Tuesday, December 23, 2008

Inventing Candy Cane Cookies

Most things that are invented aren't really completely new things that have never been seen before. Most of them are variations on something someone has already done. Just like my candy cane cookies, here. I remember having something like these once, but the details have completely escaped me, so I decided I'd reinvent them.

I made these last night, since we don't have enough cookies around here already, and it's not like people keep giving us more - oh, wait, we do, and they do. Well, I felt like making more cookies, okay? I started with some recipe for pastel cookies I found in a cookbook, but I altered it pretty thoroughly.

Candy Cane Cookies

1 cup butter
1 1/3 cups fine granulated sugar
1 large egg plus 1 egg yolk
4 tablespoons milk
1 teaspoon vanilla extract
1/4 teaspoon salt
1 teaspoon baking powder
3 1/4 cups flour
food coloring
optional: other flavorings, such as peppermint extract, and colored decorators' sugar or crushed peppermint candies.

Cream the butter and the sugar thoroughly. Mix in the eggs and milk. Add the vanilla. Sift the flour, salt, and baking powder together in a bowl, then mix a bit at a time into the wet ingredients.

Take the dough and divide it into two parts. Take one part and mix in some food coloring (red or green look traditional) and optionally some flavoring such as 1/2 teaspoon peppermint extract. Chill dough covered in the refrigerator for two hours.

Take some chilled dough in roughly equal parts of each color, and roll into fat rods of equal length, then stick the rods together and roll out the combined rod to about 3/8" (1cm) diameter. Pinch off about 5-6" (120 - 150cm) and twist (rolling the ends about the center clockwise seems to work well). Roll or dust in colored sugar or crushed candy and form into a candy cane shape or a ring and place on a baking sheet.

Bake at 350° F (175° C) for 10 - 12 minutes. The cookies should not be noticeably browned. Leave the baked cookies on the cookie sheet for a couple of minutes to cool before transferring to a cooling rack - the cookies can be fragile. Makes about four dozen.

Now, I skipped the peppermint part because I'm no fan of mint, and I don't have any extract handy anyway, but other flavorings ought to work just fine. Some of the pastel cookie recipes I've seen online actually incorporate Jell-O or Kool-aid so any old flavoring will probably work. I liked plain vanilla pretty well. Tastes like a sweet butter cookie. Yum.

How We Make an Igloo

I'm feeling the effects of a cold, with aches and sniffles and occasional sneezing, but that didn't stop us from heading outside this afternoon to try our hand at making some spare shelter.

Ingredients: Snow, shovel, plastic storage bin. Check.

Fill bin with snow, slide out block. Repeat.

Stack up the blocks in the traditional igloo shape.

Check for fit.

Shape blocks as needed to fit the curvature and let them hold each other up. It works!

Enjoy your new igloo!

Monday, December 22, 2008


So we've had a bit of snow around here - this is what the house looked like after the first day, with 9" of new powder:

And of course, the view from our sunny adirondacks on the deck, before we got another four inches:

Even the new walkway lights look festive with their hats of snow!

But here's the best stuff of all:

This is what Christmas looks like for me and my siblings - sour cream sugar cookies! Made with the traditional buttercreme frosting and sugary decors. I only baked up half a batch this year, since there's only the three of us, and we've already delivered some baked goodies to the friends and neighbors this year. They are still delicious, even if we're a bit tired of being stuck in the house and sharing the same sniffly cold. Santa is going to love eating one of these.

Thursday, November 06, 2008

Party in the Hizzouse


The buglet and friends partied on the day of the dead, and one of their fun games was to see who could be first to get a bite out of a swinging apple. No one actually managed it sans hands, but there was some determined trying. Image courtesy of Gilman, father of the fairy in the picture.
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Wednesday, October 08, 2008

More Financial Editorializing of the TL;DR Variety

It's been the lead story for weeks, if not months, sometimes knocking the presidential election off the top of the fold. Recently, someone asked, "wasn't it poorly conceived legislation which lead to this whole subprime snafu? What bit(s) of policy exactly was that?" The roots go way deep, but here's one way of looking at it:

First, America has been spending more money than it takes in for a long time, and has been buying more goods from abroad than it sells. In concert, these two facts mean that other countries have been trading the dollars they get for their goods from us for IOUs from our government, as well as other investments, stocks, bonds, what have you. They have a lot of money to invest, and America despite its faults has had a lovely and vibrant market for investing in, with unequalled liquidity and transparency and fairly low overhead. Unlike in America, the burgeoning middle classes of eastern and southern Asia have been socking their money away, and their banks have been searching for ways to put it to good use, and one of the biggest ways has been to invest in American securities, bidding their prices up and their interest rates down. So, we've been awash in cheap capital looking for an outlet.

Second, the explicit policy of American government for the past couple of decades has been to expand homeownership and participation in the securities markets. That was part of the rationale for Fannie Mae and Freddy Mac, and for the rise of the IRA and the 401k plan. Ever more people invested in their homes and in the stock market would lead to greater social stability and community participation, or so went the theory. All of that capital available to lend and government policies toward expanding homeownership led to the gradual decline in the amount of equity required to purchase a house, until for a while it actually could be negative. This flood of money into housing inflated prices, making real estate look like an even better investment. And as prices rose, people refinanced and took out some of their equity and spent it, heating up the economy and the stock markets some more.

Third, we saw the rise of relatively unregulated mortgage companies after the contraction of the thrifts in the last real estate bubble bust twenty years ago. These companies would take investor capital and sell mortgages to people with gradually more lax qualifications as they tried to expand their markets. Then they'd turn around the mortgages and sell them off to Fannie Mae and Freddy Mac, and increasingly, to investment banks. The mortgage companies would then lend the money out again, and the cycle would repeat, keeping the housing market on an expanding tear.

Fourth, the loosely-regulated investment banks would take their piles of mortgages and slice and dice them into new synthetic securities with various aspects that they could sell, chief among them some especially enticing bits that looked like a AAA-rated bond. It was the new fashion craze, everybody had to have some - as long as they could also get some insurance to go with them, to cover their butts if the securities went into default. And where there's demand, someone will supply, in the form of investment bankers and insurance companies willing to take your money in return for a guarantee that they'd relieve you of your defaulted bond at its pre-default value. Best of all, the insurance wasn't called insurance, and it fell outside the regulatory eyes of both insurance commisioners and the SEC. Hooray! Let's buy more!

Fifth, we found the investment bankers were leveraged to their eyeballs, imprudent bankers and insurers had been selling bond insurance to people who didn't even own the bonds, and people were buying houses who had no business doing so even when times were good, with sub-prime mortgages that featured teaser rates and interest-only payments that were guaranteed to get more expensive later. The last sucker was in on the deal.

Then the housing bubble popped, and people started getting in trouble with their mortgages. The investors who were holding the synthetic bonds made out of those mortgages started feeling the hurt, too, and they started a dash for the exits. The insurers of those bonds discovered that insurance only works with risks that are localized, not with risks that can affect everyone at once. With every passing month the revelations about just how big the house of cards the mortgage-derived securities had been holding up got wider, and the worse the holders of those securities were taking it in the shorts. When the market in them finally ground to a bloody halt, holders were in terrible shape, because of accounting rules that forced the securities to be valued on the books at whatever they had last sold for. That meant that the assets of many financial companies that held these now toxic securities were worth less than their obligations, a condition commonly referred to as bankruptcy. Lenders started sitting on their cash, rather than risk handing it over to some firm that might be bankrupted and seized by the government, even if the possibility was remote. Some colossal failures and equally dramatic rescues truly put the fear into people, and the mattress-stuffing began in earnest. We're watching it play out right now.

So, there's policy blame a-plenty to go 'round, but it isn't necessarily the right (or should I say wrong) policies that are getting the bad press. It's policies that have every liberal sentiment going for them that are at least partly responsible for the mess. We want to encourage investment, we want to expand home ownership in the name of community and wealth building, we want to shop the world for the best deals for consumers, and we want to spend now and pay later. We like businesses to have minimal regulation, because it lowers costs and encourages innovation in products and services. We don't like paying taxes. We're all free to take a flyer on any expanding market bubble that comes along. Blaming deregulation for our woes is missing at least ninety percent of the story. Only a couple of clear cases of deregulation, expanding the leverage investment banks can use and ending some of the Glass-Steagal restrictions, have played a real role, and these were not root causes of the situation, just multipliers.

So, how do we fix it? Trillion dollar band-aids? In some ways we've got a crisis in confidence, and that confidence is shaken at least as much as it's reassured by the size of the measures being taken. And I trust the legislatures to deal with the underlying issues appropriately about as much as I trust them to do theoretical physics. I'd rather not think about how my net worth has gone down over the last year, or worse, my retired relatives' net worth. Over the long run, I remain optimistic. I'm still maxing out my retirement funding, directing it into various domestic and foreign index funds; someday this will probably be considered an excellent time to buy. I just wish I felt better about it.

Thursday, October 02, 2008

Feeling Moral About Politics

Funniest political image I've seen all day:
I think the best family values come from Costco.
Hmm, I'd like a theremin, too.

I'm guessing that most of my readership, which I suspect can be counted on my fingers with several fingers left over, got an email pointer to a website at catholicvote.com with a video which you can see here. It was described as "cool" and thought-provoking. Go ahead, click the link if you like, I'll wait.

It made me think, too, but probably not what they wanted me to think. It impressed me that what is essentially a single-issue advocacy group, one that explicitly advocates a much harder right-to-life line than you will find from the leadership of your nominal church, has found a way to wrap its message up with the flag, motherhood, and apple pie, and some stirring music.

Just as a for-instance, LDS positions on issues of birth control (up to the parents), abortion (allowed, with caveats, for rape, incest, and certain health issues), and euthanasia (allowing for withdrawal of life support) are of course conservative, but tolerant in ways that the Marianists at the Fidelis Center for Law and Policy, sponsors of CatholicVote.com, are decidedly not. The Church has taken no position on embryonic stem cell research, but that’s practically liberal compared to the Marianist Catholic position.

The single-issue nature of the CatholicVote video plea leaves out vital considerations of a moral nature; questions about whether their preferred policies would have more children raised in poverty and abusive situations and by single parents, about whether they would incarcerate seekers of abortions, about whether they would jail providers or strip them of their medical licenses, leading to a reduction in medical services available for the rest of us, about whether we would find that products used to support our private decisions about reproductive planning are no longer available, or whether we would be forced to remain artificially animated in a cruel parody of life when our bodies would otherwise have long since given out.

They see one issue as outweighing all these things. This strikes me as the antithesis of moral.

Sunday, September 28, 2008


Someone mentioned needing a workbench while I was busy getting ready to mow the lawn, and I thought about it while pushing the mower back and forth over the damp and uncooperative grass. Pretty sure that I had everything that a workbench might require in the garage, I set to work after lunch, and was finished well before dinner. There are three 1x3s, a 2x3 stud, a 2'x4' piece of 3/4 plywood and a 2'x4' pegboard piece in there, plus some scraps made into shelves and cubbies. Tools will come later. My amazingly capable spouse said later that this is the sort of thing that would make a good Christmas present, but it's a bit late for that now.

And if you're wondering, why, yes, there is a lot of random wood in my garage. Isn't there in yours?

Monday, September 22, 2008

On the Theoretical Effects of a Minimum Wage: Brushing up on Econ 102: Microeconomics

(This is more retro-blogging of some stuff I wrote up a couple of years ago to try to explain how economists think of minimum wages in fairly simple theoretical terms. I'd say enjoy, but that might not be the first feeling that comes to mind when you read it.)

Supply and Demand

In a market in goods and services, sellers usually come in with some
price that they're willing to sell at, and buyers come in with some
price they're willing to pay. Buyers will happily pay less, and
sellers will willingly accept more, and different buyers and sellers
all probably have different prices in mind. When the sellers price
their goods and services, or the buyers post their bids, some buyers
will find things at prices they think are acceptable, and some that
are too dear; some sellers will find buyers willing to pay their
price, and others won't. When everyone who can find a deal has done
so, then the remaining buyers and sellers can either adjust their
price to find another match, or they can go home. When everyone has
done a deal or gone home, we say that the market has cleared.

When the market is large enough for a single good or service that is
essentially identical from all providers, we call it a
commodity. In this market, there are enough sellers and enough
buyers that a single price will emerge, called the market clearing
, at which every willing buyer and every willing seller will
find a match. Sellers who price their product above this price will
find no takers, because the buyers can find it available elsewhere for
less. Likewise, buyers who are looking for a deal will go away empty
handed, because all the sellers can get a better price from other

When the market gets an influx of buyers who want more stuff, or
alternatively the number of things for sale drops, the price of the
goods available will be bid up until the number of buyers willing to
pay matches the number of sellers willing to provide. If for some
reason, there are fewer buyers, or the buyers just don't want that
much of the product, or if more sellers appear with more goods, the
sellers will have to drop their prices to find buyers, since all the
buyers at the old, higher price will be gone, having already done a

Labor as a Commodity

In general, the service provided by a person as labor is not a
commodity, since each person typically brings unique skills and
productivity levels to bear on the work they perform. Considered
broadly over lots of people with similar skill and productivity
levels, a market will form the outlines of a commodity market in some
particular specialty, but this doesn't really apply to the entire
category of "Labor." One area where it comes close, however, is in the
unskilled or minimum training required labor category. On the seller
side, practically every able-bodied adult can supply this kind of
labor, and most will do so if the price is right. Some will do so even
if the price is minimal. At some price, then, the number of hours of
labor people are willing to supply will equal the quantity demanded,
and the market will clear. Once again, an influx of sellers (laborers)
or a drop in the quantity or labor demanded will tend to push the
price (wage) down, and an influx of buyers (employers) or a rise in
the quantity of labor demanded will tend to push the price up.
Markets with Price Controls

The idea that there should be a minimum or maximum amount that any
particular good or service should cost or that should be made
available doesn't seem intuitively obvious to most people, but when
the service is labor, we bring some other opinions to the table.

In the case of commodity labor, we call a minimum price restriction a
minimum wage. When the minimum wage is less than the market
clearing price, it has little effect. All of the sellers can find a
better deal, that is, a higher wage, and all of the buyers, or
employers, must satisfy their labor demands at the higher price or
leave their jobs unfilled. However, if the minimum wage is higher than
the market clearing price, then more people are willing to sell labor
at that price than employers are willing to buy. As shown in this
diagram, the quantity purchased will be less overall at the higher
price. The difference between this quantity and the quantity that
would be purchased at the market clearing price is the lost employment
opportunity, or the employment gap.

Note that at the higher price, sellers are willing to supply more
labor than at the market clearing price, mostly because more sellers
enter the market. The difference between the number of labor hours
made available and the number purchased is the apparent unemployment,
but this value is larger than the employment gap. One way to interpret
this is that raising the minimum wage above the market clearing price
will artificially inflate unemployment numbers, when the actual effect
on the number of people employed is smaller.

Markets with Supply Controls

The other kind of restrictions that are commonly applied to commodity
labor markets affect supply. Any given seller has only so many hours
of labor available to sell in a week. At a high enough price, some
sellers may be willing to place every waking hour in the market. Once
again new sellers may also enter the market at the high price to sell
a few additional hours of labor.

If a restriction is placed on the number of hours any given seller may
put on the market in a week, then the quantity supplied can only be
increased by adding more suppliers to the market. Sellers lose the
opportunity to sell extra hours at the market price, but an increase
in demand for labor hours will tend to push up the price for the hours
a seller does sell by a small amount, and will bring new sellers some
employment, as the market clearing price for labor hours rises with
the increased demand.

An overtime restriction that allows the supply but increases the price
will have a combination effect. To the extent that marginal cost of
additional labor hours supplied in the labor market is low (in
commodity markets, this cost is typically negligible compared to the
cost of goods) then purchasers will tend to hire more labor from the
less expensive unrestricted market. In the labor market however,
legal, contractual, and physical limits that raise costs to employ a
marginal labor hour are common. These may include a head tax, minimum
employment hour requirements, restriction to hiring from a particular
set of suppliers such as a union, and the costs involved in training
or providing a worker with tools or supplies. These costs are the ones
that can push an employer into purchasing expensive overtime instead
of less expensive regular labor hours.

The Big Fish Market

In a market, pricing power comes about when one party, or group
of parties, comes to the market with the bulk of the supply or the
bulk of the demand. This is when the marginal effect of the remaining
suppliers or purchasers isn't enough to change the price of the bulk
of the goods or services sold. If a seller has pricing power, then to
an extent, that seller may charge more than the net market clearing
price, even if other sellers will sell for less, because even when the
entire amount available at a lower price is purchased, there is still
some significant demand for the remaining amount supplied at the
higher price. In this case, the market may not clear at a single
price; the supplier with pricing power may accept the risk of selling
something less than all the available stuff for sale at the set price.
Other suppliers may go along with the higher pricing and also risk not
selling all of their goods; behavior in this case is mostly determined
by what pricing will maximize profit on the net amount sold.

Similarly, when a buyer has pricing power, other buyers may be willing
to pay more, but only a few suppliers are lucky enough to sell to
them, and the remainder must sell at the lowered offering price of the
buyer with pricing power or not at all, leaving some supply that would
have sold at the net market clearing price. The buyer asserting
pricing power accepts the risk of not getting all the quantity they
wish at the price offered; pricing is generally determined to maximize
the value obtained on the amount purchased.

In a commodity market, goods in one location are interchangeable for
goods in another location; the market may state its price "FOB
Chicago" for instance, and the price between other locations for
buyers and sellers may be adjusted relative to the cost of delivering
the goods elsewhere. Commodity labor tends to be a little less mobile
as well as less interchangeable. For any given person, the cost of
supplying labor hours close to home may be small, but providing it in
the next town or city may be prohibitive.

Pricing Power in Action

Let's consider that in Potterville, adult population 1000, there may
be one employer in town with commodity labor needs, Potter's Mill,
Inc. Being the sole commodity labor buyer gives them some pricing
power relative to all of the potential suppliers of labor hours in
Potterville. Lets say someone with a lot of time on their hands did a
survey, and found all thousand potential workers in Potterville will
provide forty hours of labor a week for ten dollars an hour, but only
five hundred will for five dollars an hour; another hundred people
change their minds for each dollar an hour difference. Now let's say
the mill offers five hundred forty-hour week positions at six dollars
an hour. (Apparently no one at the mill read the survey.) Six hundred
Potterville residents apply, and one hundred are turned away. They
were willing to work, some of them for even less than six dollars an
hour, but the mill only needs so much labor, so they must look

But what if the mill has six hundred positions, and is only willing to
pay five dollars an hour? Five hundred people from Potterville apply
and all are accepted, and one hundred positions go asking. Potter's
Mill Inc. can raise its offered wage, or do without that labor, but
it's up to the mill. The mill offers 100 positions at six dollars an
hour. One hundred people from Potterville take the jobs. Potter's Mill
has filled its employment needs, and saved five hundred dollars an
hour over what it would have had to pay at a market clearing price for
all six hundred positions, using its pricing power. If the mill needs
more workers, it can go back in the market and pick up another hundred
at seven dollars an hour, another hundred at eight dollars an hour,
and so on. And that's assuming some of the people over in Millerville
don't get wind of this and start applying at lower wages than the
remaining Potterville residents will accept.

Competition and Pricing Power

Let's say another business opens in town - Bailey's Pool Cleaning
Service. It's a small outfit that needs only five workers. If they
offer six dollars an hour, they may get over five hundred applicants
who currently work at the mill for less. They pick five people, and
put them to work. Them mill must fill those positions, and finds that
they must offer a higher wage to do so, but they're still the holders
of substantial pricing power, and they still save a lot of money on

If forced to compete for the Potterville pool of workers against
enough other employers, Potter's Mill would find it didn't have that
kind of pricing power, and would have to pay the higher market
clearing wage when hiring all its workers. Some workers in that market
would benefit by being paid more than they would have been willing to
work for if they had to. A few employers that would have been willing
to pay more if they needed to, find that they can save their money and
fill their labor needs for less at the market clearing price.

The Minimum Wage Comes to Town

In an effort to curb vagrancy, vandalism, and voyeurism, the town
council in Potterville decides to enact a minimum wage. Some of the
townspeople aren't being paid enough at work to keep up with the rent,
so they wander the streets at night, tagging street signs and looking
in other people's windows. To abate the scourge, they declare a
minimum wage of seven dollars an hour. Currently some six hundred five
people are employed at the town's two businesses, at wages of five or
six dollars an hour. The board of directors at Potter's Mill Inc. goes
over the numbers with management, and determines that they can't
afford to run the business with the extra sixteen hundred dollars an
hour it will cost them given their current workforce level. They
decide to relocate the mill to Millerville. Meanwhile, Bailey's Pool
Cleaning Service could have afforded to give their workers a dollar
raise, except suddenly they don't have any business as all the people
with pools in their back yard are out of work. They reluctantly close
their doors.

Leaving the extreme of Potterville behind, in a larger town with a
more competitive labor market, the effect of a higher minimum wage is
unlikely to create a ghost town. There will be some employers at the
margins whose primary cost of business is commodity labor that will be
in trouble. There will be some few people who are pushed out of the
commodity labor market, unable to command the higher wage when the
number of labor hours purchased falls off. A fair number of people
will be slightly better off, given a raise at the expense of a few
employers whose costs have gone up and whose profit margins have
fallen, or at the expense of the consumers who pay higher prices if
the costs have instead been passed along by those employers.


On net, when the commodity labor market is restricted, just like when
restrictions are placed in any commodity market, the total value of
the exchange possible in that market is cut. We are all worse off in
the aggregate, although for many of us there may have been no effect,
costs may have risen for very few of us, and for another few of us
there was a benefit. Sometimes in some non-economic sense, obtaining
the benefit for a few may outweigh the net negative effect on total
value. It's not easy to say that this is clearly the case for a
minimum wage.

Saturday, September 20, 2008

The Intelligent Person's Guide to Derivatives and The Recent Financial Meltdown

You probably have a reasonable idea of what stocks are. Stock represents a fractional share of ownership of a company. If a company has issued a million shares of stock, and you own one share, then you own one millionth of the company, referred to as your equity. If the company makes a profit, and they distribute it to the owners as a dividend, then you will get one millionth of the amount of profits they distribute. When you own stock, your upside is unlimited, and your downside is, the company can go bankrupt and your shares will be worthless. However, you can't lose more than you invest, which isn't true of some other kinds of investments.

Bonds are pretty simple, too. A bond is a kind of loan note created by a company, saying that if you buy their bond, they will pay you back the face value of the bond on a specified date. This is called the maturity date, or when the bond comes due. Some bonds are sold at face value, but include periodic interest payments, called coupons, in a specified amount. (Once upon a time, bond certificates actually had some paper coupons printed on them that you had to clip off and physically redeem for your interest payment. Nowadays, for the great majority of bonds, you just register your bond and they send you the money.) Other bonds, called zero coupon bonds, or zeroes for short, don't make any periodic interest payment, and instead are sold at a discount to the face value. The interest is paid as the difference between what you bought the bond for and what the company repays you when the bond comes due. US Savings Bonds work like this.

Investing in bonds, like investing in stocks, has a downside limited to what you invest. The upside, however, is limited because when the bond matures, it's worth the face value and nothing more. On the other hand, when a company goes bankrupt, the stockholders have nothing, but the bondholders get first claim on the company's assets. Admittedly, that may not be much consolation.

Stocks and bonds can be bought and sold, and depending on how much people want to pay for them and how much they're willing to sell them for, the price may change with each transaction. When this happens to a share of stock, it represents a change in the market value of the company. When the share price goes up, it's because people think the company is more valuable, and when the share price goes down, people think the company is less valuable. The relationship between what people are willing to pay for a company, and what the assets and profitability of the company are, can be tenuous. Famous investors like Warren Buffett have made their fortunes by buying companies that have good profitability prospects when most people think their stock is a dog and it trades for some relatively small amount compared to its value. Everyone is familiar with the way stock prices go up and down, and it's reported every day on the news.

People are less familiar with the way bond prices fluctuate every day. A bond has a fixed interest rate, but we know that interest rates change all the time, though not quite like stock prices do, A bond that pays 5% when the prevailing interest rate is 10% is not a very good deal, and so its price goes down. In fact, its price goes down about 5% for every year to maturity, until the effective difference between the 10% interest you can get on a new bond and the 5% you get on the old bond is gone. Say you have a $1000 face value bond that matures next year, and it pays 5%. If the current interest rate is 10%, then your bond's price in the marketplace will have fallen to about $955, which is what that $1050 you're due to collect next year in principal and interest is worth as an investment that pays 10%. On the other hand, if the current interest rate is a measly 1%, then your 5% bond is a pretty good deal, and someone would probably pay close to $1040 to take it off your hands. So you see how bond prices change to reflect the current interest rate situation.

The other thing that affects the bond price is a change in the creditworthiness of the company issuing the bond. When you buy a bond from the government, you're going to get paid back barring something like a nuclear war or planet-killing asteroid, in which event you probably don't care much. Companies, on the other hand, have a nasty propensity to go out of business, or lose lots of money, and might not be able to pay you back. How likely a company is to pay back its bondholders is measured by its credit rating. Companies with excellent credit ratings can sell their bonds at relatively low discounts or alternatively, with relatively low interest rates, at or just above the rates on government bonds. Companies that have not-so-good credit have to offer a bigger discount, or higher interest rate, to interest people in their bonds. Crummy credit ratings lead to really high interest rates on bonds, which are usually called junk bonds and represent a real gamble.

So when a company goes from a good credit risk to a mediocre one, suddenly nobody wants to be a bondholder, and the price of its bonds goes down, raising the effective interest rate paid if you buy one at the new, lower price. On the other hand, if you bought a cheap junk bond and the company's prospects suddenly improve, you may be able to sell your bond for much more than you paid, and the effective interest rate on the bond will have gone down proportionately. You could wind up owing capital gains taxes on your bonds, as well as taxes on the interest! I suppose there are worse problems to have.

This is all preamble to the concept of a derivative. In general, a derivative is a kind of security with a value that represents some aspect of some underlying security. For example, a stock option is a kind of derivative. If a stock is currently trading at $100, and you buy an option for a dollar to purchase a share of that stock at $100 in a month, then as the price rises, the value of your option rises right along with it. If the price falls to $100 or below, your option is worthless. At the end of the month, if the price is above $100, you can buy the share for $100 and you pocket the difference in the price, less the dollar you paid for the option, as a profit. If the price is less than $100, your option just expires, worthless. The option is sold by someone who would rather have the dollar you paid for the option than the potential upside on the stock over the next month. If they think the price will be flat or fall a little, this is a way to make some extra money, but they risk losing out on the stock's gains if the price goes up. The option is derived from the price change of the stock, so we can call it a derivative.

Another kind of derivative applies to bonds. One way to trade a coupon bond is to sell the right to collect on the coupon and the right to collect the principal separately. What you've done is split the bond into two separate securities, one that's called a strip that collects the interest, and another that's essentially a zero-coupon bond. Since these two securities are derived from an underlying one, they get called derivatives. They will have values that fluctuate along with interest rates and the fortunes of the underlying company, just like the regular bond, but with different properties which might be more valuable to various purchasers than the original bond. The company that creates the derivatives holds on to the original bond, but forwards the interest payments to the strip holder, and sends the principal due at maturity to the zero holder.

When you split off the interest payment on a bond like that, you can split it in more than one way, creating even more complicated derivatives. For example, you could take a regular coupon bond and sell a lower-interest strip and a higher-discount zero, or vice-versa. These will react in different ways to changes in interest rates compared to the original bond, so if buyers are looking for more volatility, or less, in their bond values, they can get what they are looking for.

Yet another way to create derivatives is to pool some securities together, then sell off new securities that represent some aspect of the underlying securities. For example, you could combine some treasury bills with some junk bonds and effectively create new bonds that are intermediate between the two in interest rate and creditworthiness. You can sell the high volatility and the low volatility aspects separately to parties that are looking for more risk and more upside, and parties that want less risk and will accept a smaller payout.

Now let's say someone has a big pile of mortgages. These all will have various interest rates and the payers will have various credit ratings and payment histories, but we can combine the mortgages into groups, and create new derivative securities that look like bonds out of them. Depending on how we group them, we can get low-interest, high credit rating ones together, or high-interest, lower rated ones, and create new bond-like securities with similar properties. The risk that a few of the mortgages might go into default gets built into the new mortgage-backed security's discount, effectively raising the interest rate. If the group has a lot of mortgages that might default, then the new security is more like a junk bond, and its price should drop and interest rate rise accordingly. The problem with these new securities is that it's hard for someone to tell whether a given instance really ought to be considered AAA or junk without going through all of the underlying mortgages and checking each one. One of them might have started out in good shape, but be composed of mortgages from somewhere that just had a big plant close, and suddenly lots of those houses are on the market for cheap, and how would you know? You rely on the credit rating agencies to stay on top of it, but this level of detail may be beyond them.

So, let's say you have some bond, and you're willing to part with some of the interest on the bond in return for a guarantee that you'll get your principal back, because you're worried about that more than you want a high return. Say someone comes along and says, I will agree to buy your bond from you at par (that is, the present value of the face value of the bond at maturity at the prevailing interest rate) if something happens to it to significantly change its value, such as going into default, and in return, all I ask is that you pay me all the interest your bond pays over and above what a treasury note with the same maturity pays, plus a little extra for my trouble. What you're doing is taking your bond and turning it into something more like a treasury note, because someone else has agreed to take on the default risk in return for a risk premium. This kind of derivative is called a credit default swap, and it's what got AIG into such awful straits.

What happened was, AIG and others were busy minting money by taking on the default risk for mortgage-backed securities, because they figured there was no way to lose - house prices just go up, right? And more and more financial institutions were willing to buy the mortgage-backed securities because companies like AIG were willing to sign up for the default risks, which were hidden inside and not really reflected in the price of the securities. And the mortgage companies that created the mortgage-backed securities and sold them to banks and insurers and brokerages, were busily plowing the money they got from selling them into making ever more mortgages to ever less credit-worthy borrowers, who were busy driving up the price of housing with their borrowed money.

And then the bubble popped.

Gradually, sub-prime borrowers, and a few prime ones, got in trouble as their teaser-rate variable mortgages started getting adjusted upwards, the economy slowed and house prices fell, and they couldn't refinance into something they could afford. More and more mortgages went into default, showing up as these mortgage-backed securities not making their interest payments and going into default even when they'd gotten high ratings from the credit rating firms. Financial institutions started looking into their portfolios and finding these hot potatoes and all started trying to unload them at the same time, and the market evaporated. They had to come up with more cash to cover the lost interest payments they weren't getting anymore on these things, to try and avoid going into default themselves, and cash started getting hard to come by. Firms like AIG that had guaranteed the securities without much of a cash reserve started getting viciously squeezed. Firms that had purchased the securities with borrowed money found that they had no way to get money to pay their lenders, since they couldn't sell them at any price. That's when the excrement really struck the rotational airflow facilitators.

When you buy something, and its price drops, the most you can lose is what you paid for it. When you buy something with borrowed money, and its price drops, you can lose more than you started with and find yourself in a deep debt hole. And if you can't service your debt, then whoever lent you the money feels the pain, too. If you're a major financial player and it's also going on with a bunch of other major players, it can snowball into a general financial meltdown. And so even though the underlying market value for houses has dropped by maybe 20%, and foreclosure rates are still just a small fraction of total mortgages, the number of firms that have had their capital wiped out as a result is impressive. Or perhaps depressive.

Monday, July 21, 2008

Variations on a Theme

Last Wednesday the Formidable Mrs and I were discussing something to do with decorating, fairly late, and she mentioned wanting to have a headboard for the guest bedroom downstairs.

"Perhaps a padded headboard, some foam over some plywood, covered in duck." I allowed how that was doable. "We could maybe do tufted, with buttons."

I imagined a tufted, padded headboard, and suggested "with really big buttons? Like, dinner-plate sized?"

"Like your mom has in her sewing room?"


"Where do you get those?"

"Dad made it, on the lathe. Hmm." At this point I'm thinking about what I might need a lathe for, and not much is coming to mind when she interrupts my reverie with "I don't think we need a lathe, lathes are scary."

"Yeah, okay, that's not a good enough reason to get a lathe. You know, to fit the theme of the room, we could do an Adirondack headboard. Just a bunch of vertical boards, rounded on top in a big hump."

"Oh, yes, or like a loveseat, with two humps. That would really go well in there."

Thus was born the Adirondack Headboard project. I went down and measured the bed and frame to get an idea of the dimensions we wanted and doodled up a design on some graph paper, then went looking around the garage, where I found some likely looking 1x6 pine boards I had on hand for the random woodworking needs that seem to come up once in a while. They looked just right. I had a 1x5 and a 1x3 laying about that would make good cross pieces. I set them out to work on the next day.

Did you know that a crescent wrench makes a reasonable compass in a pinch? I drew the arcs for the tops of the boards with a pencil in the jaws and my finger in the hole at the end of the handle of my 8" crescent wrench. After cutting all the boards to length with the chopsaw, I cut the curves with a jigsaw then sanded everything smooth with the random-orbit sander. Easy as pie. I've only ever made pumpkin pie, which is pretty easy, but I imagine some other sorts of pie may be somewhat more challenging. I laid out the cut and sanded parts as seen above. In the evening when we were all home, wife and son helped paint on some shellac to seal the porous, knotty pine boards up for painting.

Another few rounds of sanding, painting with primer, sanding, painting with tinted primer, sanding, painting and sanding a couple more times, then spraying on about five coats of polyurethane varnish, which all told took another three days to complete, and finally adding a bit of hardware so it could attach to the bedframe, and we have something that looks like this.

And with the bed pushed back into place, the finished product looks like this:

The guest bedroom now has a headboard that fits the theme of the room (well, the sort-of theme, we're not counting the treadmill as a theme element), that only took a few days from conception to completion, and looks like it was made to be there. Which it was.

I also doodled up a design for an Adirondack side table; we'll see if that ever happens.

Sunday, June 08, 2008

Finishing Touches

The sun came out again today, after being off vacationing somewhere else for a week, and just in time to finish the big play space project off. With some hefting assistance from PJMcD, we lifted and bolted the final sections of the play structure into place this afternoon.

The chief playtester gave it his squeal of approval.

Afterward, there was some well-earned relaxation time with the uncle.

And here's how it looks all put together.

Now that I've seen how easily the chips get moved around under the swings and at the end of the slide, I'm planning on getting some rubber mats to put underneath the chips at those locations so they don't get dug into all the way to the bottom. Some rough spots in the wood could use some attention, too. And looking around at the edges of the pictures, it's clear I need to start working on the yard some more. Then it's time for the next project! And there are so many to choose from...

Saturday, June 07, 2008

How I Spent My Summer Vacation, Day 42

Today's post is a quick follow-up to yesterday's report on the play space. Since most of the play structure was put together in big assemblies in the garage already, I mostly just had to fit them together and apply fasteners of one sort or another once I got them hauled out to the play space. We set up a work table under our patio umbrella to hold the plans and parts.

Thereafter, it was mostly a case of drill,


and assemble the various parts together.

My chief assistant did some enthusiastic quality assurance.

Here's where we left off today. The next task is to put together the swing set, which will require more heavy lifting than I can manage on my own, so we'll do that tomorrow.

Friday, June 06, 2008

Play is Serious Business

For the past month, I've been busily assembling a play structure that we purchased a year ago from Costco and which sat in its very heavy boxes taking up a big chunk of our garage for most of that year. Despite the instructions calling for two people, I managed to put together large sections of it single-handedly in a couple of weeks' worth of evenings, until I'd pretty much run out of things I could assemble in the garage. I needed a place to assemble the final product out of the large sections I'd put together, so it was time to look at the yard. The plan has always been to use the garden space, since our gardening needs do not really require such a huge space. In fact, as you see below, we've done about all our gardening this year, except for some left-over strawberries, in a cedar raised bed. The carrots and sweetpeas are coming along nicely, as our chief gardener demonstrates here.

The garden space had a couple of bushes removed by our disappearing gardener back in January, and so when I began preparations in earnest, it looked something like this.

Next, I found a level line with my framing level and a laser and marked the fence and some stakes I drove in at the rough corners of the play space, so I'd know what I needed to move around, dirt-wise, to have a level space. To avoid some trees, I decided to make the space a skewed rectangle, roughly 24' by 28' in size, and marked the corners with some garden poles we inherited with the house and some mason's line at the rough top of what I thought the play space border would be.

A couple of years ago we had some landscaping cleanup done, and the landscapers had put down a ton of beauty bark in the garden to control the weeds, and I am not speaking figuratively. I scraped off all of the beauty bark in the play space area and a bit beyond, a layer two inches thick in places, because I didn't want that to be part of the dirt I moved around to level the play space - it would be breaking down and compacting forever if I left it in, so I wanted to just be dealing with bare dirt. I had at least a couple of yards of bark when I was done, most of it clean enough for reuse, so I stashed that under our big cedar tree.

Most of the garden space had only a relatively thin layer of topsoil, over some rocky hardpan that wasn't going to respond to a shovel easily. I rented a big tiller from Home Depot and ground away at the high side, shoveling the softened dirt and rocks over onto the low side until I'd reached the approximate level I wanted within the playspace. It looked something like this.

I considered big railroad tie timbers for a border, but decided I'd rather have a box built with pressure-treated lumber around some posts, so I purchased a bunch of lumber and posts and cedar boards for a top rail. It took two trips in the heavily loaded van to get it all home.

I went back to Home Depot and rented a one-man augur with a 6" bit (that's diameter, not length) and got to drilling. Wrestling the augur against the rocks in the holes was a serious chore, and I wound up taking a couple of days completing all the hole drilling, what with stopping to dig out some rocks with my post hole shovel in practically every other hole, not to mention cleaning out all the dirt that remained after pulling out the augur. Once while my main helper was watching, the augur caught on a rock and twisted itself right out of my hands with the throttle on, and we watched it spin itself around for a while, highly entertained, before I grabbed it and shut it off.

Following in my father's footsteps, I decided to stick in an extra post for a possible future treehouse sort of affair in one corner of the play space and leave the posts tall in that corner. The rest of the posts I cut off as I went, bolting them to the lumber and maintaining a level and for the most part square line around the play space as I went. I added a cedar top rail around the edge, and a step area for easy access from the yard.

Once the border was enclosed and everything bolted together, I filled in around the posts, and levelled the dirt inside the playspace, with a slight slope from one side to the other for drainage, and packed down the loose dirt. Then I got some weed barrier and some humongous staples and covered it all up. And that was all I could do myself until I got something to fill the play space with. There had been a long run of nice weather while I busily worked up a sweat every day, but it finally came to an end about the same time I finished.

While it rained, I called around to find out about play chips. There was one company that would blow it in for you, but I didn't like their chips very much - too big. Another place would deliver with a blower truck, but you were supposed to do the actual blowing with the hose yourself. Interesting idea, but I didn't like their play chips, either - too much bark and slivery bits. I went with a slightly more expensive alternative, cedar chips from the Rainbow Play Systems outfit, and paid to have it installed. They came today, about five hours later than originally expected, and filled the play space up. Their chips came in bags on tall pallets, which they dumped out of their truck in our driveway, and hauled around to the backyard in a wheel barrow. My assistant helped with the raking.

Now that there are play chips, I can haul out the parts I've put together in the garage and start working on the final assembly. We should be done this weekend, unless it really, really pours down.

Monday, May 05, 2008

Still Turns Shoes Green, Too

I don't know what became of our landscaper. Back in December, we arranged for him to do some work in the yard to get it ready for a play structure we bought a year ago, which has been taking up space in large heavy boxes in our garage ever since. He took out some bushes, left behind some tools, and hasn't been seen since. Phone calls have gone unanswered, and his tools rusted where he left them in our yard.

So, figuring I need the exercise and could save a little money, last week I bought a lawnmower and mowed my own lawn for the first time since I have owned a house, for the first time since I was a teenager, probably. I got one of these, a Sunlawn LMM40, on sale for $40 off at the local McLendon's Hardware store. It's nothing at all like the heavy and useless things I remember from childhood. It's actually pretty easy to use, and it's about as environmentally friendly as it's possible for a lawnmower to get. I mowed the lawn twice, once in each direction, to catch all the grass that got pushed over, since it was a little long in spots. It looked mowed when I was done, so I guess that was what I was after. And best of all, I only have to mow two more times, and I've saved money over what I was paying the landscaper. I bought an electric weed whacker while I was at it, so really I'm going to have to mow and whack about four times to pay for it all, but what was I saying about exercise?

This weekend, I suggested to the Formidable Mrs. that she should try the mower, since I figure it's at least as good a workout as the treadmill at the gym, and she gamely gave it a go. Apparently all was well until she ran over a twig that got stuck. She gave her thumb a good half-inch gash trying to reach in to clear it, and of course immediately felt as bad for being dumb with a lawnmower as for being hurt and bleeding. Those blades are quite sharp, and now that they've tasted blood, who knows what trouble they might get into.

Did I mention that my contract is over and I'm "enjoying" some time off, taking care of various projects? Yeah. I'm starting in on the play structure now. So far I've unboxed everything (what an amazing amount of cardboard that was) and sorted out all the parts. Next up, assembly!

Monday, April 28, 2008

The Burial of Blackthumb, Piratical Gardener

Here lies the body of Blackthumb, ready to push up daisies, or in this instance, sweetpeas and beans and carrots and tomatoes, depending. I haven't got a gardening bone in my body, and I'm no real fan of vegetable-y produce, fresh or otherwise, but here I am, making a raised bed for the growing of the greenery. It's the boy's fault; he wants to grow things. I think it's 'cause of the gardening they do at school, which is all to the good. I'm hard pressed to tell the good stuff from the weeds (they're all weeds to me) but here we are. The raised bed is made with rough cedar 2x4 stock, cut to length and lapped at the corners with a hole for some rebar to hold it all together. It's full of a custom mix of perlite, sphagnum moss, and compost dirt. It should be easy to disassemble should the need arise, or to replace some bit of. Cedar, because the wife didn't like the orange landscape timbers I purchased first (they were oh, so cheap, $1.79 each, bargain city) because who knows what evil might lurk in that powdery orange coating? (I'm pretty sure they are not pressure treated with arsenic and copper compounds, but I wouldn't bet money on it, and thus the landscape timbers were a no-go. "We'll be eating stuff out of there!" she said, and she's right.) Of course, I probably should have just used the cheap dimensional stuff, 'cause even if it rots fairly quickly, it's inexpensive enough to replace without much concern. But the cedar looks good, anyway. We'll see how it holds up. I was getting ready to put it together, shoveling some of the old beauty bark out of the way, when a rabbit came hopping by, checking out the new snack bar location. I chased it off, and discovered those wascally wabbits can scoot through the holes in the chain link fence when sufficiently motivated. Danged varmints!

Sunday, April 13, 2008

Just One of Those Things

I came across some more furniture I'd like to have. Musical coffee tables! It would be especially cool to build something like this, but I don't think I have it in me. Maybe I'll have the funds to get one of these someday. You absolutely have to watch this video.

Doesn't that just look like the most fun time sitting around the living room ever? And if you were playing Pit, you could just slap the table when you get a corner on something...

Tuesday, March 25, 2008

To Boldly Go Where No Wormy Has Gone Before

Captain Police Baby Slimey had a birthday yesterday, and a party on Saturday that was a hit with the preschool set up at the Purple Museum. Captain Slimey's spaceship, the Police Enterprise Four, had a starring role as the birthday cake.

It is not especially easy rendering the Enterprise in cake. On the other hand, it's pretty tasty that way. This is a picture of the Enterprise Four in orbit around Planet Jurassica.

After a day, the frosting went from gray to teal. I don't know why. We polished off the last of the cake last night after Baby Slimey's favorite dinner, gyoza and ramen. The gyoza was homemade, and pretty good if I do say so myself. The Formidable Mrs. was first to try her hand at it a few weeks ago, and I made the latest batch, and they all tasted better than the frozen kind from the store. Pretty easy, too, if a little time consuming. We used ground chicken instead of pork, some thinly sliced green onion and cabbage, a little tamari soy sauce and Mirin, and wrappers from the produce section at the grocery store. Since we usually only fry up eight or ten at a time, the rest get frozen for later - the wrappers come in packs of something like 48, which takes about a pound of filling. Now that Lucy v.P. is getting the family recipe book online, we may be able to add recipes like this one fairly easily.

Thanks to the folks for coming to visit for the buglet's birthday, and the sister and bro-in-law for a lovely Easter dinner. We had a great time. Set phasers for stun!