Wednesday, September 24, 2008

Unbridled Arrogance - Paulson and Bernanke go calling on Capitol Hill

Henry Paulson and Ben Bernanke went calling on Capitol Hill yesterday, seeking $700 billion to "stabilize" the financial markets -- in effect, to bail out the industry they both represent. I managed to see some of it while I was eating lunch. Granted, I only got to watch if for about 20 minutes, but there was one exchange between Sen. Sherrod Brown of Ohio and Ben Bernanke that really summed it up for me.

Brown asked Bernanke if we should start demanding that banks issuing a mortgage actually be required to hold on to a percentage of that mortgage. This might mean they actually have a stake in seeing the mortgage repaid, and will therefore abide by more traditional lending practices. Therefore, they wouldn't be anywhere near as likely to issue questionable loans with less-than-reasonable expectation of repayment. Given the manner in which Wall Street's arcane financial mechanisms and flawed debt-benefit analyses did large part to get us into this mess, it did not seem like an unreasonable demand.

Instead, Bernanke completely denigrated the issue. He said something along the lines of, "That's a peripheral issue, and we need instead to concentrate on the main issue right now, which is stabilizing the financial markets [by infusing Wall Street with $700 billion of liquidity, added to the already-stratospheric national debt].

That comment, above all others, highlighted to me the general attitude of the financial industry and their representatives within government. Please note that this does in no way mean I resolve the Congress of their complicity in this mess. To see many of the same Senators who went along with (or championed) the deregulation of the banking industry now standing upon their soapboxes and wagging their finger at Wall Street is nauseating. However, to watch these two men come to Congress and demand they be given full control over $700 billion with no conditions or questions asked is beyond the pale. It is unbridled arrogance.

I was listening to Dr. Alan Chartock of WAMC (NY NPR) yesterday regarding this matter, and he brought up an interesting point of this crisis: the timing. Paulson and Bernanke could have laid out a worse-case scenario for some time now, going all the way back to the Bear Stearns collapse. Signs have been evident for months that a crisis was brewing. Yet, they did nothing. At every step, they assured us that the housing issue could be "contained." Now, only 6 weeks before the election and 1 week before Congress is to recess until after those elections, they came demanding a bailout on their terms. They're literally trying to shove unprecedented powers over the U.S. treasury down Congress' throat. I can't decide if it means that these guys are utterly incompetent, nefariously manipulative or some combination of the two, but those seem to be the choices. Neither gives me a good feeling when it comes to Congress issuing a bailout package under control of the same jokers who screwed things up in the first place.

I also can't help but feel that the only way out of this crisis requires that we actually "back up" a good bit before choosing alternate economic arrangements more in touch with reality and actual value than our current house-of-cards designed by the financial services industry. Our money seems to be based upon little more than debt right now. Taking on more debt will only make that money worth less (or, eventually worthless) and pushing the reckoning a little further into the horizon. Much of this debt, I believe, is the result of our failing to make difficult choices over the past 25 years. World War II left the U.S. as the unquestioned global economic engine, with roughly half of the world's manufacturing capacity. Europe and Japan were in ruins, and the U.S. got rich selling and lending to the rest of the world. However, this arrangement was a blip on the screen, and it was inevitable for more "balanced" conditions to develop. In order for Europe and Japan to gain a greater share of world output, in meant the U.S. share had to be reduced. This, along with passing the peak of U.S. oil production in 1970, resulted in the economic uncertainty of the 1970s.

Rather than face reality, we chose "morning in America." Rather than voluntarily adjust our material expectations, we embraced the philosophy of Ronald Reagan -- a man that Andrew Bacevich has referred to as the "modern prophet of profligacy." This way meant that business was given a freer hand, especially the financial services industry. Our economic growth became less about making and selling things than making and selling money. As a result, the money supply (and national debt) have turned the exponential corner and are increasing at breakneck speed. Adding so much more debt to a system that is already overextended, especially in a scenario in which nothing of utility is actually produced by that credit, cannot be the answer.

I am well aware that this "backing up" will cause pain across all elements of society. However, I think that the longer we push things off, the harder the fall at the end. And eventually all of this will fall. I feel it is irresponsible to try and push off these kinds of adjustments to my daughter and future generations without making adjustments myself. There's also an element of Schadenfreude at work here -- I think that those same Wall Street cowboys who championed the virtues of the free market over all else when things were looking good for them should be forced to take the same medicine they were always willing to prescribe everyone else. I think that if we're going to be responsible people, we have to be willing to bear some sacrifice in the nearer term. There's no such thing as a free lunch, and wishing won't make this predicament go away.

Dmitry Orlov had an interesting article about the current crisis as well: As usual, Dmitry cuts to the quick in trying to look at long-term effects of the crisis as it is unfolding. One observation of special note is the way in which our creditors now may be driving our central banking policy. For so many years, the U.S. was the one making demands of other nations through the World Bank and IMF. Now, it seems that we are on the receiving end of those demands. I remember Allan Sloane of Fortune Magazine saying something to the same effect on the Charlie Rose show a short time back.

No matter how we slice this thing, it all stinks. I just think that the architects of it should end up with more of that stink splattered on them than those who can least afford to deal with it.

Thursday, September 18, 2008

Modern Hoovervilles?

From Yahoo! News:

In hard times, tent cities rise across the country
By EVELYN NIEVES, Associated Press Writer Thu Sep 18, 1:03 PM ET

RENO, Nev. - A few tents cropped up hard by the railroad tracks, pitched by men left with nowhere to go once the emergency winter shelter closed for the summer.

Then others appeared — people who had lost their jobs to the ailing economy, or newcomers who had moved to Reno for work and discovered no one was hiring.

Within weeks, more than 150 people were living in tents big and small, barely a foot apart in a patch of dirt slated to be a parking lot for a campus of shelters Reno is building for its homeless population. Like many other cities, Reno has found itself with a "tent city" — an encampment of people who had nowhere else to go.

From Seattle to Athens, Ga., homeless advocacy groups and city agencies are reporting the most visible rise in homeless encampments in a generation.

Nearly 61 percent of local and state homeless coalitions say they've experienced a rise in homelessness since the foreclosure crisis began in 2007, according to a report by the National Coalition for the Homeless. The group says the problem has worsened since the report's release in April, with foreclosures mounting, gas and food prices rising and the job market tightening....

I think this might be a sign of things to come. Given our current financial picture, is it likely that government expenditures will increase at the federal, state and local levels to accommodate these additional homeless people? I doubt it.

Wednesday, September 17, 2008

Financial Three Card Monte

Just a bit ago I came across this gem in Yahoo! news:

How We Got Here: It's Housing, Stupid
by Chris Isidore

Thursday, September 18, 2008

The Wall Street crisis has been caused by plunging housing prices. So despite the billions of dollars being thrown at the problem, experts say more trouble lies ahead.

The nation's financial system is in the midst of a massive shakeup and many on Wall Street and in Washington are pointing fingers and looking for someone to blame.

But in the end, it all comes back to one issue - housing.

Earlier this decade, it was much easier to get a mortgage. Home prices soared about 85% from 1996 through 2006 in inflation-adjusted dollars, creating a bubble.

Then the bubble popped. And the fallout isn't over yet, experts say.

In the past two weeks, the government took over Fannie Mae and Freddie Mac, Lehman Brothers filed for bankruptcy and Merrill Lynch sold itself to Bank of America.

If all that weren't enough, the Federal Reserve announced late Tuesday night that it was loaning $85 billion to insurer American International Group....

"The housing correction poses the biggest risk to our economy," Paulson said the day he announced the Fannie and Freddie seizure. "Our economy and our markets will not recover until the bulk of this housing correction is behind us."

I agree that housing, right now, is the most immediate financial problem we face. However, I do not believe it will only take a "housing correction" to set this right. The housing problem is significant of deeper flaws in our economy.

The United States government recently accepted liability for the debt previously owed by Fannie Mae and Freddie Mac, to the tune of some $5.4 trillion. That's 'trillion' with a 't'. Most recently, AIG group became the recipient of government generosity, to the tune of an $85 billion loan. If the government already fails to meet its own debt obligations each year and has to borrow money in order to fully fund the budget, how can it provide the funds for these enterprises? Short answer: it can't.

So, the Federal Reserve has to fire up the presses and throw another $85 billion in cold cash into the system. When this much added "liquidity" enters the system, it makes every other dollar out there worth a little less. Which, in turn, makes most goods and services cost a little bit more.

What happens as the government has to fulfill Fannie Mae and Freddie Mac's obligations? Is it safe to predict that they will service this debt the same way they service all others -- by printing more money? What impact will that added "liquidity" have on our currency?

Furthermore, it's not as if the government is spending this money on anything actually utilitarian. We're neglecting our bridges. We're not investing in upgrades to our outdated and overstressed electrical grid. We're not rebuilding our rail network to help cushion long-distance freight from rising and volatile fuel costs. Instead, we're using it to bail out an industry -- high finance -- whose primary concern seems to be creating money out of nothing.

I can appreciate another side to this argument -- that by the government (meaning taxpayers, you and me) taking on this debt, it is more widely dispersed throughout our financial system. Think of this debt as water -- if you pull the plug from a large pool of water, the level goes down gradually and doesn't pull under nearby. However, in a small pool a vortex can form and pull other objects into it. Taxpayer liability is like the large pool, while corporate liability is like the small pool. If AIG were to fail, then it might pull others down with it. By spreading the risk, serious damage is averted.

However, this assumes that our economy and currency are in good order, and able to weather the storm. I don't think they are, nor do I believe they can. Our national financial pool is getting shallower with each passing year. We're taking on increasing debt every year, at every level from the federal government to individual households. Most of our currency is just that -- debt. This arrangement can persist so long as creditors can expect to get paid. However, if creditors begin to suspect that they might not get paid, all hell can break loose.

Think about it:
A current national debt of $9.6 trillion
Fannie Mae and Freddie Mac debt of $5.4 trillion
War costs of Iraq and Afghanistan, $3 trillion (est.)
estimated by Joseph Stiglitz
includes deferred and future costs
Future unfunded Medicare and Social Security obligations, $50 trillion (est.)
Total U.S. household debt, $50 trillion (est.)

That's a total of $118 trillion of future and current debt in the United States. What happens if more of this debt starts to go into default, as has happened in the popping of the housing bubble? What guarantees that a nation that only produces about 5 million barrels of oil per day will continue to use 20 million in perpetuity? What happens if creditors increasingly lose confidence in our currency?

Confidence is what's keeping us afloat anymore. That confidence appears to be unraveling a bit. Of course, most confidence schemes eventually unravel, whether they be three-card monte or paper currency.

Tuesday, September 16, 2008

The madness that is Chris Matthews

I'm not entirely certain why I do it, but I sometimes slip and flip through the cable news programs during primetime hours. Since I try to look at issues and events through a historical lens, this practice often leaves me cursing at the television and turning it off. Tonight, Chris Matthews was the one who pushed me over the edge.

Matthews was interviewing Mitt Romney and asked him, "Do you trust the current administration to fix this financial crisis?" Romney gave the kind of answer to be expected -- a series of talking points that not only don't address the question, but don't provide any kind of evidence or support. I think Romney's response left me more shaking my head and chuckling than irritating me.

That's where Matthews came in. He rattled off a series of his own conventional wisdom soundbites, most of which I quickly forgot. However, one of the completely unsupported talking points stuck firmly in my mind. Matthews said something close to, "The people look to the chief executive to manage the economy."

I watched an interview with Andrew Bacevich on Bill Moyers' Journal (August 15, 2008) that immediately came to mind in contrast to Matthews' statement:

BILL MOYERS: So, this brings us to what you call the political crisis of America. And you say, "The actual system of government conceived by the framers no longer pertains." What pertains?

ANDREW BACEVICH: I am expressing in the book, in a sense, what many of us sense, even if many of us don't really want to confront the implications. The Congress, especially with regard to matters related to national security policy, has thrust power and authority to the executive branch. We have created an imperial presidency. The congress no longer is able to articulate a vision of what is the common good. The Congress exists primarily to ensure the reelection of members of Congress.

As the imperial presidency has accrued power, surrounding the imperial presidency has come to be this group of institutions called the National Security State. The CIA, the Joint Chiefs of Staff, the Office of the Secretary of Defense, the other intelligence agencies. Now, these have grown since the end of World War Two into this mammoth enterprise.

But the National Security State doesn't work. The National Security State was not able to identify the 9/11 conspiracy. Was not able to deflect the attackers on 9/11. The National Security State was not able to plan intelligently for the Iraq War. Even if you think that the Iraq War was necessary. They were not able to put together an intelligent workable plan for that war.

The National Security State has not been able to provide the resources necessary to fight this so called global war on terror. So, as the Congress has moved to the margins, as the President has moved to the center of our politics, the presidency itself has come to be, I think, less effective. The system is broken....

(Further down in the interview)

BILL MOYERS: I was in the White House, back in the early 60s, and I've been a White House watcher ever since. And I have never come across a more distilled essence of the evolution of the presidency than in just one paragraph in your book.

You say, "Beginning with the election of John F. Kennedy in 1960, "the occupant of the White House has become a combination of demigod, father figure and, inevitably, the betrayer of inflated hopes. Pope. Pop star. Scold. Scapegoat. Crisis manager. Commander in Chief. Agenda settler. Moral philosopher. Interpreter of the nation's charisma. Object of veneration. And the butt of jokes. All rolled into one." I would say you nailed the modern presidency.

ANDREW BACEVICH: Well, and the - I think the troubling part is, because of this preoccupation with, fascination with, the presidency, the President has become what we have instead of genuine politics. Instead of genuine democracy.

We look to the President, to the next President. You know, we know that the current President's a failure and a disappoint - we look to the next President to fix things. And, of course, as long as we have this expectation that the next President is going to fix things then, of course, that lifts all responsibility from me to fix things.

One of the real problems with the imperial presidency, I think, is that it has hollowed out our politics. And, in many respects, has made our democracy a false one. We're going through the motions of a democratic political system. But the fabric of democracy, I think, really has worn very thin.


I completely agree with Bacevich's criticisms of the imperial presidency as presented here. Matthews' comment regarding the President and the economy confirms these criticisms. Congress neither bears nor has any responsibility. Business has neither. Nor do the people. Rather, it is yet another responsibility of the President to ensure that the economy satisfies our endless parade of wants.

Let me be clear -- in no way do I think this absolves the current administration (or the last few, at least through Reagan) for the emergence of an "anything goes, greed is good" culture in high finance. However, our expectation that such hopes and demands could be placed in the hands of one person, and those hopes and demands be fulfilled, is the height of folly. Our institutions of democracy are weaker for it.

Raspberries to Chris Matthews for perpetuating this particularly odious piece of convential wisdom.

On Socrates

There is a reason I picked The Death of Socrates by Jacques-Louis David (1787) as my image. Although he never wrote anything himself, I believe that Socrates is one of the most important and influential figures in the history of human civilization.

Socrates was, from the accounts we still have, a short, portly, unattractive man. He walked barefoot at all times and rarely bathed or washed his clothes. However, he dedicated his life to the pursuit of truth -- truth that could only be arrived at through honest, critical analysis of your perceptions and beliefs. While this pursuit did not endear him to the more prominent citizens of Athens, who were often played for the fool in debate with Socrates, it attracted many dedicated students, Plato the best-known among them. The Socratic method still provides the basis for scholarship in the modern world.

In a world that demands life be lived at dizzying speed with neverending instant gratification, we stop doing the thing that makes us human -- THINKING. We're losing touch with Socrates and his command for critically analying ourselves -- "The unexamined life is not worth living." My hope is that this blog provides a small space for reflection and analysis.