The CBC's got a great article on what Corn Ethanol is doing to the price of food worldwide.

It's amazing how many things have corn in them - cornstarch, corn protein, and so on. Either we've added corn to it, or it's been fed on corn in the case of pork, beef, and chicken.

What's worse? The verdict on whether Ethanol is actually helping things at all is in - and it's not good. The 10%-blended ethanol gasoline (destructive to engines and fuel injectors already) turns out to be, mile for mile, no more efficient and no less polluting than regular non-Ethanol gasoline.

But in Canada, just like in the US, the corn lobby are getting all sorts of subsidies based on false promises that Ethanol would somehow help stop people from needing gas. It's just shameful.

In a short new paper, economists Gary Becker and Kevin Murphy make the case for addressing income inequality by working to lift the bottom, rather than penalize the top, earners. I suppose this is a worthy goal. In the course of arguing against steeply progressive taxes, they say:

For many, the solution to an increase in inequality is to make the tax structure more progressive; raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same individuals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

[Semicolon sic; emphasis mine.] This is manifestly false. Progressive taxes, penalizing high earners in every field, are presently combined with government subsidies for higher education. The typical high earners described by Messrs. Becker and Murphy are rewarded at first, then penalized; while overeducated failures are purely rewarded, and -- most crucially -- those who succeed without reaching into the goody bag of state-subsidized education are purely penalized. In short, the present situation is worse, not better, than the strawman constructed by the authors.
The crucial test of the case for more education is whether it truly increases productivity, or merely provides a credential which signals the graduate's desirability. The authors do not address this problem at all. Their graphs, while cheerfully colored, are perfectly consistent with a world in which those who were going to earn a lot of money anyway were first obliged to waste several years getting a diploma to signal their status. More government-imposed pressure toward credentials -- which will be the inevitable result of making government, rather than employers, the judge of how much education is desirable -- will only exacerbate this problem and further reduce real economic freedom.

Slate's got an interesting pair of articles on taxation up today. The first explains why US tax policy has made saving money a sucker's bet for the lower and middle income brackets, offering that up as a possible reason why the US personal savings rate is steadily dropping. The second offers up some rather insane "bold ideas" on how to change the tax code.

The second article offers up some odd ideas - one being a tax system in which a basic threshold of income was tax-free, another bracket taxed at 50%, and anything other than that at 30%, which would make the "richest" pay at a rate that equates to just about 30%, while the poorest paid nothing and those who earned exactly enough to match the 50% bracket were actually paying 25% of their total income. The basic idea is to make "extra work" and "extra income" taxed at less of a rate than the "base" income, not more. Intriguing to play with in theory, but I doubt you'd be able to get most of the US taxpayers to understand the math.

A tax on the middle-aged? Ouch. Seriously; based on general life-cycle, one would expect that the 40-45 year old bracket are the ones trying to pay for their kids' college educations. Slap a tax on them right at that moment, and watch the pain ripple everywhere.

As for the genetics thing, see Gattaca.

The first article is the more intriguing, because it offers up an interesting picture - that people are investing less because they are making a conscious choice that saving money isn't worth it. I'm not quite ready to accept that explanation, mostly because it assumes far too much intelligence on the part of people who've proven (in general) not to have it. Don't get me wrong: the math definitely holds up. However, it's my opinion that the phenomenon of less savings is driven more by conspicuous consumption and a generation of people who've grown up not being taught how to live within their means; thrift, savings, and money management were just something that didn't seem to get taught to the generations who were kids during the 70s and 80s, and society may be paying that price today.

The other thing is that certain investments (indeed, some investments people ought not be making) have become more attractive than personal savings accounts and Certificates of Deposit. Primary among these has been home ownership, the housing market, and the "Home Equity Loan" (a great renaming of the proper term, which used to scare a lot of people off: "Second Mortgage").

People are being told that they are supposed to consume. Movie rental businesses are down, movie buying is up - not surprising when the price of new and used DVD's has become what it is. Instead of a "reasonable" television, a lot of people are spending way too much on a larger screen TV; they also don't do proper shopping research on the make, the model, and the longevity of the purchase. The end result is that people have replaced the old pattern of researching what they needed, finding a product to match, comparing prices to get the price range, saving up money to purchase, and then going and purchasing it from the supplier who offers the best price and options (paying a little more to a company more likely to honor the warranty, for example, might be warranted).

What's it been replaced with? "Ooh, shiny" and the production of a credit card. Not a good economic model for people to live by.

Not dressing Kermit the Frog up in a snappy suit, but taking the reverse approach to energy efficiency; starting with the things people want, and improving them.

When I was younger, the most fuel-efficient cars on the road were made by a company called Geo. Geo's line of cars sported better gas mileage than most. Unfortunately, they were also the butt of ridicule, being unfavorably compared to go-karts and riding lawnmowers in terms of engine power. The end result was disappointing sales and the dissolving of the company.

In like vein, the hybrid car has become a niche market, but it's not become mainstream yet. Attempts by gas-guzzling, energy-inefficient, glory-and-attention-seeking celebrities to get people to all go out and buy hybrid cars haven't succeeded, for the most part. Why? Because people see the hybrid car - incorrectly or not - in much the same way they saw the Geo; an underpowered vehicle that, while fuel efficient, might not deliver when they needed it to.

Schwarzenegger says:

"We don't have to take away the cars from the people. Instead, what we have to do is make those muscle cars and those SUVs and those hummers environmentally muscular."

Ultimately, I think this makes a lot of sense. An engine conversion such as this offers the option to drastically increase fuel efficiency (by reducing engine knock and allowing the use of higher compression on lower-quality fuel). Hybrids, made right, don't have to look like bicycle-wheeled go-karts or odd square-ish contraptions.

Theoretically, once the technology is finished - because the conversion rates aren't there yet - it might be theoretically possible to alter the roofs of vehicles, adding a network of solar cells to them. One imagines that the 8-9 hours a car usually sits in the parking lot is a pretty good amount of sunlight energy that could charge the batteries of a hybrid/electric vehicle.

Will an SUV with a higher-efficiency conversion be as efficient at carrying one person from point A to point B as, say, a two-person hybrid/electric car? Probably not. But if you can't get someone to drive the latter, better to try to get them to drive the former than spend years fruitlessly yelling at them and just making the problem worse.

...is paved with good intentions.

Or so the old story goes.

This isn't news to those who have been paying attention - the price of a can of corn is up. The price of milk is up, the price of beef and pork and chicken are all up. The price of tortillas is up. Why? Because they are primarily fed by or made from corn, and if you haven't noticed, over 50% of this year's corn crop went to producing (dum dum DUMMMMM) - Ethanol. Pretty much the entirety of the US is now on the 90/10 gasoline/ethanol blend, which in addition to reducing gas mileage, also causes more problems for automobile engines. Why? Because ethanol is caustic and eats away at the fuel lines, producing materials to clog the valves and the fuel injectors.

The end result's been a nightmare. Far from "reducing" the dependency on foreign energy, all Ethanol production is doing is speeding up inflation and raising the price of basic dietary staples. What's worse, the production of Ethanol has yet to produce an energy "profit" from the oil and coal burned in its production, and worldwide, rainforests and other arable land are being burned to produce the "biofuel" plants.

It's a sad day when, in the cause of environmentalism, we harm the environment far worse than we otherwise would.

Geico - formerly know as the Government Employees Insurance Company - have had enormous success with their advertising recently, especially for car insurance.

The "Cavemen" ad spots have been amazingly brilliant in particular.

However, I was poking around the other day, just checking my insurance rate against a couple other companies, when I noticed a little checkbox in one of the applications: "Are you now, or have you ever been, a customer of GEICO?"

As it turns out, GEICO may save you 10%, but the other companies are likely as not to take it out on you for being a former customer of GEICO later... and whether GEICO can really save you 10% is questionable from the quotes I was getting.

"Your mileage may vary."

[Updated]: So that I'm a bit clearer: checking that little box actually did increase the price that the insurance companies' automated systems quoted me.

In the comment section of my previous post on housing, my friend Linus speculates on whether or not his area (Jackson, WY) is in a bubble:

Whether or not people think there's a housing bubble, I've noticed that the vast majority of people think it won't hit their area. I've always thought that a place like Jackson Hole will be somewhat safe because, questionable loans or not, demand for housing here will never really decrease. You think that Houston will be fine because fewer people are signing bad mortgages there.

My friend Keith and I both find ourselves in rental situations because we truly can't afford houses in the valley and can't fathom commuting 50 miles over a mountain pass every day. We've both calculated it out and it makes more sense for us to rent unless we were planning on staying for at least 7 years (maybe more with talk of a slowdown in appreciation).

Bubbles usually occur on the backs of investors. These investors may be developers that are building neighborhoods or people hoping to flip houses for a quick buck. In the latter case, people holding on to a house that they don't wish to live in do wish to make as much money off of it as they can before they sell it. So what do they do? They rent it out. So what can you expect to see in cities with abnormally large numbers of investment properties? Houses and condos for rent and a lot of them. Since in this case supply (of houses and condos for rent) does not have much to do with demand (for rented lodging), and making money is not the primary motive and therefore they can be rented out at a loss, you can expect places these places -- with a large percentage of investment properties and an excess of rentable lodging -- to have comparatively low rent.

We would figure that rent in Los Angeles would be anything but cheap, but if a housing bubble exists there then it should be artificially low. So how can you determine whether rent is lower or higher than it should be? We compare it against markets in which we can be relatively sure there is no housing bubble. If we compare the cost-of-living differential of owning compared to renting, we should be able to determine whether or not housing prices are artificially high.

Lukckilly, there are tools that can tell you cost of living differences for owning and renting between two cities. I chose Casper, Wyoming, and Tyler, Texas as two places that it is unlikely that any significant bubble exists. None of the three are experiencing tremendous growth (Tyler grew 16% between 1990 and 2000, Casper grew 8%, and Lake Charles grew 9%), none have significant renter-friendly college populations, and none are near enough to a growing metropolis to be feeding off of that growth.

Keep in mind that we're looking at relative values here. There are a lot of other factors that go in to the cost of living, but those factors are controlled because they are the same for owning or renting. However, the actual differences (either in dollar amount or percentages) don't tell us anything about the relative housing markets between the cities themselves. Also remember that the higher the x or y value, the cheaper it is to rent/buy in the city we're testing.

Cities that I'm testing: Houston (where I'm from), Austin (where I'm living), El Paso (generally regarded as an undervalued housing market), Seattle (generally regarded as a likely bubble), and Los Angeles (ditto).

With the exception of Austin, the cities went almost exactly how you would expect given the hypothesis. The changes were more drastic than I would have even figured.

• The order from most likely to least likely to be a bubble based on buyer/renter cost ratios was: Los Angeles, Seattle, Las Vegas, Austin, Phoenix, Houston, Denver, and El Paso.
• The difference between buying and renting in Los Angeles is night and day. If you rent, cost of living in Los Angeles is actually cheaper than that in Tyler.
• There were significant renter discounts in Seattle and Las Vegas, as well, but they were less pronounced.
• Austin came down in favor of renting rather than buying against all three though I would have figured that it would be more pronounced than it was.
• The most puzzling of the results were Phoenix and Denver. Both had a rather high proportion of bad loans and should thus be renter-friendly rather than this close to the middle. So those markets aren't in nearly as much danger as I had thought or they are exceptions to this general rule for some reason.
• Houston was the only one with mixed results. The differential ran in favor of renting compared to Lake Charles and Tyler, but more heavily in favor of buying compared to Casper.
• As expected, El Paso is very buyer-friendly. I actually have to wonder what makes El Paso so much less desirable for investors than Tuscon
• Originally I was only going to use Jefferson City, Missouri for the comparison, but Jefferson City was so skewed in favor of buying it wasn't helpful. When I got the results comparing Tyler and Los Angeles, I was so suspicious that I decided to run three cities. The results were pretty consistent.

Unfortunately, the specific numbers (that I spent over an hour collecting) were accidentally erased due to some limitations between Nucleus and the webhost settings and my own carelessness in not accounting for said limitations. I need to start using w.bloggar again whenever I'm typing a longer post. You're free to toy around with the calculator and retrieve them for yourself, though.

There seems to be an increasing consensus that the housing market was riding on a bubble and that the bubble is deflating. Many have been predicting a bubble for decades, some have come around recently, and others still dispute that there is a bubble at all. This entire debate has been of great interest to me because, until recently I was employed by the mortgage industry and my job involved, among other things, pouring over mortgage contracts from all over the country.

I think that there is something to be said for all three positions on the existence or non-existence of a bubble, but from a lot of what I read a lot of people don't understand the dynamics at play, what would cause a crash, and what a crash would look like.

Most comparisons are to the bubble most recent in our memory, the tech bubble. The two, however, are not really comparable at all.

The first problem with the tech stocks is that many of them had no intrinsic value. They were completely a product of hype. You cannot sleep, sit back and watch television, or have dinner in a tech stock. Tech stocks appear nowhere on anybody's hierarchy of needs.

This speaks somewhat optomistically of what a housing bubble burst would feel like. It could be less of a burst and more of a correction. People that own houses would have to wait to sell them if they wanted top dollar. The price of housing would likely stall and fall slightly, but eventually the economic reality that land value goes up with development would bring it right back to and then above its current value. Since most of the overvalued lands are in places of natural scarcity (expansion is blocked by water, mountains, or other development), it probably wouldn't even take that long.

So if that is what the bubble consists of, I believe that we would be very lucky indeed. Unfortunately, my recent professional experience has suggested that something much, much worse could well become of it all.

Day in and day out I looked at contracts. Though I did not have access to specific information about the loans, I knew what kinds of loans the banks were working on and frankly each one of them was more depressing than the last. I could not figure out for the life of me why people would be signing these atrocious documents. There are balloon mortgages (where you make insufficient payments throughout the loan and then pay a lump sum at the end of it), interest-only loans (ten years in and you haven't touched the principal), one-way adjustable rate mortgages (where the interest rate can go up but not back down), and worst of all negative amortization (where each payment you make leaves you further in debt than you were the previous month). By the time I left banks were combining these into an unholy mess of of a loan program where at ten years you own more than you did when you started. And the length of the loans were moving futher and further out, at 50-years by the time I left.

I received several answers to my questions, some of which were benign and others less so. Construction home buyers, for instance, would be interested in making minimal payments because they can't live in it or plan on selling it in short order. A bit more disturbing are the home-flippers, who buy a home with the intent to sell it before the principal is sue. Most disturbing are the increasing number of people that sign these documents because these are the only ones that will let them buy a house. We are all taught that it is better to buy and rent, and they can afford the $800/mo interest-only, but cannot afford much else. By the time the payment comes due they hope to be making the money they need, refinance it again, or be able to sell it and use that money on a down payment on another house.

The problem is, however, that the payment will eventually come due. The real question is not what happens when the market corrects as much as it is what happens when these interest-only and neg-am introductory periods expire? What happens when the interest rate goes up, pushing the ARMs out of reach? What happens when thousands of people are left holding the hot potato, with a buyer's market that won't buy for the money that they need and banks that have been burned too many times to refinance someone into what becomes a lifetime mortgage.

Which brings us to the second main difference between a housing bubble and a tech bubble: the housing bubble depends almost entirely on bank loans, where I don't believe that was the case. As such, a significant portion of the market is dependent not only on future buyers, but also the future willingness of the the banking industry and the government's continued willingness to allow it to operate under increasingly questionable practices.

I'm not sure at what time the introductory periods of the introductory loans (the term I will use for interest-only loans, fixed-period ARM loans, negative amortization loans, balloon loans, and any other loans they may have concocted wherein the first 5-10 years are with payments that are lower than will be expected later) will end, but it is quite possible that it will start a domino effect.

A slight slowdown in sales will cause some people to sell short. Some will succeed and they would drive the housing prices down. Others won't, which if frequent enough will create a secondary foreclosure market. Both cases would lead to at least a temporary surplus of houses on the market, making banks much more reluctant to issue loans for investment properties, which will in turn produce less buyers and increase the surplus of available homes.

The other possible cause for a domino effect is when the government finally puts its foot down on questionable loan practices before we end up in a situation like that in many foreign countries where loans are multi-generational. If the housing market is presently being propped up by an ever-increasing number of buyers that are propped up with ever-creative mortgage loans, once the creativity ends so will the supply of buyers and that, too, would leave a number of people with the hot potato when the buzzer goes off.

Unlike with the tech stock, the threat is not that they are significantly overvalued now -- I don't believe that they are -- it's that they will be undervalued tomorrow. This wouldn't be a problem if the housing market were dominated by people that were buying houses that they could afford to "ride out" when the market inevitably rebounds by correcting upward, but every indication that I have seen suggests that in many markets this is not the case.

The good news is that even in a worst-case scenario, a number of markets will remain relatively untouched. Houston, for instance, is probably pretty safe since few need to take out particularly questionable loans in order to afford a house. Even the pricier Austin is likely to be just fine. However, there are a lot of hotspots that are presently being propped up by speculators with no intention of paying the tab and I would strongly advise against real estate investments in those areas (California coast, Las Vegas, Phoenix, Denver, the northeast) or taking out a loan that you cannot afford to assume yourself to term, if need-be.

And it's quite possible that it will simply be a matter of various bubbles deflating than any popping or any dominoes being knocked over. I would say the chances are 50/50 that it will be a relatively smooth correction. I certainly hope that it is.

I shouldn't have to say this, but I will anyway: the opinions expressed in this post are mine and mine alone. They should not reflect on my former employer or any of the coworkers and friends that I had there.

Pratie Place extracts from a WSJ article on Blockbuster's recent financial woes:

Blockbuster last year ditched the late fees in a concession to competition from video-by-mail chains such as Netflix Inc. that allow customers to keep movies for as long as they like after paying a flat monthly rate. [Late fees brought in] $250 million to $300 million a year for the Dallas-based company -- about 15% of annual revenue when the fees were still in place.

Now, with the company's finances in tatters and its stock price down more than 60% last year, some investors and analysts are arguing for a companywide return of the fees for tardy customers.

I am of a mixed mind about this.

On one hand, it reminds me a bit of rebates in that it is backdoor income. It counts on people spending considerably more than they intend to in order to keep the situation afloat. From an ideological standpoint, I wish that they would charge whatever they need to just so that they can make their profit and so that people know how much they're going to pay going into it. Ahhhh... but would I pay twice as much to go to a place that charges less (or nothing) in the way of late fees? I might, but I would be in the minority, which reminds me of the other hand.

I was recently reminded of a fallacy that I see in the minds of many: that companies make a good profit on their main source of income and every other source of income is just ripping the consumer off. One example of this is a friend of mine who was recently complaining about paying $2 for a refillable softdrink when they knew that it was only costing the restaurant pennies. Or the assumption that cable/satellite companies are adding too many channels just so they can charge more. Gas stations are robbing their consumers and then overcharging for food items in the convenience stores. And, of course, the assumption that Blockbuster's seemingly exorbant late fees were just another revenue stream in their ocean of profits.

You ever see on television when a bunch of bored guys goad a somewhat gullible character into picking a fight with someone else? Or maybe you've seen this happen in real life. It's the ultimate pleasure. They get what they want (entertained) while they bear none of the rists should the goadee fail to lay a punch.

I've noticed that people often take this attitude with corporations. They harbor none of the risk, so they are unsurprisingly cavalier about how much a company might be hurt if they change their way of doing things. Restaurants, for instance, have one of the lowest margins of profit of any business. The $2 they're charging for a coke isn't just to make money, it's to make sure they don't lose money on all the things that the customer isn't paying for (the building, electricity bill, etc.). It is my contention that cable and satellite companies bundle channels because the marginal costs of additional channels are such that you wouldn't save more than a few dollars by giving up 2/3 of your channel line-up. Gas stations make most of their money in convenience stores, which is why you see a lot more convenience stores that don't sell gas than you do gas stations that don't have an attached convenience store.

The list goes on and on, but let's look for a moment at Blockbuster. For the record, I absolutely hate Blockbuster. I not only want to believe that they are liars and crooks, I actively do believe they are. I got burned by an Office Space DVD I rented a few years ago that ended up costing me $30. I know that accidentally forgetting to return it for a couple weeks did not cost them that much.

But lo and behold, they touch up their late fee policies and they're actually hurting. It's almost as if giving the customers what they want may not always be in the best interest of the company and even may not be fair to the company if they're losing money at the expense of their customer base. Imagine that.

My point here is not to defend a company that I detest. In fact, this isn't even about Blockbuster or the cable/satellite companies or gas stations or restaurants. It's to lay to rest the stupid notion that customers give anymore a rats patoot about the company than vice-versa, the stupid notion that the consumer wants to play fair and it's the companies that refuse to, and the stupid notion that the customers have any clue of how the businesses they swear up and down are ripping them off actually operate.

RAW360 is back up.

The short version: RAW ran into troubles, not with his host (I run the server) but with the his domain registrar, a company that basically tried to screw him over in revenge for his wanting to switch to a competitor.

This screwage brought to you courtesy of the folks at ICANN, who have "rules" regarding transferring domains but absolutely no enforcement methods to prevent domain registars from screwing over customers.

I'll let RAW describe the whole ordeal later, if he feels like it.