HUMAN ERROR IN JUDGMENT CAUSED THE FINANCIAL CRISIS

Greed didn't cause the financial crisis. Then what did? Simple human error -- bad risk assessment. We all thought we knew all the risks and it turns out we didn't. Risks are ok, if you know them. Vegas casinos prove the point. Many of their table games give the player almost a 50% chance of winning, meaning the house loses 49.5 percent of the time. Yet the casinos continue to rake in money, year after year. Why? Because in a card game, they know the entire universe of risk and they account for it. A .5% win is still a win and it now becomes an exercise in simply ramping up the total number of dollars played to make sure they get .5% of billions of dollars instead of .5% of millions.

Insurance companies work the same way. They buy and sell risk. An insurance company promises to pay for anyone who crashes their car or gets bronchitis. They make money because they know not everyone will make a claim. They look at the population, the percentage of car crashers and coughers, and they price in the risk. But what if suddenly the bird flu makes the dreaded transition and causes a pandemic outbreak that spreads throughout the insured population? Did they price in that risk? If they did not see it coming, the consequences would be financial collapse for that company.

The idea that BOTH towers in the World Trade Center could collapse at the same time was a risk not considered. Although both towers were covered, pricing was based on the risk of only one collapsing, leaving the other uninsured on 9-11. CNN reported "The possibility of the loss of both structures was seen as so remote that cover was not taken out on those lines."

So you can see that smart people, even the smartest people in the world for calculating risk, still get it wrong, and some times, monumentally so.

The truth is that we are more comfortable believing that the rich are morally bankrupt than believing that they aren't as smart. That belief serves a two fold purpose. By exhalting the "best and the brightest", we give a natural excuse for our own failure to reach such heights. And by denigrating their conscience, we make them evil players in our ongoing Odyssee adventure.

Nothing is more destructive than thinking you know all of the risks when you don't. If you don't know how deep the lake is and you KNOW you don't know, you'll probably toe your way in. But if you don't know how deep the water is but THINK you know its deep enough, a headfirst dive can be catastrophic. That's what happened to us. Guys thought they knew the risks and they priced them in accordingly. Only so many houses go into foreclosure. Price adjusted. Risk accounted for.

We all believed in the guys who believed they knew all of the risks. Come on. These are Wall Street guys. They came from Harvard and Yale. They were the top of their class. They had pedigrees. They came from families who knew nothing but money. While the rest of us played in cardboard club houses, they played in real ones.

They didn't. Their beliefs were all reinforced by the smart guys around them who also held the same wrong beliefs.

BIG NEWS ERA IS OVER

The television news era is over. It is not coming back. It worked when there were only three stations. In order to attract both sides of the country, you had to be vanilla and bland. They had to stay middle of the road and never get too controversial or they would lose viewers. And because the public had no other source of information, they became a vanilla bland educated public. Cable and the internet have changed all of that. Now, people can get the information from a thousand different sources, up to the minute, in as much detail as they can stomach. They form their own opinions, then flock to shows that reinforce those opinions. All important debates are now decided by courtroom tactics -- the advocates argue it out and then the jury decides. It remains to be seen if this is the better way. As a trial lawyer, I can tell you that juries often get it wrong.

WHY THE HEALTH REFORM BILL VIOLATES THE CONSTITUTION

The recent Health Care bill, or Patient Protection and Affordable Care Act (PPACA), is unconstitutional with respect to at least one of its provisions -- that every person shall buy health insurance or face a fine. It violates the Fifth Amendment guarantee of protection of private property.

Proponents argue that the bill is constitutional under one of two theories -- Powers under the Commerce Clause, or Powers of Taxation.

The first claim -- Commerce Clause powers -- is that once the Constitution gives Congress a power, it can "make all laws" it deems necessary and proper to execute them. (Article 1 Sec. 8 para. 18). The main power Congress claims in this instance comes from the authority to "regulate commerce ... among the several states." (Articl 1 Sec. 8 para. 3). Since Health Care is commerce among the several states, it is said, Congress has the authority to regulate it and pass any law it deems necessary.

Until 1947, the Supreme Court shot down most of Congress' attempts to enact social programs under the Commerce Clause, but after Pres. Roosevelt threatened to dilute the Supreme Court by adding more justices to the traditional nine (nine justices is not guaranteed under the Constitution), the Court reversed itself and began upholding the New Deal legislation, justifying it under the Commerce Clause. (This is where the expression "A switch in time saved nine" came from.)

Since then, Congress has been free to pass virtually any type of legislation, social, regulatory or otherwise as long as it could claim some relationship to interstate commerce. Since virtually everything impacts interstate commerce in some way, that gives Congress a lot of power.

But that power is not without limits. The Supreme Court has struck down laws that infringe on individual rights guaranteed by the Constitution. For instance, the Child Online Protection Act, which tried to regulate "sex" on the internet was passed pursuant to the Commerce Clause, but was ruled unconstitutional because it infringed on the First Amendment right to free speech.

So where an otherwise legitimate bill conflicts with a guaranteed individual right, you can bet the Supreme Court is going to overturn it. And the individual right guaranteed in this case is found in Fifth Amendment protections of private property. It's called the Takings Clause, and it prohibits the government from depriving citizens of -- or taking -- private property without "just compensation." That means if the Dept. of Transportation needs your house to build a highway, they can take it only if they pay you for it.

The PPACA doesn't take your land, of course, but it does deprive you of your money. It forces you to hand over money to either an insurance company or to the government as a penalty. That's a "taking." It has deprived you of property -- money -- that you had yesterday but don't have today. And the government can only do that if it reimburses you the amount that was taken.

Now it could be argued, and I expect it will, that "just compensation" is provided in that you receive insurance of equal value. That argument fails. First, compensation has always been interpreted to mean dollars. The government can't come take your house and pay you with wheat futures. It has to pay you money, meaning the government has just bought every insurance policy in America. So as it violates your right to private property, the PPACA is unconstitutional.

There will be some who will not buy the insurance and will simply pay the penalty to the government, meaning they get nothing in exchange -- no compensation at all. And that brings us to the second argument, that this is not a "taking" of private property, but is in fact a tax.

Congress surely has power to tax. And though not written as a tax, the bill could be looked at in reverse like this: There is no requirement you buy insurance. Every American is taxed $695, but that tax is waived if you buy health insurance. We have seen tax incentives before. They are nothing new. They are legal. For instance if you buy a new house before April 30, the government will waive $8,000 of your income tax.

But, if it is a tax, it violates the Constitution because of the kind of tax it is -- a "direct tax." Imposing a tax on the head of every citizen -- a head tax -- is called a direct tax. The citizen pays it directly. Income taxes and sales taxes are also direct taxes because the taxed individual knows it's a tax and actually pays the tax. Other types of taxes, like on gas or cigarettes, or Value Added Taxes, are called "indirect" taxes because the manufacture or retailer pays it and then adds the cost of the tax onto the price of item. The tax is ultimately paid for by the consumer in the increased price of the product, but not directly as a tax.

The distinction between direct and indirect taxes seems slight, but it means everything under the Constitution. The founders placed a strict limit on Congress' ability to levy direct taxes. Direct taxes, like representatives in the House, "shall be apportioned among the several states ... according to their respective numbers." (Art. 1 Sec. 2 para. 3.) Simply put, if Congress wants to levy a direct tax on the head of every American, it can do so only if every state pays the same pro rata share. That means that Utah's population of 2.5 million should pay exactly half of the amount paid by the 5 million citizens of Minnesota.

If the tax were actually $695 per every head in America, the tax would be apportioned correctly. But the tax is not simply $695 per head. For instance, there are exemptions based on religion. If you claim a religious exemption, you do not have to buy insurance or pay the tax. Then there is a cap on families at $2,085, whether you have 2 kids or 10. So states like Ohio, where a large population of Amish choose not to participate for religious reasons, or states like Utah which have larger families, will ultimately pay less per citizen than other states. Not apportioned. Not Constitutional.

This wouldn't be the first tax the Supreme Court invalidated because it was not apportioned. In 1895, the Court ruled that Income Taxes (you read that correctly) were unconstitutional because they were a direct tax not apportioned where some states made more income than others. The law was struck down. The reason we have an income tax today is because Congress later passed the Sixteenth Amendment specifically allowing an income tax without apportionment.

There is no amendment, however, that allows for a health care tax without apportionment. As a tax, this bill will fail as well.

The Supreme Court has shown a divisive split along idealogical lines in the years of late, with most decisions decided by conservative swing vote Just. Kennedy, so the Court is already stacked against this bill. But this legislation is so imposing and so drastically breaks with precedent as to anything ever done by Congress before, that I think it will ultimately be overturned by a greater than simple majority. That's how I'm calling it.

PM

HOLLYWOOD WILL SAVE US FROM COMMUNISM

11-05-08
Two years ago, I thought the world had seen the end of communism. The Soviet Union was gone, Europe and Canada, waking up to double digit unemployment and stagnant economies, began to abandon the stifling socialist policies that brought them to the verge of bankruptcy. Even China accepted forms of market capitalism (which in turn led to an improvement in human rights) to fuel their growth. In the U.S., property rights were strengthening, regulations were easing, union membership was dwindling. I naturally thought Communism was on its last breath. I was wrong. It's making a global comeback. And America has done an about face, questioning free markets and about to elect what may become the most liberal government since Roosevelt. Some wonder if America is sliding down the path of Venezuela and China.

I think not, for we have an unlikely savior -- Hollywood. That's right, we will be saved from communism by the liberal, left slanted, never-grounded in reality Hollywood. I am serious. The themes produced on the silver screen that flow into the consciousness of America will prevent the tyranny of communism from taking root.

True, Hollywood likes to tout a liberal cause. Movies bash big business and greedy tycoons, while promoting alternative energy, green agendas and vegetarianism. But there is one theme it loves even more -- Individualism. Hollywood can't help but glorify the lone wolf hero, the outsider, the maverick. And Americans can't get enough -- the guy who acts on his own, breaks all the rules and thinks for himself. Batman, James Bond, Indiana Jones, Rambo, Rocky, Forrest Gump. Their guiding self interest is the hallmark of individual freedom and is a bright beacon sure to keep the masses from crashing into the collectivist rocky shore..

There's some strong individual females too -- Scarlett O'Hare, Laura Croft, Resident Evil's Alice. You're not going to see them lining up in the state run bakery anytime soon. And After Color Purple, Glory and Amistad, any communist government who even thinks about directing an African American to work the state owned farm is going to have a riot heretofore unrivaled.

Does there exist a Hollywood movie where the central character was a hapless drone acting only for the good of society, with no sense of his own identity?

Consider the animations -- A Bee Movie, A Bugs Life, Antz -- all about bugs who don't want to be one of the collective hive. Happy Feet, a penguin whose strange dancing is ostracized but ultimately saves the colony. And Wall-e, a cute little robot who overcomes his "programming" to think and act for his own selfish love interest, rescuing humanity in the process. Hollywood produced these, and what's really funny -- they thought these were liberal movies!

Star Trek, a show with liberal leanings toward the Great Society, still showcased individual thought and action as virtuous. In fact, the most sinister villain in the Star Trek world was the Borg -- a collective of human/machines who were not allowed to think for themselves, and worked only for the good of the whole. And The Incredibles? Don't even get me started. Barry Goldwater could have written that script.

It's true that movies that bash the government and military are in vogue, but that message hurts rather than helps the communist cause. That's because distrust grows toward government of either party. More than 75% of the population distrusts the government regardless of who holds the White House.

These ideals of individual liberty, so engrained now in the American Consciousness, are poison to the collective society. Communism cannot survive unless it is fed with blind trust and abandonment of self. As long as Hollywood continues to make shows that glorify the individual and vilify central government, we are safe. And as long as Americans keep paying to see them, Hollywood will continue to make them. Capitalism at its best.

So everyone, go to the movies. It will keep America safe from communism, it's good for our market based capitalist economy, and it's a heck of a good time too.

FORECLOSURES CONTINUE TO GROW

I just ran a calculation: Las Vegas has been selling about 1800 foreclosures a month, but banks have been taking back an average of 3800. That means the foreclosure pool is GROWING by 2,000 a month. Based on the last five months of pre forclosures notices, we will continue this trend for at least the next five months.

Banks are going to have to continue to slash prices to move this inventory. I see another 20 to 30% drop -- maybe more.

Minimum Wage Increase Kills More Teen Jobs

3-07-09 Update: The Teen Unemployment rate is now at a 17 year high, at 21.6 percent, according to the Bureau of Labor Statistics. Research from the University of Georgia found that for every 10 increase in minimum wage, there is a decrease of up to 9% in teenage employment.

6-19-08: As you know, I adamantly opposed a minimum wage hike last year because history shows us a minimum wage hike costs jobs of the very people it is intended to help. Employers have to cut somewhere and the first to go are the young, minimum paid workers. Did that happen?

The Federal Govt passed a wage hike and not long after, unemployment began to rise. Coincidence? Look at who is filing for unemployment. According to Dr. Mark Perry, professor of economics at University of Michigan, unemployment increased a whopping 3.3% for 16 to 24 year olds, putting them at nearly 19% unemployed! Compare that to 25 and over who have seen virtually no increase in unemployment -- only .2% with a healthy 4.1% unemployed overall.

That's not the bad news: The minimum wage is set to rise twice more in the next year -- a 24% increase and the largest in history. The next President is going to have lots of young unemployed workers to deal with.

Maybe he can blame it on global warming ...

LAS VEGAS HOUSING IN A REVERSE BUBBLE

Home prices in Las Vegas continue to fall, and the month to month decline is accelerating. The average decline since the declines began in '06 is 2% per month. BUT, the average decline in the last six months is 5% PER MONTH! Whatever your property is worth today, it's worth 15% less in three months.

And I don't see a bottom any time soon. The price graph is a straight line down and has not even hinted to start to curve back up.
And with another record of pre foreclosure notices in January, we have at least four more months of record numbers of actual foreclosures. PLUS, realtors reported the other day that since the FHA moratorium ended a few weeks ago, the market is being flooded with even MORE foreclosures.

At this rate in these conditions, prices are going to drop at least another 20% and 30% isn't out of the question.

Man, how low can they really go? What is a theoretical worst case bottom? We've already blown by cost of construction. They can't go to zero.