Monday, May 31, 2010

Restoring The Economy

Here's how the Great Depression of the 21st Century plays out. Our leaders promise a quick return to "normal" very soon. Soon they tell us growth will resume, trade will resume and the economy will be pumping out jobs and wealth as before, if not more so. However before we can get back to the happy bubble days before 2008 we have to go through some pain. Obviously we are going to have to rein in spending, get rid of waste particularly in government, and give industry room to grow. Sounds reasonable wouldn't you say?

The thing is, the pain of non restoration is going to have to be borne by almost everyone though our leaders won't tell us that. The reason for their reticence is that there cannot be any restoration of the good old days. There is no way our homes can ever again be worth what they were in 2007. Officially this country has lost 8 million jobs over the past two years, and I would bet my left testicle the actual number is higher, not to mention the numbers of workers who are working fewer hours or suffering pay cuts in one form or another (increased fees for health insurance or loss of all benefits for instance). The other slight fly in the ointment is that the people at the top, the brains behind the destruction of the world economy have absolutely no intention of bearing even a portion of the economic pain they should be sharing with the rest of us. They are, after all to blame for the bubbles and the subsequent collapse. And they ar ethe ones getting the bailouts!

It is not going to be easy to balance government budgets faced with ten percent deficits and structural spending that the voters have come to expect. It is going to be impossible actually to cut deficit spending in the actual economic circumstances we find ourselves in. During periods of economic growth (even bubble growth) government spending increases because we can afford the growth. Or rather our leaders hope we can afford the growth because they get more votes when they provide more services. The problem in an economic downturn is government earns less money and thus not only has to curtail the increases in spending but has to cut out extra spending to rein in the deficit. In an economic collapse like this one, the added paradox is that government spending increases even while revenues plummet. There are fewer taxpayers and larger numbers of citizens getting government welfare relief. Taxes on property drop with the drop in value, businesses pay less taxes, shoppers pay fewer sales taxes with the loss of purchasing power. The "70% of the economy" driven by consumer spending shrivels up.

So how do we balance budgets in a crisis? The answer is we don't. Ideally government would spend more to create jobs, build infrastructure and put people back into paying taxes and off draining public funds through welfare support. Deficit spending is not a very good solution to the long term problem of deflationary economic distress but reduces social distress and starvation which is not a bad goal on a human level. I don't want to see hopelessness and hunger stalk the land as it did in the 1930s. Which I fear is a very real prospect just at the moment.

Consider this: unemployment benefits are running out and Congress is on vacation and our leaders (paid roughly $165,000 a year plus endless expenses) have failed to pass a stop gap unemployment benefit bill. As of June 1st (TOMORROW) millions of Americans will get no financial help. Read that last sentence again, and consider these are long term unemployed who have undoubtedly already spent whatever resources they may have saved prior to 2008. Millions of them are about the face the end of any semblance of income. And Congress is on vacation. Furthermore when Congress returns Republicans will block all attempts to fire up the benefits on the grounds that $160 billion added to the 1.5 trillion dollar deficit cannot be countenanced. However $60 billion to continue to blow up Afghanistan was passed, no problems, last month. Democrats? Oh they are still having trouble discerning how to do the right thing so the unemployed can wait a while with no money at all.

Novo Nordisk (a frequent underwriter on NPR) is a Danish pharmaceutical company that produces a particular insulin injection for diabetics world wide. Not in Greece anymore. The company says Greece is behind on it's payments to the tune of ten million Euro and in light of Government cuts in Greece Novo Nordisk will no longer sell the self injection kits in Greece. The Greek Government in an effort to stabilize the economy and reduce their own pesky deficit mandated a 25% cut in spending across the board on health care. Novo Nordisk says at that rate they make no money on their unique insulin and they are pulling out. Anguished Greeks argue health care isn't a business decision it's a human right.

These are two indicators of our future I have plucked out of the ether this Memorial Day weekend. Wealthy diabetic Greeks will undoubtedly be able to either pay black market (IE: privately imported insulin) or they will fly to Italy to get Novo Nordisk's products. Wealthy Americans need not worry about unemployment benefits. These are the ways budget deficits will be balanced in the coming wave of public, world wide austerity. It will be a class war as none of us alive today have ever seen it. The wealthy will not pay a dime toward the repair of the damage they have wrought, we will carry the burden and we will be made to feel guilt and shame that we are unequal to the task. If you don't believe me consider the adjectives stuck on the long term unemployed in this country. They are called "lazy" for not having work.

I have no idea how to express my anger, the shackles of bourgeois good manners still bind me.

Saturday, May 29, 2010

Involuntary Simplicity

In my secure government job dispatching police officers in the city of Key West I work with a dozen youngsters and from them I learn what it is to be growing up in the 21st century. From my perch above it all, approaching my 53rd birthday I am the oldest dispatcher in the Communications Center and I dare say the most pessimistic. My rational mind tells me I have job for life, answering 9-1-1 calls but my irrational mind wonders what technological brilliance may one day make it possible for a $5-an-hour phone answerer in Bangalore (or whatever they call that Indian city these modern days) to take my $20-an-hour place. Perhaps it will be far enough in the future for me to cash my social security and city pension checks...

In the bad old days of the economic boom when our neighbors were taking out second mortgages on their homes to pay for granite counter tops and exotic vacations my wife and I were wondering about retirement. We sold our California home at the top of the market invested a portion in buying a less expensive small home in the Keys and worked out a retirement plan- pensions, social security and investments conservatively held that we hoped would allow us to complete paying off our house by the time we chose to retire from our public pension jobs. It seemed sensible and cautious. We have both lived adventurous lives traveling and we have seen enough of the world that we felt it time to settle down and earn our retirement, and doing that in the Keys was not very painful at all. Our 700 square foot canal home is cheap to cool yet comfortable, our 27 mile commute is easy and indeed a great pleasure, and our access to the warm Florida waters reminds us as we swim, of the pleasure we took traveling under sail for a few years, off the grid and living a life of voluntary simplicity.

"If everything falls apart" my wife says in moments of extreme pessimism, " at least we know how to live off the grid." She recalls living with solar showers and a hand operated toilet, minimal refrigeration and no air conditioning. Indeed we sailed to Key West from San Francisco over almost two years and never really missed the "comforts of home." I wonder if we will be able to cope should things come to that now? We may find it harder than we think to go back to forced simplicity, but my colleagues at work have absolutely no idea what I am talking about if I bring the concept up at work. So I don't.

This is the generation that takes Internet connections for granted, and not just the connection, but the absolute mobility of iPhones and air cards. This is the generation that thinks nothing of spending hundreds of dollars to buy an electronic book reader (the Kindle) and has no idea how to get free reading material from the library. My friends at work peruse catalogues for long distance shopping, a pastime denied to them by geography but opened up to them by the miracle of electrons. I read the doom and gloom of economic reports, they read gossip and scandal sheets. I marvel at their acceptance and optimism.

I wonder how they would cope were gasoline to be rationed, if electricity were on a permanent black out rotation, if the only hot water available for washing was available from a black plastic bag laid in the sun and hung from a hook to allow the water to trickle out by gravity. Perhaps they will surprise me with their own generation's untapped resilience, perhaps they meet the challenges of a world lacking cheap energy with aplomb and cheerfulness. Perhaps not. Perhaps my darkest broodings will never come to pass and we will skirt the worst of the downturn yet, with a sideswipe and verbal warning.

My wife and I have tried to reduce even as we compost and recycle and learn to grow meager vegetables and fruit in Florida's strange and over heated permanent summer climate. We, child free, deliberately bought a small house, where we have increased insulation and applied reflective film to the windows and bought a smaller, less expensive car to operate to replace the last one. I ride a motorcycle, my wife rides a scooter around town, our boat is the smallest skiff I ever see plying the waters of Newfound Harbor in search of a quiet swim. We lack for nothing but everything we do have is the smallest, least complex model we could find. And yet I feel our middle class life these days is balanced on such a precarious razor's edge all this modest little stuff could still be snatched from us so easily. A pay cut, an illness, another bad war, an oil spill, a hurricane. I am sure I worry too much, but at the same time like my wife says, we could probably live in a van or a small boat. We've done it before and can do it again. Quite so, yet I cannot help envying my young colleagues at work whose biggest issue of the shift is from which restaurant to order lunch and from which catalogue to order a dust catcher that has caught their eye. I seem to live on another, harsher planet and I wish it weren't so.

Thursday, May 27, 2010

Elites verus Everyone Else.

From Marshall Auerback, a column on Business Insider. Free markets for the poor and socialism for the rich. The ything that makes me crazy is that what I read here seems obvious to me and is a complete mystery to the Tea Party and their ilk.
How the elites are vying to undo the social safety net — and hurt our chances for recovery.

Harold Meyerson is spot on: “Of all the gaps between elite and mass opinion in America today, perhaps the greatest is this: The elites don’t really believe we’re still in recession. Or maybe, they just don’t care.” What is even more galling is that, having been the greatest beneficiaries of the government’s largesse over the past 2 years, these very same people now decry the government’s “irresponsible” and “unsustainable” fiscal policy.

The collective amnesia and moral turpitude of these elites is truly mind-boggling.

Why do we have a deficit of about 10% of GDP right now when it was less than 2% about 3 years ago? The reasons are: the Obama stimulus, the TARP, and the slower economy (which arose in response to a major financial crisis, not because the government began an irrational and irresponsible spending binge). A slower economy leads to lower revenues (less income=less taxes paid since most tax revenue is based on income, and lower tax brackets) and higher spending on the social safety net.

Conveniently lost in all of this furor about the deficit are the beneficiaries of this recent government largesse. It’s certainly not the unemployed or the vast majority of people who do not work in the financial services industry.

And let’s stop with the now prevailing meme (regurgitated most recently in John Heilemann’s New Yorker Magazine piece, “Obama is from Mars, Wall Street is from Venus”) that the costs of the financial bailout are minimal thanks to the “successful” measures taken to “save” our financial system (as if it is worth saving in its current incarnation). With the conspicuous exception of Simon Johnson, virtually all analysts fail to factor in the fact that our public debt to GDP ratio has moved from 40% of GDP to 90% in the space of 2 years, directly as a consequence of the crisis of 2008.

Naturally, the deficit terrorists are now out in force about this fact, conveniently forgetting the underlying cause of this increase. So are the journalists who cover it, Meyerson being a conspicuous exception. In a market economy, where most of us have to work to make a material living, the threats posed by the likes of Pete Peterson and the deficit hawk brigade represent a true impingement on our right to work. As my friend Bill Mitchell notes, “the neo-liberals deliberately undermine the right to work of millions and force them into a state of welfare dependence and then start hacking into the welfare system to deny them the pittance that the system delivers.”

The elites who decry this government spending (especially the ones from Wall Street) are akin to a person providing someone with 5 packs of cigarettes a day and then bemoaning the fact that the recipient irresponsibly contracted lung cancer.

What will happen to the deficit as and when the economy finally improves? The Obama stimulus and TARP go away in a few years regardless. Tax revenues increase and safety net spending falls. We’re back to “norma,l” with deficits around 2-4% depending on the state of the economy, which is where we’ve been for the past 30 years aside from 1998-2001. Even CBO agrees, though what happens to the Bush tax cuts will have an effect of about + or - 2% of GDP (depending on whether they are extended or ended, respectively).

In fact, full employment is also the best “financial stability” reform we could implement, because with jobs growth comes higher income growth and a corresponding ability to service debt. That means less write-offs for banks and a correspondingly smaller need to provide government bailouts.

Fiscal austerity, by contrast, won’t cut it. Our elites seem think that you can cut “wasteful government spending” (that is, reduce private demand further) and cut wages and hence private incomes and not expect major multiplier effects to make things significantly worse. Of course, that “wasteful”, “unsustainable” spending never seems to apply to the Department of Defense, where we always seem to be able to appropriate a few billion, whenever necessary. “Affordability” principles never extend to the Pentagon, it appears.

Our policy-making elites also seem to have bought the IMF line that the fiscal multipliers are relatively low and that the automatic stabilizers (working to increase deficits as GDP falls) will not drown out the discretionary cuts in net spending arising from the austerity packages. The overwhelming evidence is that this viewpoint is wrong and implementation of policies based on it cause generational damages in lost output, lost incomes, bankruptcy and lost employment (especially denying new entrants from the schooling system a robust start to their working life).

The real issue is that those who are better off don’t want to have government intervention in economic affairs unless it benefits them. With typical ingratitude, Wall Street is now threatening to cut campaign donations for Obama and the Democrats because of their proposals to impose more regulation on the financial sector. However, when the government intervenes with bailouts, Wall Street stands first in the queue, cap in hand. No one wants to bear the actual discipline of markets if that means losses. Those at the high end of income distribution aren’t against every kind of government intervention, but are frequently against certain types of government intervention that might make the workers stronger, or create competition for private businesses (in the case of a public option in health care reform, for example).

Full employment is the real value that should guide economic policy, not the bogus emphasis on financial ratios that just play into the hands of the financial sector. Somehow, I doubt that this is the underlying principle guiding our “counsel of wise men” who are deliberating the future of Social Security and Medicare behind closed doors as the rest of us debate this issue in the open.

Roosevelt Institute Senior Fellow Marshall Auerback is a market analyst and commentator.

Missing M3

There is a banking mystery absorbing some economists' attention and to try to figure out what it is one must get down and dirty with superficially boring money supply statistics.

There is a measure of the money supply in the United States that is no longer officially measured by the Federal Reserve which is measured by that fascinating home of extra-geeky statistics called SGS -"Shadow Government Statistics". The measure I am writing about is called M3 and gloom experts suggest M3 is now behaving in a way that predicts a second, or "double dip" recession is on the way. Oh dear.
The redline shows official tracking of M3 which becomes blue when SGS continued to extrapolate the line after official tracking ceased. Suffice it to say M3 is showing a nasty plunge about now. M2 is the black line which shows all money in circulation while M1, the gray line at the top shows money in circulation (plus checking accounts) less bank reserves. Note how all three plunge, but most especially the no longer reported M3.

M3 is M2 (all circulating money plus savings accounts) plus large deposits so what this plunge seems to indicate is a lack of reserves in banks. In other words the supply of money is shrinking, which seems inconceivable considering how much public cash has been thrown at the nation's banks, especially those deemed too big to fail. In the first quarter of the year the amount of money hrank by nearly ten percent.

Economists on the left prefer to ignore M3, but ignoring for the moment the politics in play (Fall elections!) consider this: The US government is now calling on Congress to authorize more money printing to the tune of 200 billion dollars to keep "stimulating the economy." The fear is that a lack of physical cash will prevent the modest recovery from taking off. What that proposal means is that the Obama Administration is once again proposing to spend money it doesn't have trying to get people back to work. Which is a position supported by Keynesian economists (Paul Krugman being one notable).

The thing that bothers other economists is that this failure of M3 to grow indicates that previous efforts to stimulate the economy have failed and we face the very real likelihood that the recovery (in which I have never had much faith) may stall. Nevertheless if the response is just to print more money and create larger national debt (approaching 100% of GDP-or annual national income, as it were), we can hardly expect more of the same stimulus to produce anything different from the effects of the first stimulus. Which, apparently did not stimulate the economy to get up and walk on it's own. And the national debt grows exponentially once again.

If the original 800 billion dollar stimulus didn't ignite the economy will the next 200 billion dollar tranche? This all smells horribly of failure and a second round of recession will surely put us into a solid depression for the 21st century. The indicators are there, with extreme volatility on the stock market, a flight to gold on every investor's mind and a government plan that has but one answer: print more money and toss it down a rat hole. Meanwhile public debt accrues, interest rates are zero and commercial real estate goes into foreclosure across the country. These are indicators of an economy in deflation. Certainly the stimulus hasn't created job growth worth mentioning, and if we do go into a "double dip" recession the economy will be shrinking and unemployment numbers will go up with a vengeance. SGS puts unemployment at twice official rates estimating it at 22%. A return to an officially shrinking economy will be disastrous.

I keep wishing I could hang my hat on something positive and here I am again, fearing the worst. This really does feel like a replay of the early 1930s.

Tuesday, May 25, 2010

European Implosion

Europe seems to be imploding state by state with Spain now taking center stage as the dominoes fall. Ireland will surely follow not far behind, a nation that has invested ten times the amount (per capita) the US has devoted to bailing out the banks. Spain has been living with the highest levels of unemployment, around 20% officially, twice the official rate in the US. Unlike our economy Spain is used to operating "under the table" to some degree so the pain of job loss has been mitigated. Of course Spaniards don't lose health care with their jobs so that stress factor is reduced. Britain's new fragile coalition government is preparing to layoff 300,000 government employees to try to head off major public debt increases. Meanwhile Greece lumbers on with a promise of public bailouts that have been made by nations (including the US) that have no reserves of their own. They borrow to lend which makes no sense at all.

When the crisis of 2008 struck the world it seemed to me that our leaders had lost control and now they do indeed admit we reached the brink of catastrophe, looked over the edge and somehow drew back. The problem is that ability to buy our way out of systemic collapse has drained all the cash left in the world. That is not hyperbole, nor is it exaggeration. By saving the system and plugging the cash drain we have exhausted the money supply and not repaired the fundamental failures that brought the system to collapse. Indeed even now Congress is unable to pass a bill that would separate banking from risk taking, such is the hold lobbyists have on our government. Long term unemployment "benefits" are running out as the mass of people, some 6 million of them who were thrown out of work two years ago are at the 99th week of benefit payments. Congress has no plans to renew their benefits.

What this means is that we are unlikely to see hyperinflation which is, they say, a good thing, but we are headed own the old old path of the Great Depression with people out of work, no credit, no cash and no jobs. Simply put, the problem with being fiscally responsible and not increasing the public debt is that you kill off any hope of restoring a functional economy. It is a trap from which there is no easy escape and we are right in the middle of it. Companies cannot invest because they cannot borrow, without investment they cannot hire and without hiring people lose their homes and end up on the streets. Already one in seven US residential mortgages is behind. Unemployment claims are rising and are once again approaching the half million a month mark- this even as the original unemployed, those from 2008, lose their final benefit payments. States are running out of money and the Federal budget deficit is set to skyrocket even without any additional unemployment payments or bank bail outs.

The litany just keeps getting worse, even as the mainstream press says consumer confidence is rising. Consumer confidence can only be rising if people are blind, stupid, delusional or paying attention to people whose best interest it is to lie to them.The oil spill is a good example of this attitude. Now that the tenuous nature of government oversight and regulation has been exposed, the cry goes out for more government oversight. The blame is shifting from BP, after all they just got away with as much as government would allow, to the government whose duty, it turns out, is to protect us from the predatory nature of deep sea oil drilling. Who knew burdensome government regulations might actually serve a purpose? And aside from the immediate apportionment of blame we now hear the voices of those opposed to off shore drilling which should be banned everywhere. Sure, then we can run our hydrogen cars on water. We can suffer rotating electrical supplies for say, six hours a day, and we can watch the store shelves reduced to no choices and few supplies as cereal becomes impossibly expensive and impossible to truck.

Europeans are being forced to come to terms with a major reduction in their quality of life and as investors flee the Euro (today around 1.22 to the dollar) the dollar strengthens. But the stock market is diving, around 9800 as I write and in the US the voices of fear talk about the imminent implosion of commercial real estate loans. Many are coming due as commercial loans are much shorter term than residential mortgages and they are expected to reset en masse across the US over the next 18 months. Once Europe has been turned over and picked apart the contagion will move across the water and if we are lucky enough to see it move to Asia first, so much the better. Japan has monstrous levels of public debt, most of it sold to it's own citizens, but that debt too needs to reset. China is apparently showing signs of an over stretched economic bubble due to burst soon. What that means God only knows as they are packed to the gills with natural resources and prime materials purchased with the income from their over heated export economy.

I am left to wonder what the terms of our future lives will be. Will we have pension plans that payout in 20 years from now? It doesn't seem likely as the plan managers base their payouts on year-over-year gains of 8%, a ludicrous figure in light of what is happening to the economy, still, after all these public buyouts. How do we cope with tens of millions of homeless unemployed? Are we back to soup kitchens and hobos? How do we, the generation of eternally rising expectations, get used to a future of making do with much less? I keep hoping that the pessimists aren't realists and the optimists have it right, but as the weeks go by the optimism of an economy in recovery seems absurd and just another lie in a series of untruths about our economy, our environment and our collective future.

Monday, May 24, 2010

Climate Change

This article by Peter Gleick of the Pacific Institute was published by Huffington Post:

The following graph should be on the front page of every single newspaper in the country. It shows, clearly and unambiguously, that the Earth has been heating up over the past 130 years (through the end of 2009), and especially over the past 30 years. And it's getting worse: the National Oceanic and Atmospheric Administration (NOAA) has just announced that the first four months of 2010 were the hottest in the entire 130-year record for the planet.Climate change deniers have been trying hard to confuse the public and policy makers about climate change. But their claims about climate science and what we see in the world around us are based on ideology and bad science, not reality. The graph below is reality. If your body temperature looked like this, you'd be calling your doctor.
If your taxes looked like this (...they don't), you'd be calling your Senator.
If your cell phone bill looked like this, you'd be calling the phone company for a new plan.

Don't be fooled when climate change deniers tell you that place A or place B was cold, or that day 1 or week 2 here or there was cold. The planet as a whole is heating up. A cold winter in Washington doesn't change that.

And don't be fooled when the climate change deniers pretend that the data are no good. They are.

And don't be fooled when they cherry-pick from these data and show you only a few years, or a partial record. That's misleading science.

And don't be fooled when the climate change deniers say this is all natural. It isn't: no natural mechanisms can explain this.

It's time to call our elected leaders and get a new plan.

Peter Gleick

Thursday, May 20, 2010

Fraud In Our Economy

This is the text of a letter written by the economist James Kenneth Galbraith to the Senate Judiciary Committee, pleading for proper oversight of the financail sector to eliminate fraud. It is spectacularly blunt. It was carried by Jesse's Cafe Americain Blog which was where I first read it.

Chairman Specter, Ranking Member Graham, Members of the Subcommittee, as a former member of the congressional staff it is a pleasure to submit this statement for your record.

I write to you from a disgraced profession. Economic theory, as widely taught since the 1980s, failed miserably to understand the forces behind the financial crisis. Concepts including "rational expectations," "market discipline," and the "efficient markets hypothesis" led economists to argue that speculation would stabilize prices, that sellers would act to protect their reputations, that caveat emptor could be relied on, and that widespread fraud therefore could not occur. Not all economists believed this – but most did.

Thus the study of financial fraud received little attention. Practically no research institutes exist; collaboration between economists and criminologists is rare; in the leading departments there are few specialists and very few students. Economists have soft- pedaled the role of fraud in every crisis they examined, including the Savings & Loan debacle, the Russian transition, the Asian meltdown and the bubble. They continue to do so now. At a conference sponsored by the Levy Economics Institute in New York on April 17, the closest a former Under Secretary of the Treasury, Peter Fisher, got to this question was to use the word "naughtiness." This was on the day that the SEC charged Goldman Sachs with fraud.

There are exceptions. A famous 1993 article entitled "Looting: Bankruptcy for Profit," by George Akerlof and Paul Romer, drew exceptionally on the experience of regulators who understood fraud. The criminologist-economist William K. Black of the University of Missouri-Kansas City is our leading systematic analyst of the relationship between financial crime and financial crisis. Black points out that accounting fraud is a sure thing when you can control the institution engaging in it: "the best way to rob a bank is to own one." The experience of the Savings and Loan crisis was of businesses taken over for the explicit purpose of stripping them, of bleeding them dry. This was established in court: there were over one thousand felony convictions in the wake of that debacle. Other useful chronicles of modern financial fraud include James Stewart's Den of Thieves on the Boesky-Milken era and Kurt Eichenwald's Conspiracy of Fools, on the Enron scandal. Yet a large gap between this history and formal analysis remains.

Formal analysis tells us that control frauds follow certain patterns. They grow rapidly, reporting high profitability, certified by top accounting firms. They pay exceedingly well. At the same time, they radically lower standards, building new businesses in markets previously considered too risky for honest business. In the financial sector, this takes the form of relaxed – no, gutted – underwriting, combined with the capacity to pass the bad penny to the greater fool. In California in the 1980s, Charles Keating realized that an S&L charter was a "license to steal." In the 2000s, sub-prime mortgage origination was much the same thing. Given a license to steal, thieves get busy. And because their performance seems so good, they quickly come to dominate their markets; the bad players driving out the good.

The complexity of the mortgage finance sector before the crisis highlights another characteristic marker of fraud. In the system that developed, the original mortgage documents lay buried – where they remain – in the records of the loan originators, many of them since defunct or taken over. Those records, if examined, would reveal the extent of missing documentation, of abusive practices, and of fraud. So far, we have only very limited evidence on this, notably a 2007 Fitch Ratings study of a very small sample of highly-rated RMBS, which found "fraud, abuse or missing documentation in virtually every file." An efforts a year ago by Representative Doggett to persuade Secretary Geithner to examine and report thoroughly on the extent of fraud in the underlying mortgage records received an epic run-around.

When sub-prime mortgages were bundled and securitized, the ratings agencies failed to examine the underlying loan quality. Instead they substituted statistical models, in order to generate ratings that would make the resulting RMBS acceptable to investors. When one assumes that prices will always rise, it follows that a loan secured by the asset can always be refinanced; therefore the actual condition of the borrower does not matter. That projection is, of course, only as good as the underlying assumption, but in this perversely-designed marketplace those who paid for ratings had no reason to care about the quality of assumptions. Meanwhile, mortgage originators now had a formula for extending loans to the worst borrowers they could find, secure that in this reverse Lake Wobegon no child would be deemed below average even though they all were. Credit quality collapsed because the system was designed for it to collapse.

A third element in the toxic brew was a simulacrum of "insurance," provided by the market in credit default swaps. These are doomsday instruments in a precise sense: they generate cash-flow for the issuer until the credit event occurs. If the event is large enough, the issuer then fails, at which point the government faces blackmail: it must either step in or the system will collapse. CDS spread the consequences of a housing-price downturn through the entire financial sector, across the globe. They also provided the means to short the market in residential mortgage-backed securities, so that the largest players could turn tail and bet against the instruments they had previously been selling, just before the house of cards crashed.

Latter-day financial economics is blind to all of this. It necessarily treats stocks, bonds, options, derivatives and so forth as securities whose properties can be accepted largely at face value, and quantified in terms of return and risk. That quantification permits the calculation of price, using standard formulae. But everything in the formulae depends on the instruments being as they are represented to be. For if they are not, then what formula could possibly apply?

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: "liars' loans," "ninja loans," "neutron loans," and "toxic waste," tells you that people knew. I have also heard the expression, "IBG,YBG;" the meaning of that bit of code was: "I'll be gone, you'll be gone."

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails -- those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the "Paulson Put" was intended to delay an inevitable crisis past the election. Does the internal record support this view?

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye. What is the appropriate response?

Some appear to believe that "confidence in the banks" can be rebuilt by a new round of good economic news, by rising stock prices, by the reassurances of high officials – and by not looking too closely at the underlying evidence of fraud, abuse, deception and deceit. As you pursue your investigations, you will undermine, and I believe you may destroy, that illusion.

But you have to act. The true alternative is a failure extending over time from the economic to the political system. Just as too few predicted the financial crisis, it may be that too few are today speaking frankly about where a failure to deal with the aftermath may lead.

In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case. Thank you.

US Debt Graph

This International Monetary Fund Graph shows the increase in US debt as a percentage of Gross Domestic Product since 1950.Aside from the rather U- shaped curve and the current rather steep trajectory up, I noticed one other interesting little tid bit. The two points along the curve that show declines come under Democrat Presidents- Carter and Clinton which is an inconvenient fact to those who label Democrats as tax-and-spend-liberals. Naturally those who want to blame democrats for increasing the "size of government" will wiggle off the hook as fast as they can but President Reagan and president Bush The Younger bear a heavy share of the responsibility for rapidly increasing Federal budgets. Them and their wars.
Another interesting note in the IMF's discussion of US Debt is the projected increase in the cost of US health care- 50% higher than in the UK where they labor under the burden of universal single payer health care.
Undoubtedly the grim news in the chart above is the meteoric rise of the debt to more than 100 percent of Gross Domestic Product projected by 2015. How that will play out is an interesting question. Our leaders suggest a burgeoning economy will knock the numbers down. I remain skeptical. I have no doubt the Republicans will use the debt as an excuse not to tax the wealthy but to try to shaft the workers. That is predictable and so far the Democrats haven't shown much propensity for stopping them. A depressing prospect.

Wednesday, May 19, 2010

Time To Default

It seems as though we need to call a time out for the world's economic system and says "enough's enough." It is in short, time for everyone to default. The Europeans backed by the International Monetary Fund (20% of which is US-supplied money) are planning a trillion dollar bail out of themselves, which is as lunatic in reality as it sounds. Every industrialized nation is living beyond it's means, every nation is borrowing to make ends meet therefore the solution is to create a fund, put some of the borrowed money into it and loan it back to yourselves collectively to meet your own financial obligations.

Very often, over the years I have found that reducing apparently complex intractable issues to family level problems helps me to see what is really going on. In this case imagine you owe more than you have. So you borrow more to pay off current obligations. This was how people who had credit cards and got in over their heads used to drag along for a little while more. They couldn't pay back cards A and B as their income was insufficient, so they borrowed on card C and kept A and B current with the new loan. Inevitably they ran out of credit and had to declare bankruptcy. Industrialized nations appear to be doing a similar high wire act. The result must be an inability to meet the obligations. Of course it is possible to print money to make the payments, if you are a sovereign nation with your own currency, however that debasement tactic is well known and will only keep the charade going for a little while longer.

Essentially what we are facing is a long, or possibly rapid, descent into bankruptcy, and historically nations have ended the cycle of unemployment, deflation, poverty and misery by finding an enemy, declaring war on them and trying to kill as many of their hapless targets as possible while ramping up war production and diverting resources to the government which refunds the system on a "war footing" a device that allows everyone to work for the government, wipe out debt and lose a few lives in the process. The last economic wind down ended with tens of millions of unimportant dead people and entire nations were reduced to rubble. It was an uncomfortable time the history books tell us. Iran is threatening to cut off oil supplies from the Persian Gulf, Israel is threatening war to end Iran's nuclear ambitions and the US wants to impose the sanctions that will kick off these various and several steps toward war. that would be one way to divert attention from the deficit.

Maybe this time around we could short circuit the process by having everyone declare bankruptcy simultaneously on the morning of January 1, 2011, reset the financial clocks and start again. This tactic might cause problems to some banks which feel they are owed money, but banks typically don't have armies. Other creditors, like China, and possibly Japan might get miffed at the apparent loss of wealth but at the moment Japan is stumbling on a deficit of horrific proportions, by far dwarfing all the trillions the US owes Japan, and the other major creditor China is reportedly about ready to have an economic melt down all their own (or not, who knows). China knew it was playing a dangerous game lending money it didn't need to it's political enemy and default may be just the tonic the Chinese leadership needs to retreat once more behind their own private bamboo curtain where they can resume torturing dissidents in peace and without US interference. Note I never said declaring bankruptcy doesn't have losers, and a few human rights campaigners would be a small price to pay to resume business as usual in the US. Wouldn't it?

The fact is politicians couldn't commit to such a sanguine path as calling a financial time out- we the voters won't let them. Every time an elected official speaks truth we vote them out and then we complain that they treat us like mushrooms, feeding us shit and keeping us in the dark. Another fact is we are facing a vast and all encompassing reduction in our standard of living (remember the Gulf Oil Slick swelling by the hour?) and the only historical path out is violence on a global scale to reset the economic clock. It seems to be that or simply calling it a day, a bad end to a long run of good luck, and restarting the world's currency clocks. Or we keep doing what we are doing, seeking energy too expensive to drill, burning our food as fuel, demanding ever weirder amusements to distract us and pretending we can bring back 15 million lost jobs that had no purpose before the crash and will have one purpose after the crash- to keep propagating the lie that all is well if only we can get the bubbles bubbling again. I say let's default and do it now before someone drops a nuke on Tehran. That will take your mind off budget deficits instantly.

Tuesday, May 18, 2010

In Something We Trust

From Rick Ungar at the Policy Page a nice dissertation on why the US is not a religiously based society, as Sarah Palin and her ilk would assert.

The religious right has long sought to make the case that the United States was founded on Judeo-Christian beliefs despite the fact that the evidence clearly points to a very different intent.

While purveyors of this notion have come up with any number of reasons to support their claim, the most often cited ‘proof’ is the fact that the Declaration of Independence puts God front and center. The thing is, there was no American nation when we proclaimed our independence from Great Britain. And while the Declaration of Independence is certainly one of the most important political documents in our history, it simply has no legal effect on the laws of this nation. That distinction belongs to the Constitution; our first, and most enduring, statement of the concepts which form the basis of law in the United States.

Another explanation frequently offered up in support of the notion that the founders had God on their minds is the advent of the phrase “In God We Trust” as the nation’s motto. What the religion peddlers don’t appreciate is that the phrase was first used in 1864 – almost 100 years after the founding of the nation – when embossed on the two-cent coin in response to the rising religious fervor in the country as a result of the Civil War. Indeed, the phrase did not officially become our national motto until 1956.

While God played a part in the personal lives of many of our founders (though not all), the truth is that nowhere in the United States Constitution can you find the word “God” – not even once.

An oversight? Unlikely.

In Thomas Jefferson’s autobiography, he comments on the language he used to restate the importance of religious freedom in the document that is his second most famous writing (and the one historians suggest was the creation he was most proud of ) , the Revised Code of the State of Virginia.

Where the preamble declares, that coercion is a departure from the plan of the holy author of our religion, an amendment was proposed by inserting “Jesus Christ,” so that it would read “A departure from the plan of Jesus Christ, the holy author of our religion;” the insertion was rejected by the great majority, in proof that they meant to comprehend, within the mantle of its protection, the Jew and the Gentile, the Christian and Mohammedan, the Hindoo and Infidel of every denomination.
Thomas Jefferson, Autobiography, in reference to the Virginia Act for Religious Freedom

Does this sound like someone who sought to weave Judeo-Christian theory and belief into the creation of the Constitution?

Indeed, no less a religious source than acknowledges that Jefferson was a heretic in his time – deeply angered by what he viewed as a total perversion of Christianity after the time of Christ’s death. Given his feelings, it seems highly unlikely that he sought to include the principles of Christian religion into the founding of the nation.

Another key author of the Constitution, Thomas Paine, had this to say in Chapter 1 of his famous pamphlet, The Age of Reason-

I do not believe in the creed professed by the Jewish Church, by the Roman Church, by the Greek Church, by the Turkish Church, by the Protestant Church, nor by any Church that I know of. My own mind is my own Church.

Does anyone believe that Thomas Paine sought to include Judeo-Christian beliefs in his drafting of the U.S. Constitution?

As for author John Adams – a man with strong religious beliefs who allowed religion to play a part in his personal life but carefully avoided it in public matters – nowhere is there clearer proof of the man’s approach to this subject than in the little known “Treaty of Tripoli”, signed by President John Adams and confirmed by the U.S. Senate in 1796, less than 10 years after the Constitution’s adoption.

Chapter 11 of the treaty reads:

As the Government of the United States of America is not, in any sense, founded on the Christian religion; as it has in itself no character of enmity against the laws, religion, or tranquillity, of Musselmen; and as the said States never have entered into any war or act of hostility against any Mehomitan nation, it is declared by the parties that no pretext arising from religious opinions shall ever produce an interruption of the harmony existing between the two countries.”
Treaty of Tripoli

Could it possibly be any clearer?

If people like Sarah Palin wish to argue that the nation ought to follow a course that places religion squarely into the law making process, I suppose that is their right.

However, the continuous effort by Palin and friends to pervert the true history of the nation and the intentions of the founders is nothing short of subversive and clearly dangerous.

At best, the suggestion that religion rests at the foundation of our legal system is one based on ignorance of the principles that are the heart of this country. At its worse, the effort is little more than an attempt to pervert the philosophy of the nation’s founders in order to re-invent America to meet the religious right’s own objectives and to re-make the nation into something quite different than what it was intended to be.

I respect and appreciate the value of religion in many people’s lives. But if Sarah Palin wants to rule a nation based on God, she really should look elsewhere. There are many countries in the world that would meet her requirements – although she will find that most of them worship the God of Islam. Palin might ask the women in so many of these theocracies how government and law based on religion has worked out for them.

Or Palin and friends might simply look up the word “Pilgrim” in the dictionary and learn about how our own original settlers were fleeing religious persecution at the hands of a Monarch who was also the leader of the Christian church in the land of their birth.

Our founders knew exactly what they were – and were not – doing when determining the nature of law in this country and the importance of a secular government.

While the religious right are free to vote for candidates who share their reliance on religious belief, they are not free to re-imagine the fundamentals of this country - at least not without putting their reinvention through the rigorous process of amending, or re-writing, our Constitution.

That’s the way it was intended to be done and even Sarah Palin doesn’t get to make it otherwise.

Monday, May 17, 2010

Euro Versus Dollar

For one wild moment my wife started checking airline prices to Italy, as she watched the euro drop to 1.23 to the dollar. Last year when I was in Italy the exchange rate was an awful (for me) 1.65 to the dollar and everything cost the Earth. The airlines took care of the fantasy that a European vacation might be affordable. We could drive to California and back four times for the cost of a pair of economy class tickets purchased (as they must be by working stiffs like us) weeks in advance. We will, in the hallowed words of the Chevrolet ad of yesteryear, see America first.

Frankly I feel lucky to be contemplating a vacation at all in this year that seems to be unravelling into the beginning of phase two of the Great Depression of the 21st century. Mind you we are surrounded by unreality so my plan to pack a tent and a dog in my new-to-me car and take off on the open road is no more unreal than say, the size of official estimates of the Gulf oil spill, or projections for the Federal budget deficit. I tried to explain to Giovanni in Italy how catastrophic a job loss is in the US, and while he does understand intellectually how thread bare the social safety net is in our country he doesn't understand viscerally what it means to lose your job, your home your health insurance and your self respect all at once. Giovanni views the unravelling of Greece with a certain detachment, of the "it can't happen here" variety, though he does note that belt tightening is underway throughout his provincial corner of the Italian hinterland.

The pundits have been telling us that we who have enjoyed the benefits of First World membership are in fact in grave danger of losing our elevated status on a slow but certain decline into a way of life we are used to seeing in Third World countries. By that I mean the cobbling together of a life through second jobs, bartering, keeping machinery alive by expedients, not with factory supplied spare parts, a way of life that is all about "making do." Cutting back will be the theme of the coming decade and as usual the poor will take the cuts firstest and the mostest. A dropping economic tide dumps the rowing boats deepest in the mud of a financial Depression.

In the US we know all too well what high unemployment and hopelessness bring. In Europe the landscape of social welfare in a restricted form has to be mapped out. In the US the working class is trained to accept social inequity, in Europe plans to restore fiscal solvency on the backs of the working class are being met with resistance. So, for the time being the Euro loses value and pundits talk of the break up of the Euro currency as governments crave control over their own printing presses to save themselves. And as the dollar strengthens the theory gains credibility that the US is pulling strongly out of the recession. Which is odd as unemployment isn't improving, thus one has to believe businesses and factories aren't doing better and the drag of a fifth of the workforce not working at all or enough to do well, means spending cannot increase. Some houses are selling but at short sale prices, so where is the recovery to come from?

The most interesting thing of all is how Governments react to our problems which is to treat these issues as blips that will go away given time. The reason they do this is because electorates have shown repeatedly that given the truth about a situation their reaction is to vote the bearer of bad tidings out of office. That I suspect is why the previous Greek government got Goldman Sachs involved in covering up the size of the debt. If they had stood up and said they couldn't join the Euro because Greek debt levels were too high, the populace would have voted them out of office instead of figuring out how to deal with the problem. Now, faced with imploding government debt it's better to soldier on and pretend nothing is happening rather than presenting the populations of first world countries with the truth. Note that when Jimmy Carter presented the US with the notion of finite energy supplies and a need to seek alternatives, he was promptly voted out of office and accused of being a defeatist.

The fact is that had he been heard and re-elected and had his plans been implemented we would be in a far better and stronger position today than we can currently imagine. The world most likely would have been a far better place to live in for the past three decades too. But here we are, faced once again with an unpalatable truth and leaders unwilling to tell us about it because if they do we will stamp our feet and tell them to go play elsewhere.

The fact is that we are facing a steady and very unpleasant decline in our living standards. Ever since the US domestic oil production peaked in the Jimmy Carter era we have struggled to maintain and improve living standards by using foreign oil and volatile prices as our guide to a better tomorrow. Now, the Gulf oil spill has shown the true cost of attempting to extract deep water reserves and without them our living standards must plummet because we are nowhere near ready to deploy energy alternatives, and the notion of conservation is still viewed as subversive to capitalism. Greeks face massive cuts in Social Services and in some US states similar bitter medicine is being applied almost by force as it were, in Illinois and California, New Jersey and no doubt the economically ravaged Gulf Coast states impacted by the oil. If tourists are scared to book vacations in Florida where there is no oil, imagine what will happen to the Gulf tourism industry when the oil lands in large quantities and beaches really are disfigured. Already the fishing industry is pretty much wrecked and tourism seems sure to follow.

The difference between our problems and those of the Euro zone are not yet apparent and it seems odd that our country with war commitments overseas and failing obligations at home has a currency that is seen as viable. Tiny little Greece is toppling the Euro, massive California isn't even registering as a problem on the world economic platform. Some people argue that the American Federalist system makes state sovereign debt more manageable in the US and the rigid unsupported Euro system means the slightest fissure can bring the whole currency to it's knees. It all seems like more smoke and mirrors, reflective of the bizarre state of the Dow Jones average, still high and simultaneously we see gold peaking at around $1223 an ounce. Nothing adds up, all is a lie, tomorrow things will be better.

Sunday, May 16, 2010

Gulf Oil Folly

In reading an article at about the total catastrophe that is developing in the Gulf I read this comment from someone signing off simply as "m" and the quotation perfectly sums up my feeling about the past 30 years in the US, life as envisioned by President Ronald Reagan which has led to the pass we find ourselves in both economically and environmentally speaking.
Dolphin Swimming Under The Oil
WE the people, the voters, have done much of this to ourselves. We fell for the big CON known as ''Less Government'' in the belief that WE would prosper if We went along with Reagan's view that 'Government (of Ourselves) IS the Problem' and that if We were to drastically shrink Government, we would find greater prosperity.
Instead, it was all about simple minded Deregulation Schemes to get Government off the backs of huge Corporations and sold to Americans as the pathway to liberty for all.
It worked. And worse, it Multiplied itself exponentially. As Corporations were relieved of Regulatory and Tax Burdens, their new found wealth and freedom from oversight, responsibility and accountability gave them ever more wealth and power to throw around and move Government to further deregulate them. They were allowed to grow to the size of 'Too Big To Fail' and such power begets more power and greater wealth begets greater wealth and so.., the circle jerk continues. The Republic fades...

Friday, May 14, 2010

Moral Hazard

40 million Americans on food stamps. How d'you like them apples? So we are on the path to recovery which is a good thing as a quarter of all mortgages are underwater. That's about 2.5 trillion dollars "worth" of loans. US debt amounts to a total of 825 trillion they say, a number so huge I don't know what it means. Luckily the Treasury lost count along the way and is unable to tell us how much money we (the taxpayers) have paid out in corporate "loans." Our blood sucking friends in the corporate world continue to take our money and instruct us to rail against our government, the one they have bought. With our money.

There is the question of moral hazard and how to deal with it. I went hunting for a definition of moral hazard and found this: "the lack of any incentive to guard against a risk when you are protected against it." The problem is that our corporate leaders have insulated themselves against losses by using our money and after they used it we didn't ever hold them accountable for their losses and our guarantees. Which begs me to ask: why are Greeks rioting and the Irish protesting and we are doing nothing? We can't even get it together to remember who to blame for this fiasco.

Goldman Sachs, remember them? The investment bankers who became a "proper bank" when it most suited them, so they could take public monies, our money and gamble it away or award to themselves as a bonus, with no risk because we the people are backing them without possibility of repercussions. That would be the American taxpayers who aren't on food stamps, as well as the rest of us who face a bleak future of declining living standards, increasing pollution and no leadership at all. Moral hazard? There is no moral hazard in the US, not real moral hazard because here, no one goes to hell. They just turn up the volume on the television.

Wednesday, May 12, 2010

Taxation And Representation

I have just started on the three disc series by HBO called simply "John Adams" based on David McCullough's book and it is a reminder why I enjoy Netflix so much, this ability to order a movie, a series, on a whim at my leisure. The story was made into a mini series a couple of years ago and stars Paul Giamatti in the title role and Laura Linney as his wife Abigail, the power behind the throne as it were. As abbreviated as all movies must be this story does a nice job of filling in the historical cloth that created the second President of the United States, a man of principle and abrasive passion. I enjoyed the scene where he hands off the writing of the Declaration of Independence to Thomas Jefferson, played by Stephen Dillane......and even more so the scene where Adams and Ben Franklin (played by the stalwart Tom Wilkinson, an English actor who got his break in The Full Monty, weirdly enough, and has carved out a career in Hollywood) edit Jefferson's original draft which was considered perfect by it's huffy author.The film renders history as a series of chances, taken at the flood by men of intelligence and determination, beset by all the mortal fears we all know so well. It's a valuable lesson to remind us that history is made up of people just like us. Before I move on to my main point one closing still from the series showing Adams and George Washington played by David Morse:History Made Real.

It struck me, as I watched the opening scenes, how carefully the movie makers worked to recreate with as much accuracy as one can imagine, a time and a place marked by history yet completely unrecorded. We have no idea how any of these famous men, or their wives, sounded as they spoke, but we do know what they said and we marvel at their wit, and study their tension and their fear, so ably expressed on screen. The story makes it clear that independence was only considered after every alternative was tried first. What a contrast to what we see today with people screaming thoughtlessly about ways to split our union as a form of anarchic political expression. Today we find state attorneys general want to ignore the US constitution simply as a way to oppose health care reforms enacted by Congress. It is as though our own government is a tool of oppression exactly as Adams ended up viewing the British government in his day.

I suppose one could argue that oppression in any form is unconstitutional, and God knows in the past twenty years I have felt at odds with my government on more than one occasion. yet now, today we find Americans yelling loudly about their government in terms that make my skin crawl. There is the frequent tedious comment in monotone from Milton's Freeman protesting no matter what the subject matter that we need less government not more. An argument as stupefyingly stupid as it is repetitious. Were I to suggest government oversight of the short cuts used in the Gulf of Mexico needs to be more all encompassing, not less, the response would be, why, I have never seen a government I liked. Look harder is my reply.

The childlike fantasy that modern societies can function with the taxation levels of the 18th century betrays not only a lack of collective memory but also an inability to imagine the consequences of one's day dreaming. Never mind that taxation levels in the US are reportedly at their lowest level since Harry Truman's administration. They will never be low enough apparently.

For myself, a government employee, I see a lot of good that comes out of government, or more accurately, a lot of good that can come out of government. All the same, I had some feelings of empathy when John Adams called for no taxation without representation, the famous rallying cry of the revolutionaries. Indeed they never did call for simply No Taxation, being as they were men of erudition who understood the function of government. It seems to me that even today the "representation" part of the equation is lacking. Today we the people vote, yet our government does not represent us, for our elected leaders are bought by pernicious lobbyists, leaving us as unrepresented as the colonists.

The solution to our modern dilemma is not to seek less government but to seek more representative government, and to demand an end to the buying of free speech as encouraged by the Supreme Court, as big a body of dolts as ever was sitting on the bench, with their recent ruling selling elections to the highest bidder. The Supreme Court is no stranger to stupid decisions, Dredd Scott being one outstanding act of public stupidity, Plessy versus Ferguson another enshrining Jim Crow as the law of the south, Schenck in 1919 rolled back the First Amendment, all of which prove that the law can sometimes be an ass. However throwing out the baby with the bathwater is a tedious exercise and if we can get back our representation those precious founding principles will have been upheld.

What astonishes me about these anti-government asses is how blinkered they are. Government oversight of anything at all, urban planning or oil drilling is to be abhorred, yet these same guardians of public morals couldn't give a toss about how much personal information they give away to multi national corporations, entities endowed with the rights of human beings and having no allegiance to anyone or anything except their profits. These same dimwits will protest the intrusion of government census takers and will in the same breath give away all their personal information to an anonymous corporate website selling one more useless electronic gadget. These are the same unthinking numb nuts who blank out their vehicle tags on websites- those license plates designed to be seen on public highways everywhere(!)- yet ride unthinkingly though the security cameras on tollbooths on privately operated highways.

Me? I know very well how uninterested I am in the names, social security numbers, photographs and address histories of 20 million Floridians whose records I can access with a click of the mouse at work. That I don't hoard and sell this precious secret information is because I am a public servant not paid to delve into citizens' private lives to make a buck. You'd better believe Winn Dixie doesn't have your best interests at heart when they take your personal information and bar code all your purchases to make a diagnosis of who you are and how you shop. That's the difference between the private and the public sectors. Too bad not enough people understand that.

Monday, May 10, 2010

Pass The Feta

One reads various pundits arguing all ways on the subject of the European Union and the survival of their currency. For some observers the chaos in Greece presents Germany with an opportunity to enjoy a lower valued currency which will help with exports and improve Germany's balance of payments while decreasing their debt load. For other observers the Euro's plunge in value against the dollar spells the end of the currency and perhaps the end of the unification of Europe. The Euro's problem dealing with disparate economies wasn't apparent when it came into being in the middle of a boom. They made no provision for the possibility that debts in one country would grow so large as to create a disincentive for other countries to support the debtor. No one figured that if Greece were to go down the toilet Germany may not want to save them from default.

Whether or not the Euro survives will remain a matter of speculation as no one is yet suggesting the currency's demise right now. Rather, the speculation goes, it will most likely fade as more and more countries get into debt difficulties. That being the case it will take a few more years (and a few more crises) to see if indeed the Euro and the European Union will get past this mess intact. Up next: Portugal a relatively well run country that has found itself insolvent through over-spending and Spain a poorly run speculative enterprise has also found that living beyond one's means is a dicey proposition. Italy and Britain are not far behind and the weight of all this may be more than France and Germany want to sustain or are able to sustain. And Britain never even joined the Euro so theirs will be a private crisis of the pound all by itself.

What has occurred to me is to wonder if the European ideal of cradle-to-grave public welfare support will survive this economic crisis. For someone like me who grew up in the post-World War II Europe, the idea of no more public health care system would be inconceivable. The notion that pensions, as modest as they may be, will be pushed back, perhaps for decades, to accommodate the needs of bankers, seems utterly out of place to your average European. Yet numbers don't lie and the numbers are absolutely dreadful. The suggestions I have read require European public spending to be cut on the order of around seven percent over a period of years to restore balance in public treasuries. These kinds of cuts represent a severe retrenchment in living standrds and huge reductions in expectations. How they will play out will be something to watch.There are those who argue endlessly in favor of public spending cuts, but when we get down to it, cutting spending is horrendously difficult, and politically impossible, as we are seeing on the streets of Athens.

The bad news from this side of the Atlantic is wondering how we will escape a similar fate. Perhaps the fact that we print the world's reserve currency will help, perhaps the fact that we have low welfare expectations will help. On the other hand we have created a lifestyle in the US that is largely dependent on oil for mobility and we have a population that for the most part hasn't even heard of Peak Oil, never mind figured out how to deal with it. I suppose it's all a matter of degrees, now we have to get used to doing with less, just as Greeks will have to also, except their less is a good deal less than our less. Germans will have to do with less but their less is perhaps as much as ours perhaps more. I wish I were Norwegian, a country with no debt and a massive bank account filled with oil money earned from the North Sea and stashed as a rainy day fund to keep their system of national welfare healthy and strong. We could have taken a leaf out of Norway's book and saved our oil pennies instead of trying to run the world and have military bases in 700 different places. Oh well, now is how we learn to do with less, and at least we never had a National Health Service so we won't miss not having that anymore. And maybe feta cheese will get cheaper by way of consolation, as we find Greeks bearing the gift of a new uncertainty to a world not too keen to get involved.

Sunday, May 9, 2010

Stratospheric Inequality

There is a phenomenon in the United States that confuses me mightily and it never quite manages to be explained to my satisfaction. I do not understand how ordinary working people can side so staunchly with the forces arrayed against their own economic best interest. For instance, in the health insurance reform debate we heard endlessly from opponents of reform, people who themselves had no insurance, or who enjoyed the benefits of the single payer system we call Medicare, who rejected as evil "socialism" any attempt at reform of our grossly inefficient cruel "system" of private health insurance.On the subject of the implosion of the economic system in 2008 and subsequent economic devastation, we see no widespread protests or demands for change. Already we hear the storyline of the economic implosion changing to reflect the desire of the private banking sector to avoid blame for our troubles. It is extraordinary how easily public opinion can be swayed, how little it takes to convince a population that lives in dread of unemployment, that the people who profited most from the wreckage had nothing to do with it's creation. To suggest otherwise is to engage in that most pernicious lie of all " class warfare." It seems obvious to me that to avoid laying the blame for the collapse squarely where it belongs is a form of class warfare far more cruel and vicious than simply telling the truth. Yet the American population cannot bring itself to protest; we leave such activities to the Greeks who are loud in arguing the sins of the rich should not be expiated by the population at large. They take to the streets to make their point; we don't.

Just this week the minutes of a Federal Reserve meeting from 2004 were revealed. Chair Alan Greenspan made the following breathtakingly snobbish remark:

We run the risk, by laying out the pros and cons of a particular argument, of inducing people to join in on the debate, and in this regard it is possible to lose control of a process that only we fully understand.

Perhaps in 2004 only the federal Reserve bankers understood the housing bubble they had created but they, among all of us, failed to take corrective action to spare us all the Depression level misery we now collectively suffer at their hands. Yet we do not protest.

It is said that Americans labor under the delusion that the American Dream is alive and well and thus they too can one day benefit from the breaks we give to the very rich. Indeed this is a country that sees widespread admiration for the accumulation of wealth (in defiance of the religious stereotype that recommends abandonment of wealth as the true portal to eternal happiness!). Furthermore the theories of one William Sumner are suddenly making themselves known. This 19th century philosopher had apparently become fashionable in conservative circles which have adopted his two principle characters to describe the best of modern America. That would be the Captain of Industry who epitomises free wheeling capitalism. And then there is the Forgotten Man, who represented the substance of the self reliant member of the capitalist world. This Darwinian view of the world is coming back to haunt the United States where the forgotten men and women are laboring under the delusion that it is government, not the absence of government oversight that is wrecking our world.

My contention that our working class world is being wrecked is supported by new figures that should the top one percent in this country are taking home the bacon and the rest of us are getting the shaft. This inequality is now at levels not seen since the 1920s.

Notice how the boom years of growing expectations and expanding wealth from 1960 to 1980 show historic high levels of parity, falling away with the election of Ronald Reagan as President. The problem with income disparity at these levels is that in an economy like ours driven by "consumer spending" you won't see much spending by people if they have neither income nor security. And we thus get back to the original contention: without a fair share and moderate distribution of wealth we as a nation suffer. Everyone does better when everyone does better, as the saying goes. That isn't dreaded Socialism, that's common sense.

Thursday, May 6, 2010

Ilargi On House Price Support

From Ilargi's The Automatic Earth, a must-read economic blog:

It's one thing for the US government to go after Goldman Sachs. But while Goldman's actions have been obviously fishy, whether they’re outright criminally illegal or not, and whether they involve and include activities that make the firm a de facto bookmaker, or perhaps just constitute withholding information that the law requires divulging, let's not forget it was Washington that allowed Goldman to attain bank holding company status, which enabled Blankfein et al to rape and pillage the Fed discount windows and take the zero percent cash received straight down to the race track.

And we need to wonder what the government's role here is precisely. If Goldman stands accused of betting and withholding information, how, pray tell, is that different from the White House letting Fannie Mae and Freddie Mac now underwrite 96.5% (!!) of all US mortgage loans? For one thing, this presents a far larger bet than anything Goldman Sachs could ever dream of. For another, where is the information? Or the justification for, and the reasoning behind, this multi-trillion dollar wager?

Sources like Robert Shiller and others may declare that according to their data, US home prices are not sinking like so many anvils anymore, but they don't explain why that is; they don't even try. The perceived apparent idea is that the economy is recovering. Well, excuse us, but shouldn't they maybe try to figure out where the housing market would be without the government guaranteeing just about every last penny of it? And why doesn't anyone ever question this practice? No Congressmen, no journalists, nobody, far as I see. Is the kettle too scared to stir the pot?

Fannie and Freddie (and the FHA and FHLB systems) were once conceived with the alleged goal of making homes more affordable for the poorer segments of the population. And, strike me dead if they don’t, most people still believe that’s what they do. Which is easily squashed and put to rest by the fact that Congress increased the limits on the size of loans that Fannie, Freddie and the FHA can guarantee to $729,750 in high-cost housing markets. Wherever you live, you’re neither poor nor in need of taxpayer help if you buy a home that size and that price.

Let nobody try and fool nobody else anymore. Fannie and Freddie have nothing to do with the less privileged: they are the ultimate tools for Washington to keep Wall Street alive. Not only would significantly lower home values put severe strains on the major banks' balance sheets, they would also implode and destruct what Mortgage Backed Securities and various other housing related derivatives can be put on the books for.

And if Washington keeps on refusing to do so, maybe some other party can come up with some calculations on what the cost to the taxpayer would be, now that 96.5% of mortgages are provided on that taxpayer's account, of prices going down another 10%, and another set of calculations for a 20% drop, and one for 30% (or maybe 50% would be a better, more realistic view). If a government holds the view that it can spend tax revenue at will and limitless, that same government can still be put to task for doing so largely in secret. The American people have a right to know how their money is spent, on what it is spent, and above all how much.

The government needs to explain, for instance, why it has decided to prop up home prices at levels that are far higher than what they were prior to the 2002-2007 housing boom. This is vital data, because it will, or at least may, alert enough people to the fact that domestic real estate prices have zero percent chance of staying at those levels unless taxpayer money is used into perpetuity to guarantee any and all mortgages. And once you realize how this works, it gets all the more ridiculously irritating that the likes of Goldman Sachs take the derivatives written on what the taxpayer stands behind against her will, and makes multi-billion profits on them.

In a lovely case of irony, the most lucrative policy Fannie, Freddie, the FHA and the Treasury could develop is to buy credit default swaps betting that the trillions of loans for which they use a taxpayer money guarantee will fail. And for all we know, some or all of them may well have done so already. A government betting against its own citizens, that would be rich, and still only just one notch up from Goldman using zero percent discount window taxpayer money to do the exact same thing.

Wednesday, May 5, 2010

The Government Giveth, And Taketh Away

I have heard the statement that Government through the method of taxation is by definition a Socialist enterprise. It is a world view that suggests Government is stealing from one group of citizens (the wealthy) to give to another lot (the undeserving). If you view taxes in this light the whole concept of nationhood loses meaning. If taxes are theft then the United States is an ideal that has passed it's sell-by date. I happen to disagree with the modern notion that taxes are theft; here's why.

"From each according to his ability, to each according to his means" is the oft-quoted Communist dictum that is used to support the proposition of taxes as theft and despite the appeal of the simplicity of the idea, theft is not what taxation is about. It is about creating and supporting a cohesive public entity- the Res Publica ("Public Thing") of which the Romans spoke so many years ago. The Res Publica provided citizens a safe place in which to trade, engage in debate, learn and raise families and live peaceful meaningful lives. The Res Publica kept enemies at bay and welcomed merchants and suppliers. And through this trade the Res Publica helped citizens to create wealth. And part of that wealth was paid back to the Public Thing to support the system that allowed the creation of wealth. It is a circular argument that has been in effect ever since humans banded together.

During the 20th century huge fortunes were built within our own Public Thing, our Republic called the United States and with an ever expanding population, a supply of cheap energy and an energetic population there was money to be made. Lots of it. With a vast internal market to be supplied anyone who created a useful tool or product stood an excellent chance of doing very well. Microsoft is the obvious example, built from nothing it created vast wealth for it's founders and provided useful tools to the citizens of the Public Thing. Those citizens it was who gave Bill Gates his preeminent social position of wealthiest man in the world. Certainly he created a tool that benefited him, but had the citizens not bought the Microsoft products Gates and his company would have been worth exactly that.

Nowadays people who have lived prosperous lives protected and nurtured by the Public Thing, whose wealth has been created or enhanced by the ready market of 300 million fellow citizens who buy the products and use the services, all this goodness they tell us is not worth supporting with taxes. The question one has to ask oneself, to use an extreme example: Would Bill Gates be as wealthy as he is, had he invented Microsoft in say, Kenya or Latvia where the home markets are tiny? It's possible, but it would have been surprising to say the least. Instead it comes as no surprise to learn that the world's population of billionaires is concentrated in the United States, the land that nurtures enterprise and open markets. It does however come as a surprise to me to hear how much these people want to wreck the Public thing that has been the crucible of all this enterprise and wealth.

The fact is, without income the United States cannot function. Take away taxes and this cradle of peace and stability fades away. It's a simple enough equation, without money we lose infrastructure like roads, clean drinking water, telephone and high speed Internet connections and all the rest of the stuff that it takes to run a modern country. And when one understands that in this country taxes are lower than in any other industrialized nation one has to ask: What's the beef? This insistence on cutting taxes, rendering it impossible to function as a state is having deleterious effects already on our civilization and our ability to prosper as a people.

Lack of government oversight and enforcement of regulations has led to serious deficiencies in our industrialized food supply. Lack of oversight has led to the implosion of our financial system. Lack of public debate has led to our involvement in wars that are draining our ability to meet our own national needs. The general tone of distrust of government in the US is leading to disaffection and lethargy. We need to separate the people who propose and implement failed policies from the system that they have corrupted. Instead our leaders convince the mass of people, people who have no hope of attaining independent wealth, that government is their downfall.

Look to corporate lobbying and malfeasance for the source of our troubles. Not the tax code.

Tuesday, May 4, 2010

Immigrants Out!

I find the attitude to migrants in the US hugely ironic, an irony brought bubbling to the surface by the recent Arizona law that has been cause for loud and prolonged discussion. Arizona complains that Federal border protection has been beefed up in neighboring California and Texas, leaving Arizona squeezed in the middle by a concentrated tide of migrants who see Arizona as more porous by comparison. The state estimates 640,000 of them crossed the border illegally and reside in the Grand Canyon State. In order to do something about this flood Arizona is implementing it's own anti-immigrant measures by empowering local police to take on the immigration duties normally operated by Federal agents. All sorts of constitutional issues have been raised and boycotts are threatened right and left, from both sides of the border. Indeed some local law enforcement agents, notably the Sheriff based in Tucson has said he opposes the law as it will cause migrants to be reluctant to come forward if their status can be reviewed by local officers. Aside from all that I see a shortsightedness on the entire illegal immigrant issue highlighted by the Arizona law.Immigration has always been a schizophrenic issue in the United States, the land that proclaims itself as different and the one land that welcomes industrious arrivals on it's shores. However even the legal migrants have generally received a rather cold shoulder by those already hard at work within the US. It used to be that southern Europeans were the peasants at the bottom of the migrant ladder, typically admitted through Ellis Island and sent to struggle to get a job in the tenements of big cities. These days everyone loves to hate the brown skinned immigrants, the arrivals from south of the Rio Grande, the Spanish speakers who work long and hard and are always accused of bilking the "welfare system" in the US with greater efficiency and rapacity than Goldman Sachs on Wall Street. They are not welcome in Arizona.The trouble is that for all the talk of securing the borders and refusing to consider amnesty for people already here without papers, the truth is we all want and need illegal immigrants even if we don't realise it. As long as they provide cheaper labor than legal US residents the products they produce, vegetables and meats for instance, will not skyrocket in price. Were you to take illegal workers out of the US meatpacking industry and replace them with legal residents the cost of meat would go out of sight. How many people who scream and moan about the "illegals" really take the time to understand the costs of eliminating cheap labor? CBS reported last year that health care costs for illegal immigrants cost one billion dollars- far less cost to the public treasury than the bank bailout at 12 trillion dollars. Yet illegal immigration, which has certain peculiar benefits to the US economy produces far more outrage and public anxiety.

I always supported the 1986 Immigration Control and Reform Act which provided a controversial path to amnesty yet also provided for severe fines for businesses that knowingly hired illegals. So burdensome were these fines that the business leaders, pillars of the community, lobbied to overturn that portion of the bill. And because they had well paid lobbyists no one gets fined regularly anymore for hiring non-US residents. Which is a scandal in light of the appalling levels of unemployment.

As hard as it is to accept, most undocumented migrants come to the US to work, and most have a plan to return home and use their savings to set themselves up in some small business. It is in fact the American Dream in it's purest form. Now that unemployment is stalking the land like a plague the tide of migrants is ebbing as many of them go to try to survive closer to home. Yet the issue, a perennial electoral red herring, continues to cause debate in the US. I say lets only hire US residents, let's enforce all the original 1986 provisions and lets see how low WalMart can keep it's prices. Be prepared to pay for the cost of paying a proper living age. And about time too.

Monday, May 3, 2010

Oil Spill On It's Way

From the Huffington Post:
GULFPORT, Miss. — Scientists say the Gulf oil spill could get into the what's called the Loop Current within a day, eventually carrying oil south along the Florida coast and into the Florida Keys.
Nick Shay, a physical oceanographer at the University of Miami Rosenstiel School of Marine and Atmospheric Science, said Monday once the oil enters the Loop Current, it likely will end up in the Keys and continue east into the Gulf Stream.
Shay says the oil could affect Florida's beaches, coral reefs, fisheries and ecosystem within a week.
He described the Loop Current as similar to a "conveyor belt," sweeping around the Gulf, through the Keys and right up the East Coast.
Shay says he cannot think of any scenario where the oil doesn't eventually reach the Florida Keys.
There is nothing further that needs be said, is there? We are ruined if it does land here.