February 2009 Archives

February 2009 Archives

Recursion error: already rendering the `body' part.

Posted by James on Feb 03, 2009

$10 billion for broadband ignores real problem: government-enabled duopoly

The Wall St Journal reports:

[America] ranks 15th in the world for broadband penetration. For those who do have access to broadband, the average speed is a crawl, moving bits at a speed roughly one-tenth that of top-ranked Japan.

…[N]othing in the [$10 billion government handout] would address the key reason that the U.S. lags so far behind other countries… an effective broadband duopoly in the U.S., with most communities able to choose only between one cable company and one telecom carrier. It’s this lack of competition, blessed by national, state and local politicians, that keeps prices up and services down.

In contrast, most other advanced countries have numerous providers, using many technologies, competing for consumers. A recent report by the Pew Research Center entitled “Stimulating Broadband: If Obama Builds It, Will They Log On?” concluded that for many people, the answer is no, often due to high monthly prices. By one estimate, the lowest monthly price per standard unit of millions of bits per second is nearly $3 in the U.S., versus about 13 cents in Japan and 33 cents in France…

What we need to get the U.S. back into the top ranks of wired countries is more competition, not taxpayer handouts.

Posted by James on Feb 11, 2009

3,600,000 jobs lost

The New York Times' David Leonhardt reports that 3.6 million jobs have been lost since December 2007 and the government now estimates that “385,000 more jobs were lost last year than it had initially estimated.”

Posted by James on Feb 06, 2009

"$500,000 is not a lot of money"

If you don’t believe there are two Americas, consider this comment on President Obama’s plan to cap executive compensation at firms receiving government bailout money:

“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm.

Leaving aside the moral/political question of whether CEOs of corporations that have lost so much money that they require taxpayer bailouts should earn more than $500k, few Americans consider $500,000 a year “not a lot of money.” By large corporation standards, it’s a true statement, proving how lopsided our economy has become.

Posted by James on Feb 04, 2009

$800 billion can't plug a $2.9 trillion hole

Perhaps I should just forward my blog to Paul Krugman’s since I seem to be quoting him so often. Anyhow, he’s worried D.C.’s not doing enough to arrest our economic plunge, and I (again) think he’s correct:

While Mr. Obama got more or less what he asked for, he almost certainly didn’t ask for enough. We’re probably facing the worst slump since the Great Depression. The Congressional Budget Office, not usually given to hyperbole, predicts that over the next three years there will be a $2.9 trillion gap between what the economy could produce and what it will actually produce. And $800 billion, while it sounds like a lot of money, isn’t nearly enough to bridge that chasm.

Officially, the administration insists that the plan is adequate to the economy’s need. But few economists agree. And it’s widely believed that political considerations led to a plan that was weaker and contains more tax cuts than it should have — that Mr. Obama compromised in advance in the hope of gaining broad bipartisan support. We’ve just seen how well that worked.

Now, the chances that the fiscal stimulus will prove adequate would be higher if it were accompanied by an effective financial rescue, one that would unfreeze the credit markets and get money moving again. But the long-awaited announcement of the Obama administration’s plans on that front, which also came this week, landed with a dull thud.

Posted by James on Feb 13, 2009

82% of job losses hitting men. Disemployed men not doing more at home

3 million men have lost their jobs since December 2007! That’s 82% of the 3.6 million jobs lost:

82 percent of the job losses have befallen men, who are heavily represented in distressed industries like manufacturing and construction. Women tend to be employed in areas like education and health care, which are less sensitive to economic ups and downs, and in jobs that allow more time for child care and other domestic work.

Shockingly — to me, anyhow — those 3,000,000 men aren’t doing any more work around the house than they were before they lost their jobs. They’re not taking care of their kids more or doing more chores or picking up the slack if their wives are still employed outside the home:

When women are unemployed and looking for a job, the time they spend daily taking care of children nearly doubles. Unemployed men’s child care duties, by contrast, are virtually identical to those of their working counterparts, and they instead spend more time sleeping, watching TV and looking for a job, along with other domestic activities.

Many of the unemployed men interviewed say they have tried to help out with cooking, veterinarian appointments and other chores, but they have not had time to do more because job-hunting consumes their days.

“The main priority is finding a job and putting in the time to do that,” says John Baruch, in Arlington Heights, Ill., who estimates he spends 35 to 45 hours a week looking for work since being laid off in January 2008.

While he has helped care for his wife’s aging parents, the couple still sometimes butt heads over who does things like walking the dog, now that he is out of work. He puts it this way: “As one of the people who runs one of the career centers I’ve been to told me: ‘You’re out of a job, but it’s not your time to paint the house and fix the car. Your job is about finding the next job.’”

I’m disappointed in my (average) fellow man. Come on, guys! Let’s pitch in and contribute to running the family the best we can. There are 168 hours in a week. Even if you’re really searching for work 40 hours/week (which I doubt), that still leaves 128 hours to be a great dad and husband.

Posted by James on Feb 07, 2009

America's top capitalist: Dennis Kucinich?!?!?!

True capitalists believe firms with negative net worth (more liabilities than assets) should be closed down.

The U.S. government seems to believe firms that lose the most money require the largest taxpayer bailouts.

Does that make Dennis Kucinich America’s #1 capitalist? He says:

“We shouldn’t be approving any more of these TARPS. We should force this economic system to come to terms with their speculative practices. With their misspending. With their bad investments. This is a fraud that’s being perpetrated on the American taxpayer on a scale that is unprecedented in the history of our country.”

Posted by James on Feb 04, 2009

Are stocks now priced reasonably?

An interesting chart at Fortune plots the total market value of stocks divided by GNP. The article’s titled Buffett’s metric says it’s time to buy because Warren Buffett said in 2001, “If the percentage relationship falls to the 70% to 80% area, buying stocks is likely to work very well.” It’s now at approximately 75%.

I’m not at all sure this signals a market bottom. The metric averaged about 50% until 1990. But 75% is certainly more reasonable than the 190% it hit in March 2000.

Posted by James on Feb 04, 2009

Articles making sense of our historic crisis

The causes of the historic collapse of the global financial and economic system are many and hard to grasp (esp. since trillions of dollars of credit default swap gambling trading losses remain secret to this day). I’ve learned from these excellent articles: * Niall Ferguson’s Vanity Fair article Wall Street Lays Another Egg * Paul Krugman’s New York Times article Bailouts for Bunglers * Michael Lewis' Portfolio article The End * Michael Lewis & David Einhorn’s New York Times article How to Repair a Broken Financial World * Michael Lewis & David Einhorn’s New York Times article The End of the Financial World as We Know It * James Lieber’s Village Voice article What Cooked the World’s Economy? * Pam Martens' CounterPunch article The Two Trillion Dollar Black Hole * Gretchen Morgenson’s New York Times article Time to Unravel the Knot of Credit-Default Swaps * Joe Nocera’s New York Times article Risk Mismanagement * Virginia Postrel’s Atlantic article Pop Psychology * Joe Stiglitz’s Vanity Fair article Capitalist Fools * Joe Stiglitz’s Vanity Fair article Reversal of Fortune * Aaron Task’s Former Regulator: Clear Fraud in Financial Crisis — Why Isn’t Anyone in Jail? * Nicholas Varchaver and Katie Benner’s Fortune article The $55 trillion question * Michael Wolff’s Vanity Fair article The Ultimate Bubble?

Posted by James on Feb 04, 2009

Bailout "plan" resolves nothing

Financial institutions have stubbornly refused to recognize trillions of dollars in losses on distressed assets. Hedge funds have offered to buy those assets, but almost always at a price far below what financial institutions are willing to sell for because: 1) banks think the government will pay them more; and, 2) many banks would be officially insolvent if they recognized their losses to date.

Yesterday’s “plan” does not provide details on how much of the bank bailouts will be paid by taxpayers because it fails to reveal what price will be paid for distressed assets:

Frank Pallotta, a former managing director at Morgan Stanley and a veteran mortgage trader, said the gap was so wide between what banks were valuing their assets and what investors were willing to pay that the government would attract investors to buy only if it provided a subsidy of one form or another.

“Right now, the banks aren’t selling anything,” said Mr. Pallotta, now a consultant to both buyers and sellers of distressed mortgages. “You have Chase thinking that its assets are worth 75 cents on the dollar, and Joe Hedge Fund who thinks they are only worth 45 or 25.”

Posted by James on Feb 11, 2009

Bank bailout potential cost: $10,000 per American!

It’s official. Congress confirms the Treasury has been substantially overpaying banks for their junk assets:

A regulator overseeing the government’s $700 billion bailout testified Thursday that the Treasury Department paid $254 billion for $176 billion of assets — a shortfall of $76 billion.

“Treasury paid substantially more for the assets it purchased under the TARP than their then-current market value,” said Elizabeth Warren, chairwoman of the Congressional Oversight Panel examining the Troubled Asset Relief Program, or TARP.

So we’re paying banks $3 for every $2 they give us.

Forbes is talking about a possible total bailout cost to taxpayers of $9 trillion!

A federal program to guarantee or buy bad assets from the ailing U.S. bank sector could come with a $3.5 trillion price tag.

That would push the accumulated costs of rescuing the financial markets over the last year through various federal loan, stock purchase, debt guarantee and other programs close to $9 trillion and counting, with practically no end in sight for the bad news battering the banking industry.

That figure doesn’t count the $825 billion economic stimulus plan.

If we spend $9 trillion, one-third of which is a pure gift, that would be a $3 trillion gift to banks! That’s $10,000 per man, woman and child in America.

I’m expecting a darn spiffy toaster next time I open an account.

Posted by James on Feb 05, 2009

Bank bailouts

I sent the letter below to The New York Times on January 16th. It never ran, but Paul Krugman has since written several articles along the lines of my letter. (Obama should have hired Krugman — and Joe Stiglitz — into his administration.)

The idea of letting failed banks fail is picking up steam, albeit not among the insiders empowered to decide how to spend taxpayer dollars. Reuters columnist James Saft today asks, “Why not just play by the existing rules and rescue the economy, rather than the banks and their foolish shareholders and counterparties? The choice for the Obama administration comes down to this: pay a subsidy to weak banks and reward failure and self-dealing or shut them down and start over again.” Amen!

And yesterday, Financial Times columnist Martin Wolf agreed: “Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.”

To the Editor:

Re “Rescue of Banks Hints at Nationalization,” Jan. 16:

Edmund Andrews writes that giving away taxpayer money to insolvent banks — by promising taxpayers will repay bank losses on junk assets — has “the virtue of protecting the bank’s common stockholders from being wiped out by the government.” Conversely, the approach favored by Britain and most economists and used in most successful bank rescues, “injecting capital in exchange for preferred shares with warrants to convert to common stock,” is apparently a vice because it “squeez[es] out the common shares.”

The ONLY reason failed bank shares have ANY value is because investors are betting government bailouts will socialize losses while allowing shareholders to pocket future profits. Stockholders SHOULD be wiped out when liabilities exceed assets. Instead, the Fed and Treasury are bailing out stockholders while burdening taxpayers with losses and risk.

This is no “virtue.” It’s a massive scam.

James Lavin

Posted by James on Feb 04, 2009

Brain science

In high school, I was so fascinated by the brain’s complexity that I wanted to become a brain researcher. But I figured that so little was known and progress was so slow that it would be a frustrating plod.

I didn’t then appreciate the power of exponential technological progress. We’ve still unlocked only the brain’s rudimentary secrets, but we’ve already come much further in twenty years than I then imagined possible in my lifetim. And the next twenty years will bring astonishing advances (unless humanity destroys itself… an ever-present danger in a species lacking wisdom and self-control commensurate with its technology).

I now keep up with some of these advances by subscribing to the wonderful Scientific American Mind. It’s full of fascinating new discoveries about the human brain.

Posted by James on Feb 03, 2009

Chrysler: John Snow's hostage?

James Kwak writes:

Why does Cerberus (the private equity firm that owns Chrysler) need money from the government? …Chrysler… is asking for $5.3 billion in new loans (on top of the $4.3 billion already committed, and in addition to another $6.0 billion from the Department of Energy’s alternative energy funding program)…

If Chrysler were a Silicon Valley, venture capital-funded startup that needed cash, and had a viable plan, the VCs would simply invest more money, effectively diluting themselves (and the founders). If the Cerberus overlords really believe the plan that their underlings mailed in yesterday, why not put in the money themselves?…

You’ve probably heard this bank bailout analogy: The banker walks into the Oval Office, puts a gun to his head, and threatens to blow his brains out unless he gets a bailout; the government bails him out because they don’t want to have to clean the carpet. The difference here is that no one cares about Cerberus… so instead he dragged a hostage named Chrysler into the Oval Office and put the gun to her head. In the end, this feels like a kidnapping, where Cerberus is betting that the Obama Administration won’t be willing to take any risks with the hostage’s life.

(Of course, American oligarchs don’t use guns; they use lobbying. Which is why John Snow is still chairman of Cerberus despite overseeing this catastrophic bet on the auto industry.)

Posted by James on Feb 18, 2009

Congress fails Economic Stimulus 101

Nobel Prize-winning economist Paul Krugman is scared by the insufficient size of the stimulus package (“Even if the original Obama plan — around $800 billion in stimulus, with a substantial fraction of that total given over to ineffective tax cuts — had been enacted, it wouldn’t have been enough to fill the looming hole in the U.S. economy, which the Congressional Budget Office estimates will amount to $2.9 trillion over the next three years”), but he’s angered by cuts won by Congressional Republicans:

One of the best features of the original plan was aid to cash-strapped state governments, which would have provided a quick boost to the economy while preserving essential services. But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed spending on school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut from the plan, with the great bulk of those cuts falling on precisely the measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers. Dean Baker of the Center for Economic Policy Research calls this the “flip your house to your brother” provision: it will cost a lot of money while doing nothing to help the economy.

Posted by James on Feb 09, 2009

Day after yelling at bank CEOs, Congress quietly removes compensation cap

The brilliant Cenk Uygur writes:

I knew what Congress was doing yesterday by bringing the Wall Street executives in and scolding them in public was a dog and pony show. But I had not realized how profoundly full of shit these politicians are.

They make a big display of yelling at the CEOs and then the very next day they quietly remove any cap on their compensation. These people are not on our side. This is why so many Americans are so damn frustrated. Everyone in power appears to be bought and paid for. There is a circle of people in DC and NY that keep passing the money around to one another and then come and collect it from us…

The constant non-sensical argument is that if we cap their pay they won’t want to participate in this system. Ooh, don’t scare us now. So, we won’t get the most incompetent and corrupt losers in America to participate in their own rescue? I’m shivering thinking about the possibility of losing out on the help of these geniuses.

We’re wasting our time here. Just nationalize the damn banks already. Almost all of the top economists are now in agreement that we should take this step. The people who put the money in are the people who own the company – that’s how capitalism works. I’m a die-hard capitalist. I don’t want the federal government owning banks for an extended period of time. But what’s worse is to continue letting these bankers rob us of our money day in and day out while we sit around like fools.

We buy it, we own it. Kick the clowns out. Run it for a limited amount of time while we stabilize the credit markets. And then sell them off in the free market. Instead of begging the bankers to loosen up credit, we take the banks and do it ourselves.

The most depressing thing is, this has been obvious for months. But we’ll waste more months throwing good money after bad before we take the inevitable step of nationalizing the banks or declaring them bankrupt and restructuring them.

I wish I could paste the entire article here. I encourage you to read it in its entirety.

Posted by James on Feb 13, 2009

Economic doctors get sick, refuse medicine they prescribed others

The New York Times reports:

Given [Presidential economic advisor Larry Summers'] experience with the Asian financial crisis of the 1990s, some economists wonder how he could have signed off on a bailout plan that did not force banks to admit that they were insolvent.

“The irony is that Summers and Geithner wrote the textbook on how to manage these crises, and they lectured countries all over the world on what to do,” said Adam S. Posen, deputy director of the Peterson Institute for International Economics, lamenting that they did not “follow through with their own prescriptions.”

Mr. Summers dismissed the criticism, maintaining that the bailout plan, for which he said Mr. Geithner would announce details in due time, was “tough and ambitious.”

Yes, tough on taxpayers to bail out failed banks… not tough on the banks that have so eagerly shuttled Summers around in private jet luxury.

Posted by James on Feb 17, 2009

Economists with most credibility on bank crisis agree nationalization necessary

In “Krugman, Stiglitz, Roubini, Taleb, Baker Agree: Nationalize,” David Mizner notes that “among economists who’ve been right about most things over the last few years, there’s virtual consensus. The "only answer” ( in the words in Joseph Stiglitz), “the obvious answer” (in the words of Dean Baker) is to nationalize the banks."

Posted by James on Feb 13, 2009

Education spending boosts economy in short- and long-term. No brainer... if you have a brain

To balance their budgets, states across America are being forced to slash educational spending. Federal government spending to cover state government education cuts seems a perfect use of economic stimulus money because it achieves the two main objectives of the stimulus: 1) puts (or keeps) money in the pockets of those likely to spend it now; and, 2) boosts America’s long-term ability to generate GNP and taxes by educating the next generation. It’s both a quick pick-me-up and a long-term economic enhancer. What’s not to like?

Well, The New York Times' Nicholas Kristof is pleading with Congressional Republicans to stop blocking funds for education:

The effort to prune the stimulus package to make it more palatable to Republicans is focused on slashing money for education.

The proposed cuts, by various accounts, include $40 billion to help states (in large part with education budgets), possibly $14 billion for Pell grants, and $14 billion for other education programs… [Republicans] particularly don’t want Headstart and school construction in the stimulus…

If education is our greatest challenge with huge significance for our long-term economic competitiveness, it’s also precisely where states are likely to cut…

Education is the best way to fight poverty, the best way to break the cycle of the underclass, the best way to ensure a broader distribution of opportunity in America, the best way to preserve our country’s economic competitiveness. And it’s just as good for stimulus purposes as repaving a road — and you still want to throw those school children out the window?

Stimulating the economy with infrastructure spending is great, but there are only so many machines and appropriately skilled workers to build bridges and railroads and only so many worthwhile “shovel-ready” projects to fund. (For example, commuters riding the up-to-36-year-old railcars that haul passengers between Fairfield County and Manhattan are still waiting for railcars ordered in 2006 because there simply aren’t many companies that manufacture railcars for American railways.) Our severe economic crisis requires far more stimulus than infrastructure spending alone can provide.

Education offers both short-term stimulus and long-term economic benefits (including higher future tax receipts). It’s a no-brainer. Sadly, many in Washington seem to have no brains.

Posted by James on Feb 06, 2009

Fannie & Freddie's nationalization: Smart economics or bad politics?

Last year, Fannie Mae and Freddie Mac owned or guaranteed nearly half of America’s $12 trillion in mortgages. Fannie and Freddie were (like many financial institutions) severely under-capitalized, and they had moved a bit away — under political pressure — from their traditional role of lending only reasonable amounts to credit-worthy borrowers (“conforming loans” conform to Fannie/Freddie standards) but remained far more responsible than most lenders during the housing bubble.

Further, Fannie & Freddie had profited handsomely and undeservedly for decades on their ability to borrow at very low interest rates due to their perceived U.S. government backing. (The market assumed that if Fannie and Freddie ever got in trouble, Uncle Sam would bail them out.) They raked in immense unearned “economic rents” thanks to their implicit government subsidy. And they spread some of those rents around to favored politicians (Democrats and Republicans alike) and their allies. Fannie and Freddie gave many Washington insiders cushy, high-paying jobs.

This created widespread jealousy. Wall Street envied those rents. And non-insiders coveted those jobs. So, when the economy began tanking, Fannie and Freddie’s many enemies attacked. Republicans had another reason to attack: Seeking to pin the blame for the recession on Fannie and Freddie rather than its true primary culprits: ratings agencies that gave “AAA” ratings to packages of subprime mortgages, “hot potato” lending — lending to anyone and everyone, even with no-money-down “liar loans,” knowing you could pocket the transaction fee and pass the risk to foolish investors — and Wall Street’s casino atmosphere following two decades of intense deregulation (non-regulation). Deregulation was a cornerstone of conservative free market ideology, but its passage was aided-and-abetted by Democrats. A majority of House and Senate Democrats approved the atrocious Gramm-Leach-Bliley Financial Services Modernization Act, and President Clinton signed it into law.

Bethany McLean, the reporter who broke the Enron story, offers a detailed look at Fannie and Freddie’s nationalization. It’s an interesting read, suggesting the decision to nationalize had more to do with politics than economics and that their nationalization may have scared investors and exacerbated the financial crisis:

Thus far the government has put not a dime into Fannie and only $13.8 billion into Freddie—which is a drop in the bucket compared to the taxpayer dollars that have gone to some other firms, such as the $45 billion Hank Paulson has handed Citigroup. In this alternative narrative, it was Paulson’s rash action of taking over Fannie and Freddie that helped cause the financial meltdown. As famous money manager Bill Miller, the chief investment officer of Legg Mason Capital Management, wrote in a recent letter to his investors: “When the government pre-emptively seized [Fannie and Freddie] not because they needed capital and could not get it, but because the government believed they would run out in the future, then shareholders of every other institution that needed or was perceived to need capital did the only rational thing they could do—sell, in case the government decided to pre-emptively wipe them out as well.”

In truth, Fannie was a company with extraordinarily powerful enemies. They spanned the decades, the two parties, and the ideological spectrum, from Reagan budget director David Stockman to Clinton Treasury secretary Larry Summers to President George W. Bush, and from Ralph Nader to former Federal Reserve chairman Alan Greenspan. These enemies, who detested the privileges Fannie got from its congressional charter, had long wanted to drastically curtail the company—or kill it outright.

Posted by James on Feb 05, 2009

Former IMF chief economist Simon Johnson says bankers are playing us for chumps

Bill Moyers Journal is the best show on TV. And Bill’s guest this week, MIT Sloan School of Management professor and former IMF chief economist Simon Johnson, hit a home run with his comments on the financial crisis, what we should be doing about it, and why we’re not. He says we routinely shut down smaller banks but that America’s mega-banks are now playing American taxpayers for chumps because we’re too chicken to treat them like normal banks.

When normal banks have fewer assets than liabilities, the government “intervenes” and takes possession of those banks. Depositors' accounts are transferred to healthier banks. Those who drove the bank to bankrupcy are fired. And bank assets are transferred to healthier banks. America’s failed mega-banks should be similarly reorganized. They must also be broken up because, as Sen. Bernie Sanders says, “If they’re too big to fail, they’re too big to exist.” These mega-banks are throwing their political heft around and receiving massive Fed and Treasury bailouts instead of being broken up, as routinely happens with failed regular banks.

Having worked at the IMF, Johnson has more experience dealing with failed banks (in both successful and unsuccessful financial crises) than almost anyone running the U.S. bailout. So his pessimism, based on the great power mega-bank insiders still wield in U.S. government, is troubling.

I agree with everything he said and encourage you to watch his twenty-minute interview.

Posted by James on Feb 17, 2009

Frontline picks up where "House of Cards" ends

Just finished watching Frontline’s “Inside the Meltdown.” It picks up where CNBC’s “House of Cards” stops.

“House of Cards” shows the dominoes being set up — how the U.S. financial system reached a crisis after issuing trillions of dollars of unlikely-to-be-repaid mortgages and tens of trillions of credit default swaps.

Frontline shows the dominoes falling down and Fed and Treasury officials scrambling desperately and chaotically to stop them from crashing into one another. It describes how allowing Lehman Brothers to fail triggered a cascade of frozen credit by signalling that any institution could fail. Realizing that other banks could go bankrupt tomorrow raised the perceived risk of loaning money and the risk of holding cash insufficient to meet the sort of run-on-the-bank that had already toppled Bear Stearns and Lehman. So, banks started hoarding their cash. This obviously hurt regular businesses which suddenly found themselves unable to borrow to meet their operating expenses.

My only complaint is that these shows describe what happened but largely ignore what should have happened differently. They fail to discuss the central role played by deregulatory zeal, without which this crisis could not have occurred. Credit default swaps were illegal for almost all of the 20th Century. What did we think would happen after we allowed executives to gamble trillions of dollars on unregulated derivatives? And the unrestrained lending to borrowers who obviously could not afford their mortgages should have been shut down and those who issued, packaged and re-sold such toxic mortgages to unsuspecting investors should have been thrown in jail many years ago.

Posted by James on Feb 18, 2009

Geitner's "plan": Guarantee trillions in junk bank assets... send taxpayers bill later

The “gurus” proposing the next taxpayer fleecing… I mean bank bailout… er, “rescue package” want to spend trillions (more) taxpayer dollars bailing out failed banks. But they want to withhold the bill from us because telling us how many trillions of dollars they want to put us on the hook for would scare the bejeezus out of everyone.

The new “plan” is for taxpayers to guarantee trillions of dollars of toxic bank-owned assets without even telling us how many trillions we’d be on the hook for.

Tricking the public into massive bank bailouts while pretending there will be little or no cost is not democracy.

Congress may well roll over and do what they’re told, but at least they enjoyed a good chuckle:

Administration officials were greeted with sarcasm and laughter Monday night when they briefed lawmakers and congressional staff on Treasury Secretary Tim Geithner’s new financial-sector bailout project, according to people who were in the room.

The laughter was at its height when Obama officials explained that the White House planned to guarantee a wide swath of toxic assets — which they referred to as “legacy assets” — but wouldn’t be asking Congress for money. Rep. Brad Sherman (D-CA), a bailout opponent in the fall, asked the officials to give Congress the total dollar figure for which they were on the hook. The officials said that they couldn’t provide a number, a response met by chuckling that was bipartisan, but tilted toward the GOP side. By guaranteeing the assets, Geithner hopes he can persuade the private sector to purchase a portion of them.

Posted by James on Feb 11, 2009

Gloom, doom and more gloom

Dave Lindorff writes:

In an interview I did for the trade publication Investment Management Weekly on Thursday, Putnam Investments’ global asset allocation head Jeffrey Knight said that while the stimulus could “help to prevent a Great Depression sequel,” at the same time “Those who measure prosperity against the Faustian opulence of the last 10 years may find that stability, equilibrium and even recovery will still feel like a deep depression.”

Another fund manager, Ron D’Vari, co-founder and CEO of a new fund management firm that specializes in so-called distressed assets—the very things that have the nation’s banks reeling on the edge of failure—says the economy has fallen into “an L-shaped recession where it’s hard to say how long it will be down at the bottom.” D’Vari also told me, “We think we will have a sort of subsistence economy—not like North Africa, but it could look like just getting by for some time before you see the start of a real recovery.”

Lindorff believes Obama’s approach is too Hoover-esque:

An economic “team of rivals” is a great idea, but to get that, Obama would have to be willing to reach over to the left side of the spectrum, not just the right.

Posted by James on Feb 09, 2009

Has Obama let foxes in sheep's clothing guard America's hen houses?

My last post asks, “Why didn’t Obama hire the Joe Stiglitzes and Paul Krugmans of the world? They’ve got brilliant minds and Nobel Prizes to prove it. And they’re far more objective (and less compromised) than those who helped create the mess, whom Obama hired.” Two other names inexplicably not on Obama’s economic team: Brooksley Born (who fought efforts to turn Wall Street into the world’s largest casino) and Robert Reich.

Frank Rich answers my question:

Citigroup had one highly visible [political] asset that Lehman did not: Robert Rubin, the former Clinton Treasury secretary who sat passively (though lucratively) in its executive suite as Citi gorged on reckless risk. Geithner, as a Rubin protégé from the Clinton years, might have recused himself from rescuing Citi, which so far has devoured $45 billion in bailout money.

Key players in the Obama economic team beyond Geithner are also tied to Rubin or Citigroup or both, from Larry Summers, the administration’s top economic adviser, to Gary Gensler, the newly named nominee to run the Commodity Futures Trading Commission and a Treasury undersecretary in the Clinton administration. Back then, Summers and Gensler joined hands with Phil Gramm to ward off regulation of the derivative markets that have since brought the banking system to ruin…

Not only did Rubin himself serve on the Obama economic transition team, but two of the transition’s headhunters were Michael Froman, Rubin’s chief of staff at Treasury and later a Citigroup executive, and James S. Rubin, an investor who is Robert Rubin’s son.

These banking insiders have strong vested interests in using public money to paper over the derivatives disaster they made possible and to rescue the private banks whose net worth they helped destroy. They’re so invested in re-inventing the status quo ante that it’s hard to imagine them devising creative solutions beyond pouring public money into the private holes they dug. Unsurprisingly, when Obama put them in charge of economic hiring, they hired from their incestuous, even nepotistic, circle of friends.

Posted by James on Feb 09, 2009

"It's Time to Treat America's Homeowners as Well as... Wall Street's Bankers"

I highly recommend the informative (and depressing) CNBC special “House of Cards.”. It depicts the mess and the many guilty parties: * Homebuyers who bought homes they obviously could not afford, often by lying about their incomes * Mortgage companies that gave mortgages to buyers who obviously couldn’t afford them and were lying about their incomes and assets * Wall Street banks that packaged up mortgages they knew were junk into “structured securities” so complex Alan Greenspan said he and his team of Ph.D.s couldn’t understand them and passed them along to trusting investors around the world * Ratings agencies that stamped financial junk with absurd AAA ratings * Federal regulatory agencies (SEC, Fed, etc.) that should have stopped these practices but did nothing * Legislators who should never have allowed subprime predatory lending

And this list doesn’t even cover the biggest problem, worth trillions: CDSes (credit default swaps) that allowed anyone to place massive bets on the housing market, bets taxpayers are now paying off on behalf of AIG and other losers. For most of the 20th Century, CDSes would have been illegal. Unregulated gambling (via derivatives) was made legal late in the Clinton administration with the strong support of both parties. CDSes have turned a disaster into a catastrophe.

In “House of Cards,” Cynthia Simons — a woman who overextended herself to escape from drug-and-violence-infested Compton by buying a house she now may be forced out of — declared (something like), “I’m stupid, but these banks are guilty.” She’s exactly right. Yet government’s response to date has been to shovel trillions of dollars at the banks and virtually nothing toward the core problem of failing mortgages.

So, Arianna Huffington has it exactly right when she declares, “It’s Time to Treat America’s Homeowners as Well as We’ve Been Treating Wall Street’s Bankers”. The American mortgage and banking system caused our current Depression, but Washington is treating banks as victims, not perpetrators.

Posted by James on Feb 17, 2009

Krugman's "crazy 36"

Paul Krugman writes:

I presume — I haven’t checked the roll call — that the 36 Senators who voted against cloture on the stimulus were the same 36 Senators who voted for the DeMint amendment, which would have replaced $800 billion of stimulus with $3.1 trillion of non-stimulative tax cuts. These, by the way, are the same people now accusing Obama of engaging in “generational theft.”

Anyway, this is the starting point for any analysis of the Senate from now on: 36 Senators — 87.8% of the Republican delegation — are irresponsible hypocrites.

How can the proper societal response to the loss of 600,000 jobs/month be tax cuts for the highest-income Americans who are lucky enough to still have jobs (and massive bank bailouts)???

Tax cuts provide only a small fraction of the stimulus bang-per-buck as government spending because: 1) unemployed people have a high propensity to spend their income whereas high-income, wealthy people save much of any extra dollar they receive in tax cuts; and, 2) tax cuts are spent on foreign goods as well as domestic whereas 99% of government stimulus spending is recycled into our economy. Furthermore, government spending on education, transportation and communication infrastructure, etc. lifts the nation’s economic potential, thus increasing our ability to pay bills in the future… the exact opposite effect of tax cuts.

These “representatives” of the people are either economic morons or unabashed protectors of only the wealthiest Americans.

Posted by James on Feb 11, 2009

Macromyopia

I’ve long feared society’s over-specialization. As society and technology have grown increasingly complex, each human’s knowledge has grown increasingly narrow. Given society’s division of labor, virtually no one has as their job perceiving the big picture and anticipating risks caused by complexity.

Sadly, even when humans perceive risks, we often fail to reduce those risks, esp. when risk reduction requires sacrifices in the present. Two years ago, as every new piece of environmental data pouring in exceeded the most pessimistic climatologists' worst fears, National Academy of Sciences president Ralph J. Cicerone asked, “Does it take a crisis to get people to go along a new path or can they respond to a series of rational, incremental gains in knowledge?”

On this all-important question, like many, I’m hoping for the best but expecting humanity will put in place only half-measures (or, more likely, 10% measures) that merely slightly delay environmental catastrophe.

New York Times reader Sailesh Rao suggests (probably aptly but hopefully inappropriately) that our looming environmental crisis mirrors our current financial crisis:

Financial blogs are all abuzz over the phenomenon of “Macromyopia”. This is the inability of self-interested individuals to see beyond the next quarter and thus to have played along with the fiction that sub-prime No-Income-No-Job-No-Assets (NINJA) mortgages can be mashed up to form AAA rated financial securities forever.

Perhaps, Macromyopia is equally at play in all our environmental problems as well, and it might take a catastrophe for the majority of people to clamor for action. It is up to our world leaders and the media to use their bully pulpits to mitigate risks for life on earth. Surely, they can muster the intellect to understand these charts and act accordingly?

“Macromyopia” is a great name for something that has worried me for many years.

Unfortunately — and ironically — identifying humanity’s Achilles' heel may not prove sufficient to rouse us into (appropriate levels of) action… because our Achilles' heel is our inability to rouse ourselves sufficiently when confronted with future dangers.

Posted by James on Feb 27, 2009

McDonald's: No workers comp for employee shot protecting patron

McDonald’s will hopefully lose many customers (including my family) unless it reverses this really, really stupid and inhumane decision:

McDonald’s has denied workers compensation benefits to a minimum wage employee who was shot when he ejected a customer who had been beating a woman inside the restaurant…

Haskett tackled Kennon, threw him out, and then stood by the door to prevent him from reentering…

Kennon went to his car, returned with a gun, and shot Haskett multiple times…

McDonald’s may be on shaky legal ground in their attempt to deny benefits. As explained by the blog “Joe’s Union Review,” courts have repeatedly ruled that injuries incurred in the course of “good samaritan” acts while on the job are entitled to compensation, especially if they result in good will towards the employer.

Posted by James on Feb 23, 2009

Millions ignored diagram of doom hiding in plain sight

Economist Nouriel Roubini predicted (with great accuracy and in great detail) the current economic crisis. What was his secret? He took seriously a chart in a book read by millions:

Roubini said that he studied a chart in economist Robert J. Shiller’s book “Irrational Exuberance.” It showed that U.S. housing prices, adjusted for inflation, had remained essentially flat for a century, until the mid-1990s, when they began to shoot up. What’s more, Roubini saw that the most recent housing correction in the late 1980s had a severe effect on the financial system — leading ultimately to the collapse of the savings and loan industry.

So Roubini knew two things: Housing prices wouldn’t keep going up forever, and when they went down, they would take a big piece of the financial system with them.

Posted by James on Feb 18, 2009

More on Parenting

My (wonderful) son is now 2 ½, and over the past few years I’ve invested some time very wisely in reading several child development books.

One that I love is What’s Going On In There? by Lise Eliot. She’s a neuroscience professor and a parent of three children. Her book — informed by both academic knowledge and practical experience — is full of scientifically valid research findings and useful ideas. Here are a few:

  • Breast milk is VERY good for your baby. Breast-feed your baby for at least a year.
  • Interact with and talk with your baby as much as possible. Try to respond to your baby’s cues as much as possible. The more back-and-forth interaction (verbal or non-verbal), the better. Children whose parents talk the most with them develop rich vocabularies and sophisticated language earlier than other children.
  • Eliminate as much distracting noise as possible. Babies need to focus their attention. Having the television or video game machine on constantly in the background makes it much harder for babies to concentrate and learn.
  • Encourage your baby’s attempts to explore his/her world, except when doing so is dangerous. Babies also like to have fun, and playing games (like peek-a-boo) with them help them learn while having fun.
  • Don’t try to solve all your baby’s problems. Let them struggle a bit with things that are just a bit too hard for them. That’s how they grow more capable.
  • Use positive, encouraging words as often as possible with your children. Of course, you must set limits and express disappointment when your rules are violated. But the higher the ratio of positive to negative words you use with your children, the happier and healthier they will grow up to be.
  • For older kids, summer is a critical time. Most kids' academics regress during summer. Successful kids engage in summer activities (like reading) that keep their minds busy. Instead of regressing, they make progress over the summer.
  • It’s never too early to expose a baby to another language. We focused on Chinese in our family because we figured he would pick up English quickly when he started going to daycare at age 2 (which he has). Language has a “critical period” that lasts for about six years. If you don’t hear a language before age six, it’s virtually impossible to ever talk like a native speaker.

Another book I like that offers similarly useful information and is perhaps more practical and less focused on the science of brain development is Stanley Greenspan’s Building Healthy Minds. The same author has a new book, Great Kids: Helping Your Baby and Child Develop the Ten Essential Qualities for a Healthy, Happy Life.

Posted by James on Feb 04, 2009

Nader warned us in 2000

In January 2000, Ralph Nader predicted disaster:

Never underestimate the ability of Congress to repeat its mistakes. A decade ago, after it gambled and lost on deregulation, Congress was forced to launch a $500 billion taxpayer-financed bailout of the savings and loan industry. Congress has just rolled the deregulation dice again. This time the outcome may be even more costly.

Congress and the White House have come up with the granddaddy of all financial deregulation, the “Financial Services Modernization Act,” which whipped out the Glass-Steagall Act of 1933 and removed the major restrictions of the Bank Holding Company Act of 1956. In so doing, Congress and Clinton have opened the door for banks, securities firms, insurance companies, and in some cases nonfinancial corporations to combine into a handful of giant conglomerates.

These conglomerates will be the financial equivalent of nuclear bombs. The explosion of even one could have a disastrous impact not only on the U.S. economy but on financial systems around the world.

Posted by James on Feb 19, 2009

Obama: Too little economics knowledge to hire the right people?

I think Jeffrey Klein nails it:

The fundamental problem seems to be that our new president is a lawyer lightly versed in economics. His understanding of our financial crisis is not in the same league with his many other gifts. To help himself out, he’s hired the very people who created the crisis. Their impulse is to create ever more complex financial fixes. And to police these fixes and their shifting capital requirements, they’ve hired in from the private sector (from PriceWaterhouseCoopers, Ernst & Young) the same auditors trained to look the other way…

Like Bush, his first instinct has been to protect the status quo. He wants to save the banks. Why? If there is profit to be made, new banks will spring up in their stead. There is no sound reason — nothing the experts know that you don’t — to transfer private debt into public debt, where it will eventually result in decreased services, increased taxes and crippling inflation.

Is Obama rationalizing that his efforts are stabilizing? Citizens are already de-stabilized by Obama’s perpetuation of Bush’s ruling class rules: heads they win, tails you lose. Common sense and fair play dictate that financial shortfalls must wipe out bank equity and bond holders before anyone else. This should be non-negotiable. Why is Obama stooping to negotiate?

Why didn’t Obama hire the Joe Stiglitzes and Paul Krugmans of the world? They’ve got brilliant minds and Nobel Prizes to prove it. And they’re far more objective (and less compromised) than those who helped create the mess, whom Obama hired.

Posted by James on Feb 09, 2009

Parenting

If you’re a parent, you’d be remiss to not learn the basic scientific findings concerning the power of “emotional coaching” of children. I’m currently reading two books on how to become a trusted ally and emotional coach to your son/daughter:

Millions of very well-intentioned parents unwittingly use harmful parenting techniques. These books describe the common mistakes misguided parents make and the techniques proven to help your children trust their emotions and act responsibly based on those emotions.

Posted by James on Feb 03, 2009

Positive psychology

For far too long, psychology focused almost exclusively on abnormal behavior. Recently, many researchers have conducted fascinating research into factors that do and don’t make people happy. The conclusions are directly relevant to how each of us can improve the (self-perceived) quality of our lives. And many of the field’s research findings are quite counter-intuitive.

For example, if you are not extremely poor, how much money you have has virtually no effect on how happy you feel. If you hit the lottery, you’ll be excited for a few months, but you’ll quickly revert to your previous level of happiness.

And, although money itself does not buy happiness, love of money makes you less happy. The more value you place on money, the less happy you’re likely to be. Consequently, you can make yourself happier by avoiding the “hedonic treadmill” (a.k.a., the rat race). Engaging in meaningful work will make you happier. But working extra hard at a soul-less job purely for the sake of making more money will leave you less happy.

I recommend Martin Seligman’s Authentic Happiness. The same author (a leader in the field) has also written two more recent popular books, Learned Optimism: How to Change Your Mind and Your Life and What You Can Change and What You Can’t: The Complete Guide to Successful Self-Improvement, which I haven’t read but suspect are excellent reads.

Posted by James on Feb 03, 2009

Recession

Reading about Americans struggling after losing their jobs is heart-breaking, especially because I don’t see much hope on the horizon. We’ve lost our manufacturing industry over several decades. Much of our financial industry has imploded, seemingly overnight. And the severe wealth contraction from the bursting of the housing bubble is killing the retail and construction industries. And, of course, service jobs that can be done over the Internet continue to be outsourced in ever-increasing numbers.

Even worse, it feels like a death spiral because every job lost in these fields causes several more collateral job losses among barbers, waiters, lawn service, etc. And monetary policy is now totally ineffective. We’re caught in a liquidity trap that’s kept Japan’s economy moribund for the past 15 years.

P.S. Stop calling this a “credit crunch,” as if bank bailouts will solve America’s woes! We’ve experienced a massive wealth contraction. Borrowers are now much less credit-worthy because net asset values have plunged and earning power has plunged along with economic conditions. Of course, many banks have negative net worth and should be liquidated (but are being kept alive by shoveling taxpayer money at them). The credit crunch is but a symptom of a widespread and deep contraction in wealth and earnings. Government should be helping ordinary citizens and Main Street businesses recover from the consequences of the wealth and earnings contraction. Let banks that made stupid bets fail. Use the money to create middle-class jobs, improve education, and rebuild America’s infrastructure. If you’re going to give banks money, give it to the well-run banks, not the failed ones. If we don’t help ordinary families and businesses, the future for many American cities (and small towns) is bleak indeed.

Posted by James on Feb 04, 2009

Saving failed banks is *exacerbating* credit crunch, not solving it

The “experts” keep telling us we need to pour trillions of dollars into our sick banks (and non-bank financial institutions) to make them healthy so they can start lending again. But if the goal is to spur lending, shouldn’t we pour our money into healthy banks (or create new banks with healthy balance sheets)? An analogy: If we wanted to quickly build a tower, should we find a deep hole in the ground and pour in lots of dirt and then start building or should we just find a flat piece of land (or a hill) and get right to work?

Analysts at The London Forex Broadsheet seem to agree:

Setting up a so-called “bad” or aggregator bank to purchase the banks’ toxic assets is all the rage now among some of the leading economists, politicians and government officials, but the idea is an unworkable disaster which needs to be immediately abandoned. Instead, what really needs to be set up by the government is a new “good” bank to make good, new mortgages for the many well-qualified buyers which now exist, especially because prices have made such a steep decline. Those buyers will include families who wish to live in them as well as investors seeking a return on capital…

Continue Reading…

Posted by James on Feb 05, 2009

Soros says West disintegrating like former USSR

Reuters reports:

Renowned investor George Soros [says] the world financial system has effectively disintegrated, adding that there is yet no prospect of a near-term resolution to the crisis.

Soros said the turbulence is actually more severe than during the Great Depression, comparing the current situation to the demise of the Soviet Union…

“We witnessed the collapse of the financial system,” Soros said at a Columbia University dinner. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” [former Federal Reserve chairman Paul] Volcker said.

If you’re curious how a Soviet-style collapse would reshape America, you might want to read a recent speech by Dmitry Orlov, who says he predicted in 1995 that the U.S. was following the U.S.S.R.’s path to ruin:

I started to see Soviet/American Superpowerdom as a sort of disease that strives for world dominance but in effect eviscerates its host country, eventually leaving behind an empty shell: an impoverished population, an economy in ruins, a legacy of social problems, and a tremendous burden of debt.

While I hardly agree with everything Orlov says, his speech certainly provokes much-needed thinking about how to prepare for our (suddenly rather bleak) future. Perhaps especially shocking is Orlov’s argument that the Soviet citizenry was much better prepared to muddle through their economic collapse than Americans are to survive ours:

Many aspects of the Soviet system were paradoxically resilient in the face of system-wide collapse, many institutions continued to function, and the living arrangement was such that people did not lose access to food, shelter or transportation, and could survive even without an income. The Soviet economic system failed to thrive, and the Communist experiment at constructing a worker’s paradise on earth was, in the end, a failure. But as a side effect it inadvertently achieved a high level of collapse-preparedness. In comparison, the American system could produce significantly better results, for time, but at the cost of creating and perpetuating a living arrangement that is very fragile, and not at all capable of holding together through the inevitable crash.

Orlov says government should stop trying to save the failed system and instead focus on life’s necessities:

What should [government’s] realistic new objectives be? Well, here they are: food, shelter, transportation, and security. Their task is to find a way to provide all of these necessities on an emergency basis, in absence of a functioning economy, with commerce at a standstill, with little or no access to imports, and to make them available to a population that is largely penniless. If successful, society will remain largely intact, and will be able to begin a slow and painful process of cultural transition, and eventually develop a new economy, a gradually de-industrializing economy, at a much lower level of resource expenditure, characterized by a quite a lot of austerity and even poverty, but in conditions that are safe, decent, and dignified. If unsuccessful, society will be gradually destroyed in a series of convulsions that will leave a defunct nation composed of many wretched little fiefdoms.

If you’re looking for a new Depression-proof career, I recommend gallows humorist:

1990 was particularly tough when it came to trying to score something edible. I remember one particular joke from that period. Black humor has always been one of Russia’s main psychological coping mechanisms. A man walks into a food store, goes to the meat counter, and he sees that it is completely empty. So he asks the butcher: “Don’t you have any fish?” And the butcher answers: “No, here is where we don’t have any meat. Fish is what they don’t have over at the seafood counter.”

Posted by James on Feb 24, 2009

Stocks down more than during Great Depression

Stocks are down 5.1%/year over the last decade (in real terms) versus just 2.8% during the Great Depression:

In the last 82 years — the history of the Standard & Poor’s 500 …it has never seen a 10-year stretch as bad as the one that ended last month.

Over the 10 years through January, an investor holding the stocks in the S.& P.’s 500-stock index, and reinvesting the dividends, would have lost about 5.1 percent a year after adjusting for inflation…

Until now, the worst 10-year period, by that measure, was the period that ended September 1974, with a compound annual decline of 4.3 percent…

For the 10 years after the crash, through Sept. 30, 1939, the compound annual decline of the stock market… after factoring in deflation… was 2.8 percent a year.

Posted by James on Feb 07, 2009

Summers flew free on Citibank corporate jet... then decided Citibank's fate

A perfect example of why I’ve been calling for disinterested people like Paul Krugman, Joe Stiglitz and Nouriel Roubini to lead the bailout…

Last year, taxpayers injected $45 billion into Citibank and promised to guarantee $306 billion in Citibank’s junk assets.

We now learn that Larry Summers was flying free on Citibank’s corporate jets just months before he helped decide Citibank needed $350 billion in taxpayer cash:

Top White House economic adviser Larry Summers hooked a freebie flight on a posh Citigroup corporate jet mere months before he began weighing the bank’s fate with other policymakers trying to save the banking system.

Summers’ decision to accept the freebie raises questions about his ability to remain impartial in those crucial deliberations, critics said…

The Herald has confirmed that Summers, as a high-profile economic adviser to Barack Obama’s campaign, hitched at least one ride on a Citigroup jet that shuttled people last August between the East Coast and Denver’s Democratic National Convention…

One source said Summers took a number of flights on Citi aircraft.

Posted by James on Feb 11, 2009

Taleb: "You can’t have capitalism without punishment"

Black Swan author Nassim Nicholas Taleb wants to end Wall Street’s riverboat gambling incentive structure — heads, they “earn” fat bonuses; tails, taxpayers bail out investors — by turning banks into highly regulated utilities to “save capitalism and free markets from the banks.”

Taleb’s also out for blood, especially from private equity firms that buy companies using mostly borrowed money. Blackstone Group, for example, has lost 86% of its market value since its IPO just 18 months ago. But its founders made a fortune in its IPO, a fortune they’ll retain even if Blackstone goes bankrupt… in which case lenders will pay the price for Blackstone’s risky leveraged buyouts.

Taleb says:

“I want them poor and they deserve to be poor. You can’t have capitalism without punishment.”

Oh, and another thing, he wants Bob Rubin, who trousered millions while chairman of Citigroup, to cough up.

“I want Bob Rubin to return his $110 million dollars to the American taxpayer.”

Posted by James on Feb 05, 2009

Taxpayers pay for me and my 14 kids, but I'm not on welfare

The more I learn about the octuplets' mother, the worse I feel:

Suleman, who lives with her mother… acknowledged in the NBC interview that she was struggling to support her six children before the birth of her octuplets [but]… She denied that she was on welfare — a comment her publicist later clarified.

She can’t pay for her fourteen children. She’s receiving large welfare payments from taxpayers. She’s a single mom living with her parents. But she has a publicist!!!

Imagine if this woman were African-American! Media criticism of “welfare queens” would be 24x7, and the subtext would be that they are all living large on your taxes.

(Similarly, most terrorist acts in America are committed by white people — think Timothy McVeigh — but the media treats white terrorists as lone nuts while conveying the impression millions of Muslims worldwide are actively plotting to blow up America.)

Suleman is paying her bills almost entirely thanks to government assistance. But she’s not on welfare!

“In Nadya’s view, the money that she gets from the food stamp program … and the resources disabilities payments she gets for her three children are not welfare,” Furtney said. “They are part of programs designed to help people with need, and she does not see that as welfare.”

I’m having flashbacks to Joe the Plumber, who has repeatedly benefited from welfare (“I once was on welfare, my parents twice!”) but didn’t let that stop him from condemning the entire concept of taxation and government spending: “Was it patriotic for Joe Biden to say ‘take my money and give it to other people’? That’s patriotism?”

And then there’s Suleman’s fertility doctor, who appears to be both incompetent (“of the 61 procedures Kamrava conducted in 2006 — the most recent data available — only five resulted in pregnancies and only two of those resulted in births. One of those births was Suleman’s twins”) and corrupt (“Kamrava required patients to pay their bills in cash, which was then put in an envelope and given to Kamrava’s wife, who “never entered the payment into the computer and never deposited the payment in the bank” so that Kamrava could avoid paying income tax on the money. The clinic kept two sets of books, one for insurance payments and one for cash payments, the lawsuit alleged”).

Posted by James on Feb 10, 2009

To be happy, live below your means

Harvard economist Edward Glaeser writes:

Envy is not just a deadly sin, it is also an emotional reality. My colleague Erzo Luttmer finds that middle-income people who live around the rich are significantly less happy than middle-income people who have poorer neighbors. Today’s new fashion for frugality may reflect an awareness that showing off one’s prosperity imposes emotional costs on others.

Posted by James on Feb 17, 2009

VaR + Gaussian copula function: Magic wands for making risk vanish

Many have pointed fingers at the VaR (value at risk) formula for modeling financial risk as the cause of excessive Wall Street risk taking. An interesting Wired.com article wags its finger at another risk model driving excessive risk taking: David X. Li’s Gaussian copula function.

Both risk models have legitimate uses but were totally misused by Wall Street, either because bankers and ratings agencies failed to understand their limitations and the implicit assumptions underlying their applicability or because bankers and ratings agencies didn’t want to think about the formulas' limitations. Those formulas were based entirely on the (unreasonable) assumption that the future would look remarkably like the very recent past. For example, the assumption that housing prices would continue rising forever was baked into these models. Because bankers' pay was based on short-term “profit,” bankers had no incentive to model the truth because these formulas — by systematically underestimating risk, esp. systemic risk — enabled those banks to take on much larger risks and rake in billions in extra “profits” than they could have had they accounted more honestly for systemic risk that would drive down all asset prices.

You can read the details, but it boils down to this: Li’s formula was used to slap “AAA” ratings on aggregations of very risky mortgages by systematically ignoring the possibility that the housing market could ever turn down. Basically, the math claimed that pooling together many mortgages eliminated almost all risk. The result was an explosion of risky mortgages (which could now be slapped with “AAA” seals of approval and passed on to unsuspecting investors) and gambling on top of those risky mortgages in the form of tens of trillions of dollars of CDSes (Credit Default Swaps):

The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.

At the heart of it all was Li’s formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

“The corporate CDO world relied almost exclusively on this copula-based correlation model,” says Darrell Duffie, a Stanford University finance professor who served on Moody’s Academic Advisory Research Committee…

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that “the correlations between financial quantities are notoriously unstable.” Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn’t alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn’t perfect. Li’s approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford’s Duffie and ask him to come in and talk to them about exactly what Li’s copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

Posted by James on Feb 25, 2009

What to do with all the surplus humans?

Perhaps 15 years ago it occurred to me that the accelerating advance of computing, robotics, and mass production would inevitably enable capital owners (and the brains that program their machines/capital) to produce massive output and generate immense wealth for themselves with no help from the vast majority of humanity. The rich would get rich beyond imagination while an increasing proportion of people would find their labor of little or no value.

Well, we’re well down that road and driving faster and faster. Middle class Americans' income has stagnated for decades while rich Americans' income has skyrocketed. The same is true globally. China’s nouveau riche have made vast fortunes while China’s manufacturing laborers are being laid off by the tens of millions after years toiling in sweatshops for a dollar an hour.

Because technology now enables immense supply chains and economies of scale, global mega-corporations dominate. To give but one example, America is littered with Wal-Marts and cookie-cutter chain store malls, while mom-and-pop stores have shuttered their doors. Though shoppers benefit from these efficiencies, workers have suffered far more. Today’s Wal-Mart greeter doesn’t make what yesterday’s independent shoestore salesman earned.

Continue Reading…

Posted by James on Feb 04, 2009

Why does Obama team keep proposing sweetheart deals for private investors?

Another clear, compelling article on the banking crisis from Paul Krugman, well worth reading in its entirety:

Lately the Federal Deposit Insurance Corporation has been seizing banks it deems insolvent at the rate of about two a week. When the F.D.I.C. seizes a bank, it takes over the bank’s bad assets, pays off some of its debt, and resells the cleaned-up institution to private investors. And that’s exactly what advocates of temporary nationalization want to see happen, not just to the small banks the F.D.I.C. has been seizing, but to major banks that are similarly insolvent.

The real question is why the Obama administration keeps coming up with proposals that sound like possible alternatives to nationalization, but turn out to involve huge handouts to bank stockholders.

For example, the administration initially floated the idea of offering banks guarantees against losses on troubled assets. This would have been a great deal for bank stockholders, not so much for the rest of us: heads they win, tails taxpayers lose.

Now the administration is talking about a “public-private partnership” to buy troubled assets from the banks, with the government lending money to private investors for that purpose. This would offer investors a one-way bet: if the assets rise in price, investors win; if they fall substantially, investors walk away and leave the government holding the bag. Again, heads they win, tails we lose.

Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.

Posted by James on Feb 24, 2009