One Small Step....

"Soon my Treasury Secretary, Tim Geithner, will announce a new strategy for reviving our financial system that gets credit flowing to businesses and families. We'll help lower mortgage costs and extend loans to small businesses so they can create jobs. We'll ensure that CEOs are not draining funds that should be advancing our recovery. And we will insist on unprecedented transparency, rigorous oversight, and clear accountability -- so taxpayers know how their money is being spent and whether it is achieving results." - Barack Obama, in his weekly address, January 1, 2009

I have mentioned several times in private conversations in the past week, that we should be looking at increasing the availability of small business loan guarantees as a part of any economic stimulus package. I was therefore encouraged when I heard President Obama mention that, as a part of a (hopefully) soon to be announced strategy, there would be an increase in loans to small businesses.

We are told that small businesses are the biggest job producers in the country so often that it has become something of a mantra. If this is true, then this should certainly be an area of focus for economic stimulus. Not only does it create jobs, but these would be loans and at least have the possibility of being repaid. There was a book that I read in the mid 90s, Unlimited Wealth, by Paul Zane Pilzer, that made an argument that layoffs were, in the long run, good for the economy. His reasoning was that the company laying people off would be at least nearly as productive, but with less overhead, and that a percentage of those that found themselves out of work would not find work, but would instead make work - they would start their own businesses, hire people, and the economy would expand.

I am not trying to make quite the same argument here. I think it is difficult to say that unemployment on the scale that we are currently seeing it is good, even in the long run. What I am saying is that it is not enough to merely pump money into the economy. It is important for us to pump money into the economy in ways that are going to be the most effective, and the key to that effectiveness is the velocity of money.

Money's velocity is essentially a measure of how quickly money changes hands. It is important because it acts something like a multiplier. Let's say that the government gives someone a stimulus check in the amount of $1,000. This individual isn't sure what to do with the money, but they cash the check and keep the money in their wallet until, some months later, he buys a computer for $1,000. The owner of the computer store puts that money in his safe, where it sits for another couple of months, until he remembers it is there, and he deposits it in his bank account. Assuming that this is where the trail ends, and the money only changed hands twice during the year, there are two people that have seen their income increase by $1,000. For their $1,000 investment, the government saw the economy grow by $2,000, and the money's velocity would be 2/yr. If, on the other hand the person that received the money immediately spent it, and the money ended up changing hands 100 times in a year, that investment of $1,000 would result in an increase of $100,000. If we are going to be spending money to try to get ourselves out of our current economic downturn, we need to identify where we can put it where it will work the hardest, and move the fastest. My suspicion is that small business, and especially new small businesses, is one of those places that we can get the most bang out of our buck.

As the saying goes, however, "the devil is in the details." It will be interesting to see the specifics of the Obama plan when they are released. I am hopeful that the administration will not use the stimulus in order to do a little "social engineering," and use it to fund businesses that they deem to be "worthy." If they can resist this temptation, this can be a powerful tool in stabilizing our economy. It can start to expand the economy, which will increase the tax base, and (because these would be loans, or loan guarantees) at least some of this money would be repaid (some businesses, of course, would not be successful, and will default on their loans).

Thoughts on Obama's First Interview

Barack Obama has given his first interview since becoming President, to Hisham Melham of Al Arabiya TV. Upon reading the transcript, I found that it contained potentially revealing insights into his world view. Of course, this could merely be a case of politician playing to his audience, but if it is not....

"But I also believe that there are Israelis who recognize that it is important to achieve peace."

Isn't that insightful? I know, it's hard to believe, but there actually may be some Israelis who might want peace. How many times has Israel been to the negotiating table? How many times have they signed cease-fires, or peace accords? How many times have they shown restraint in the face of a constant barrage of missiles and suicide-bombers? How long has Israel been at peace with Egypt, after the Camp David peace accords were signed? In the face of all this evidence, President Obama is somehow able to phrase it like it is some new revelation that there are Israelis that think it is important to achieve peace. The fact that he didn't even use the word most is also telling. Although he didn't quantify it, the impression that this statement leaves is that there are some Israelis that want peace, but that, in reality, their aren't that many. They certainly couldn't be in the majority. The truth is actually the opposite. Sure, there is probably a fringe minority in Israel that doesn't want peace, but the vast majority of Israelis yearn for it. They yearn for it so badly that, in the face of cease-fire after cease-fire that is broken, in the face of treaty after treaty that is circumvented, still they come back to the negotiating table, attempting to make peace with their neighbors.

"My job to the Muslim world is to communicate that the Americans are not your enemy. We sometimes make mistakes. We have not been perfect. But if you look at the track record, as you say, America was not born as a colonial power, and that the same respect and partnership that America had with the Muslim world as recently as 20 or 30 years ago, there's no reason why we can't restore that. And that I think is going to be an important task."

Here's a question - what has changed in the last 30 years? What events have transpired since the Carter administration that might have jeopardized the "respect and partnership" that used to exist between America and the Muslim world? I can certainly name a few. The Iranian Hostage Crisis. The bombing of the Marine Corps barracks in Lebanon. Two Intifadas. Saddam Hussein's overrunning of Iraq, and the subsequent Gulf War. Two bombings of the World Trade Center in New York (including 9/11). The USS Cole bombing. Nightclub bombings from Germany to Indonesia. Afghanistan. Iraq. If there has been a change in the past 30 years, that change has come, or at least has been initiated by, elements in the Muslim world. President Obama's remarks, while not being explicit, leave the impression that it is America that is somehow responsible for this change. If you go back more than 30 years, you would find that America's role in the region was far from idyllic. The ouster of the Iranian Prime Minister, Mohammed Mossadegh, in 1953 is certainly not a high point on the American resume. Let's face it, the United States has had a history of supporting authoritarian regimes in the region in order to protect its economic interests. This, if anything, has diminished in the past 30 years.

"Now, the Iranian people are a great people, and Persian civilization is a great civilization. Iran has acted in ways that's not conducive to peace and prosperity in the region: their threats against Israel; their pursuit of a nuclear weapon which could potentially set off an arms race in the region that would make everybody less safe; their support of terrorist organizations in the past – none of these things have been helpful."

It is hard to argue against most of what the President says here. He artfully praises the Iranian people and Persian civilization. He rightly identifies their threats against Israel and the dangers inherent in their nuclear program as not being conducive to peace. He then, however, mentions "their support of terrorist organizations in the past." (Emphasis mine.) Forgive me, but this doesn't pass the laugh test. Is Hezbollah not a terrorist organization, or does Iran no longer support it? I suppose, however, that I am just not properly parsing President Obama's words. The fact that Iran supported terrorist organizations in the past does not negate the possibility that they continue to support those same organizations in the present. The impression left by his words, once again, is different.

If these three statements truly reflect our new President's world view, we could be in for a long 4-8 years. Barack Obama is so many things that George W. Bush is not. He is both eloquent and charismatic. While President Bush's words grated against my ears, I love to listen to President Obama's soaring rhetoric. But this man who comes to the Presidency with a scant four years separating him from the Illinois Assembly may also be naive, and in the tangled web of Middle Eastern politics, that could prove to be a dangerous thing.

A State of Bondage

California is broke. The largest state in the Union can't pay all of its employees, its vendors, or us, the taxpayers. It's hard to imagine that California, which, if it were a country, would be the 7th largest economy in the world, could get itself into such a mess. Obviously, there are a number of contributing factors to the predicament that California finds itself in - anything from employee contracts, to pension fund liabilities, to required spending thresholds. Another, however, is the state's increasing reliance on bond measures to finance project, especially public works projects.

It wasn't always this way. There was a time when California was forward thinking, looking ahead at projected population growth, and allocating funds to improve the infrastructure necessary to support its burgeoning citizenry. In the 50's and 60's, California's roads and schools were the envy of the country. Unfortunately, this is no longer the case. Anyone living in the Golden State today can attest to the fact California has now lost its race to keep the infrastructure ahead of its population growth.

As of December 1, 2008, California has on its books, $56,944,224,000 in existing bond obligations, with the approval from voters to issue nearly the same amount ($56,823,816,000) in additional bond issues. This does not include any of the myriad of bond measures that passed on the November ballot. Fortunately, the ability to issue bonds does not require that they be issued, so there is hope that the state will not use the entirety of its line-of-credit. Since 1960, the state has been authorized by voters to issue $141,362,000,000 in general obligation bonds. Approximately 2/3 of the debt has been issued, with about 60% of that amount still outstanding.

This year, estimates have California running some $42 billion in the red. Between the housing slump and the sagging economy, state revenue is down. In the middle of a national fiscal emergency, California voters approved another $9.95 billion for a high speed train between Northern and Southern California, $990 million for Children's Hospitals, and $900 million for aid to Veterans.

Don't get me wrong, these may all be good things, bond issues are always for good things like schools, roads, libraries, police, fire and the like. Hey, who is against those things - certainly not me. The problem is, money is fungible. Does anyone think that if a school bond is not passed, there will not be any money for school improvements? What happens is, because a new source of funds has been found for improving schools, the money that would have gone for schools can be moved to other projects. This is key. When you vote for a bond measure, you are not just voting on the projects that the bond is used for, you are also voting for all the other projects that will be funded with the money that would normally have been allocated to that project.

There's evidence for this, too. In 2002, we passed the Kindergarten-University Public Education Facilities Bond Act of 2002 (K-12) , which authorized $11.4 billion in bonds, with $1.5 billion of this amount yet to be issued. Then, in 2004, we passed the Kindergarten-University Public Education Facilities Bond Act of 2004 (K-12) , which authorized another $10 billion in new bonds. We have issued $7 billion of this, with another $3 billion available. One might think that was enough, but, in 2006, we passed the, you've got it, Kindergarten-University Public Education Facilities Bond Act of 2006 (K-12) - another $7.3 billion, again with $3 billion unissued. This is not an outlier, either. There were New Prison Construction Bond Acts in 1986, 1990 and 1992; Veterans Bond Acts in 1982, 1984, 1986, 1988, 1990, 1994 and 2000; California Safe Drinking Water Bond Laws in 1976, 1984, 1986 and 1988, Clean Water Bond Laws in 1970, 1974 and 1984, a Clean Water and Water Conservation Bond Law in 1978 and a Clean Water and Water Reclamation Bond Law in 1988. I could go on. Why would we need the ability to borrow millions upon billions of dollars, year after year, in consecutive election cycles? Perhaps because the real reason was to free up dollars for other projects.

There's another problem, too - Prop. 13. Prop. 13 isn't going anywhere, nor should it. The problem is in the juxtaposition of the requirements of Prop. 13 and the requirements to pass a bond measure. Because it takes a 2/3 majority to increase taxes, it is much more difficult to increase revenue through a tax increase than it is to increase revenue, through debt, by passing a bond measure. But here's the thing about debt - it reduces your capacity for future expenditures because of the interest you have to pay in addition to the principal. Sure, because of inflation, we pay back our debt in dollars that are worth less than the ones we borrowed, but that merely reduces the cost, it doesn't eliminate it. And if this recession worsens, we could end up in a deflationary period, where we would potentially pay debt in dollars worth more than the ones that we borrowed.

I propose that we pass a new initiative in California, a companion to Prop. 13, that would bring the requirements to pass a bond measure more in line with what it takes to raise taxes. My preference would be to make the requirements the same - a 2/3 majority, but I would settle for 60%. In the case of the three initiatives mentioned above, only one of the three would have passed the 60% threshold. The Veterans Bond Act of 2008 passed with 63% of the vote. The High-Speed Train measure received 52.5% of the vote, while the Children's Hospital Bond Act received 55.1%.

How many of us can go to the store and buy without looking at the opportunity costs inherent in a budget? Within any budget, there are choices to be made, if you purchase one thing, it means that you don't have the funds to purchase something else. When we vote on bond measures, we don't have enough information. We don't see everything that is on the table. All we see are schools and roads and clean water, and we think to ourselves, "yeah, we need that." This is the job that we pay our elected representatives to do for us, and we usurp their responsibility at our own peril.

B(c)S - Part II

There is a fundamental flaw in the way that we determine the teams that vie for the BCS National Championship. The problem is that, as long as you are limited to choosing only the top two teams. Unless you have two, and only two, teams from the major conferences that go undefeated, it will be difficult, if not impossible, to narrow the field to two teams.

The problem is not just that the top teams rarely play each other, it's that they don't even play many common opponents, unless they happen to be in the same conference. Prior to bowl season, Florida, Texas, USC and Utah played a grand total of two common opponents. Utah and USC both played Oregon State, while Florida and Texas both defeated Arkansas. Not until the bowl games had been played did we see how Texas and USC matched up against Ohio State, Utah and Florida against Alabama, and Florida and Texas against Oklahoma.

Because there is not enough meaningful data to be able to the best team(s), there is a tendency to rank the conferences that belong to, instead. This is how we ended up with Oklahoma v. Florida. By most accounts, the Big XII and the SEC were considered to be the two best conferences in the country. Oklahoma and Florida were the champions of those two conferences. It didn't matter that Utah was undefeated, or that Texas beat Oklahoma, or that USC might have a better loss when compared to Florida. It sounds reasonable, doesn't it? The BCS Championship was ultimately what many people have been asking for, a "plus-1" game. It is just based on the regular season, without taking the bowl games into account.

The problem with this is that, just as we don't have enough information to determine which is the best team, we also don't have enough information to determine which is the best conference. Nine out of the twelve games that a team plays are against teams in their own conference (ten of thirteen for conferences with a championship game). That means that three-quarters of the data by which we evaluate conference strength is based on the conference playing with itself. Going into the bowl season, who would have picked the PAC 10 to go 5-0 in bowl games? Does that make the PAC 10 the best conference in the country? No, but neither are they the weak step-sister to the SEC and the Big XII as they were made out to be.

Many have suggested that the way to solve this is to play one more game after all of the bowl games - a "plus-1" scenario. Yet, this year, a "plus-1" would solve nothing. Any teams that were not invited to play in the plus-1 game would still have a legitimate claim that they should have been. Maybe the "plus-1" scenario would help settle a debate in some years, but in other years it would merely extend it. This year was a great example of a year that the "plus-1" would be insufficient.

The argument against a playoff system is that it would diminish the importance of the bowl games. I would suggest, however, that the bowl games be the starting point of a "plus-2" scenario. This would allow the BCS affiliated bowl games to retain not only their importance, but also their traditional match-ups. Under this scenario, we would return to eight teams that would play in the four BCS affiliated bowl games, all of which would be played no later than January 2. The eight teams would be, first, the winners of the six BCS conferences - the SEC, ACC, Big East, Big 10, Big XII and PAC 10 - followed by two "wild-card" teams. As is currently the case, the top ranked non-BCS conference team would receive an automatic wild-card bid, provided it finished in the top eight of the final BCS standings, otherwise, it should be the top two remaining teams. Winning your conference should mean something. If you can't win your conference, you take your chances - maybe you are in, maybe you're not. This year, Texas might have had a legitimate beef, tying for the Big XII South title, but missing out on the Big XII championship game because of the three-way tiebreaker rules set out by the Big XII. Based on this, the eight playoff teams this year would be Florida (SEC), Oklahoma (Big XII), Virginia Tech (ACC), Cincinnati (Big East), Penn State (Big 10), USC (PAC 10), and wild-cards Texas (Big XII) and Utah (MWC). As mentioned previously, the Orange, Sugar, Fiesta and Rose Bowls could retain their traditional affiliations, which could have resulted in the following match-ups:

Rose Bowl
USC v. Penn State

Fiesta Bowl
Oklahoma v. Utah

Orange Bowl
Virgina Tech v. Texas

Sugar Bowl
Florida v. Cincinnati

Okay, I admit it, I manipulated these match-ups to ensure that the same four teams that are in the national championship discussion could win and move on. Were these the match-ups, who knows what might have happened, but who wouldn't be excited to see match-ups of USC v. Utah and Florida v. Texas next Saturday, with the winners contending for the championship the following week.

Would this system be perfect? Certainly not. Alabama ended the year ranked fourth in the nation, yet would not have a chance to contend for a championship. As noted above, if you don't win your conference, you take your chances. It could just as easily have been Texas ranked fourth and Alabama third, leaving Texas on the outside looking it. Or Oregon State could have won the PAC 10 with a 9-3 overall record, and USC, ranked fifth, would have had to sit on the sidelines. Wouldn't it be better, though, to be arguing over who the seventh and eighth teams should be, rather than the first and second? And enough of this nonsense about "every game being an elimination game." If that were really true, Utah would have gotten their shot, as they didn't lose a game, and therefore should not have been eliminated from contention.

Think, also, about the additional revenue that would be generated by having not one, but three additional games (the two national semi-finals, and the one national championship games). These games could be played at the sites of the existing BCS games. Instead of getting an extra game once every four years, as is currently the case, each site would get an additional game three out of every four games. Add to that the additional revenue generated by the advertising during the games, additional sponsorship, and there would be enough money to make it worthwhile. Two more weeks of college football, a playoff system that embraces the the existing bowl structure, and a Football Bowl Subdivision championship played the week before the Superbowl. That sounds like College Football Nirvana.

B(c)S - Part I

Last night, the Florida Gators defeated the Oklahoma Sooners, and have been declared the national champions of Division I college football. The final gun signalled the start of the annual debate about which team was really the best in college football this year. Every year, the awarding of the BCS Championship Trophy does more to start this debate than end it, as it was designed to do. This year, there are four teams (Florida, Utah, USC and Texas) that can make legitimate arguments that they should be considered "national champions."
Florida is the team that will go down in the record books as the 2008-09 National Champions. They won the BCS National Championship game. They ended the year on top of both the AP Poll and the ESPN/USA Today Coaches Poll. They were champions of the Southeastern Conference, and beat the champion of the Big XII conference, arguably the two top conferences in the nation this year. But still, there is that one blemish on their resume. One loss, at home, to Ole Miss. And so there are questions.
USC seems to be in this position every year. Every year they put up one bad game, and it haunts them. This year, the stinker occurred in Corvallis, against a pretty good Oregon State team. In the end, they were able to make it close, losing to the team that would end the year as either the 18th (AP) or 19th (USA Today) ranked team in the country. How does that loss compare to Florida's loss to Ole Miss, which ended the year ranked either 14th (AP) or 15th (USA Today) - a loss that occurred on their home field? Yet Florida was invited to the BCS Championship game as the #2 team in the country, while USC was ranked #5 and played Penn State in the Rose Bowl. USC plays in the PAC 10, which is often characterized as USC and the 9 Dwarfs. But the PAC 10 finished with four teams (USC, Oregon, Oregon State and California) ranked in the top 25 of the USA Today poll (Cal was 26th in the AP poll), while the juggernaut known as the SEC finished with... four teams in the top 25 (Florida, Alabama, Georgia and Ole Miss). Maybe, then, it was the strength of schedule that put Florida over the top? Florida played five games against teams that ended the year in the top 25 of the USA Today poll, Ole Miss, Georgia, Florida State, Alabama and Oklahoma, going 4-1 against that competition. USC, on the other hand, played Ohio State, Oregon State, Oregon, California and Penn State - five teams from the end of year poll, and went 4-1 against that competition. Oh, and the PAC 10 went 5-0 in Bowl games (yes, one of those was Oregon State's 3-0 win over Pittsburgh).
Of the 1 loss teams left out of the BCS Championship game, Texas has, perhaps, the best loss on their resume. Their one loss came at the hands of Texas Tech, who ended the year as the 12th ranked team in the country according to both the AP and USA Today. Not only that, but Texas Tech had to pull off one of the most memorable plays in recent memory in order to secure the victory. Texas is also the only team in the end-of-year top 5 that can boast a victory over one of the two teams that played for the National Championship. Rest assured, we will see signs proclaiming the final score of 45-35 when the Red River Rivalry resumes in 2009. But is a Texas team that struggled to beat Ohio State, 24-21, the equal of a USC team that beat Ohio State 35-3?
Utah has a pretty good argument that they are the real National Champions. They were the only team to go undefeated, 13-0. They stood against all comers, and remained unblemished. In their final game, they beat Alabama, a team that spent five weeks atop the polls, a team that took Florida to the limit. After their first 3 possessions, they were ahead, 21-0. Alabama did manage to cut the lead to 21-17, but then Utah scored the final 10 points for a final score of 31-17. Oh, and that Oregon State team that beat USC in Corvallis? Utah beat them, too - 31-28. It isn't like they played a slouch of a schedule, either, as Utah went 4-0 against the end-of-year top 25.
In the end, there should be only one, but we are left not with one, but four teams, each with a legitimate claim to the title. The uncertainty leaves us dissatisfied. Even the most ardent fan feels it, the doubt, the uncertainty, the not knowing what would have been, what could have been. Such things were meant to be decided on the field, not by some sort of computer simulation or popularity contest. Even the Gators, who are speaking with the bravado of those flush with victory, have doubt. What if it had been USC, Utah, or Texas that had stalked the opposing sideline? Would the outcome have been the same? But there is no knowing what might have been, so here we are, at the same crossroads we have faced countless times before. Lost. Confused. Empty. Unsatisfied.