Friday, August 31, 2012

Energy As Investment

An interview looking at energy as a way to make money, not as a way to run an industrial civilization. The difference? Pragmatism versus politics so in this interview we see how Doug Casey of sees how the future should unfold. His motto is personal freedom through financial freedom so the usual constraints regarding the niceties of societal living have no place here. A practical guide to our wobbly energy future:

The Energy Report: There will be a Casey Research Summit on Navigating the Politicized Economy in Carlsbad, California, in September. At the last conference, Porter Stansberry caused some excitement with his argument that oil could go to $40/barrel (bbl). What's your view?

Doug Casey: We like to have a range of defensible views represented at our conferences. But personally, I don't think it's realistic to suggest oil prices will drop as low as $40/bbl.

I am of the opinion that the Hubbert peak-oil theory is correct. In the 1950s, M. King Hubbert projected that US oil production would start declining in the 1970s, and he was accurate. Then he projected that in the mid-2000s, the world's production of light, sweet crude would start declining. He was quite correct about that, too.

There will always be plenty of oil at some given price, but to produce oil – even conventional, shallow, light sweet crude – now costs close to $40/bbl in many places.

It's extremely expensive to produce oil through unconventional techniques like horizontal drilling and fracking. Producing oil from tar sands is very expensive and problematical.

Drilling 15,000 feet under the ocean is very expensive and has a lot of risk.

Drilling in politically unstable jurisdictions with sparse infrastructure is neither cheap nor fun. We're talking about production costs of at least $80/bbl in many cases.

I don't think oil is going down much from here.

Let's not, in addition, forget that it's the most political commodity in the world, and that most of it still comes from the Middle East, where tensions will remain high.

I'm neutral to bullish on oil. I'm not bearish at all.

TER: How will US natural gas impact oil prices?

DC: The thing with natural gas is that it's almost an entirely local market. Oil is very transportable, very fungible – it's a world market. Oil prices are relatively consistent – say within 20-30% worldwide. But the price of gas differs by hundreds of percent around the globe because it's not very transportable. It doesn't seem that's going to change in the near future.

The price of gas is going to stay low in the US for some time because of new technologies, namely horizontal drilling and fracking, which allow the exploitation of vast new deposits. These deposits can produce large amounts of hydrocarbons, albeit at relatively high cost. As soon as prices start to rise, however, wells that have been shut because of low prices will start producing again – and that will keep a lid on gas prices for some time to come.

TER: Do you see potential for the US to become a natural-gas exporter at some point in the future?

DC: The problem with gas is that, unlike oil, it's hard to move and inconvenient to export. There are basically two ways that you can move gas. One is via pipelines. That doesn't work very well across oceans. The second is by liquefying it and putting it in liquefied natural gas (LNG) tankers and then transporting it to some place where it is re-gasified again, but that is expensive and it's actually quite dangerous because the LNG tankers are almost like floating bombs.

I'm not convinced that gas is ever going to become a truly international commodity – at least not until it's much more expensive.

The idea of the US becoming a huge gas exporter is a politically driven fantasy. The government throws ideas out if it makes them look good. We bat them back when we weigh up the realities, then it's up to the reader to decide. It's why I think our summits and the world-shaping topics we discuss are so important.

TER: Can we assume that you're not as bullish on gas as you are on oil?

DC: Yes. I'm much more bullish on oil. Oil is a much more concentrated energy than gas. Oil is needed for cars. It's needed for airplanes. It's needed for everything. Gas is mostly used for utilities and heating. Oil is both a much denser energy and a much more important form of energy.

TER: Speaking of concentrated types of energies, you have called nuclear "the safest, cheapest, and cleanest form of mass power generation," yet we still haven't seen the uranium price return. What's your view on the future of uranium?

DC: I have to be bullish simply because of reality. It really is the safest, cheapest, and cleanest form of mass power, but unfortunately it's also the object of mass political hysteria. Many misinformed but well-funded nongovernmental organizations simply hate uranium, for purely ideological reasons.

Actually, thorium would be an even better form of nuclear power than uranium. We've been using uranium primarily because you can't make nuclear bombs out of thorium, and the US was building up its nuclear arsenal from World War II on. This is how uranium came to be used for nuclear power plants instead of thorium, but that's a whole different discussion.

Of course, now the disaster at Fukushima is held up as proof that nuclear isn't viable; the Japanese and German governments are panicking and shutting down their nuclear plants as quickly as they can. But doing so is extremely foolish.

To start, Fukushima used 50-year-old technology. That plant was – like most plants in the world today – an antique, two generations behind current designs. It was also poorly located. It should never have been put right on the ocean. Other design mistakes were made. Still, even over the next decade, only a few people will die from radiation released, whereas at least 20,000 died from the earthquake and tsunami.

But the real question is: if nuclear is not going to be used for mass power generation, where is the power going to come from?

Most of the world's power is generated by coal, but coal is extremely dirty and dangerous in every way possible – in the production process, and in the residues that it leaves both on the land and in the air.

In an industrial world with seven billion people, the only energy source that makes sense is nuclear power. Sure, you can use wind and solar from time to time and in certain places. But those technologies are extremely expensive, and they absolutely can't solve the world's energy problems. Certainly not when electrical grids start going down, as they did in India last month. That's why India and China will be building scores of nuclear plants in the years to come.

TER: Doug, thanks for sharing your insights. I greatly appreciate it.

DC: Thanks for having me. I encourage your readers to attend the Navigating the Politicized Economy Summit. If you can't make it, the audio collection is a great way to benefit from the information the conference's 28 expert presenters will be sharing – and if you preorder, you can save $100. It's a great deal.


Wednesday, August 29, 2012

Pension Crisis Worldwide

No one wants to face this reality but interest rates held artificially low to help bankers and executives are going to screw baby boomers out of their pensions. Typically we are told low interest rates benefit working classes by allowing them to buy more stuff for lower interest charges. Fair enough, but how many would knowingly mortgage their retirements for a new car? In this every long and very thorough essay Raul Ilargi Meijer of The Automatic Earth takes us on a trip around the world to confirm what we have always known: there isn't enough money to pay our pensions. Blame low interest rates, a failing world economy and not enough well paid youngsters.

We have been saying for a long time that anyone in the western world who's 10-15 years away from collecting their first pension payments, shouldn't expect to get much, if anything, when the time comes. This is because, obviously, the economy has deteriorated as much as it has. It's also because, in essence, pensions plans are the ultimate Ponzi schemes.

What doesn't help are the central bank and government policies that are in fashion today that are based on pushing interest rates about as low as they can get.

The reactions to all this are interesting in their range of variation. Last week I picked up an article (more on that later) that made me refer back to a series of bookmarks I had made over the past month or so. Here are a few quotes that, when put together, paint the picture pretty accurately; you add up the details and numbers and you get an idea of what's going on. Not necessarily for the faint of heart. First, Michael Aneiro for Barron's:

Top Pension Fund Sends a Warning

The California Public Employees' Retirement System, the nation's biggest public pension fund at $233 billion, reported a mere 1% return on its investments in its fiscal year ended June 30. Earlier this year, in an attempted acknowledgment of today's realities, Calpers had lowered its discount rate–an actuarial figure determining the amount that must be invested now to meet future payout needs—for the first time in a decade, to 7.5% from 7.75%. That represents combined assumptions of a 2.75% rate of inflation and a 4.75% rate of return.

Needless to say, a 1% annual return didn't come close to hitting any of those figures and doesn't engender confidence in the assumptions of institutional or individual investors alike. Calpers was quick to note that its 20-year investment return is still 7.7% and that the past year was challenging for everyone. But Calpers is a bellwether, and other systems are expected to report similarly disappointing returns, necessitating higher annual contributions in the years ahead to meet funding needs.

Later in the week, S&P Dow Jones Indices said that the underfunding of S&P 500 companies' defined-benefit pensions had reached a record $354.7 billion at the end of 2011, more than $100 billion above 2010's deficit. The organization reported that funding levels at the end of 2011 ran around 75%, on average, and that future contributions will constitute a "material expense" for many companies.

Fitch Ratings later released its own study of 230 U.S. companies with defined-benefit pension plans and found that median funding had dropped to 74.4% in 2011 from 78.5% in 2010, and that corporate pension assets grew just 2.9% in 2011 amid sluggish returns and a 6% decline in contributions.

This is not pretty. What we see is hugely unrealistic annual return assumptions combined with equally huge underfunding. Both ends burning. More from Marc Lifsher at the Los Angeles Times:

Pension funds seriously underfunded, studies find

Corporate and public pension funds across the country are seriously underfunded, threatening the retirement security of workers and straining the financial health of state and local governments, according to a pair of independent studies.

In 2011, company pensions and related benefits were underfunded by an estimated $578 billion, meaning they only had 70.5% of the money needed to meet retirement obligations, according to a report by S&P Dow Jones Indices.

Funds generally don't need to have all the money needed pay future pensions because returns on investments vary over the years and people retire at different ages and with different levels of benefits, experts said. But a funding level in the 70% zone is considered dangerously low.

The looming shortfall, and the move by corporations to 401(k)-type plans in which the level of investment is controlled by employees, could keep many aging baby boomers from retiring, said Howard Silverblatt, a senior S&P Dow Jones Indices analyst and the report's author.

"The American dream of a golden retirement for baby boomers is quickly dissipating," Silverblatt said. "Plans have been reduced and the burden shifted with future retirees needing to save more for their retirement.

"For many baby boomers it may already be too late to safely build up assets, outside of working longer or living more frugally in retirement."

While the cost of retirement is out of reach for many older workers and growing more expensive for younger ones, it's becoming less of a burden for employers, according to the report issued Tuesday.

Employers are paying less into pension funds despite the fact that company cash levels remain near record highs and cash flows are at an all-time high," Silverblatt said.

Meanwhile in the public sector, a separate pension-related report by the national State Budget Crisis Task Force warned that public pension funds in the U.S. are underfunded by $1 trillion to $3 trillion, depending on who's making the estimate.

There's no consensus on the amount by which pensions funds are underfunded. According to Reuters' Jilian Mincer, the funding shortfall may be as high as $4.6 trillion (2011 numbers).

Public pension funds to face calls to set realistic targets

Public pension funds are expected to report poor annual returns in the coming weeks, results that are likely to increase calls for more realistic retirement promises for teachers, police officers and other public workers.

At least three of the nation's largest U.S. public pension funds have already announced returns of between 1% and 1.8%, far below the 8% that large funds have typically targeted.

The fund's targets have been "unrealistic," said Michael Lewitt, a portfolio manager at Cumberland Advisors in Sarasota, Florida. "They've been fooling themselves because there is no realistic case they can make that." [..]

Low returns will further aggravate funding shortfalls for hundreds of pension plans, adding to pressure on cities, counties and states that are already facing lower tax revenue and rising costs.

The vast majority of states have cut pension benefits or increased contributions from workers, or are trying to.

"Failing to understand the scope of the pension crisis sets taxpayers up for a bigger catastrophe in the future," said Bob Williams, president of free-market think-tank State Budget Solutions, in Washington. "Without government action, states, counties, cities and towns all over America will go bankrupt," he said. [..]

Major public pensions typically assume an average return of about 8%, but the median annual return in 2011 for large pension funds was roughly half that amount, 4.4%, according to data provided to Reuters by Callan Associates.

Median returns were only 3.2% for the last five years and 6% for the last 10. Before the 2007-09 recession, market performance was often above the 8% assumptions. Average returns for the last 20 or 25 years as a whole still reach that level. But with losses in 2008 and 2009 and uneven returns since then, analysts say pension funds should adjust to what seems to be a new reality. [..]

The funding status of public pensions has dramatically slipped over the last decade. Barely more than half were fully funded in 2010. At the end of that year, the gap between public sector assets and retirement obligations had grown to $766 billion, according to a report by the Pew Center on the States.

Ratings agency Moody's Investors Service calculated this month that if it used a 5.5% discount rate, a rate closer to the way private corporations value their pensions, it "would nearly triple fiscal 2010 reported actuarial accrued liability" for the 50 states and rated local governments to $2.2 trillion.

Other estimates put the shortfall even higher. State Budget Solutions estimated it in a recent study at $4.6 trillion as of 2011.

In San Francisco, they don't mince words, writes Heather Knight at SFGate:

More bad news for San Francisco’s city pension fund

A preliminary report of how the city’s pension fund performed in the fiscal year 2011-12, which ended June 30, shows it earned a meager 1.6% — far below the assumed rate of return of 7.5%. For a fund currently worth $15.3 billion, that’s a big difference.

"This is even worse than anyone predicted," said Public Defender Jeff Adachi, who offered a competing, failed pension reform measure that would have raised more money through employee contributions. "If this was a movie, it would be a disaster movie called ‘Pension Armageddon.’"

Canada, which faces similar problems ("massive shortfalls"), despite an ostensibly far better performing economy (how on earth does that add up?), apparently takes a somewhat different approach than the US, where, essentially, the favorite approach is moving the goalposts, which "lets companies use a 25-year average of the discount rate rather than two years".

You don't have to be a genius to see that the - financial - world was a totally different place 25 years ago than it is today. So using 25 year old stats to calculate today's required pension funding rates is a highly risky affair. If you find two years too short a period, you can go for 5 years, perhaps, I can see an argument being made for that. But 25? That looks like a desperate attempt at a cover-up more than a serious effort to find accurate accountancy methods.

Well, Canada resists such desperation. So far, at least, and despite strong opposition, that wants a sweet deal like the US gets. Louise Egan and Susan Taylor for Reuters:

Ottawa shrugs off pleas for pension fund relief amid massive shortfalls

Canada is taking a different tack than Washington on the thorny issue of helping companies fund their widening pension gaps, shrugging off corporate pleas for relief even as the United States lets businesses slash their contributions.

A frightening prospect for workers, retirees and companies, yawning pension deficits have gone from arcane accounting entries to front page news on fears that massive shortfalls could even cause some corporations to fail.

As a growing number of employers look to roll back benefits to the alarm of unions, others are pouring cash into their pensions funds only to see the hole get deeper.

Canada is not unique, and as in the United States, generous public sector pensions are a hot-button issue. But the federal government is taking a more hands-off stance than U.S. President Barack Obama, who signed a bill last month that changes how companies calculate what they must contribute to their pension funds, effectively allowing them to pay less.[..]

Softening the rules implies letting plans stay underfunded for longer, a risk financially prudent Ottawa may be reluctant to accept. After all, the country’s conservative banking culture helped it survive the global financial crisis better than most.

As in other countries, the scope of the Canadian problem is huge. 90% of the roughly 400 defined-benefit pension plans overseen by Canada’s federal regulator are underfunded, meaning they cannot meet their liabilities should their plans be wound up today, as is required by law. [..]

Historically, Canada has preferred relief measures such as lengthening amortization periods. Permanent rule changes in 2010 let companies average their solvency ratios over a three-year period instead of one, so that a sudden bad year doesn’t force them to make big cash infusions.

But some critics say it is dancing around the real problem – the very low "discount rate" used to assess a plan’s solvency, which is the focus of the recent measures in the U.S., Denmark and Sweden. This rate, based on long-term government bonds, helps actuaries judge how much assets will earn over time.

Companies complain the rate has never been lower and artificially inflates a plan’s deficit. The lower the discount rate, the bigger the deficit. Air Canada’s chief financial officer, Michael Rousseau, told analysts on a recent conference call that a 1.5% or 2% rise in the rate would eliminate more than $3-billion from the airline’s deficit.

That wishful thinking effectively became reality last month, not for Canadian companies but for their U.S. competitors. The new law there lets companies use a 25-year average of the discount rate rather than two years.

In Europe, Denmark and Sweden have tinkered with how the discount rate is used and the United Kingdom is thinking of following in their footsteps. [..]

Bob Farmer, who represents 250,000 pensioners as president of the Canadian Federation of Pensioners, says softer rules for companies mean bigger risks for workers. Tough luck about the low yields, he says. "That happens to be the world we’re living in." [..]

"The biggest social issue in the next 10 years is going to be pensions," said Rick Robertson, associate professor at the Richard Ivey School of Business, part of the University of Western Ontario. "What do I tell the 64-year-old person who may not have a chance to rebound if the company doesn’t succeed. Who’s my duty to? There’s no easy answer."

Whereas in Japan, with the world's fastest ageing population, the world's biggest pension fund has taken a dramatic route: selling off assets. It hopes to make up for this by moving into riskier assets. That's of course a big gamble no matter how you look at it. Monami Yui and Yumi Ikeda at Bloomberg:

World’s Biggest Pension Fund Sells JGBs To Cover Payouts

"Payouts are getting bigger than insurance revenue, so we need to sell Japanese government bonds to raise cash," said Takahiro Mitani, president of the Government Pension Investment Fund, which oversees 113.6 trillion yen ($1.45 trillion). "To boost returns, we may have to consider investing in new assets beyond conventional ones," he said in an interview in Tokyo yesterday.

Japan’s population is aging, and baby boomers born in the wake of World War II are beginning to reach 65 and become eligible for pensions. That’s putting GPIF under pressure to sell JGBs to cover the increase in payouts. The fund needs to raise about 8.87 trillion yen this fiscal year, Mitani said in an interview in April. As part of its effort to diversify assets and generate higher returns, GPIF recently started investing in emerging market stocks.

Now, remember that the level of funding for US public pension plans has fallen as low as 70% or thereabouts. And that brings me to the article from last week which made me return to the pension topic.

In the Netherlands, pension funds are by law required to maintain a 105% funding level. And there is little enthusiasm for changing this. Right after the autumn 2008 crisis peak, some leeway was provided by the government, but only for a short period. Now, there are other steps being taken:

Civil service pension fund ABP may cut pay outs by up to 15%

One of the biggest pension funds in the world, the Dutch civil service fund ABP, may have to cut pensions next year and again in two years time in order to keep its finances in order, the Volkskrant reports on Wednesday.

The paper bases its claim on confidential documents from the pension fund, which covers some three million workers and pensioners.

The current method of calculating pension funds’ coverage ratio - the amount of assets needed to meet pension obligations - could mean ‘reductions mount up to between 10% and 15%’, the document states.

The fund has already agreed to cut pensions by 0.5% next year. However, talks are under way between ministers and the central bank on changing the way interest rates used to determine the coverage ratio is calculated.

The document also states that if nothing is done to change the calculations, premiums for 17 big funds could rise by 28.5%.

Hundreds of thousands of pensioners are likely to get smaller pay-outs next year because pension funds have been hit by lower interest rates and the economic downturn.

There is no need to explain how tough it will be for many people to see 15% cut off their fixed income. And that will be just the beginning. Some pensions plans may temporarily do better if and when they're allowed to invest in risk(ier) assets, but just as many will do worse for that exact same reason. Changing coverage ratio calculations is not a magic wand; it's just another layer of creative accounting, and we've already got plenty of that.

For younger generations, which over a broad range have lower income jobs, if they have any, seeing pension plan premiums rise 28%, and then some more and so on, will become unacceptable, fast. They will soon figure out that the chances they will ever get any pension decades from now are close to zero. So they’ll ask themselves why they should pay any premiums, from the pretty dismal wages they make in the first place.

Over the next few years, this is a battle that will play out in our societies, and it will have no winners. We need to be very careful not to let it tear those societies apart. In a world where just about everyone has to settle for much less than they have or thought they would have, that will not be easy. Realistic accounting standards would be a good first step, but they will also be very painful. It will be very tempting to hide reality for as long as we can, in the same way we already do with issues ranging from Greece to real estate prices to bank losses to derivatives to our own personal debts.

The best, or even only, advice for those of us who belong to younger generations is: don't count on getting a pension when you reach retirement age. It’ll probably have been moved to age 85 or over by the time you get there anyway.

This is not something that can or will be fixed overnight. It was doomed from the moment baby boomers started producing the number of children they have. It simply hasn't been enough to keep the pension Ponzi going. And those baby boomers, with far too few children to provide for their pensions, have only just started to retire now, as the plans are already in such disarray. I'm sure you can see where this will lead.

Monday, August 27, 2012

More Bailouts?

From Alternet
Surprise, surprise! Last week, the Justice Department announced it wasn’t going to prosecute Goldman Sachs or its employees for its shady activities during the mortgage crisis. The same day, Goldman disclosed in a regulatory filing that the Securities and Exchange Commission (SEC) had dropped an investigation into a troubled $1.3 billion residential mortgage-backed securities deal launched in 2006.

Time is running out for prosecutors to file cases against big banks for activities that triggered the 2007-2009 financial crisis, since statutes of limitations set deadlines for launching prosecutions for fraud and other financial crimes. If prosecutors don’t start lawsuits before these deadlines expire, the big banks will, once again, have got off scot-free.

Failure to pursue banks, culpable management and employees for their complicity in causing the financial crisis is one of six bad policies that ensure we’re likely to see another bust-up of a big U.S. bank -- sooner rather than later.

Who’s going to pay the price for such a failure? We will, of course. Uncle Sam’s policy of allowing banks to get too big to fail means we’ll all be left holding the bag when that collapse occurs — and another banking bailout is necessary.

1. Too big to fail

Thirty years of financial deregulation have seen unprecedented concentration of the financial sector. Before, financial firms were limited both in where they could do business and the types of business they could do. This prevented a big banking blowup in the U.S. for more than 50 years.

Banks used to be limited to owning branches within individual states. When a bank got into trouble—and some did -- losses stayed confined. Regulators such as the Federal Deposit Insurance Corporation (FDIC) could clean up the mess and preserve depositors’ assets, without unduly burdening taxpayers. But after changes culminating in the Riegle-Neal Interstate Banking and Branching Efficiency Act in 1994, those restrictions vanished.

So some banks got steadily bigger, while the overall number shrank. From 1990 to 2011, the number of commercial banks halved, from about 12,000 to 6,000, according to the St. Louis Federal Reserve Bank.

Once upon a time, the 1933 Glass-Steagall Act limited banks to either commercial or investment banking functions. Brokerage activities were restricted, and the operations of insurance firms constrained. Problems in one area of financial activity didn’t spread to another. Bankers could not speculate with small depositors’ money. Banks competed with each other, which led to better lending terms. And they didn’t get too big, so when they screwed up, they paid the price. They failed.

In the 1980s, financial institutions claimed that Glass-Steagall and other restrictions prevented U.S. banks from competing head-to-head with foreign banks. They lobbied hard and regulators began to allow the restrictions slowly to erode.

Financiers like Sanford Weill, the head of the Traveler’s Group, couldn’t wait for U.S. laws to change. In 1998, he masterminded the takeover of Citicorp, a merger which combined commercial banking, investment banking, and insurance functions in one firm in a way that was technically illegal. But the merged company got a grace period—during which Weill deployed formidable lobbying muscle to dismantle Glass-Steagall. It worked. In 1999, Congress passed the Financial Services Modernization Act of 1999 and finally buried Glass-Steagall.

Last month, Weill gave an astounding interview to CNBC [4] in which he admitted that “What we should probably do, is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not gonna risk the taxpayer dollars, that’s not gonna be too big to fail.”

That’s a bit like Jesus Christ returning to announce that introducing Christianity was all a big mistake. The reaction from the financial mafia has been appropriately apoplectic.

The net effect of all these rule changes – like the one that enriched Sandy Weill – was that banks became too big to fail. Fear that their failure has led regulators to go soft on the big banks, and to do anything to keep them alive.

2. See no evil, hear no evil

While the financial system was consolidating, another threat was looming: the “shadow banking system“ was being created. Another New Deal reform, the Investment Company Act of 1940, imposed heavy restrictions on investment companies, which were intended to protect investors from excessive risks, fraud and scams.

But regulators decided that sophisticated investors, including the wealthy, pension funds and charities, had enough financial savvy to be allowed to invest in shadow banks that were either lightly regulated, or not at all. Such alternative investment vehicles, including hedge funds and private equity funds, were exempt from investment restrictions.

In the last two decades, there’s been an explosive growth in shadow banks. The size of this unregulated system has increased fivefold and today is larger than the regulated financial system.

The rationale? Sophisticated investors, it’s claimed, can look after themselves, and therefore the largely unregulated funds that cater to them don’t pose any risks to the rest of us. But that’s not proven to be the case. And, surprise, surprise, when such firms fail, guess who pays the price? We do.

3. Calling in the cavalry, but giving them the wrong directions

Once the U.S. decided to deregulate the financial sector, and banks got bigger, it was inevitable that the government would be called in for a rescue. Most of us were aware that in 2008, the government stepped in to bail out big banks that were destabilized by Lehman Brothers’ collapse and by the bad derivatives bets entered into by AIG Financial Products. The world financial system was at the brink, we were told, and the Troubled Asset Relief Program (TARP) was necessary to save the system.

But a decade before this bailout, U.S. financial regulators were involved in a rescue of a shadow bank, which helped set the stage for TARP. In 1998, the Long-Term Capital Management (LTCM) hedge fund got into trouble by placing heavily-leveraged derivatives bets during the Asian financial crisis. Hedge funds are allowed to operate with scant regulatory supervision on the rationale that they cater only to sophisticated investors who could bear the risk.

The Federal Reserve changed its mind when it realized that LTCM’s failure was a threat to the global economy. So the Fed corralled major banks in a room, and told them to fix the problem. They dismembered LTCM and took its underperforming assets onto their books.

The Fed’s role in this rescue sent the wrong message: that the government would be there to fix problems, and that banks and shadow banks alike didn’t have to work too hard to manage risk and to protect themselves from contagion.

Sometimes you want government intervention to quell a banking panic, and to shore up or reboot a failed banking system. Banks need to be seized, or at minimum assessed by a neutral observer, and their balance sheets cleaned up. Investors, too, must pay a price for making foolish investment choices. Typically, existing shareholders are wiped out, while bondholders see their promises of guaranteed debt payments converted to more speculative shares of stock.

We used to know how to do this. The Depression-era Reconstruction Finance Corporation seized failing banks, cleaned up their balance sheets, and later transferred these institutions back to private ownership. The Resolution Trust Corporation followed similar policies in cleaning up the savings and loan crisis of the 1980s and early 1990s. More recently, the Swedish government nationalized failing banks in the 1990s. Managers were penalized, and shareholders and sometimes bondholders took losses.

But the U.S. forgot all these sound policies in the 2008 TARP. The government provided cash to stabilize shaky financial institutions, guarantees to bondholders, and tax breaks. It also purchased some risky assets. But it didn’t get much in exchange. Regulators didn’t demand that banks open their books and clean up their balance sheets. The big banks continued as going concerns.

Bank managers paid no price and mostly kept their jobs. They paid themselves bonuses rather than using capital to shore up their banks. Bottom line: Managers, shareholders, and bondholders didn’t fully pay for their folly.

The government further erred by nudging sound banks to take over failing ones. This policy led to further consolidation of the banking system, making surviving banks even bigger! Finally, the government failed to take action to address the problems that let big financial institutions get into trouble in the first place.

4. Creating financial weapons of mass destruction

The need to bail out AIG Financial Products in 2008 arose from huge losses in unregulated derivatives trading. We should have seen that coming, because derivatives had caused LTCM to fail back in 1998. In fact, plenty of people saw that derivatives were problematic. Warren Buffett called them “financial weapons of destruction” back in 2003.

So, why wasn’t anything done to defuse these weapons?

Well, in 1998, one very prescient regulator, Brooksley Born, chairman of the Commodity Futures Trading Commission, tried, and failed, to initiate a unilateral disarmament policy.

Derivatives aren’t necessarily dangerous. Farmers have long used futures contracts to hedge—or lock in—prices for their crops. As long as they’re traded fairly on open exchanges, they’re a valuable tool for minimizing risk. Congress recognized this when in 1974 it created the Commodity Futures Trading Commission (CFTC) to regulate futures and options markets, which at that time, largely concerned agricultural commodities.

As derivatives became more popular, transactions were restricted to two parties, trading only with each other. These over-the-counter derivatives (OTC) transactions, weren’t regulated. Born had spotted this weakness in the regulatory framework before the 1998 LTCM collapse and had accordingly attempted to write rules to plug this regulatory gap.

But folks like Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and his successor, Lawrence Summers, and SEC chairman Arthur Levitt, ganged up on Born to preserve the status quo. They saw derivatives users as sophisticated financial players who should not be regulated.

Congress first passed a temporary provision forbidding any change in regulating derivatives. Born resigned in 1999. Congress then passed the Commodity Futures Modernization Act of 2000, which specifically excluded OTC derivatives from regulation. This same state of play remained in 2008 when these weapons of mass destruction nearly destroyed the world financial system.

In the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, Congress has taken some steps to increase regulation of OTC derivatives, and to push for more trading on organized exchanges. But these provisions have been riddled with exceptions, and delayed in their implementation.

So these weapons remain armed—and dangerous.

5. Companies consolidate, while regulation remains fragmented

Which brings us to another key question: What’s happened to the regulators while financial companies continue to get bigger and bigger? Answer, not enough.

Regulation continues to be very fragmented, with many different agencies responsible for bits and pieces of banking regulation. The Commodity Futures Trading Corporation, the Consumer Financial Protection Bureau, the Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Association, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, and the Treasury Department-- each regulates some significant aspect of bank activities.

There’s no one single, buck-stops-here banking regulator. Instead, the newly created Financial Stability Oversight Council, comprised of representatives drawn from each agency named above, is supposed to coordinate and oversee all policies.

Believe it or not, each state is also part of the regulatory mix. Insurance regulation remains primarily a state affair, and states are also heavily involved in banking regulation.

Does this seem sensible? Just as a teenager may play one parent off of another until one of them says “All right! You can go to the prom,” the lack of a streamlined regulatory system means banks play regulatory arbitrage. Recently we saw this dynamic unfold—unsuccessfully in this case— as Standard Chartered Bank used its press cronies to pressure Benjamin Lawsky, New York’s Superintendent of Financial Services, to go easy on the bank for laundering money for Iranian clients and cooperate with other regulators — the Fed, Justice and Treasury— that favored a softer stance. Lawsky threatened to cancel the bank’s license to operate in New York—a death sentence for any international bank. When he didn’t back down, the bank agreed to a $340 million settlement. Lawsky’s firm stance improves the prospects for the pending federal probes.

There’s another major problem with our current regulation. Agency missions often confuse priorities. Some agencies are supposed to worry about a bank’s survival at the expense of other concerns, such as looking out for the bank’s customers or worrying about broader public goals such as stopping money laundering.

The consequence? The regulator often sides with the bank and colludes in concealing facts and circumstances that should be more widely known.

The latest financial crisis should have been a giant wakeup call. The Obama administration had the chance to reform bank regulation to confront 21st-century challenges. Instead, it caved to bank lobbying, and in Dodd-Frank cemented a confused mix of regulatory imperatives. Even the meager promises are not kept, since further rule-making procedures must occur before key provisions can be implemented. Many of these have slipped their deadlines, and as a result of continued bank pressure, reforms remain pending or have been watered-down.

6. Perps get off scot-free

And so we come back to where we started—the decision not to go after Goldman Sachs. Normally, the Justice Department doesn’t comment on its pending investigations. But for Goldman, the rules are different. Justice issued an unusual statement saying the firm wouldn’t be criminally charged, as prosecutors didn’t believe they could meet the burden of proof necessary to win a trial. Earlier last week, Goldman disclosed that the SEC wouldn’t be pursuing criminal charges against the firm, despite having issued Goldman a “Wells notice” of its investigation. Dropping an investigation after issuing such a notice is not altogether unprecedented-- but is also rare.

Things weren’t always this way. During the savings and loan crisis of the late 1980s, banks were allowed to fail, prosecutions were undertaken, and executives and employees were jailed. Even after the popping of the dot-com stock bubble in 2000, prosecutors chased after cheating companies and their executives. Officers of Adelphia, Enron, WorldCom, to name a few, ended up doing significant jail time.

The current failure to prosecute means that banks will continue to pursue risky policies. Bankers continue to get paid based on results, and there’s so much to gain from a successful risky bet, and so little to lose from a bet gone bad, particularly if the taxpayer is there to pick up the tab.

In America, if you misuse food stamps, and you get caught, there’s a good chance you’ll lose your benefits, and you might even go to jail. If you rip off the Medicare system, commit tax fraud or perpetrate identity theft, federal prosecutors will throw the book at you. But if you’re part of a multi-billion dollar enterprise that misleads investors and lies to Congress, you’re like the trophy fish that’s caught and released. You’re off the hook.


Sunday, August 26, 2012

John Locke And Property Rights

By John Henry, Professor of Economics at UMKC. Originally published at New Economic Perspectives.

John Locke is the “father” of property rights theory, and continues to be referenced in defense of private property. In the second volume of his Two Treatises of Government, Locke specified the conditions that must be satisfied in order for property to be deemed legitimate. Initially, any property taken from “the commons” (public or collective property) had to be based on one’s labor that was expended to improve that property. (While Locke focused on landed property, his argument applies more generally.)

But, there were two further conditions that had to be met, labeled the “prejudice” and the “spoilage” constraints—and these were seen as moral constraints. Essentially, the prejudice constraint means that no one can be disadvantaged by another’s appropriation of property; all must benefit, though some may benefit more than others. The spoilage constraint connotes that none can seize property beyond that which can be used by one’s own labor. If either constraint is not satisfied, two options are proposed: the disadvantaged have the right to revolt and overturn a private property regime, or government has the obligation to step in to rectify the situation in the interests of the community at large.

Now, it is clear that any large property holdings—giant farms, the modern corporation, etc.—violate the spoilage constraint. Locke himself was aware that there was a problem in his formulation in that, if adhered to, the capitalist accumulation process could not proceed. (He tried to wiggle out of his self-imposed dilemma by arguing that the accumulation of money—gold for him—was morally permissible as it didn’t violate either the prejudice or the spoilage constraints; anyone could accumulate money, and money (gold) didn’t spoil. For a critical evaluation of Locke’s proposed solution, see Bell, Henry, and Wray 2004.) The main issue addressed here is whether unemployment violates the prejudice constraint, thus calling the continued adherence to a private property regime into question. If so, from a purely Lockean standard, then government must undertake a program to guarantee full employment in the interests of society as a whole—and this is a moral obligation.

It must be noted that Locke was arguing from what is now a politically conservative position. In his day, Locke was considered something of a radical, but with the passage of time, private property has become ingrained in our institutions and our habits of thought that it might be said to have become sanctified as a necessary condition for our very existence—the essence of “freedom.” So, from a modern conservative position, what follows should be seen as consistent with Locke’s defense of property, and, again, Locke continues to be called on as a seminal reference point in current debates.

It is clear that in a modern capitalist society, most of the non-propertied segment of society—overwhelmingly the majority of the population—is dependent on the private (propertied) sector for employment, thus income, thus well-being. There is, however, nothing in the arrangements of a modern economy to guarantee that the private sector will offer enough jobs to satisfy the needs of the non-propertied for work. (Nor, for that matter, that the wages offered will satisfy the needs associated with well-being.) Indeed, the normal case is that there is always some amount of unemployment; “full” employment (however determined) is exceptional and conventionally attendant to large-scale wars—when a goodly part of the labor force is sent out to kill and be killed. As the non-propertied (workers) are dependent on the propertied to provide them with employment, and if that employment is not forthcoming, then workers are “prejudiced” by the existence of private property: the “social contract” between the propertied and non-propertied has been violated; not all are advantaged by the arrangement.

This also calls into question the issues surrounding the spoilage constraint. Should some acquire property that is more than they can use in exerting their own labor, if he “. . . took more than his share, and robb’d others” (Locke, p. 318), others were denied the use of the spoiled output resulting from privatization and were thus “prejudiced.” Spoilage offends “. . . the common Law of nature,” and the property owner “was liable to be punished” for “he had no Right, farther than his Use called for . . .” (Ibid, 313; emphasis in original). Locke, if consistent, would oppose large-scale holdings. A Lockean solution to this issue would be the imposition of a Jeffersonian-style democracy where all would be independent small farmers, artisans, etc. But this is not capitalism, in which a class of property owners hires a class of non-propertied workers. (Indeed, we seem to be moving in a direction quite the opposite of that which Locke would find legitimate. Recent rulings which permit private oil and gas companies to use eminent domain in their own interests and cause great “prejudice” to be heaped on the non-propertied as well as those with small property holdings—the environmental, health, and other forms of damage inflicted by “fracking,” the construction of pipelines, etc.—represent an abrogation of the moral responsibility of government. See

Now, while this raises the specter of revolt, let me focus on the more “reasonable” alternative—a jobs guarantee program. For Locke, should the two constraints be violated, government has the moral obligation to oversee the correction to the problem. One solution would be a very generous unemployment benefit that would at least equal the wage one could earn if employed. In addition to this payment, though, the benefit would have to include a sum that would compensate for the psychological costs of being unemployed, loss in skills as a consequence of not working, perhaps an additional amount to compensate for the social stigma usually attached to the inability to secure a job. All this would be necessary to override the Lockean “prejudice” caused by those with property who possess the ability to hire workers who do not do so in a sufficient amount. Clearly, this is unworkable as the compensation package would be considerably larger that the wages paid to the employed and many would find this a more satisfactory alternative to working. Wages would probably be driven up, causing costs in the private sector to rise and the propertied segment of the population would resist—mightily.

The other approach, and the only one that is feasible, is a jobs guarantee program. Governments have the ability to operate employment programs that do not compete with—indeed, may well complement—jobs in the private sector. Given their ability to spend without facing a profit constraint (one important aspect of so-called Modern Money Theory), governments can organize programs to employ all those who want a job, and, if properly structured, provide useful output for society. The rebuilding of infrastructure in the U.S. and elsewhere comes readily to mind. And such a program would clearly benefit the private sector. That is, it would not conflict with extant property rights. The list of projects is extensive: schools, hospitals, and so forth. And, one should not forget various service-sector possibilities including public arts projects. A short check of Works Progress Administration ventures of the 1930’s will confirm that government can undertake and has undertaken useful activities that enhance personal and societal well-being. And it can to this efficiently (though efficiency in the cost-minimizing or revenue-enhancing sense should not be the objective).

Would John Locke approve? If one takes him at his word, the answer is an unequivocal “yes.” When unemployment is seen as a “prejudice” resulting from the normal behavior of a propertied regime, government has the moral obligation to rectify the problem. And this is a politically conservative position.


Bell, S., Henry, J, and Wray L. “A Chartalist Critique of John Locke’s Theory of Property, Accumulation, and Money: Or, is it Moral to Trade Your Nuts for Gold?” Review of Social Economy, LXII, No. 1, March 2004.

Locke, John. Two Treatises of Government, edited by Peter Laslett. Cambridge: Cambridge University Press, 1967.

Why They Hate Obama

Saturday, August 25, 2012

The Progressive Ryan

The Progressive Magazine's Mathew Rothschild on Mitt Romney's choice of Vice Presidential candidate for the GOP. My feeling is President Obama has given the one percent what they need and he has been anointed for a second term so all this is window dressing for a race that was decided in the modern version of Tammany Hall.

Other than the fact that someone appears to have stolen all his ties and he doesn’t own a sharp razor, America doesn’t seem to know a lot about him.

But it if you look at his policies, you’re not going to like him.

He’s against abortion even in the case of rape, incest or the life of the mother.

He wants to cut taxes on the rich and corporations, while gouging programs like food stamps that help the poor.

Ryan is hailed by fellow Republicans as a kind of economic whiz kid. But he’s actually a fool. He blames FDR for making the Depression worse, when, in fact, FDR reduced unemployment from 25 percent to 10 percent. And he voted against Obama’s stimulus program and said, over the weekend, that it didn’t do any good, when, in fact, even John McCain’s former economist, Mark Zandi, has acknowledged that the stimulus program (insufficient as it was) created 2.7 million jobs.

And, as Paul Krugman has repeatedly pointed out, Ryan believes in voodoo economics—the theory that if you just cut the taxes on the rich and corporations, the economy will somehow take off all on its own.

Ryan has called Social Security and Medicare part of a “collectivist system” and is intent on destroying them.

He insists that Americans will have to work beyond the age of 65, and he wants us to invest some of our retirement savings on Wall Street. He also wants to replace Medicare with a voucher system for the private insurance companies. This would end up costing seniors more than $6,000 a year!

Still, he’s a better snake oil salesman than Romney, a better peddler of the myths of unbridled capitalism.

Not that these ideas have helped his constituents in his Wisconsin district, who lost between 30 and 54 percent of their manufacturing jobs while he’s been in office voting for free trade agreements, as Roger Bybee has reported for The Progressive (“The Truth About Paul Ryan”).

When Romney chose the Janesville Republican, Ryan might as well have said that he can see China from his back porch because that’s where plenty of those jobs have gone.

But don’t underestimate Ryan. He’s got the personal skills that Romney lacks, and he does retail politics very well.

Unless Obama hammers home the pitfalls of the Ryan approach, Ryan will be a winner for the rightwing, and a winner for Wall Street, whether he helps Romney get to the White House or not.

Thursday, August 23, 2012

World Debt Default Marathon

From AOL's daily Finance page this little noticed piece of news. Greece's technique for dealing with debt is catching. It makes sense though if an already impoverished country wants to dela with intolerable debt burdens they just end up ignoring them. It is a violation of the sacred bond of banking but we've seen what lengths bankers will go to break the law, their cruel injustice is simply spreading. Chaos will ensue:

When Greece defaulted on its government bonds in March, it was the first country of any size to take such a step since the great Argentine default of 2002. It won't be the last.

Now, quibblers contend that Greece didn't really default on its debt. Instead, the country presented its creditors with a take-it-or-leave-it offer: Write off all but 46.5% of the debt, or watch Greece declare bankruptcy and lose it all. (They took the 46.5%).

But that's still a technical default -- and that's now what Belize is proposing to do, too.

According to The Wall Street Journal, Belize is telling its creditors that unless they write off 45% of its debt, or give it a 15-year holiday from debt payments, the country will default on the whole shebang.

That's $543.8 million in bonds -- poof! -- gone.

As an added insult, the government didn't even do its creditors the courtesy of notifying them of its plans directly. Instead, it posted a note on the web page for the Central Bank of Belize. (You check its updates daily, right?)

But lest you think this is a little amateur hour, Belize demonstrated its seriousness on Monday by skipping a $23.1 million bond payment that was due. If it doesn't make a catch-up payment within 30 days, the government will technically already be in default -- and will have nothing to lose by taking the next logical step and defaulting on all the rest of its debt.

Investors who think Belize is bluffing may be enticed by the 26.3% interest its bonds are yielding today. Standard & Poor's, however, is taking the country at its word. When the default notice first appeared on the website, the debt monitor cut its rating on Belize's bonds to "CC," just a couple notches short of total default.

Even if 26% interest rates don't entice you into investing in developing world bonds, don't make the mistake of thinking that Belize's threatened default doesn't affect you at all. The fact is, while Belize has a $75 million budget deficit today, and owes moneylenders a sum totaling roughly 80% of its annual gross domestic product, a lot of countries are in similar financial straits -- or worse.

According to the IMF, 25 countries "boast" debt levels (as a percentage of GDP) higher than that of Belize. What's more, many of these countries are of sufficiently low profile that you might have trouble placing them on a map. (Saint Kitts and Nevis? What is that? A country or a cognac?)

But several debtors on this list are major players on the global stage. They're big enough, and important enough, that there's a good chance your 401(k), your pension plan, and many of the stocks you own have invested in their debt, or do business there -- business that's likely to suffer in the event of a sovereign default.

Take a look. See if anyone on this list concerns you (click to enlarge):
Now sure, topping this list is Japan. And yes, this proverbial economic "bug" in search of a windshield has consistently managed to dodge bankruptcy concerns for decades. But just one notch down from Japan is Greece, with debt of 161% of GDP -- post-default.

When Greece defaulted on its debt this year, it was basically able to dictate its terms of payment to the bankers who had bailed it out. Already, analysts are speculating that Greece's success in debt reduction by government fiat may spawn imitators in other severely indebted countries. As one investment banker in London put it recently: "Greece set a precedent for, 'Here's what you're going to get, take it or leave it."'

Now, thanks to Belize -- half a world away from Greece, and just weeks away from bankruptcy itself -- we're on notice. The risk of sovereign debt defaults spans the globe, and includes countries in far looser financial straits than Greece.

Wednesday, August 22, 2012

Crackpot Congressman Strikes Again

I read mostly to enjoy the madness of the political scene in the county to our immediate north. However the redistricting plans following the recent census put the Florida Keys right in the middle of the madness it seems. Our"new" member of Congress is of course another Republican which is the party of the exteremist Cuban exile community and it seems we are now to be represented by one David Rivera whose grasp of democratic principles seems slender at best. I found these references to him on Wikipedia which outline several weirdnesses which seem to disqualify him from office but which have so far failed to dislodge him:

Domestic violence allegations

On October 13, 1994 a domestic abuse charge was filed in Miami-Dade County against one David M. Rivera. Rivera denies that he was the defendant in the 1994 domestic violence case, and the victim of the attack has maintained that David Rivera, the politician, was not the defendant in her case. The case file has been destroyed by the court (case files are retained for only 5 years,).

The Miami Herald reported that according to a woman who is friendly with the victim's brother, Rivera and the victim came to her home as a couple to attend a dinner party about 10 years ago. The victim's mother also once worked on one of Rivera's political campaigns, records show.

Mail truck collision

On September 6, 2002, Rivera was involved in a traffic collision with a truck carrying thousands of fliers, produced by Rivera's campaign opponent at the time, that included a last-minute attack on Rivera's character and detailed past domestic violence accusations against him. According to reports filed by the Florida Highway Patrol, a car driven by Rivera hit the truck and forced it to the shoulder of the Palmetto Expressway, ten minutes before the truck's 6 p.m. deadline to deliver the fliers to the post office, preventing the fliers from being delivered in time to be mailed.

Rivera has said that he had planned to meet up with the truck on an exit ramp off the Expressway so he could retrieve a batch of his own campaign fliers. The owner of the company that produced the anti-Rivera fliers maintains that the truck driver did not voluntarily pull off the highway. According to the FHP incident report, the collision occurred in the middle of the road.

Additional source of income

Rivera on more than one occasion stated in sworn documents that his primary source of personal income, besides his salary from the Florida State Legislature, was from freelancing consulting work he did for the U.S. Agency for International Development (USAID). However, when the Miami Herald asked USAID, the agency said that Rivera never worked for them. On October 21 of 2010, a suit was filed in Miami-Dade Circuit Court stating that Rivera should be disqualified from running for office for violating state laws requiring public officials and candidates to file full and complete financial disclosure forms. After the initial investigation was reported, Rivera amended his disclosure forms, removing any reference to USAID as a source of income for the seven years in question.

Not as grotesque as the Missouri candidate's assertiosn about rape which have made headlines recently but bad anough and now the Miami Blog holds out hope Democrat Joe Garcia may beat him. A sign of desperation is the verbal thrashing Governor Scott, another known anti-democrat has been giving our Elections Chief Harry Sawyer, trying to persuade him to disenfranchise voters in Monroe County. On policies I'd like to see more backbone from Democrats but on these issues I don't understand what possible leg Republican fascists have to stand on in a democratic society.

Wednesday, August 22, 2012 GOP Congressman David Rivera steps in it, again ... by gimleteye

GOP Congressman David Rivera has a political death wish. Today's Miami Herald story -- of Rivera secretly funding a campaign to undo the primary of his Democratic rival -- is amazing of itself, but quadruply so because of his repeated near political death brushes with the law since his first election to Congress only a few years ago.

It all spilled out in the Herald and El Nuevo Herald this morning: "Fueled with $43,000 in secret money, Republican Rep. David Rivera helped run a shadow campaign that might have broken federal laws in last week’s Democratic primary against his political nemesis Joe Garcia, according to campaign sources and finance records. As part of the effort, a political unknown named Justin Lamar Sternad campaigned against Garcia by running a sophisticated mail campaign that Rivera helped orchestrate and fund, campaign vendors said. Among the revelations: The mailers were often paid in envelopes stuffed with crisp hundred-dollar bills. Rivera and Sternad have denied working together in his campaign, which ended Aug. 14. But Hugh Cochran, president of Campaign Data, told The Herald this week that Rivera contacted him in July and requested he create a list of voters who were ultimately targeted in the 11 mailers sent by Sternad’s campaign. “David hired me to run the data,” said Cochran, who is a retired FBI agent."

Amazing. You can't make this stuff up, including the ham-handed effort by the GOP to suppress the November early election vote in the Florida Keys. The image of GOP Gov. Rick Scott trying to push around Monroe County's election supervisor, Harry Sawyer, just makes me grin.

Sunday, August 5, 2012

Notes From Acqualoreto

There is a blog I read occasionally wherein an American expatriate living near my home village in Central Italy writes about his life as an Italian resident and his thoughts as an American living abroad. Unfortunately he publishes far too irregularly but from time to time he nails a vague idea I was pondering. Like this essay on a new American Civil War in our political scene.

My early childhood memory seems like a piece of Swiss cheese, more holes than substance. One small and vague morsel remains which concerns some sort of a celebration in the basement of my elementary school. It may have been an end of the school year celebration. Whatever, for a few hours we got to play games. Between logic and arithmetic, I now deduce that the war (WWII) was still on and while I would have been too young to remember very many details, it seems to me that one of the games was to throw darts at three balloons tricked up to represent Hitler, Tojo and Mussolini. I suppose that every nation at war feels the need to demonize the enemy. It wasn't difficult to demonize Hitler but my recollection of these figures was that they were more ridiculous than scary. That's another common and useful tactic, one I sometimes dabble in myself. Making the enemy ridiculous may be even more effective than making him the personification of evil.

I don't recall a particularly large campaign of this sort in the major wars of my lifetime, but my mother did tell me of how the windows were smashed in my German great-grandfather's food shop during WWI, how sauerkraut was officially renamed liberty cabbage, and how my mother's German lessons were curtailed at the time. When WWII came along, there was much less of that sort of thing in the US, unless you were of Japanese origin. In the Korean and Vietnamese wars, I can't remember either the Korean or Vietnamese people being subjected to scorn, but of course we were fighting both with and against indistinguishable people in their civil wars.

Counter-intuitively, it seems that domestic battles lead to more elevated demonization than do foreign wars, where both sides tend to go about their business with more detachment. When I went to college in the south, the residue of resentment against people from the north seemed stronger ninety years after the Civil War than that felt toward the Germans and the Japanese who had been bitter and deadly enemies just a decade before. I've never been to Ireland and I doubt that I could tell a Protestant from a Catholic there and yet, somehow the Irish could, and the violence and bitterness lingered. For that matter, I also couldn't tell a Lebanese Muslim from a Lebanese Christian but they seem often unable restrain their hostility towards each other. Shiite-Sunni violence is another of those mysteries. When I moved to Rome in the 70's I experienced that kind of battle up close. Violent hoodlums battled on the streets and kept scrawling graffiti all over the city. Their slogans and their colors differed, but otherwise the militants of the right and the militants of the left didn't seem much different.

Back in the USA we have people of all sorts of nationalities, races and religions. There have certainly been battles but we're so mixed up by now that it keeps becoming harder to draw the lines of otherness. And yet, they do sometimes emerge. Many years ago, I was on assignment in Miami for a couple of months. I found a group of congenial people to socialize with, in and around the motel in Coconut Grove where I was staying, and I was thoroughly enjoying my Florida sojourn. One day the news came of the assassination of Martin Luther King. In the motel bar, comments started flowing freely with the booze, such as, “that bastard finally got what was coming to him”. Suddenly, in front of my eyes, Sam, the voluptuous barmaid that I had lusted after, was transformed into a monster. The place seethed with venomous creatures who only the day before had seemed like normal people. I just wanted to be out of there and never see any of those people again. Fortunately, I was repatriated to New York after only a few more sullen and angry days.

Our Civil War has been over for a long time and one might have hoped we would be getting along by now. Maybe it's not as bad as it seems. After all, I do live in Italy, so perhaps I don't get to see a more complete picture, since my view of the country is basically through family, friends, visitors and the media. Nevertheless, a few days ago I was surfing through the news channels in search of some bit of news when I came across the Gang of Five, or something like that, on Fox News. One older conservative fellow played the role of lion tamer in the midst of a circle of wild and vicious creatures who appeared not to have been fed yet. Except for their aggressive demeanor, the men were nondescript, but the women on Fox are always young and good looking, and these were no exception. The foxes almost make one think of airline stewardesses in the early days of commercial flight, all young, pretty, slim and single, back in the days before age discrimination law suits. One of the women on the show had had her fangs polished by working in the Little George Bush Administration, defending the indefensible. I don't know where the other one came from but she was shapely and exotic, and if she hadn't come from the adult entertainment sector, she certainly could have a future there if Fox goes down. All in all, the crew seem more a pack of rabid ferrets than lions or tigers. They were constantly on the attack. They routinely spoke about President Obama in terms more hostile than ever heard in the American media about the likes of Tojo or Mussolini, closer in tone to that used for the late Col. Ghaddafi or the current President of Iran. While the President of the United States received his share of gratuitous insults, the villain du jour was Chief Justice John Roberts, of all people. Yes, the same John Roberts who led the Supreme Court to rule that corporations are people and money is speech, after pledging judicial restraint at his confirmation hearings. John Roberts had not done his God-given duty by striking down Obamacare, the health care plan borrowed from Mitt Romney. He was clearly a traitor, not to be trusted, and the occasion of his defection from plutocrat orthodoxy had made the need to appoint yet more radical members to the court all the more apparent.

These people are paid (very well I suspect) to foment hatred and they are masters at it. Just as an Ian Paisley could rouse his rabble to attack Catholic neighborhoods while raising the level of hatred amongst the Catholics for his dreary flock, the Foxters manage to raise the blood lust, or at least the blood pressure, of their Tea Party faithful while producing feelings of disbelief and disgust in any outsiders who wander into the tent. I'm not especially prone to hating people, though I may succumb too easily to disdain or contempt. Neither working in difficult conditions in Saudi Arabia nor having my NYC office destroyed by the 9/11 terrorist attack ever managed to get me to hate Arabs, just as hearing way too many racist slurs directed at every imaginable minority in my childhood never left much of an impression. I even married one of the hated Catholics. Getting me to hate a beautiful woman is an especially arduous and improbable task but, when it comes to stirring up hate, these people at Fox are not to be underestimated. Watching that show was like another Martin Luther King Assassination Day all over again. Every day on Fox has something of that feel.

I don't know how long it will take the country to get over the increasingly bitter oligarchy/anti-oligarchy struggle. It took more than a century to get over the Civil War, a war which killed more Americans than any other. Slavery had to go. Oligarchy will have to go too, and with it the fascist infrastructure that sustains it. We can hope that it will take less casualties than the abolition of slavery did, but pretending that the problem isn't there, or that it will just go away by itself, is no solution.

The effectiveness of the Gang of Foxes, and the many others in their cage, is disturbing. Hatred is a bad thing but indifference isn't much better. Should King Kong miraculously return to New York and throw the whole Gang of Five through a plate glass window on the 32nd floor of the Fox HQ building, I confess that while I might be curious about all that broken glass, I doubt that I'd give a fig about the collateral damage.

Thursday, August 2, 2012

Wednesday, August 1, 2012

Gore Vidal In His Own Words

From the BBC

Celebrated author, satirist and political commentator Gore Vidal has died, aged 86. He was famed for his biting political critiques and his acerbic take on American society. Here are some of his best quotes.

Gore Vidal... on US politicians
"The United States was founded by the brightest people in the country - and we haven't seen them since."

On the US electorate
"Half of the American people have never read a newspaper. Half never voted for President. One hopes it is the same half."

On his campaign to become a US Senator in 1982
"I'm part of the furniture. I've been on TV for over 30 years. And look what TV did for Ronald Reagan. It's all a bit chilling."

On Ronald Reagan
"He is not clear about the difference between Medici and Gucci. He knows Nancy wears one of them."

On John F Kennedy
"He was one of the most charming men I've ever known. He was also one of the very worst Presidents." (The Progressive)

On David Cameron
"He's everything we thought Bertie Wooster was - and God knows we worship Bertie Wooster, in the form of Hugh Laurie." (New Statesman)

On political speeches
"In America, if you want a successful career in politics, there is one subject you must never mention, and that is politics. If you talk about standing tall, and it's morning in America, and you press the good-news buttons, you're fine. If you talk about budgets, tax reform, bigotry, and so on, you are in trouble. So if we aren't going to talk issues, what can we talk about? Well, the sex lives of the candidates, because that is about the most meaningless thing that you can talk about."

On the press
"A writer must always tell the truth, unless he is a journalist."

On art and politics
"There is something about a bureaucrat that does not like a poem."

On secrets
"When anyone says to me, 'Can you keep a secret?' I say, 'Why should I, if you can't?'"

On punishment
"I'm all for bringing back the birch, but only between consenting adults."

On style
"Style is knowing who you are, what you want to say and not giving a damn."

On looks
"A narcissist is someone better looking than you are."

On adolescence
"Until the rise of American advertising, it never occurred to anyone anywhere in the world that the teenager was a captive in a hostile world of adults."

On jealousy
"Whenever a friend succeeds, a little something in me dies."

On sexuality
"There is no such thing as a homosexual or a heterosexual person. There are only homo or heterosexual acts. Most people are a mixture of impulses if not practices."

On procreation
"Never have children, only grandchildren."

As well as his novels, Vidal was a frequent contributor to magazines like Playboy and Esquire
On learning to read
"I was taught to read by my grandmother. Central to her method was a tale of unnatural love called 'The Duck and the Kangaroo'. Then, because my grandfather, Senator Gore, was blind, I was required early on to read grown-up books to him, mostly constitutional law and, of course, the Congressional Record. The later continence of my style is a miracle, considering those years of piping the additional remarks of Mr. Borah of Idaho." (Paris Review)

On WH Smith banning his novel Myra Breckinridge in 1970
"There must be some legal action I can take. I am not British and I have nothing to lose. I don't give a damn whether anybody buys it or not - I think far too many people have read it - but I am angry that a bunch of shopkeepers are setting themselves up as a literary tribunal, for which they have neither the competence nor the right." (The Times)

On censoring his own novel, Myron in 1974
"I've removed the dirty words and replaced them with clean words... I thought and thought for a long time: What are the cleanest words I can find? And I discovered that I could not come up with any cleaner words than the names of the five Supreme Court justices who have taken on the task of cleansing this country of pornography. I inserted the words in place of the dirty words. For example, a cock becomes a rehnquist."

On the death of the novel
"You hear all this whining going on, 'Where are our great writers?' The thing I might feel doleful about is: 'Where are the readers?'" (Esquire)

On his arch-rival, writer Norman Mailer
"You know, he used the word 'existential' all the time, to the end of his life, and never even learned what it meant. I heard Iris Murdoch once at dinner explain to Norman what existential meant, philosophically. He was stunned." (The Independent)

On Truman Capote
"A Republican housewife from Kansas with all the prejudices."

On F Scott Fitzgerald
"I like best what he leaves out of The Great Gatsby. A unique book. Incidentally, I think screenwriting taught him a lot. But who cares what he wrote? It is his life that matters. Books will be written about him long after his own work has vanished - again and again we shall be told of the literary harvest god who was devoured at summer's end in the Hollywoods." (Paris Review)

On ageing
"At a certain age, you have to live near good medical care — if, that is, you're going to continue. You always have the option of not continuing, which, I fear, is sometimes nobler." (Esquire)

On the secret to a happy life
"Never pass up a chance to have sex or appear on television."

On the human condition
"There is no human problem which could not be solved if people would simply do as I advise."

Nationalism In Corporations

From Richard Reich a suggestion that perhaps the too big to fail banks are about to be seen as simply too big. Too late though for most of us...

If any single person is responsible for Wall Street banks becoming too big to fail it’s Sandy Weill. In 1998 he created the financial powerhouse Citigroup by combining Traveler’s Insurance and Citibank. To cash in on the combination, Weill then successfully lobbied the Clinton administration to repeal the Glass-Steagall Act – the Depression-era law that separated commercial from investment banking. And he hired my former colleague Bob Rubin, then Clinton’s Secretary of the Treasury, to oversee his new empire.

Weill created the business model that Wall Street uses to this day — unleashing traders to make big, risky bets with other peoples’ money that deliver gigantic bonuses when they turn out well and cost taxpayers dearly when they don’t. And Weill made a fortune – as did all the other executives and traders. JPMorgan and Bank of America soon followed Weill’s example with their own mega-deals, and their bonus pools exploded as well.

Citigroup was bailed out in 2008, as was much of the rest of the Street, but that didn’t alter the business model in any fundamental way. The Street neutered the Dodd-Frank act that was supposed to stop the gambling. JPMorgan, headed by one of Weill’s protégés, Jamie Dimon, just lost $5.8 billion on some risky bets. Dimon continues to claim that giant banks like his can be managed so as to avoid any risk to taxpayers.

Sandy Weill has finally seen the light. It’s a bit late in the day, but, hey, he’s already cashed in. You and I and millions of others in the United States and elsewhere around the world are still paying the price.

What’s the betting that one of the presidential candidates will take up Weill’s proposal?

On the other hand when it comes to other American corporations, not banks, Reich notes nationalism has been turned into transnationalism. Which is why I view corporations as far more of a threat than the Faux News propaganda expecting we the people to fear our government.

President Obama is slamming Mitt Romney for heading companies that were “pioneers in outsourcing U.S. jobs,” while Romney is accusing Obama of being “the real outsourcer-in-chief.”

These are the dog days of summer and the silly season of presidential campaigns. But can we get real, please?

The American economy has moved way beyond outsourcing abroad or even “in-sourcing.” Most big companies headquartered in America don’t send jobs overseas and don’t bring jobs here from abroad.

That’s because most are no longer really “American” companies. They’ve become global networks that design, make, buy, and sell things wherever around the world it’s most profitable for them to do so.

As an Apple executive told the New York Times, “we don’t have an obligation to solve America’s problems. Our only obligation is making the best product possible.” He might have added “and showing profits big enough to continually increase our share price.”

Forget the debate over outsourcing. The real question is how to make Americans so competitive that all global companies — whether or not headquartered in the United States — will create good jobs in America.

Apple employs 43,000 people in the United States but contracts with over 700,000 workers overseas. It assembles iPhones in China both because wages are low there and because Apple’s Chinese contractors can quickly mobilize workers from company dorms at almost any hour of the day or night.

But low wages aren’t the major force driving Apple or any other American-based corporate network abroad. The components Apple’s Chinese contractors assemble come from many places around the world with wages as high if not higher than in the United States.

More than a third of what you pay for an iPhone ends up in Japan, because that’s where some of its most advanced components are made. Seventeen percent goes to Germany, whose precision manufacturers pay wages higher than those paid to American manufacturing workers, on average, because German workers are more highly skilled. Thirteen percent comes from South Korea, whose median wage isn’t far from our own.

Workers in the United States get only about 6 percent of what you pay for an iPhone. It goes to American designers, lawyers, and financiers, as well as Apple’s top executives.

American-based companies are also doing more of their research and development abroad. The share of R&D spending going to the foreign subsidiaries of American-based companies rose from 9 percent in 1989 to almost 16 percent in 2009, according to the National Science Foundation.

What’s going on? Put simply, America isn’t educating enough of our people well enough to get American-based companies to do more of their high-value added work here.

Our K-12 school system isn’t nearly up to what it should be. American students continue to do poorly in math and science relative to students in other advanced countries. Japan, Germany, South Korea, Canada, Australia, Ireland, Sweden, and France all top us.

American universities continue to rank high but many are being starved of government funds and are having trouble keeping up. More and more young Americans and their families can’t afford a college education. China, by contrast, is investing like mad in world-class universities and research centers.

Transportation and communication systems abroad are also becoming better and more reliable. In case you hadn’t noticed, American roads are congested, our bridges are in disrepair, and our ports are becoming outmoded.

So forget the debate over outsourcing. The way we get good jobs back is with a national strategy to make Americans more competitive — retooling our schools, getting more of our young people through college or giving them a first-class technical education, remaking our infrastructure, and thereby guaranteeing a large share of Americans add significant value to the global economy.

But big American-based companies aren’t pushing this agenda, despite their huge clout in Washington. They don’t care about making Americans more competitive. They say they have no obligation to solve America’s problems.

They want lower corporate taxes, lower taxes for their executives, fewer regulations, and less public spending. And to achieve these goals they maintain legions of lobbyists and are pouring boatloads of money into political campaigns. The Supreme Court even says they’re “people” under the First Amendment, and can contribute as much as they want to political campaigns – even in secret.

The core problem isn’t outsourcing. It’s that the prosperity of America’s big businesses – which are really global networks that happen to be headquartered here – has become disconnected from the well-being of most Americans.

Mitt Romney’s Bain Capital is no different from any other global corporation — which is exactly why Romney’s so-called “business experience” is irrelevant to the real problems facing most Americans.

Without a government that’s focused on more and better jobs, we’re left with global corporations that don’t give a damn.