America may have the most geniuses, but that doesn't affect the average

Is the US media making Americans stupid? That's the question posed by this article at the Daily Clarity. My initial response would be "stupider, certainly, but maybe not stupid". It's a perfectly fine article, not terribly informative but certainly has some food for thought. My only problem is this point:

Firstly, let us state up front, we do not think Americans are a race of low intelligence or by nature intrinsically stupid. This is a common assertion from international critics of the US, but one that is easily countered by examining the history of technological innovation, medical research breakthroughs, and the alumni of America’s better universities.

Ummm, so what? Where are the statistics on average US IQ vs. other countries? How about our scores on international standardized tests? The point is that a few outliers don't represent a statistical mass. Put another way, the fact that a large number of highly intelligent and productive come from the US* isn't relevant when trying to assess the nation as a whole. Especially in elections, where all votes matter the same amount.

So just becase we may have produced some of the greatest technological breakthroughs in the US doesn't mean the whole country is smarter. Nor does the fact that Palin was so popular among some make the whole country dumber. Can't judge the whole by a few outliers.

Error rating: 4. Relatively minor error to the point of the article, but it's a big logical error.

-Enginerd

*For this to matter at all, one would at least need to show that there are a disproportionately large number of advances coming from the US. This might be the case, but it doesn't mean we're smarter. Just do a better job of fostering/funding new technologies.

Madoffs victims may deserve to lose their money, but not necessarily respect

I haven't posted for a while, mainly because nobody anywhere in the world has done anything stupid in the past month.  I guess people get smarter around the holidays.   Go figure.

The BBC has an article blasting rich people, mainly to the effect of "how much money does one person need?".  It's a good question, and I think one that deserves to be asked, but I take particular issue with their treatment of the Maddoff scandal.  Specifically, his clients:

But most of them had got their money the same way, by promising vast returns on money from other people who were trying to make money out of nothing.

Well, he didn't promise them vast returns.  What he promised was steady returns.  He promised (and claimed to have delivered in the past) 8-12% annual returns, each and every year.  That is pretty impressive, but it's the same returns your financial advisor will tell you the S&P 500 returns each year.  They're lying, but over a 30 year average it's true.  

So, with options, shouldn't you be able to establish a strategy which averages the stock market returns?  Well, maybe over a few years (LEAPS, long term equity options, last 3 years), but certainly not over 30 without establishing private contracts.  But hey, he's a hedge fund, maybe that's what he did.  It's not, it's not even what he claimed to do.  I've been looking around and I still can't find information on his alleged strategy, just that it was so complicated that nobody seemed to understand it.  

This is a sure sign that you shouldn't invest, but then, the people who invest in biotech of software startups don't necessarily know any chemistry or programming themselves.  The late investors just saw past results, and took it for granted that he couldn't just be making them up. Can't argue with results, right?  

Investors need to be aware of the risk of fraud, so I'm not saying they should be bailed out.  Or even deserve sympathy.  But that doesn't make them idiots.  Maddoff didn't promise vast returns, just steady ones.  In retrospect this seems just as outlandish, but the total returns after a few decades wouldn't be much different than the stock market.  So if his scheme is money for nothing, so is $15 trillion in assets of our economy.  

Error rating: 3.  I know it's fashionable to take joy in the pain of the rich, but really, they weren't being too greedy. Just too trusting.

-Enginerd

As the share price goes, so goes the company

Citigroup's share price has plunged over the past week, from an already abysmal $10 to about $4. This gives it a market capitalization of $20 Billion, for a bank with $2 trillion in assets. This same behavior precipitated the takeover of Bear Stearns, Fannie/Freddie, and as I've written about before, in the UK.

Bloomberg has an article speculating on the takeover of Citi by the federal government:

The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.

The only possible justification for this would be Citi becoming insolvent. If any company is too big to fail, it's the the ginormous financial behemeth which is Citigroup.

But what the hell does the share price have to do with anything? Really? The only problem is if they don't have enough capital on hand to cover immediate obligations. As a fractional reserve bank they're vulnerable to bank runs, even if they're solvent (in theory). The shareholders would get wiped out, so if people were worried about Citi going under it would make sense to sell.

It doesn't work the other way, though. If the market thinks Citi is insolvent, so everybody sells their shares, that doesn't affect the capital they have on hand to meet liabilities. At all. A drop in share price could trigger other things, like creditors recalling loans, which would affect the capital ratio, but the share price itself is not something the government should care about.

Error rating: 7. MARKETS FLUCTUATE

-Enginerd