe. Just take my training conscientiously, and do nothing dangerous. Physical therapy, trainers. No more skiing or anything that would put me into a hospital again. Fast forward another couple of years to last spring. It was the 55s singles at the National Tennis Center at Flushing Meadows. I was playing just great (as well as could reasonably expected, and then some). It was the semifinals against the #2 seed, and I won the first set only to lose the second in a tiebreaker. My wife and one of my daughters uncharacteristically showed up for the third set to cheer me on. I was serving down 2-4, 15-40 and miraculously came back after some terrific play that surprised even me to win the third set 6-4. Despite the adrenaline coursing through my body, I felt a stabbing pain in my foot. I took several Advils and luckily came back and won the final the next day in straight sets. But my foot really hurt.

After a few weeks of limping around, a podiatrist diagnosed me with a Morton’s Neuroma. Several injections, expensive orthotics and some physical therapy didn’t eliminate the pain. It would only hurt a little at first, but as I continued to play, the pain increased . Hitting partners got tired of my asking to do only half court drills while avoiding full court play that pounded my foot with needle like sensations. I was advised to get an MRI to confirm the original diagnosis. (Of course my health insurance refused to pay for it.) The MRI showed that I had a plantar plate tear. Last week, I had a Weil Osteomaty to finally correct the problem. It was my 5th surgery from self inflicted athletic injuries.

To some people, my continuing cycle of injuries sustained in the course of sporting activity seems ridiculous and excessive. But I am already plotting the changes I will undertake to improve my game and avoid other injuries. In about six weeks, I hope to be back on a court. I might even be well enough to defend my title at Flushing Meadows. Life is good!

Owning one’s own home has been a part of the traditional “American Dream”. For the past 77 years, government policies have attempted to increase the percentage of Americans who participated in that dream. In 1934 the Federal Housing Administration (FHA) was established to provide loan guarantees to banks, and in 1938 the Federal National Mortgage Association (Fannie Mae) was set up as a means to securitize those loans in order to increase the amount of capital invested in the housing sector, as well as to increase the availability of mortgages to lower and moderate income families. Keep in mind that these programs began during a period of 25% unemployment and rising civil unrest that threatened government stability. Until that time, most mortgages were for relatively short periods, typically five to ten years, and required as much as 50% down payments. The new programs gave rise to the 30 year fixed rate mortgage (FRM), which until the 2000s and Adjustable Rate Mortgages (ARMs), was the standard American mortgage product, accounting for about 90% of mortgage originations.

For many years, FHA loan guarantees were primarily given for 20% down mortgages, and because of loan guarantee limits, were made primarily to lower and moderate income home buyers. It seems that no government program ever dies or sunsets, but morphs instead into some other grotesque monster. During the Clinton administration, the programs were tweaked to reduce down payments to 3.5% (or less), and loan limits increased to allow for the purchase of less modest homes. (Indeed, the current loan limit of $729,950 is roughly 3.5 times the new median home value today, making it hard to argue that the program advances social equality by providing benefits only for lower and middle income families.) These modifications gave rise to sub-prime loans, and greatly increased taxpayer costs for two reasons. First, unlike mortgage loans in virtually every other country, American mortgages are non recourse loans. In other words, a borrower’s liability is limited to their investment in the home, not to all their assets. And with as little as 3.5% equity, which is usually even less after closing costs are added to the principal amounts owed, any small drop in house prices puts the borrower “underwater”, owing more than the value of their home, with little penalty for defaulting on their payments. With the foreclosure process taking additional time, homeowners can default and still remain in their homes , sometimes for years, without paying. Recent research shos that defaults are significantly higher in non-recourse mortgages than when borrowers cannot just walk away.

As a result, Fannie and Freddie have already cost taxpayers $150 billion, and with trillions more on their balance sheets, will probably cost $220-311 billion before they are fully wound down. Incredibly, Americans own homes at lower rates than citizens in several other developed economies that do not subsidize their mortgage finance markets.


So why haven’t these incredibly expensive federal housing finance programs been effective in raising the level of home ownership in the U.S.? I believe one of the biggest reasons is that the 30 year fixed rate mortgage is the wrong product for today’s homeowners. The only other country in which this product is regularly offered is Denmark, which has a lower level of home ownership than the U.S. If we look at the types of mortgages used in other countries, we see very little in the way of long term fixed rate products.

The primary justification for FHA support of the FRM  is that it offers payment certainty and stability. But the average duration of FRM products is only about 5 years. This is because homeowners rarely stay in one home for 30 years, and because the FRM offers borrowers a one way option to prepay the loan without penalty, converting FRMs into a downwardly adjustable rate mortgage. When interest rates are falling, and prices are rising, this situation is stimulative to an economy, as homeowners refinance into lower cost mortgages, freeing up new cash to spend. Homeowners are encouraged to think of their homes as piggy banks rather than a permanent store of value, negating the intent of government policy. Inserting itself into the housing finance equation in furtherance of increasing home ownership can only be justified if homeowners are eventually able to retire in their own homes, free and clear of encumbrances. Otherwise, why not just subsidize all low and moderate income housing, rental or otherwise?

The flip side is that like other fixed income products, mortgage rates and home prices move in inverse directions. When rates are rising, or prices declining, this is a cost to investors in fixed rate mortgages. The value of their collateral is falling, and borrowers lose value in their assets. As the value of equity drops and the mortgage exceeds the collateral value, underwater homeowners may be unable to sell their homes. In situations such as those today, when long term rates are historically low and unemployment is high, underwater homeowners may be unable to refinance to take advantage of the fall in rates, move to right size their consumption of housing, or move to take advantage of new job opportunities.

Because of the one way optionality embedded in FRMs, these mortgages have higher rates than non-callable mortgages of about 50 basis points. Since not all mortgages are prepaid, those that hold their mortgages subsidize those that refinance. Those who don’t exercise the option as rates fall are presumably less sophisticated borrowers intimidated by the process or perhaps are credit impaired, so those most needing the benefit of refinancing are least able to take advantage of it.

Longer term FRMs have higher rates in most interest rate environments than mortgages with shorter term fixed rates. So even as government policy encourages homeowners to take on long term fixed rate loans that they do not need for pricing certainty, they increase the cost of mortgages. Think of those home buyers from 2005 and 2006 who paid top dollar for their properties and financed them at much higher rates than today. If they had financed their purchases with shorter term ARMs, they would have had automatic decreases in their payments since, lessening their losses and perhaps lowering defaults.

The government needs to get out of the housing finance business. Our policies are costly, ineffective and unnecessary. Freddie and Fannie should be wound down and/or privatized completely without any federal support. Private banks and finance companies should be allowed to completely take control of housing finance. They will quickly change the products offered to be of shorter term fixed rates regularly adjustable in the longer term. Those who need, or want long term rates should pay for them. Most home buyers will want a period of certainty, but they will be better served in an era of uncertain markets to have floating rates for the longer term.

The world at the moment seems focused on the European sovereign debt crisis and the very real potential to send most of the developed and developing world into another severe recession. But the greater threat to global security is the fact that Iran is almost certainly continuing to develop nuclear weapons.

President Obama has tried to convince Chinese President Hu and Russian Prime Minister Medvedev to support increased sanctions on Iran to prevent this development. But when have sanctions ever worked to deter a sovereign nation from pursuing the acquisition of nuclear weapons? Libya is the only candidate to fill that bill, and the clear message to Islamic dictatorships from the execution of Colonel Qaddafi is that the lack of nuclear weapons allows foreign powers to intervene in your domestic affairs with relative impunity.

The State Department states that all options are still on the table. But does anybody believe President Obama has the political will to initiate military strikes against the Iranian nuclear program? It seems that the development program is widespread and heavily secured. Even though Israel has the political will and desire to strike militarily, it does not have the requisite depth and breadth of capability to delivery a crushing blow to the program’s widely dispersed facilities. The Libya campaign illustrated that it will require the U.S. military to do the job. Although many of the air attack sorties were conducted by France, the U.K. and other coalition partners, their efforts were directed and coordinated by American AWACS planes, and were undertaken after the U.S. had sent more than a hundred cruise missiles in to destroy the Libyan Air Forces command and control facilities.

If Hitler had possessed nuclear weapons, is there any doubt he would have used them? Iran’s leaders have stated repeatedly that they are willing to sacrifice much to rid the Earth of the Israeli state. Very soon they will have the capability to make good on their threats. Iran suffered more than a million casualties in it’s eight year 1980s war with Iraq, including many near suicidal human waves of youths sent to clear minefields or draw enemy fire. Why would they now fear to use nuclear weapons?

What of the rest of the Middle East? Can you imagine what havoc a nuclear armed Iran could do to oil shipping in the Straights of Hormuz, through which 40% of Middle Eastern crude is shipped?

Strait of Hormuz

Having seen that America’s military umbrella is too weak to protect them, Saudi Arabia, Turkey, Egypt and other Islamic states will rush to arm themselves with nukes as a counter to Iran’s implied threat.

The moment for diplomatic engagement is over. It’s crunch time for the U.S. to project its power while it still has power to project. Mitt Romney claims his administration would not allow Iran to obtain nukes. But even if he is elected, is it credible to believe one of the first acts of a Romney administration would be to attack Iran? On the positive side, such a move might be so politically popular with Americans, and the rest of the Islamic world, that if President Obama actually pulled the trigger now on an attack, he might even be re-elected.


College graduates from the class of 2010 left school with average third party student loan debt of over $25,000. Many have either had their family pay directly for some of their costs or owe additional amounts to their parents. Most have found employment, but many complain they are unable to support themselves with jobs in their fields of study. At the same time, many employers claim that they can’t find qualified workers to fill high paying entry level jobs. What is going on here? Can these seemingly contradictory factoids both be true?

Let’s step back a moment and examine what has been going on with higher education. College costs increased 439% over the 25 year period from 1982-2007, compared to inflation of 106%, and outpacing even healthcare cost increases of 251%. But results have been decidedly mediocre, as US students are only average among OECD countries in math and below average in science.  The increases in college costs have been largely made feasible by government Pell Grants and the federal takeover of education lending. These now allow any citizen not convicted of major crimes to obtain funding without any assessment as to ability to repay this debt, much as no documentation loans fueled the sub-prime credit crisis. Student loans now approach $1 trillion , more than all credit card debt in America. And funding for college is essentially a new entitlement because most of that debt will be forgiven if the borrower waits long enough, doesn’t make enough, or takes a broadly defined “public service” job after graduation.

The U.S. used to be known for the quality of its secondary education, but domestic students appear to realize it’s easier to get better grades in the soft sciences than in math and real science. The US Census Bureau reports that foreign born students account for about a third of all engineering degrees earned, roughly twice their representation in the student population, despite the fact that the  US Department of Commerce reports the number of jobs in science and engineering grew at three times the rate of other fields over the last ten years.

Parents and students get an implied warrant of merchantability without any accountability from colleges. They should be supplied with expected outcomes by major before the first classes begin. Perhaps if they saw the following chart (and the unemployment rates that are part of the same study) they might focus students’ efforts earlier towards acquiring the hard skills that would qualify them for a better economic life.  “In many cases, the most popular majors pay the least and have the highest unemployment rate…the majors that provide the most employment security and earnings tend to be those with some technical aspect to them” says Tony Carnevale, the Director of Georgetown’s CEW. The differences are huge; median incomes for engineering, computer, and math majors are 50% greater than for humanities and liberal arts majors.

Source: Georgetown Center on Education and the Workforce

Science, technology, engineering and math (STEM) courses are harder than those in the humanities, in large part because questions have clearly right and wrong answers. They require more study, and grades tend to be less inflated. Few are innately talented in these fields, and colleges need devote more effort to get their students to achieve broad proficiency in these areas.

Some might say that unlike trade schools which seek to teach specific job skills, the primary purpose of college is to develop in students the ability to think critically. But the rigor required in STEM courses only aids in achieving that goal. Distributive courses make up between half and two thirds of all credits needed for a bachelor’s degree, so taking more of these courses would only change roughly a single semester’s worth of courses. But the economic results over a lifetime could be dramatic.