CoCo Wins Awards

Colorado Confidential has, for a second year in a row, won an armful of journalism awards from the Society for Professional Journalists.

I shared a byline with a number of other Colorado Confidential staff members on their second place price winning feature on the emergency contraceptive Plan B in Colorado. (They also won first place in that category.)

Tribal Justice in America

The tribal jail system is not large. The entire tribal jail system has fewer inmates than the City of Denver.

Hat Tip to the Sentencing Law and Policy Blog.

VA PETA Shelter Kills Most Dogs Received

The organization People for the Ethical Treatment of Animals (PETA) is known for its hard line opposition to fur clothing and other economic uses of animals. It also runs an animal shelter in Norfolk, Virginia where the organization is based. But, that shelter killed 97.4% of the animals it received in 2006.

PETA has threatened legal action against bloggers who have characterized that high kill rate (higher than most other Virginia animal shelters), in a manner other than they way they would like it to be characterized. PETA has taken the position that it is more humane to kill animals that are "unadoptable" and that almost all of the animals it receives fit this characterization. The notion that mere unadoptibility is a sufficient ground for killing an animal is a philosophy not easily reconciled with the organization's mission and stances on other fronts.

Defense Against The Dark Arts

One of the admirable elements of the Hogworts curriculum in J.K. Rowling's Harry Potter series is the inclusion of a "Defense Against the Dark Arts" class as part of the standard curriculum. Unlike, for example, Herbology or the History of Magic classes which are also elements of the Hogworts curriculum, it has no good analog in the world of muggles where the rest of us live. But perhaps it should.

The closest the real curriculum comes to such a class is "health" in which young men and women learn mostly about sexually transmitted diseases, how to avoid peer pressure in connection with sex and drugs, and the harms of smoking and excessive drinking.

But there are all sorts of perils out there of which young adults should be wary, and the broader notion of knowing how to defend yourself from malicious influences in the larger world is a worthwhile construct. The world is full of muggers, bank robbers, rapists, child abusers, sexual harassers, drunk drivers, cheaters, liars, deceptive trade practices and frivolous litigants, to offer just a brief parade of horribles. We teach our children to be defensive driver's in driver's education, but we don't really make a systematic effort to teach people who to response to threats in other domains. Moreover, some advice that we routinely give our children, like "beware of strangers" is problematically incomplete.

Dealing With Sociopaths In Everyday Life

Any part of such a curriculum should include some version of psychologist Martha Stout's "Thirteen Rules For Dealing With Sociopaths In Everyday Life" from her 2005 book The Sociopath Next Door (at pages 156-162).

Her book actually leaves a lot to be desired.

The title term, "Sociopath" is more often reserved for people who disregard established social norms because they instead follow the social norms of a criminal or deviant subculture to which they belong, which is not what her book is about. Instead, her book is about what leading research in the field Robert Hare and most of the other behavioral researchers she cites call "Psychopathy" which is to say a hard wired mental condition that involved a lack of conscience or emotional affect.

The touchstone statistic she cites throughout the book that "1 in 25 ordinary Americans secretly has no conscience" which is based upon the prevalence of "anti-social personality disorder" as defined in the Diagnostic and Statistical Manual of Mental Disorders IV, a definition that its both broader and narrower than the construct of psychopathy developed by Robert Hare which appears from several books and journal articles in the field to be the touchstone of recent research in the area. On one hand, it captures some people who persistently engage in criminal behavior who do not fit the psychopathy construct, and on the other hand, it fails to capture people with Machiavellian personalities who are higher functioning but still seem to fit the psychopathy construct. Based upon other reading I've done, most sources put the prevalence of what she calls psychopathy at closer to 1% in males, and these sources claim it is less common in females. But, her core point that it is a quite rare condition, but is common enough that you are likely to encounter someone like this at some point, is well taken.

Stout's assertion that the condition is 54% heritable is at odds with other sources I have read that suggest that while it is commonly associated with a family history of mental disorders generally, that it is not very strongly heritable specifically, and I can't tell you who is right on that score. This again may be a definitional issue, or the data may simply be contradictory.

Her short (218 page, 12 chapter) book is also about three chapters too long. She spends the first nine chapters of the book arguing rather persuasively, if not terrible rigorously, that by the time we are adults, we either are or are not sociopaths. She spends three chapters making the case that it is better to be a non-sociopath than it is to be a sociopath, despite the fact that no one gets to make that choice.

This is all forgiven, however, because the "Thirteen Rules" which are the most practical contribution this book makes to the literature, appeal not to research, but to her own lengthy experience as a clinical psychologist treating trauma patients many of whom have suffered as a result of people who can be identified by warning signs she describes in her rules. The Rules are, at their root, simply practical experience driven strategies for coping with difficult people who fit this profile. It doesn't matter if they are biochemically or genetically psychopaths in any platonic or scientifically rigorous sense. The notion is that if you encounter someone who shows these warning signs in your everyday life, that certain strategies are likely to work in dealing with them. This may be more folk wisdom than it is science, even though it has a theoretical construct suggestively supported by rigorous neuroscience and psychiatry to back it up. The same can be said of a lot of psychology. But better to have a working model that somebody else has spent years of clinical work refining, than to have no model at all.

While the Thirteen Rules, which I won't recite in full and verbatim, lest you skip the book, don't distinguish between theory, lay diagnosis and coping strategies, I will summarize the conclusions in those categories. I will also state her conclusions in a manner that is more robust and does not require any more agreement with her underlying theoretical construct than is necessary to apply the Rules. I also fill in some points made elsewhere in the book. As I result, I provide more than thirteen rules.

Theory

Some people act in a manner that shows no sign that they have a conscience. They aren't easy to identify and nothing you can do once you encounter them can change them. They are often a danger to those who encounter them. Some rise to positions of power, some are petty tyrants, some are passively exploitative, and a fairly small minority are persistently violent.

Diagnosis

The more of the following apply, the more likely it is that the coping strategies discussed below will be helpful.

1. Beware if you "find yourself often pitying someone who consistently hurts you or other people, and who actively campaigns for your sympathy."

2. Trust you instincts and anxieties, rather than allowing them to be filtered by someone's formal rank or position of authority.

3. Practice the Rule of Threes (derived, I suspect, from a similar rabbinical maxim): "three lies says you're dealing with a liar, and deceit is a linchpin of conscienceless behavior."

4. Beware of people who engage in "gaslighting," which is outrageous or deceptive conduct which makes the target doubt his or her own perceptions, and makes others doubt them when they recount this behavior.

5. Beware of people who want you to keep their troubling behavior secret, or rely on your good manners or civility to provide a cover for their behavior.

6. Suspect flattery (i.e. extreme appeals to our ego in unrealistic ways), whether targeted at us individually, or to a larger group or nation to which we belong.

7. Beware of people who appeal to your fears.

8. While neither alcoholism or drug use necessarily imply that someone fits this profile, 75% of people who fit this profile are alcoholic and 50% abuse drugs.

9. People who fit this profile often engage in risky-taking or impulsive behaviors. In particular, they may try to sow mayhem for no good reason.

10. Beware of people who are, or were as children, cruel to animals.

11. Beware of people with an "intense, emotionless or 'predatory' stare."

12. Beware of people with glib and superficial charm.

Note that the core theoretical issue of lack of emotion or remorse is often concealed, except from people who know the individual who fits this profile very well and are unlikely to take action as a result.

Coping Strategies

1. "Cut your losses and get out [of relationships with persistent liars] as soon as you can. . . . Do not give your money, your secrets, or your affection" to these people.

2. Publicly challenging these people when they are in positions of authority will encourage others who are aware of them but have remained silent to challenge them as well. You are rarely their sole target.

3. "Resist the temptation to compete with . . . outsmart . . . psychoanalyze . . . or even banter with" this person.

4. Avoid this person and "refuse any kind of contact or communication . . . . If total avoidance is impossible, make plans to come as close as you can to the goal of total avoidance."

5. "Do not be afraid to be unsmiling and calmly to the point" when confronting this person.

6. Do not try to help this person or give this person another chance.

7. Ignore pleas to conceal this person's behavior, such as "Please don't tell," "you owe me," or the guilt trip implicit in "you are just like me."

8. Don't lose your faith in humanity, most people are not like this person.

9. Try to live well rather than seek revenge; take comfort in knowing that most people like this eventually self-destruct although it may take them a long time to do so.

Saying "I'm Sorry"

When I was in law school, I took a course in Asian Legal Systems and also had a number of South Korean L.L.M. students as colleagues. According to these sources, in Korean and Japanese judicial proceedings an apology to the victims is a standard part of almost every criminal proceeding.

But apologies aren't limited to court room settings. This week I saw the movie, "The Host" on DVD. Like most DVDs it had, in addition to the movie, some extras. There were deleted scenes, and then there was a featurette entitled "Director Bong Joon-Ho Reflections," a title that didn't precisely capture its substance.

It was a five to ten minute apology track. Seriously, the director of a medium to big budget movie made one non-stop apology after another. He apologized to actors whose lines or scenes were cut. He apologized to actors who were hard to recognize because their role in the film required them to wear masks or other obscuring head gear. He apologized to the gophers who had to carry large numbers of bicycles away from one of the shooting locations and then put them back when the scene was over. He apologized to citizens of Seoul whose commutes and leisure time were disrupted by his movie shoot and to crew members who had to deal with annoyed citizens. He apologized to prop makers whose work was hard to see because there were short scene cuts from a distance in their scene. And so on, and so on, and so forth. It was amazing. I've never seen such a thing in any other DVD I've ever watched. Movie directors in English language films, as a rule, are an arrogant lot who never apologize for anything.

But Korea is not the United States and that makes all the difference.

About Social Security

What are the key political issues related to Social Security?

A trade group for certified public accountants has a nice report of issues related to Social Security reform three years ago, whose executive summary I quote liberally from below.

Poverty Prevention

Social security is arguably the most effective anti-poverty program in U.S. history:

Social Security provides more than half of the total income for almost 60 percent of beneficiaries. For almost 30 percent, it provides more than 90 percent of income. . . . The poverty rate among the elderly in 2000 was approximately 10 percent, down from a rate of 35.2 percent in 1959. Without Social Security, the poverty rate among the elderly would be 48 percent.

Note also that on top of their Social Security benefits that Medicare provides essentially everyone age 65 and up in the United States with health care under what amounts to a single payer program, and that Medicaid provides nursing home care to most asset poor senior citizens. The means tested SSI program provides further support to the elderly poor.

Efficiency

Social Security's operating transaction costs, both on the benefit paying side, and on the revenue generation side, are phenomenally low. Fraud in either part of the program is infrequent and small in dollar amount, in large part because there are few relevant facts necessary to produce a correct tax or benefit amount, and those facts are maintained by third party government and private sector professionals for the most part.

Solvency

Social Security is not in a fiscal solvency crisis, although tweaks need to be made to match revenues to expenses in the long run. As of three of years ago, in an estimate that remains close to accurate now:

According to the Social Security Administration's "best guess" (intermediate) assumptions, the Social Security Trust Fund surplus will peak in 2028. Then it will decline steadily until 2042, at which time the Trust Fund will be exhausted. However, inadequate funds do not mean zero benefits. If no changes are made to Social Security, beneficiaries could receive full scheduled benefits through 2042. Thereafter, scheduled benefits would have to be reduced by 27 percent. In 2078, benefits would have to be reduced by 32 percent. This Social Security "deficit" could be funded by an immediate infusion of $3.54 trillion; by increasing the payroll tax rate from its current level of 12.4 percent to 14.3 percent; or by reducing current scheduled benefits 12.6 percent.

Other tweaks that can be made to improve the fiscal solvency of Social Security include changing the way it calculates cost of living adjustments, increasing the payroll tax wage base which is currently a little over $100,000 (quite a bit lower than the maximum income that can be taken into account in tax preferenced defined benefit plans in the private sector), and broadening the scope of the self-employment tax which substitutes for FICA for people who are self-employed rather than earning wages and salaries upon which a payroll tax is due.

Another, moderately more controversial way to improve the fiscal solvency of Social Security is to invest some part the Social Security trust fund, which currently consists of ledger entries representing U.S. Treasury bonds, in some other form of security, a strategy sometimes known as "pre-funding" the Social Security trust fund.

In addition to the fiscal solvency motivation, pre-funding would help inspire greater confidence that Congress will make good on its promise to provide Social Security benefits to future retirees.

Payroll taxes collect more than is currently needed to fund current Social Security benefits. But when there is no longer a "Social Security surplus" (i.e. excess of current payroll tax receipts over current benefit payments) which will happen much sooner than the 2040s, Congress will have to either raise general fund taxes to redeem the bonds in the Social Security trust fund in order to pay current benefits or publicly offer the Treasury bonds that make up the Social Security trust fund to members of the general public, first in an amount that would only be a trickle, but eventually, in an amount that would flood the Treasury bond markets and drive down Treasury bond interest rates. In contrast, the liquidation of a diversified low risk private securities portfolio in the Social Security trust fund to pay current benefits would not necessarily have the same overwhelming impact on the markets because the impact would be felt more widely.

For example, a gradual investment of part of the Social Security Trust fund in a mixed portfolio of municipal bonds and investment grade corporate bonds, in a manner designed to spread the investment more or less evenly over the entire market for each would be relatively low risk, give the Social Security trust fund psychological substance, and might increase the rate of return. Yet, it would give the federal government no additional say in how corporations or state and local governments are managed.

At the end of December 2004, the Trust Fund had an accumulated balance of $1.69 trillion, comprised largely of “special issue” securities available only to the Trust Fund. (The Trust Fund holds a very small amount of marketable Treasury securities.) The weighted average maturity of these bonds was 7.2 years, and the weighted average interest rate was 5.7 percent. . . . The Social Security Administration’s Office of the Actuary (SSA) estimates that a 1 percentage-point increase in the real interest rate [earned on the Social Security trust fund] would reduce the actuarial deficit from 1.89 percent to 1.38 percent of payroll and push back the estimated exhaustion date by approximately three years.

I suspect that the Trust Fund's weighted average interest rate now is lower than it was in three years ago.

The biggest problems with pre-funding the Social Security trust fund with private sector assets are that (1) even a diversified portfolio of private securities invested for the term could be invested in a way that carries more investment risk than Treasury securities or produces a lower return, if not optimally managed, and (2) the trust fund would be such an 800 pound in gorilla that this species of sovereign wealth fund would permit political agendas to inappropriately manipulate the private securities market place and thereby harm the economy.

A far more controversial proposal is to great private accounts invested in publicly traded securities in lieu of some of the existing core social security benefits, at least for young Social Security system participants. This minimizes, although it does not eliminate (since someone would have to decide what investment choices were available to participants), the sovereign wealth fund investment issues. But, this raises a host of additional difficult questions involving transition arrangements, increased administrative costs, how to handle cases where individuals make poorly performing investments for themselves that cause a hardship in retirement, and how this changes the relative benefit that individuals receive from the system. Suffice it to say that I oppose private accounts that would reduce the core of benefits currently provided by Social Security, that Congress and public opinion agree.

The modest fiscal solvency issues that the Social Security system can be solved in ways that don't create their own problems in the way that private accounts do. For example, if the investment meddling by the federal government was the primary concern associated with pre-funding the Social Security trust fund collectively in private securities the federal government could entrust state treasurers and/or state pension fund managers with the investment of a share proportionate to social security benefits paid to state residents to invest on a pooled basis with state funds.

Also, if tweaks were made to a combination of payroll tax rates, the Social Security payroll tax base amount, the self-employment tax base scope, and a factor that impacted scheduled benefits like the manner in which inflation adjustments are calculated, no one adjustment would have to be as large in magnitude as the ones suggested in the blockquote above.

Also, it is worth noting that solvency solutions are well suited to being put in place on a piecemeal basis. Even if only half of the long term solvency gap is fixed by a proposal, or the trust fund insolvency date is only pushed out by ten or twenty years, an early half measure now makes the job easier for those who have to address it in the future.

Fairness

Individual returns on investment from Social Security vary a great deal. In the worse case scenario, someone who works at a high income for his or her entire life, without ever suffering from a disability, and then dies without a surviving spouse (or ex-spouse to whom the person was married for at least ten years) and without minor children, who dies right before reaching retirement age, has made large contributions to the system and gotten almost nothing in return. Others can receive significant benefits based upon contributions made by someone else like a spouse or parent without making any contributions personally.

But most of those difference are the capricious happenstance of any defined benefit system. While two men born on the same day with the same marital history and having the same work history might end up receiving very different benefits, no one could predict that in advance. There is no systemic bias towards one man or the other.

While Social Security's tax base (a combination of FICA payroll taxes and self-employment taxes), is regressive by design, because it does not tax investment income and does not tax income over a certain dollar threshold, when the tax cost and benefit returns to individuals are taken together, the Social Security system is actually moderately progressive in effect, an element of the program which is fairly uncontroversial because it is intended to be a social safety net rather than make complete provision for seniors in their retirement.

Also, while high income people, on average, get something of a raw deal in terms of returns on their contributions, they also get the lion's share of the tax benefits associated with tax favored non-Social Security retirement accounts and defined benefit plans.

The benefits that older recipients receive relative to younger ones, call it the Ponzi scheme effect, while real are also not horribly controversial. This distinction is gradually losing its currency as the most advantaged oldest beneficiaries pass away. To some extent this is also an inevitable consequence of the fact that people are having, on average, fewer children, and are living longer, reducing the number of people of working age per retiree.

The more controversial fairness issues in Social Security reflect the fact that its formulas were designed with a traditional breadwinner husband, homemaker wife, with common children family model in mind. AICPA explains who wins and who loses in the Social Security benefit formula:

Most of today's Social Security recipients are receiving – and will continue to receive—more in benefits than their actuarial "fair share" based on their contributions. Even if all promised benefits were paid, future retirees, particularly singles, two-earner couples and those with high incomes, will earn below-market rate returns on their contributions.

The rate of return earned on an individual's Social Security contributions is affected by gender, marital status, and income level. Social policy considerations weaken the direct link between contributions made and benefits received. The Social Security benefit formula includes a declining fraction of income in the calculation. As a result, low income beneficiaries benefit from the formula, high income beneficiaries do not. Married couples benefit from spousal and survivor benefits.

The magnitude of that differences is significant.

Rates of return in the 1960s and 1970s were still much higher than one could expect from a private pension plan or from a mature pay-as-you-go system. The rate of return for a single male was 10.97 percent in 1960, declined to 1.82 percent in 1995, and is projected to be 1 percent by 2030.

I display below numbers from the Report's Exhibit 3.2A showing average annualized real rates of return on contributions expected for beneficiaries of each type based upon retirement age. I omit the entries for beneficiaries who retired in 1960, who are almost all dead now, and for beneficiaries who retired in 1980, who are now age 92 or 93, and are likely to be irrelevant to political issues involved before any change could be enacted and take effect.

Single male
1995 - 1.82%
2010 - 1.16%
2030 - 1.00%

Single female
1995 - 2.89%
2010 - 2.09%
2030 - 1.90%

One-earner couple
1995 - 4.79%
2010 - 3.64%
2030 - 3.37%

Two-earner couple
1995 - 3.54%
2010 - 2.52%
2030 - 2.29%

It is worth recalling that the greater return on contribution that single females receive on average at any given income is largely due to women's longer life expectencies, and hence to their greater need for benefits.

Also, it is worth maintaining a sense of perspective. None of these types of beneficiary categories is making less than a 1% rate of return on their contributions, and for persons retiring in 2030 (i.e. people who are currently age 45), no one is making more than a 3.37% return on their contributions. Everybody make a return in the range of what one might earn in a savings account, certificate of deposit or a government bond fund, which is appropriate at an order of magnitude level, for a system that is providing emergency fund like support in the event that there are no other retirement savings.

About 95% of the population gets married at some point and some people who remain single all their lives die before reacing retirement age. When you are married and how long you are married to particular people matters.

Most of this couples’ advantage comes from the availability of spousal and survivor benefits. Spouses are eligible for the greater of (1) the benefit they earn on their own; and (2) the amount they are entitled to as spouse or a surviving spouse. Contributions to the system by a one-earner couple can result in benefits generating a greater rate of return because the surviving, non-worker spouse can continue to receive benefits. A single individual’s rate of return on investment would be lower because benefits stop at his or her own death.

One-earner couples also receive a greater return than two-earner couples based on their lower contributions, even with comparable benefits. The availability of spousal benefits diminishes the value of Social Security benefits for two earner couples relative to one-earner couples – particularly when there is a significant disparity between spouses’ incomes. If the spousal benefit is larger than the benefit based on the surviving spouse’s own earnings, the survivor’s contributions have earned no return. If the survivor’s earnings generate a greater benefit, the additional contributions made by the deceased spouse decreases the couple’s rate of return as does the “net” benefit – which is the increase over the benefits the survivor would have received as a spousal benefit. . . .

One-earner couples versus single individuals and two-earner couples. The spousal benefit provides tremendous value at little or no cost to beneficiaries. Even as Social Security rates of return are projected to decline rapidly, one-earner couples are projected to receive a very beneficial deal in the future.

The income effect is significant, but still keeps most people within the return range associated with safe preservation of principle oriented investments. On average, only man who is single all his life and has a high income will not manage to at least achieve a return of all his contributions, and men in this situation will still come very close.

Although contributions are made at a fixed rate based on earnings, benefits are calculated using only 15 percent of average indexed monthly earnings over the second bend point ($3,689, or $44,268 annually, in 2004). This creates a lower rate of return as income increases, as illustrated in Exhibit 3.4. Income taxes paid on Social Security benefits received by higher income retirees further reduces rates of return.

Exhibit 3.4

Impact of Social Security for Low-, Middle-, and
High-Income Beneficiaries Turning 65 in 2000

A. Real Rates of Return

Single male
Low Income 2.02%
Middle Income 1.15%
High Income -0.07%

Single female
Low Income 2.77%
Middle Income 2.05&
High Income 0.81%

One-earner couple
Low Income 4.39%
Middle Income 3.54%
High Income 2.39%

Also, were it not for the preferrential treatment that Social Security provides low income workers, many elderly individuals would be reduced to poverty and expensive to administer welfare programs that would mitigate any costs savings from providing more modest Social Security benefits would have to be established to support them.

New Judicial Appointments

As I noted previously in a comment to another post, Governor Ritter has made new judicial appointments. He issued a press release announcing three new judicial appointments yesterday:

In his first appointment to the Court of Appeals, Gov. Ritter has named Nancy Jean Lichtenstein of Denver to replace retiring Judge Jose D.L. Marquez. Lichtenstein has served since 2001 as an appellate division attorney for the Colorado State Public Defenders Office. Prior to that, she was in private practice.

She is an author and an adjunct professor in the University of Colorado School of Law’s Appellate Advisory Clinic. She earned her B.A. degree from Northwestern University in 1984 and her law degree from the University of Denver School of Law in 1988.

Also today, Gov. Ritter named Thomas Bradford Flesher and Larry C. Schwartz, both of Pueblo, to the District Court bench in the 10th Judicial District. Flesher is replacing the retiring Judge David A. Cole, and Schwartz is filling a new judgeship created by House Bill 07-1054.

Flesher is currently a solo practitioner in private practice. From 1988 to 2007, he served as a deputy state public defender. He received his B.A. degree in political science from Oregon State University in 1982 and his law degree from the University of Colorado in 1985.

Schwartz has been a partner at Drummond, Dougherty & Schwartz P.C. since 1985. He received his B.S. from the University of Southern Colorado in 1979 and his law degree from the University of Oklahoma in 1982. Schwartz will take the bench on July 1, 2008, when funding for the new position takes effect.

Congratulations to all three.

Progress In The Credit Markets

The consumer credit marketplace has changed a great deal in the last few years.

Mortgage Lending

Foreclosure Reform

Effective January 1, 2008, a new foreclosure law took effect in Colorado. Under the new law the number of days it takes to foreclose upon a house didn't change, but the amount the debtor needs to pay to get out of foreclosure went down. While this doesn't appear to impact foreclosures filed in 2007, it will provide a greater window of opportunity for borrowers seeking to fine alternate financing, family help or to sell the troubled property so that equity isn't lost in a foreclosure sale.

Under the old law, in the first half of the process, the debtor could "cure" a default by paying all past due amounts on the loan and any associated collection costs. After the cure period expired there was a "redemption" period in which the debtor could get the house back only by paying off the entire loan balance, in addition to collection costs. The new law ended the debtor's right of redemption in exchange for a cure period equal in length to the old cure plus redemption period.

A foreclosure hotline in Colorado has helped tens of thousands of Coloradans facing foreclosure act more rationally in the face of their dilemna.

Homestead Exemption Increase

Colorado has also increased its home equity exemption from creditors. The first $60,000 of a home's equity is immune to judgment liens from creditors who don't have a mortgage or deed of trust, such as judgments for unpaid credit cards, unpaid medical bills or car accident liability. If one of the homeowner's is aged sixty or more, or is disabled, the exemption is $90,000.

Few Coloradans are impacted negatively by federal bankruptcy law limitations upon claiming a homestead exemption. Those changes primarily impact people who live in or move to one of a handful of states with unlimited or very high homestead exemptions. But there is some impact for the narrow class of Coloradans who have moved to the state less than two years ago from a state with more stingy protections for home equity and then filed for bankruptcy here.

Prepayment Reform

New regulations in Colorado have banned new mortgage loans with pre-payment penalties that extend beyond an initial teaser rate. These pre-payment penalties, usually found in subprime loans, had made it hard for distressed buyers who may have qualified for conventional credit to refinance into more manageable loans.

Mortgage broker regulation

Mortgage brokers are now a regulated profession in the state of Colorado, a move that drummed hundred of questionable lenders out of the business and has imposed meaningful obligations on these professionals to consider borrower interests, such as the suitability of the loans recommended for those borrowers, obligations of a kind that have long been imposed upon securities brokers.

Governor investors and lenders have also cracked down on real estate appraisers who cook their numbers to make otherwise not viable real estate deals go through.

Federal Tax Breaks

Federal tax laws have provided relief for taxpayers who lose their homes in a foreclosure or deed in lieu of foreclosure arrangement, when a bank forgives balances due in excess of the equity in the home. Previously, that forgiven debt was treated like taxable income unless the taxpayer could take addition steps to show the IRS that he or she was insolvent.

Private mortgage insurance premiums, required of borrowers in almost all loans with less than a 20% down payment, are now deductible like mortgage interest.

Jumbo Loan Relief In High Cost Areas

Changes to the Federal Housing Administration's loan criteria have greatly increased to availability of FHA loans with fair government set terms and more reasonable rates in high housing cost areas where more expensive jumbo loans were once the only available means of financing a home.

The End of the Subprime Market

The subprime mortgage lending market has virtually disappeared (with dollar volume down about 95% over two years ago) as a result of its own unprofitability, Alt-A mortgage lending market has contracted by about two thirds, and private mortgage insurance underwriting standards have tightened, as have the underwriting standards of all mortgage lenders.

Falling Housing Prices

Housing prices, especially in the less expensive part of the market, have fallen significantly. This eats up the equity of existing homeowners, leaving a record high percentage of them with a loan balance greater than the value of their house. But it also collapses a bubble in the housing market that was making it unaffordable to buy a new home.

Mortgage interest rates, for those who can qualify for mortgages and have a meaningful down payment, are not at an all time low, but they are sitll well below historical average mortgage rates. They are within a pecentage point or so of the market bottom.

Reasonable interest rates and falling housing prices combined have made it a buyer's market for first time homeowners who qualify for an FHA loan because they can come up with a 10% down payment, have credit sufficiently good (typically FICO scores of 620 or better), and have a steady income commensurate with the price of those in light of their other debt burdens.

A decline in rental vacancies and rise in rents as a result of large number of people who are easier foreclosure victims or who don't buy homes because they can't qualify for FHA loans has both spurred a shift from condominium development to apartment building develop, and has improved the affordability of buying a home relative to renting.

Credit Card Minimum Payment Increases

Major credit card companies have increased their minimum payments as a percentage of the total balance. For those who were carrying balances at the time and just getting by paying minimum payments, this was a catastrophe that probably pushed many of them over the bring into default and bankruptcy or garnishments. But for customers accruing balances after this time, it is dramatically reduced the length of time it will take them to ultimately pay off their balances, and will, as a result, greatly reduce the total amount of interest paid on their loans. Higher minimum payments will also make it harder for cardholders who tend to borrow until they can't pay the combined minimum payments anymore from going as deeply into debt as they did under the old minimum payment cutoffs.

Payday Loan Reform in Colorado

Another major change in the consumer credit market in Colorado, which will be huge if adopted, would impose a maximum annual interest rate on payday loans of 45% per annum, Colorado's usury rate for all other types of loans. Currently the interest rate on payday loans exceeds 300% and can be as high as 450% per annum. The bill has passed the state house and the house version passed on reading on the floor of the state senate. A committee vote, another couple of state senate floor votes and the signature of Governor Ritter are still required to pass the bill. But it appears that there is sufficient support in the Senate to pass the bill, quite possibly unamended (its first floor vote was 19-16 in favor), and the odds that the Governor will sign the bill seem good.

If the payday loan bill passes, the number of payday lenders in the state would plummet, from current levels in which they a ubiquitous and in a major expansion mode, largely ending one of the most exploitative elements of the consumer credit system. Other states have taken this step and have not seen the harm to the working class customer base that tends to use these loans that payday loan lobbyists claimed would arise.

Bankruptcy Reform

The 2005 bankruptcy reforms are hurting the economy right now.

Most importantly, the requirement of the new law that Chapter 7 debtors obtain credit counseling before filing, and all debtors have their paperwork lined up in advance of filing, has made it much more difficult to prevent a foreclosure with a last minute bankruptcy petition. As a result, mortgage lenders in foreclosures where there is some equity have received windfalls, while what would otherwise be an asset available to pay priority and unsecured creditors has been removed from the estate. Studies of Chapter 7 debtors referred to credit counseling has revealed that in the vast majority of cases, approaching 99%, credit counselors agree that a Chapter 7 bankruptcy is the debtors best course of action.

Debtors who make more than the state median income are forced into five year repayment plans under Chapter 13 in which all income over a certain allowed amount must be turned over to creditors. Given the less than 50% success rate for completing these plans back when they were three year plans and the amount paid to creditors was permitted to be much smaller, debtors advisers are reluctant to recommend Chapter 13 to debtors who have more than the state median income. Also many debts that used to be dischargable in a Chapter 13 plan but not under a Chapter 7 plan through the so called "superdischarge" are no longer entitled to be discharged. There are times when Chapter 13 can be appropriate, particular for debtors only a little over the state median income who hence have fairly small payments under their Chapter 13 plan, who also have very large consumer debt burdens and want to keep their homes.

Colorado's saving grace in the face of bankruptcy reform is that the state has a fairly high median income. As a result, many debtors who would have to file Chapter 13 bankruptcies to obtain relief in other states can file Chapter 7 liquidations in Colorado.

While Chapter 7 bankruptcies are more expensive to file due to the increased paperwork and attorney liability involved, and require more leadtime, on the merits Chapter 7 bankruptcies for the average below median income Colorado consumer debtor are only slightly less beneficial than under prior law. Secured creditors rights are strengthened, particularly car loan lenders who can repossess cars with loans in default during a bankruptcy with less paperwork and have a greater ability to force a car to be given up unless than full amount of the loan is reaffirmed. There are greatly limits on the ability of debtors to discharge "luxury purchases" made on the eve of bankruptcy on credit. There is less bankruptcy court interference in evictions pending at the time of a bankruptcy. Child support and alimony collection proceedings can now virtually ignore bankruptcy proceedings. The federal law governing exemptions from creditors has been tightened up, but that doesn't apply in Colorado which requires debtors to us its own homegrown set of exemptions from creditors.

Repeat bankruptcy filings close in time by the same person or with regard to the same piece of real estate are prohibited more severely.

In a nutshell, bankruptcy has been made inconveniently more difficult for working class debtors in Colorado, but not prohibitively so. But bankruptcy is a much less viable option for upper middle class debtors overwhelmed by consumer debts than it used to be prior to 2005.

One thing I like about Presidential candidate Barack Obama is that he has proposed a package of important targeted reform to the 2005 bankruptcy law. Presidential candidate Hlllary Clinton voted for the 2005 law, which made some worthwhile reforms and closed some legitimately loopholes, but also made significant changes for the worse in existing law and was poorly drafted and thought through.

Pending Legislative Action

There is a whole swirl of pending federal proposals to bring about further reform. Among them are freezes on ARM triggered interest rate hikes, proposals to allow cramdowns of mortgage debts in bankruptcy (which reduce the princpal on the debt to the value of the collateral and then include the balance owed in a larger discharge of indebtedness, rather than requiring the home to be surrendered), greater regulation of the mortgage lending industry, encouragements for lenders to negotiate more favorable deals with customers perhaps partially forgiving debts in some cases, and more.

Pawn lending will still exist, and that isn't likely to be reformed, but that industry doesn't carry the same kind of instant gratification temptation element that drive the subprime and payday lending industries, because you have to give up possession of something that you value to get the loan.

The rent-to-own business may see a short term boost, as alternative ways to buy the good life on the installment plan at outrageously inflated prices have evaporated. But it would hardly surprise me if a state legislature willing to take on the payday loan industry this session, if it retains the current balance of power in the 2008 elections, which seems likely, might institute significant regulation of the rent-to-own industry in the 2009 legislative session.

The Economic Impact of the Changes As A Whole

The bottom line for a lot of working class consumers will be that the never ending temptation to try to consume at a middle class level with high interest rate loans with unfair terms is going to largely evaporate. The myth, which is only partially valid with respect to this group of consumers, that bankruptcy relief is much harder to get than it used to be, could also contribute to a major working class flight from consumer debt. I expect to see responses a number of conseqeuences of these changes.

A Return To Traditional Commercial Banking

At the business level, I expect to see significant growth in regulated lending. These are low dollar amount, high interest rate loans (still subject to the 45% interest rate cap and other consumer loan regulations). While it isn't nearly so profitable as the ubiquitous payday lending industry (there are more of them than there are McDonalds and Starbucks combined and the intensity of low income neighborhoods is particuarly great), and as a result supervised lenders will not flood low income neighborhoods the way that payday lenders did, there will be a slow and steady increase in this kind of lending. No longer facing competition from unscrupulous but consumer friendly predatory lenders, banks and credit unions may begin to recolonize low income and minority neighborhoods that they had been squeezed out of by their flashier and more profitable competition.

At the consumer level, I expect to see the old fashioned savings accounts, Christmas funds and emergency savings in checking account become much more common. The fact that payday loan customers and rent to own customers manage to make regular installment payment at the excessive rates charged for that credit or quasi-credit with surprising low default rates despite the low and sometimes irregular incomes and poor credit histories of that population suggest that even the American working class in an era of stagnant income has significant income that could be devoted to savings rather than debt payments if the economy favored that choice.

Another big change I expect to see at the consumer level who have its greatest impact on the black and Hispanic middle class living in predominantly minority neighborhoods. Many of households in these situations have historically used subprime and predatory lending operators because their less affluent peers with fewer options use them and because they are ubiquitous in their neighorhoods. Yet, about half of the people who got subprime mortgages, a disproportionately minority group, would have qualified for FHA mortgages with far lower interest rates and far more fair terms. Deprived of subprime choices, many middle class minority households will earn of the more favorable conventional FHA lending options available to them and not be exploited by predatory for profit subprime lenders. Similarly, if rent-to-own and payday lending options no longer available, many predominantly lower middle class and middle class minority customers of those financing arrangements will learn that qualify for more conventional small loans and conventional credit cards, in both cases often though banks, that charge far lower interest rates.

Is The Homeownership Impact Bad?

Of course, many people who qualified for subprime mortgages will no longer be able to afford a house. But as I've noted before at this blog, there are real reasons to doubt that securing home ownership through subprime lending is in the economic best interest of the people who do it, relative to renting for a longer period of time and trying to save up for a down payment.

Furthermore, as I've noted in another previous post at this blog, most subprime lending is made to existing homeowners to finance consumer debts with second mortgages or refinances of first mortgages, an activity that does not increase the homeownership rate. Empirically, the number of foreclosures resulting from subprime loans going bad equals or exceeds the number of first time home purchases made with subprime loans, with the bottom line conclusion being that the recent modest increase in homeownership rates to all time highs can be attributed entirely to an increase in more conventional, lower interest rate FHA lending.

So, while the homeownership rate is likely to fall modestly, this does not mean that marginal homeowners are worse off economically as a result. The fact that home ownership is an important way for the vast majority of homeowners with conventional or FHA loans to build wealth and economic security does not mean that the same is true for marginal homeowners who pay excessive interest rates and incur obligations that render them economically insecure to do so.

Incentives To Save and Their Virtues

As the option to get goods and services first and pay for them later, or to use the ability to borrow money as an emergency fund evaporates, there will also be a very strong economically incentive for people who have made heavy use of high interest debt and lived paycheck to paycheck to instead get a paycheck or two ahead with savings in order to have funds to cope with emergencies or make big consumer purchases.

If the unavailability of high interest rate debt does indeed reduce the debt burden of and increase the savings rate of working class families and individual and minority middle class households, the economic benefit to those households and to the stability of the greater economy could be great. This is because saving first and buying later is a lot cheaper in the long run, making those families better off financially overall. Lots of these individuals don't know at a emotional level just how great of a burden not paying predatory lenders interest and fees would save them, but once forced to pursue less exploitive purchasing habits, a whole generation's attitudes towards borrowing, saving and consumer spending could be transformed for the better.

Playing by the rules does lead to economic success in America. But a lot of us have forgotten that one of "the rules" for those who are chasing the American dream is to postpone consumption, including purchases of particular houses and consumer purchases, until you can afford them, and this rule's corollary, which is to devote some of your income to savings so that you can make major purchases and buffer future economic hardships, rather than living paycheck to paycheck.

Isn't This Economic Paternalism?

Do the regulatory agenda and economic trends, partially completed and partially in process, impose some economic paternalism upon many poor, working class and middle class minority consumers? Yes, it does.

It subcribes to the theory that many people in this economic class are taken advantage of by amoral business interests who systematically exploit their lack of economic sophistication leading them to make decsions which are not in their enlightened economic self interest. Lassiez faire economics assumes that people act in their own rational economic self-interest, but in real life, people don't act quite like that and the worse abuses in our economy arise in situations where the rationally self-interested economic actor is least accurate in describing a typical person involved in a transaction.

These regulatory reforms target economic irrationality by using something like a substantive economic unconscionability analysis. They presume that someone is economically irrational and is being exploited in situations when it would be exceeding unlikely for a well informed economically rational person to engage in such a transaction, and either give special scrutiny to, or prohibit those transactions.

Sometimes parents have good advice. These changes will mean more of these households will be less able to live the good life now. But it also means that are far larger percentage of these families will be put on a sustainable path to a more comfortable life in the long term, gimmick free. We'll have to wait and see, but I believe that the larger package of state and local reforms that are coming together in the wake of the subprime mortgage collapse and related economic downturn, will make our economy both more sound and more just.

TSA Still Stupid and Humiliating

The idiots responsible for keeping us safe on airplanes at the Transportation Security Administration insisted that a woman remove small nipple rings with pliers before she would be allowed to board the plane.

Once again we get tasteless security theater instead of real security.

Two More Years In Iraq

It is clear that President Bush is not going to significant draw down troop levels from Iraq while he is in office. Both Obama and Clinton would withdraw our troops from Iraq but this would take something on the order of 14 months (Obama identifies this time period expressly but Clintons plan for withdrawal suggests a similar pace of troop drawdowns). McCain, of course, doesn't want to leave Iraq at all.

As a result, the Iraq War, which just had its fifth anniversary, is almost certain to last at least seven years, i.e. two more years. At current casualty rates this means that something on the order of 1000 more U.S. troops are likely to die in the conflict and that more than 10,000 more U.S. troops are likely to suffer serious non-mortal wounds before the conflict is over. The cost to U.S. taxpayers, probably on the order of a trillion dollars, and the costs to world oil consumers as a result of elevated oil prices due in part to the conflict (oil was at $106 a barrel this week) during that time period are likewise immense.

It is also unlikely that troops will be withdrawn from Afghanistan any sooner than that time frame. Thus, we are likely to have troops in Afghanistan for a total of nine years or more. The number of U.S. troops in Afghanistan, however, is only about 10% of the number of troops in Iraq. Also, while our coalition allies have faded away in Iraq leaving the U.S. holding the bag there, there is continued strong international coalition support for the military action in Afghanistan. This week France announced its intent to increase its involvement in that conflict and Britain showed its commitment earlier this year by sending one of the crown prince's sons to serve in that action.

Laser Missile Defense Needs Work

A point defense anti-missile laser system has been rejected by Israel because it works only 22% of the time in tests.

Farewell Scooter Joe's

My favorite coffee shop, Scooter Joe's shuts its doors tomorrow. Appropriately, it's raining today.

The decision was made by Jan, its principal owner. No scandal rocked the well liked establishment. There was no blow up with the employees who remain loyal until the end. No government regulator stepped in. Like many small businesses, the balance between revenues and expenses wasn't right and efforts to change the balance failed. Running a small business takes a lot of work, and considerable management talent. But there is no guarantee that the returns are great. Business is not a meritocracy in a conventional sense. While businesses that fill urgent needs are rewarded, businesses are not rewarded simply because their owners are talented people. While the rich are disproportionately self-employed, an accountant friend of mine who has many small business clients informed me that a large share of retail business owners barely make minimum wage.

Cities change. Businesses come and go. One of the triumphs of capitalism is that it doesn't allow good ideas that don't work out to linger. Lots of good ideas don't work out, and in government, those ideas often flounder for year after year, because it is always hard to change the status quo in government. State owned enterprises are notorious for continuing long after they have ceased to be profitable without any serious efforts to reform them.

A related and important characteristic of capitalism is that it is profoundly non-majoritarian. Milton Friedman most important intellectual contribution, which was bipartisan in its impact, was his ability to vividly illustrate that majoritarian electoral democracy is not the only, or even the most important, form of our democratic culture.

Capitalism doesn't require all or nothing outcomes. While capitalism often does reward scale when it creates economies of expense or advertising, it does not do so ruthlessly. A few hundred regular customers in a metropolitan area of a couple of million people, is all that it takes to sustain a coffee shop. My own law practice boasts several hundred clients, but in any given month only a couple of dozen are active cases.

As a result, it is often much easier for unconventional ideas or minority preferences to prevail in the marketplace than it is in government, where there are far more decision makers who must buy in, far more public consultation is required, decision making it slow and often subject to appeal, and far more people are entitled to input. The tendency of conventional zoning laws to suppress the fundamental mechanism of capitalism in favor of the governmental model is one of the reasons that it so often leads to mediocrity in urban land use.

Also, while one associates the term capitalism with the ruthless pursuit of profit, I used the term more broadly. The same market logic that drives the rise and fall of coffee shops is also at play in the non-profit civil society sector. Anybody can start a church or society. Religion is vibrant in the United States, while it has wilted in Latin America and Western Europe, largely because the United States has organized religion on a market model, allowing a closer fit to individual niches and forcing churches to adapt or die, while Western Europe and Latin American have predominantly followed the governmental model.

Of course, a great many important enterprises strike a balance between the two models. They have far more constituents than a closely held business like a coffee shop or a small law firm, but they have far fewer than even a single major city or county. A typical homeowner's association in a condominium or subdivision has dozens or hundred of members. Producers cooperatives, which are particularly common in the farming sector, often have similar numbers of members. Political power in private colleges is often vested in the alumni of whom thousands are active. Publicly held companies typically have thousands to hundred of thousands of distinct shareholders, typically dominanted by dozens to hundreds of institutional investors and ultra-wealthy individuals. Mutual companies, credit unions (which are a form of mutal company) and buyers cooperatives (like CostCo) not infrequenlty have tens of thousands to millions of members.

Mutual companies are a far more natural and less regulatory way to prevent abuse of monopoly power, and to prevent excessive risk taking than the regulated utilty/regulated industry model that the U.S. has favored in a variety of settings from commercial banking (the FDIC) to cable television, to electricity and natural gas, to local telephone service, to water and sewer service. For a long time they provided a good solution in the health insurance industry through Blue Cross/Blue Shield, but somewhere along the way the balance stopped working. Insurance remains an important area for this form of enterprise.

Long before Starbucks spread the expresso craze across America, the British instituted private clubs, that serve a similar function, providing a pleasant social gathering place to have meals or drinks. Since these clubs are member owned, the members can be assured that they won't be exploited, but the club can charge enough to keep it going. The members, rather than a government agency that runs public recreation centers or officer's clubs in the military, decides when the price has gotten too high to justify the benefit. While this organizational form caught on in the United States among golf players creating country clubs across the nation, and it has also captures a good share of the high end athletic club market, but this organizational model has languished in the eating club realm.

A recent effort to create one in Denver crashed and burned. Denver has a few, like the Press Club downtown and the University Club near the capitol, but they haven't thrived. The Petroleum Club, at which Presidential candidate John McCain is speaking today, has reincarnated itself again and again as one incarnation after another has failed economically. Part of this is a function of land use. A club needs to be convenient to its members and it is harder and harder to do that in an urban landscape that is sprawling. The British urban environment, in contrast, is far more compact.

Undergraduate Major and Graduate School Admission

Math majors do much better on the LSAT (the standardized law school admissions test) than any other undergraduate major. Math majors also have the highest rate of admission to medical school and the best MCAT scores. Math majors tend to be among the most economically successful majors after graduation (second only to engineers). Math majors also do well on the GMATs (business school); not as well as some other quantitative discipline majors but better than either economics majors or undergraduate business majors.

Philosophy and physics majors also do well on standardized tests connected to further graduate study. Education majors tend to do worst on both the LSAT and the GRE (see also here).

Alas, math majors pay a price for their exceptional test scores: less sex.

Convergence On Mortgage Insurance and Underwriting

Mortgage lending standards and private mortgage insurance underwriting standards are converging on agreement over what kind of down payments, income and asset documentation, credit histories and loan terms must be present in order to reduce the risk of default on loan to tolerable levels. The near complete demise of the subprime mortgage industry, in turn, makes deviation from these minimum standards very difficult.

Mortgage Insurance Taxation

Most lenders offering mortgages which are not conventional (i.e. 20% down payment) require borrowers to pay for mortgage insurance.

Congress has intervened by temporarily allowing mortgage insurance payments to come within the mortgage interest deduction, subject to certain limitations (a change which should be made permanent).

This change in the tax law, which previously allowed only interest payments and points to be deducted, normalizes and subsidizes non-conventional loans, opening up the house market on a level playing field taxwise to first time home buyers who can't afford a 20% down payment.

Mortgage Insurance Underwriting Tightens

Meanwhile, mortgage insurers are tightening their underwriting standards in some markets, a change that I suspect will soon sweep the nation.

One mortgage insurer "won't insure mortgages where the borrower has had a short sale, foreclosure or bankruptcy in the past two years." Another insures loans of borrowers with as little as a 5% down payment if they have reasonably good credit (a FICO score of 620 or better), but insist on a 10% down payment for other borrowers.

Many mortgage insurers almost all now require at least a 5% or 10% downpayment, depending upon the company, the location of the home and the borrower's credit. Mortgage insurers are also steering clear of interest only and other exotic loans. For example, one major mortgage insurance company Nor will it insure loans lacking full documentation of income, loans for investors and negative amortization mortgages."

This is a major change. In 2006, about 40% of subprime loans lacked full income documentation.

The evolving standards are similar to the standards that Fannie Mae imposes to meet its prime borrower standards:

Prime borrowers have a credit score above 620 (credit scores are between 350 and 850 with a median in the U.S. of 678 and a mean of 723), a debt-to-income ratio (DTI) no greater than 75% (meaning that no more than 55% of net income pays for housing and other debt), and a combined loan to value ratio of 90%, meaning that the borrower is paying a 10% downpayment.

While borrower's with good credit can get a 5% down payment loan, mortgages with 0% or 3% downpayments have virtually vanished, and no documentation loans are now largely limited to loans where no private mortgage insurance is required. Borrower's with seriously bad credit can likewise forget about trying to get a mortgage unless they can put together the 20% downpayment that shifts almost all of the risk in the loan to the borrower.

Private mortgage insurance premiums are also increasing.

The Demise of the Subprime Market

"The share of subprime mortgages to total originations was 5% ($35 billion) in 1994, 9% in 1996, 13% ($160 billion) in 1999, and 20% ($600 billion) in 2006." This rise in lending was accompanying by a rising number of lenders: "By 2005, a list of subprime-lending specialists compiled by the Department of Housing and Urban Development had grown to 210 lenders, from 141 in 1996. Their combined loan volume grew tenfold during the same period."

But subprime lending is collapsing as subprime lenders go bankrupt and the collateralized mortgage pools that financed their lending have become poison on Wall Street. According to an analyst at Washington Mutual Bank quoted on June 6, 2007: "Total subprime loan volume will probably drop to about $350 billion this year from $640 billion last year due to improved underwriting and other changes, he said." Nine months later, that forecast looks optimistic.

My own guestimate, based upon the data below, is that total industrywide U.S. subprime loan value will probably drop to about $35 billion or less in 2008: absolute numbers not seen since 1994 and market share numbers that are even smaller, of under 4%. Total industrywide U.S. Alt-A loan value may drop to $150 billion or less in 2008. The combined subprime and Alt-A market in 2008 is likely to be about a quarter of the size of the subprime market alone in 2006.

For example, at Countywide Financial, once one of the nation's largest providers of subprime loans, according to report from the company released in November of 2007:

Volume of loans considered to be riskier fell significantly. Adjustable-rate lending totaled $3.1 billion, down 81 percent from a year earlier and 19 percent from September.

Subprime loans, which go to people with poor credit, totaled just $42 million in October, down 84 percent from September, and 99 percent from $3.3 billion a year earlier. Home equity loans totaled $1.36 billion in October, down 15 percent from September and 68 percent from a year earlier.

The top ten subprime originators made about $4.9 billion of subprime loans in the fourth quarter of 2007 compared to about $82 billion in the fourth quarter of 2006. The top ten Alt-A lenders (just above subprime) made about $23.5 billion in Alt-A loans in the fourth quarter of 2007, down from $78 billion in the fourth quarter of 2006.

The collapse was in full swing in 2007: "A recent survey of mortgage brokers found that of home purchase closings they had scheduled for August, 2007, 56% of subprime homebuyers had canceled closings. Of subprime borrowers trying to refinance adjustable rate mortgages with resetting interest rates, the survey found that 64% of the subprime homeowners were unable to do so."

One website lists the total number of imploded subprime lending operations since late 2006 at 242 (2 of which have since returned from the brink) and has 19 more on a watch list. A list of the top 25 subprime lenders as the second quarter of 2006 noting their current conditions is bleak.

In short, the entire subprime industry has withered and very near died in the face of overwhelming evidence that these loans have high default rates. According to Wikipedia (and here:

Beginning in late 2006 . . . A steep rise in the rate of subprime mortgage foreclosures has caused more than 100 subprime mortgage lenders to fail or file for bankruptcy, most prominently New Century Financial Corporation, previously the nation's second biggest subprime lender. The failure of these companies has caused prices in the $6.5 trillion mortgage backed securities market to collapse[.]

There is almost no subprime lending to be had out there in the private market. It is FHA lending or nothing for most less creditworthy buyers or buyers with only small downpayments.

There is good reason for this phenomenal collapse:

16% of subprime loans with adjustable rate mortgages (ARM) were 90-days delinquent or in foreclosure proceedings as of October 2007, roughly triple the rate of 2005. By January of 2008, the delinquency rate had risen to 21%. . . . Subprime ARMs only represent 6.8% of the loans outstanding in the US, yet they represent 43.0% of the foreclosures started during the third quarter of 2007.

Subprime fixed mortgages represented 6.3% of outstanding loans and 12.0% of the foreclosures started in the same period.

The American Enterprise Institute notes that:

The June 30, 2007 National Delinquency Survey of the Mortgage Bankers Association reports a total of 1,090,300 seriously delinquent mortgages. Serious delinquency means loans 90 days or more past due plus loans in foreclosure. Of the total, 575,200 are subprime loans. Thus subprime mortgages, which represent about 14% of mortgage loans, are 53% of serious delinquencies.

The survey reports 618,900 loans in foreclosure, of which 342,500 or 55% are subprime.

The ratio of subprime loans in foreclosure peaked in 2002 at about 9%, compared to its current level of 5.5%. Seriously delinquent subprime loans peaked during 2002 at 11.9%, compared to the current 9.3%. These ratios at this point are not as bad as five years ago, but they are still rising.

A systematic regularity of mortgage finance is that adjustable rate loans have higher defaults and losses than fixed rate loans within each quality class. Thus we may array the June 30, 2007 serious delinquency ratios as follows:

Prime fixed 0.67%
Prime ARMs 2.02%
FHA fixed 4.76%
FHA ARMs 6.95%
Subprime fixed 5.84%
Subprime ARMs 12.40%

The particular problem of subprime ARMs leaps out of the numbers. Also notice that FHA and subprime serious delinquency ratios for fixed rate loans are not radically different. he FHA is predominately a fixed rate lender, whereas subprime is about 53% ARMs. The total range is remarkable: the subprime ARM serious delinquency ratio is over 18 times that of prime fixed rate loans.

A central problem is that during the boom the subprime market got very much larger than it used to be. In the years of credit overexpansion, it grew to $1.3 trillion in outstanding loans, up over 8 times from its $150 billion in 2000.

While all out war on adjustable rate mortgages has not been declared, the effect of cracking down on subprime and weak credit loans may have the same effect. According to a report from a year ago: "At the end of 2006, subprime and alt-A loans accounted for roughly 72% of ARM debt outstanding—that is roughly $2.5 trillion in debt, or 25% of the total mortgage debt outstanding."

The Circle of Ideology

It is customary, based upon the seating preferences of deputies the French revolutionary parliament, to call liberals "left wing" and to call conservatives "right wing." Most of the time, this is a quite useful description of real life political behavior.

Despite the protestations of organizations like the operators of the Political Compass website, that strive to distinguish between social liberals and conservatives as one dimension of political ideology, and economic liberals and conservatives as another dimension of political ideology, most real life politicians end up in the liberal-liberal quadrant, or the conservative-conservative quadrant. There are subtle distinctions to be made in the middle in a multi-dimensional way, but they are outliers.

Left and right wing ideologies are, of course, matters of degree. Some people are more liberal than others, and some people are more conservative than others. Some people in the middle are just plain muddled and incoherent ideologically, and those people are mostly politically inactive or at least reluctant participants in politics.

I'm certainly not the first to note, however, that if one goes far enough to the right, and one goes far enough to the left, that there is a certain convergence, suggesting that left and right wing are relative directions not on an ideological line, but on an ideological circle in which the extremes meet.

The new to me, at least, Not My Tribe group blog which comes up as a Colorado based blog in the Lefty Blogs feed is very far to the left of my own ideology to the point at which it is starting to enter the extremes meet zone. I'm something of the Brennan liberal roughly in the ideological middle of non-Blue Dog elected Democrats in the U.S. House and U.S. Senate. So far as I can tell, Not My Tribe hovers around the ideological boundary distinguishing Democratic Socialists from bona fide Communists.

For example, a recent comment at the blog, which seemed to me to be in accord with the spirit of the blog, argued that the Free Tibet movement was an corporatist Anglo-American plot to secure a puppet who could cut off the water supply of the rest of China. Call me old fashioned, but I'm not too impressed myself with sovereignty obtained in recent times through mere force of conquest.

Colorado Candidates 2008

Dan Willis has the skinny on all candidates and rumored candidates running for partisan public office in 2008 at state and judicial district level.

The Alternative Minimum Tax

Alternative Minimum Tax was due on 3.01% of tax returns in 2005. But this varied widely by state. The states with the highest rates were:

New Jersey 6.82%
New York 6.00%
Conecticut 5.9%
District of Columbia 5.19%
Maryland 5.02%
California 4.86%
Massachusetts 4.74%

The overwhelming factor that influences AMT impact rates is the level of deductible state and local taxes that a state imposes. Ordinary income taxes allow taxpayers a state and local tax deduction under Section 164 of the Internal Revenue Code, but AMT found at Sections 55-58 of the Internal Revenue Code does not. The state and local tax deduction reduces federal revenues by about $75 billion a year.

AMT disproportionately impacts states with Democrats in Congress.

A March 2008 article by Brian D. Galle in the Michigan Law Review examines the impact of the partial repeal of the state and local tax deduction via the AMT from a theoretical tax justice and federalism perspective.

In a nutshell, from a 2002 report, AMT works as follows:

Taxpayers subject to the AMT must calculate their tax liability twice: once under regular income tax rules and again under AMT rules. If liability under the AMT proves higher, taxpayers pay the difference as a surcharge to the regular tax. Technically, the difference paid is their AMT.

To calculate their AMT, taxpayers add to their regular taxable income two categories of items called AMT preferences. Exemption preferences, which can be deducted from income under the regular income tax, are disallowed in the AMT. These items include personal exemptions, the standard deduction, and itemized deductions for state taxes and miscellaneous expenses. Middle-income AMT taxpayers are the most likely to be hit by exemption preferences.

Deferral preferences allow taxpayers to postpone regular income tax payments by hastening deductions or delaying income recognition. The AMT rules limit the extent to which taxpayers can use deferrals by, for example, allowing less generous depreciation deductions. Compared with exemption preferences, deferral preferences are more complex, tend to affect high-income filers, and generate less AMT revenue.

Once taxpayers add in all applicable preferences and tally income, they subtract the AMT exemption . . . The resulting income level is taxed at flatter rates than under the regular income tax. The statutory AMT tax rate of 26 percent applies to the first $175,000 of net income above the exemption. For income over that level, a 28 percent tax rate applies. . . . Many taxpayers' effective AMT rate, however, is significantly higher, because the exemption phases out at a 25 percent rate over higher income ranges. The AMT parameters are not indexed for inflation.1

The AMT exemption was set at $66,250 for joint filers and $44,350 for single filers in 2007 as a result of the Tax Increase Prevention Act of 2007. Those numbers will drop in 2008 without Congressional action.

Notably, the exemption for municipal bond income (other than certain private activity bonds), which is a key factor that allows high income taxpayers to pay no income tax (the reason it was adopted in the first place), is not affected by the AMT, nor is the capital gains tax preference with also overwhelmingly aids high income tax payers. As a result, the upper middle class, rather than the rich, bear most AMT burdens.

AMT liability has increased about 50% due to lower ordinary income taxes that are reclaimed under the AMT, and about 50% due to a lack of indexing for the AMT exemption.

An AMT repeal would cost about $60 billion a year in tax revenues. Allowing dependent exemptions under the AMT would cost about $17.5 billion a year in tax revenues. Allowing state and local tax deductions for AMT purposes would cost about $36 billion a year in tax revenues. But allowing both dependent exemptions and state and local tax deductions would cost about $44 billion a year, rather than $53.5 billion a year, because their impact overlaps.

According to a 2004 estimate that assumed that there would be no AMT relief:

Until 2000, less than 1 percent of taxpayers paid the AMT in any year. Under current law, however, the number of taxpayers affected by the AMT will grow from just over 1 million in 2001 to nearly 30 million in 2010 before falling back to about 23 million in 2014 after the expiration of the 2001 and 2003 tax cuts (see Figure 1). Twenty percent of all taxpayers--and 40 percent of married couples--will owe AMT in 2010. AMT receipts in 2010 will total about $90 billion, roughly 7 percent of total individual income tax revenue. Nevertheless, the AMT is only partially successful in imposing tax liabilities on all high-income people: in 2001, nearly 1,100 tax filers with AGI above $500,000 paid federal income taxes only because of the AMT,(9) but almost 900 people in that income range paid no federal income tax at all despite the AMT.(10)

Current estimates are that about 20 million people would owe AMT but for the law passed in 2007.

I would favor adding preferrential capital gains and qualified dividend rates as AMT preferences, including all municipal bond income in alternative minimum taxable income, disallowing interest on a second or vacation home, and allowing the standard deduction (if elected), personal exemptions and the state and local income tax deduction against alternative minimum taxable income.

This would shift the AMT burden to the intended targets, i.e. high income people who pay unfairly low taxes under the current system, while providing relief to middle and upper middle class families who aren't receiving any unusual or exceptional benefits under the current system.

On Partnership Taxation

"Partnership taxation probably is the epitome of what's wrong with the tax system."

From Mauled Again which discussed why this is the case in detail.

The amount of tax due in most, but not all, situations is lower in partnership taxation than in C corporation taxation, but this comes at the cost of having to deal with among the most heinously complex parts of the tax code. (Subchapter S corporation tax law is much less complex than partnership taxation and produces similar although not identical tax liabilities, but is less flexible.) It also doesn't help that most big corporations can afford expensive legal counsel to handle the hard issues, which often come up primarily in big business settings. In contrast, partnerships are often small ventures with little room in their budget for tax counsel or a tax accountant.

The widespread use of limited liability companies, limited liability partnerships, limited liability limited partnerships, limited partnership associations, and assorted other spawn of the check the box rules have made the problem profoundly worse, because Subchaper K was written with the assumption that some or all partners have unlimited liability and many Subchapter K rules are awkward at best and simply do not work at all, at worse, in non-recourse regimes.

Yet, as I explained to my continuing education class on asset protection yesterday, no sane person should ever use a general partnership by itself as their sole business entity, even though there are select circumstances when a sole proprietorship should be preferred to a single owner corporation or LLC. General partnerships are the default regime of the uncounseled, or arise accidentally.

General partnerships can also be a pain to deal with from a non-tax internal management perspective, in addition to their obvious asset protection flaws. I can affirm from experience that a general partnership breakup is an ugly thing and that the uniform laws adopted in Colorado and almost everywhere to deal with them are inadequate to address the issues that arise in practice. This happens mostly because important practical issues like who controls the entity during the breakup, who the proper parties are to litigation, and how discovery is handled are not adequately addressed in the manner that they come up in real life by the statute.

Subchapter K was hard enough, however, even before completely limited liability entities appeared. For example, my clients almost always find the distinction it makes between allocation of items of profit and loss on one hand, and distributions of partnership assets on the other, to be difficult to understand and counterintuitive. Do it yourself partnership agreements are frequently ambiguous in practice as a result of failing to make that distinction.

Alas, tax law is not driven by small general partnerships, LLCs and LLPs, but by highly sophisticated financial transactions designed using the tool of Subchapter K of the tax code which governs partnerships. As Maule explains, the reason that this is not reformed, despite the fact that it wouldn't be terribly hard to adopt reforms is that:

Simplification attempts would . . . be opposed by those who have advantages under the current system that they would lose if the partnership provisions were simplified. The same, unfortunately, can be said about most other areas of the tax law, though perhaps not quite to the extreme level as afflicts partnerships.

One possibility would be a safe harbor regime for reasonable simple LLCs and LLPs. Another would be to simply follow the example of the 1986 tax reform and simplify the law on a revenue neutral basis notwithstanding the fact that all sorts of special interests would be offended as a result.

More Progress For Mouse Kind

Stems cells have been used to cure Parkinson's disease in mice. The hope, of course, is that a human cure could follow someday.

University of Akron Doesn't Get It

The University of Akron recently demoted a philosophy department chair (who had held that post for eleven years) to merely professor rank for failing to be in the office forty hours a week during normal business hours. While this is a typical expectation in the business world, and both professors and department chairs generally work full time, it is unusual for either professors or department chairs to be on campus in their offices full time. Most are on campus to teach classes and to hold office hours for students and for faculty meetings. Department chairs spend a few more hours in their offices than most, but the administrative responsibilities of a department chair are modest (this contract called for 20% of full time work directed towards administrative duties), and some of those hours are typically spent off campus or outside regular business hours doing paperwork, planning or attending meetings.

Typically, the only people on the academic side of university administration who maintain full time business day office hours are deans, provosts, registrars and their support staff. Often, in an academic department, the department secretary is the person present in the office the most hours of the week.

The University of Akron's decision suggests that it doesn't understand how university's work and that it isn't committed to its academic mission. Those are serious blows for what is already a third rate university in the court of popular opinion.

Presidential Candidates on Criminal Justice

The three major candidate's criminal justice positions are outlined here. This is an area where I am not impressed with Clinton relative to Obama.

SCOTUS: Vienna Convention Irrrelevant

The U.S. Supreme Court has held that the Vienna Convention which is a duly Senate adopted treaty which the World Court has found Texas to have violated is not enforceable in the United States against state governments.

Once again, the United States has shown itself to have wanton disregard for what should be binding international law.

Know When To Quit

Some people don't recognize that they've lost when it is obvious to others. Even lawyers. For example, this lawyer who was disbarred for trying to collect an illegal fee and then brought suit to try to collect an even bigger fee anyway.

Defense As Foreign Aid

The Department of Defense has a deceptive name. Defending the United States has never been its primary or sole mission (ironically, the military did have this purpose prior to World War II despite a more bellicose description of the government departments involved). While everyone knows this, the name has had a profound effect on how people analyze the budgetary issues involved.

It is easy to simply assume that the purpose of the United States military is to be able to crush any potentially hostile military force in the world in a foreign world by entirely destroying its military and occupying it a la the Iraq War. But that is an unrealistic mission that can only ruin America economically.

A responsible federal government clearly has a duty to protect the American people from foreign threats and domestic insurgencies, and to have military forces necessary to prevent such invasions and insurgencies from overwhelming our democracy. But, if all we were concerned about were protecting the United States, we could put together a force that would meet those needs with something on the order of $60-$80 billion a year, about 20% of the peacetime budget of the U.S. military or perhaps a little more.

Such a notional force might have 150,000 active duty ground troops with another 150,000 in reserve forces, plus some National Guard forces which would reflect an ability to overwhelmingly outnumber Canadian, Mexican or amphibious assault forces in the unlikely event of assault from any of those quarters under a radically different international regime than one in place now, and to put down a full fledged insurrection in some of the U.S. states.

In the Navy it might have no aircraft carriers, about 40 surface combatants (all of those not routinely tied to aircraft carrier groups) for commercial ship escort, anti-piracy and interdiction of invading ships particular near Hawaii and Guam, about 20 attack submarines for similar duties, and perhaps 6 amphibious ships whose purpose would be solely to rescue American expatriots from third world countries that had dissolved into anarchy, rather than for mounting amphibious assaults.

The Air Force and naval air resources would concentrate on aircraft like maritime patrol and air to air combat roles for interdicting invading forces. Our large current capacity to bomb military targets in foreign states would be less important.

Nuclear forces might stay at similar levels, given the deterrence justification for their existence, but most of this is sunk cost. The operating resources necessary to maintain the American nuclear arsenal are quite small.

I'm not proposing such a force for the United States. There is a place in U.S. foreign policy and within the obligations of a world superpower to intervene militarily on behalf of our allies in foreign wars. Little countries do this by sending out units to participate in peace keeping missions. Our obligations are greater in that regard.

But the Defense budget, beyond the first $60-$80 billion should be understood to be what it is, foreign military aid.

Seen in that light, the Defense budget is no longer all for a core purpose of the federal government. Also, this kind of recognition suggests that we should more carefully compare the benefits of a marginal dollar of military foreign aid with the benefits of a marginal dollar of non-military foreign aid or spending in lieu of military spending when evaluating our budget priorities.

How many foreign conflicts could you end by buying off their leaders with $50 billion? At what price would North Korea be willing to give up the submarine force that we now spend tens or hundreds of billions of dollars to have the ability to destroy? How much terrorism could we prevent by using several billion dollars a year funding programs that give young men brighter futures in places like Saudi Arabia that produce a large share of foreign fighters and suicide bombers in Iraq and produced most of the 9-11 terrorists?

Recognizing that the Defense budget is mostly foreign aid also calls for more careful analysis of whom we are aiding.

Japan, South Korea, Taiwan, Israel, the Bosnians and the people of Kosovo are big beneficaries. The Phillipines and the Eastern Europeans also receive significant benefit. In other areas, like South Asia, our Defense spending seems to work at cross purposes, while other areas, like Latin America and Africa are largely neglected by direct U.S. Department of Defense spending.

Our direct defense spending when added to our military aid and arms sales also presents a conflicting puzzle in the Middle East where we have simultaneously funded both sides of an arms race between Saudi Arabia and Egypt on one hand, and Israel on the other, that has only benefitted U.S. arms makers.

Some spending, like the Iraq War, has been immense, but actually made American less safe than they would be if it had never happened, by germinating a new generation of terrorists and anti-American hate while defusing a threat that never existed in the first place.

Once we get beyond the notion that we are actually defending ourselves, as opposed to our allies, with our massive defense budget, we can better weigh these supports against competiting and foreign needs for funds without wrongly thinking that the survival of the Republic is put in danger by not making this spending.

Delegate Math

A detailed analysis of delegate math leading up to the Democreatic National Convention by Chris Bowers is here.

The one significant flaw in the analysis is its scenario number 5 in which a Michigan delegation is seated on the basis of the January primary. In that scenario while some delegates from Michigan would be "uncommitted" those delegates would in essence be "anti-Clinton" delegates as Clinton supporters presumably voted for Clinton rather than uncommitted.

The bottom line is that it will take a truly remarkable set of events between now and the Convention, in which Clinton receives very favorable resolutions of the Michigan and Florida situations and repeatedly outperforms expected results based upon polls and prior contests for Clinton to become the Democratic nominee.

The other scenario in which Clinton wins is one in which the superdelegates monolithically all choose to buck the pledged delegate count, something which would create something close to constitutional crisis for the party. It is permitted, but an overwhelming disregard for primary voters and caucus attendees would likely wound the process and the nominee. It is not believed to be very likely to happen.

So Obama v. McCain is much more likely than Clinton v. McCain at this juncture.

On The Eve Of Greatness

Tomorrow people across the world are going to greet the day by recalling an event that was supposed to have happened 1973 years ago, give or take a few years, to a guy about my age. Like me, this guy's religious beliefs weren't mainstream for the time. Millions of people have wished they could have been there.

I'm quite glad to be living right now, instead. There are all sorts of romantic notions about the greatness of our ancestors, the stories of Cibola (the city of gold), Atlantis, the Da Vinci Code, the wonders of Egyptian and Mayan civilization and so on. But I'm convinced that there has never been a more fantastic era of human history than right now.

Our engineering marvels are unsurpassed. Our scientific achievements make even decade old understandings outdated. Our powers to heal the human body are unparalleled in human history and illness after illness is in retreat. Our understanding of the history and pre-history of the world has never been more comprehensive or rigorous. While it isn't universal worldwide, there are more enclave of tolerance that are more widely encompassing than at any other time in the history of the world. The wealth of the average person has never been greater. Women have never had a better lot in life than now. Slavery has never been more scarce.

The use of the death penalty has never been more rare. A couple of centuries ago there were more executions in Vatican City, at which the Pope presided, than there are now in all but a handful of countries in the world -- the Pope is now a leading world force against the death penalty. The Catholic Church once condemned Galileo; the modern Catholic church played a part in developing Big Bang cosmology and accepts some form of evolutionary theory.

Our dramatic works are as grand as any Italian Opera, as inscrutable and mythic as Kabuki theater, as profound as Greek tragedies, and as prolix as epic poems.

The human race was far worse off when the Egyptians built the pyramids, the Chinese build the Great Wall, the Greeks enjoyed their Golden Age, the Roman peace reigned supreme, the Arabic empire stretched from Spain to Indonesia, the Renaissance and then the Enlightenment took hold in Europe, and when the Industrial revolution sprang into being in England.

The late Arthur C. Clarke's fame, more than anything else is based upon 2001: A Space Odyssey, and sequels to it. The premise of those novels is that humanity was preceded by a vast extraterrestrial intelligence that helped make us what we are today. This premise and similar tales involving first contact with advanced alien civilizations are staples of the genre. But it is much more likely that we will be the advanced civilization that discovers some more primative civilization on another world. Indeed, that first contact scenario has played out again and again in human history. We have reached the point where only a tiny percentage of all humanity, perhaps a few million people out of six billion can in any meaningful way be said to not be a part of the modern world. There are a few small civilizations deep in the Amazon, deep in the Congo, in Papua New Guinea, and in distant mountain villages and desolate African deserts that still live more or less as their ancestors have for dozens of centuries, but even they know the outside world exists, even if they don't fully comprehend it and are not meaningfully a part of it.

This is not to say that I agree that we have reached the End of History, except to the extent that this is always tautologically true. Our civilization has poeple tasked to identify and look for solutions to anything which might be considered a societal problem. The big problems, like war, receive lots of attention. The smaller problems, like the fact that I can't buy liquor on Sunday in Colorado, have smaller, but effective groups of people attending to them.

Modern mixed capitalism and the scientific method, along with hte values associated with Western liberal government have put in place engines of change that are continually working in excruciating detail, to remake our world to better fit our highest visions of what it could become.

My daughter is studying the Middle Ages in school right now. I was a history minor in college and spent a lot of time covering the same territory. There is an argument, not as perfectly true as early understanding would have had us believe, but not without respectible support either, that the Middle Ages, from the fall of Rome around 532 CE, to the Renaissance in the late 15th century, marked a millenium in which civilization slipped below its previous heights in Europe, making the era one of the most epic setbacks in recorded human history.

No setbacks of that scale have befallen humanity since then, and I'm not at all convinced that even an apocolyptic disaster that caused civilization to collapse and killed the vast majority of the population (another science fiction staple) could set us back that far again. We might be set back a few generations, a century or two maybe, but the knowledge and thought processes of our era are too widely disseminated t obe lost for good.

Humanity can no more forget the basics of genetics, physics, chemistry, geology, biology and medicine at this point in time, than it could have forgotten how to raise domesticated animals and cultivate wheat after the fall of Rome. A single small town or high school library contains enough information to allow our descendants to reclaim almost every breakthough made in science and in culture to date, with the leads provided, in half a century or so. If a single university library survived, that timeline could be trimmed to a couple of decades. Building the industrial base and some of the more obscure trade secrets (like the manufacturing standards necessary to build computer chips like the ones we have today) necessary to actually carry out what we knew how to do might take longer, while populations levels stuggled to catch up. But the knowledge would not be lost, even if 99.9% of us did not survive and only 6 million people were tasked with rebuilding and starting over.

While many deadly threats stalk the human prospect, I'm not convinced that any of them could be 99.9% lethal. Certainly not peak oil, or global warming, and probably not even a modern plague or a global nuclear war. The only comparably catastrophic events in natural history appear to have been asteroid/comet impacts with Earth, and the forms of life living at each of those points in time lacked the brain powe we have to predict the coming of such an event and to mitigate its effects on humanity. We have a one way ticket to progress, even if we might hit some small bumps in the road or take a deteur or two on the way.