Archive for the ‘Josh’ Category

Sunday, April 26, 2009

Stress Tests: Down the Rabbit Hole
Category: News and Politics
There were many things that were deeply disturbing about the Bush Administration, but perhaps nothing was more so than its willingness to make blatantly false statements in the face of obvious evidence to the contrary. When a government commits itself to upholding obviously false positions, all rational discourse and debate is short-circuited. Once that happens, there is no limit to the atrocities that the government can commit in the name of protecting the public interest.

Whereas it is possible for reasonable people to disagree as to whether it is acceptable to use military force against a country that poses a threat but has not actually attacked us (e.g. Iraq, Iran, North Korea), when Dick Cheney repeatedly asserted that Iraq was linked to 9/11, logic and reason were left without a foothold. How do you argue with someone who states that up is down and down is up? Ordinarily we put such people in mental institutions, but when these people are our leaders, the entire country becomes a nut house. And unfortunately it seems that the Obama Administration is picking up right where its predecessors left off.

Case in point is the current hubbub surrounding the Federal Reserve’s “stress tests” of our nation’s banks. The stated purpose of the stress tests is a reasonable one – i.e. to analyze how the banks will fare in the event of a further deterioration in the economy. However, as we learn more about the methodology of the stress tests, it becomes clear that the whole thing is nothing but an exercise in fantasy every bit as divorced from reality as the most outlandish statements of Bush & Co. A careful reading of a recent article by the Associated Press highlights the many ways in which the Administration is trying to sell a blatantly false bill of goods.

In the second paragraph, the article states that, “Federal Reserve officials held top-secret meetings with bank executives to give them preliminary findings of how each bank would fare if the recession got much worse.” However, in actuality the stress tests look at how the banks would hold up under two different economic scenarios. The first assumes an unemployment rate of 8.8% and a decline in housing prices of 14%. The more negative scenario posits unemployment of 10.3% and a 22% fall in real estate. Later in the article it is pointed out that the actual state of the economy is already close to the latter case. Therefore, the original assertion that the stress tests will reveal how banks will fare if the economy gets “much worse” is obviously false.

The article then goes on to report that the Fed announced that the banks under examination would be required to raise additional capital in order to supplement their reserves against continuing credit loses. However, the Fed cautioned that this should not be taken as a measure of the “current solvency or viability of the firm”. In other words, the government has lent, and will continue to lend, hundreds of billions of dollars to keep these banks afloat, yet the public should rest assured that the companies are solvent and viable. (At the same time, banks are being chastised for their unwillingness to lend. What is glossed over is the fact that simultaneously asking the banks to increase their reserves while also increasing their lending is impossible. The two are in direct contradiction to each other. This is a level of absurdity that would make Lewis Carroll proud.)

The article concludes by discussing the possibility that the stress tests might harm the weaker banks by highlighting their precarious financial positions and encouraging speculators to bet against their survival. However, it goes on to say that, “Friday’s announcement put some of those fears to rest, underscoring that the Fed will not say any bank lacks the reserves it needs to survive (italics added).” In other words, pay no attention to logic and facts – just listen to what we tell you. And, to me, this is the most frightening aspect of the whole situation.

Regardless of whether the government is able to prevent a total collapse of the financial industry, the results of such an all-out assault on the truth could have far-reaching consequences that extend way beyond our current financial problems. Proving himself to be a typical politician, rather than the straight-shooter that we all hoped he would be, President Obama is overseeing a deliberate effort to obscure the truth about the banking industry. One can almost imagine him borrowing the immortal words of Colonel Nathan Jessup…”You Can’t Handle The Truth!!”

Wednesday, April 15, 2009

NASA Sucks!
Category: News and Politics

For those who haven’t been following the evolving NASA/Steven Colbert controversy, let me briefly recap. NASA recently decided it would try to increase public interest in the International Space Station by holding a contest to allow people to vote online and choose a name for a newly built section of the space station. Brilliant self-promoter that he is, comedy-show host Steven Colbert mobilized his large viewing audience to try to get the section named after him. At the end of the contest period, “Colbert” had the most votes by a huge margin. However, the contest rules stipulated that NASA reserved the right to name the section themselves, and last night they rejected the public’s wishes and instead named the section “Tranquility”.

I’m sorry, but I’ve got to call it like I see it. NASA is a bunch of pussies! What possible harm could be done by naming the section “Colbert”? Instead the end result of the whole fiasco will be to reinforce the stereotype of NASA as being filled with a bunch of self-important, humorless eggheads. And what could be better calculated to decrease public interest in the space agency than to run a contest soliciting public opinion and then reject the overwhelming public choice? Come on guys, its not rocket science…

Tuesday, April 07, 2009

I Almost Regret Voting For Obama
Category: News and Politics

The “almost” is due to my firm belief that electing John McCain would have led to World War III. That being said, in terms of the economy, I don’t believe McCain could possibly have done worse than Obama is doing.

Those who read my blog regularly may have noticed that despite supporting Obama in the election, I quickly became critical of him when he took office. I felt somewhat bad about doing so – as if he deserved some kind of “grace period”. So, although I made a number of criticisms, I felt conflicted – like maybe I was being a little too hard on the guy. As of now though, I am convinced that Obama is either a) incompetent, or b) a bought-and-paid-for stooge of the banking industry.

The new Geithner Plan is an unmitigated disaster. I haven’t heard one reasonable defense of the glaring injustices at the heart of this plan. In essence, the plan boils down to an illegal subversion of Congress in order to improperly transfer wealth from the general public to large financial institutions. There are two aspects of the plan that ought to outrage every citizen of this country. The first is how the plan works, and the second is how the Administration is using the FDIC to circumvent Congress.

The essence of the plan is to encourage large financial institutions to make enormous bets which, if they turn out well will earn giant profits, and if they turn out badly will dump the losses on the American public. The plan selects a few large institutions and allows them to buy the so-called “toxic assets”, but it only requires them to put up around 5% of the purchase price (while the companies and the government share the profits 50/50). The government then guarantees that it will absorb 90% of any losses on these investments. (Keep in mind, this opportunity isn’t available to you or me – or even to medium-sized banks – its only for the very largest institutions.)

As an analogy, imagine that I was offered the opportunity to bet $100 on the Super Bowl, but I only had to put up $5 of my own money. If I win, I get $50 (the other $50 goes to the bookie), and if I lose I’m only out my original $5. With such ridiculous terms, I don’t need to be a football expert to make a profitable bet. In fact, I don’t even need to know who’s playing.

So, of course the Geithner Plan will generate a lot of enthusiasm among financial institutions. They are being offered the bonanza of a lifetime. But the truly disgusting aspect of the plan is the way it is implemented at the governmental level.

As everyone knows, the FDIC has one basic function. It insures depositors against bank failures. The Geithner Plan gives the FDIC a function that it was never intended to have. It uses the FDIC as the agency that will backstop the $1 trillion in toxic-asset purchases. The reason for doing so is that it enables the Administration to guarantee the asset purchases without the approval of Congress.

And hey, what about the recent talk of the FDIC itself becoming insolvent? How is a nearly insolvent agency supposed to backstop over a trillion dollars of highly questionable assets? Well, obviously it can’t, but we all know what will happen if push comes to shove. If the FDIC runs out of money, Congress will have no choice but to recapitalize it. The alternative would be financial Armageddon.

Truly, this kind of disregard for our system of checks-and-balances is every bit as blatant as the abuses of the Bush Administration. All I can say is, Mr. Obama, I am very disappointed in you.

Sunday, March 22, 2009

The Intentional Destruction of the Dollar
Category: News and Politics
There’s a lot that doesn’t make sense about the economy these days. The situation is so mind-numbing that an increasing number of Americans seem to be opting to simply ignore it all in the hopes that it just goes away. Most people I know have stopped looking at their account statements, and “bailout fatigue” is nearly universal.

Part of the reason for our collective denial is that we don’t want to come to terms with our diminished circumstances. When the average American’s life-savings has been cut in half, its understandable that people would be reluctant to face the new realities. However, I would argue that there’s something deeper going on. Not only does a clear-eyed appraisal of the situation require people to come to terms with painful facts, but it is also threatening to their basic sanity. How are we to make sense of the idea that the way to solve a crisis caused by excessive debt is by taking on even more debt? Faced with such counterintuitive notions, the rational mind simply turns away.

The latest insanity announced by the government is a plan whereby the Fed will buy over $1 trillion of government bonds and mortgage backed securities. In other words, the government is going to print money and then loan it to itself.

Likewise, on the same day that the Congressional Budget Office released staggering projections of the largest deficits in history, President Obama repeated his claim that he will halve the deficit by the end of his first term. This is double-speak that even George W. Bush would be proud of. Its no wonder that people choose to tune out rather than try to make sense of such absurdity.

There is, however, an explanation for the government’s actions which is logical and straightforward but will never, ever be officially acknowledged.

It is increasingly clear that we have dug ourselves into a hole that we can never hope to dig ourselves out of. Individuals, corporations, and government have borrowed more money than they can ever hope to repay. In such a situation, there is really only one option left open to policy-makers – i.e. devalue the currency.

Currency devaluation (i.e. inflation) is a way of transferring wealth from creditors to debtors. When a nation finds itself so in debt that it can never realistically hope to repay, there is a strong temptation to simply crank up the printing presses and inflate the debt away. An extreme case of this was Germany after World War I. The Treaty of Versailles imposed financial obligations on Germany that it could never possibly meet, so they did the only thing they could do – they printed enormous amounts of money. By the end of 1923, one pre-war Mark was worth one trillion post-inflation Marks. If we did likewise, we could eliminate our entire national debt for about ten dollars.

The actions of the Treasury and Fed make it clear that the government is willing to print any amount of money it deems necessary. A year ago a trillion dollars was an unheard of amount. Today it seems that every week the government pledges another trillion to the latest bailout/stimulus plan. It is the most basic common sense that you can’t print money indiscriminately without destroying its value.

My guess is that all of this is crystal clear to the President and his economic advisers. The destruction of the dollar is already a fait accompli. Its just a question of when. We have poured so much gasoline into the flooded engine of our economy that when it finally does fire, the whole thing will go up in a massive inflationary conflagration. Viewed from this perspective, it is completely understandable why the government would continue to print trillions upon trillions of dollars. If the destruction of the currency is already a certainty, why not print as much of it as you can as long as there are people dumb enough to take it? As long as the Chinese are willing to take our worthless paper, why not let them have as much as they want? As John Maynard Keynes observed, “The creation of legal tender has been and is a Government’s ultimate reserve; and no State or Government is likely to decree its own bankruptcy or its own downfall so long as this instrument lies at hand unused.”

Those who hold US debt are in a catch-22. If they don’t continue to lend us even more money, the value of their holdings will evaporate. So, for the time-being they have kept the money flowing. But even now there are ominous signs relating to the long-term health of the dollar. The Chinese Premier recently cautioned the US government against policies which will further erode the value of the dollar. (The very fact that he’s saying so publicly is highly significant.) Meanwhile, the UN is discussing replacing the dollar as the world reserve currency with a basket of national currencies.

So far, the game of hot-potato continues, but the music will eventually stop, and when it does, anyone holding dollars will have to pay the piper.

Tuesday, March 17, 2009

Meet the New Boss, Same as the Old Boss
Category: News and Politics
Sad to say, but with each passing day President Obama looks less like an agent of change and more like the latest installment in a never-ending series of Washington powerbrokers. This is doubly disappointing, since if there is a silver lining to the current crisis, it is that we have a once-in-a-generation opportunity to fundamentally change the way things are done. So far, all indications are that the Obama Administration lacks the courage and integrity to deliver upon the hopes they raised during the course of the campaign.

Case in point is the omnibus spending bill that the President signed last week. Despite promising repeatedly to veto any budget with earmarks, Obama signed this spending bill containing over 8,000 earmarks. Granted, it would be much more difficult to cobble together a congressional majority without the sweeteners that these earmarks represent, but this is precisely the kind of situation that tests the mettle of a leader. Does he have the strength to hold the line, or will he cave in to the status quo when push comes to shove? Obama could have stood up to the corrupt leaders of his own party (Pelosi, Reid, Frank, etc.) and refused to sign the bill, but he didn’t.

Another example of failing to lead is this week’s populist pandering over AIG bonuses. Yes, it is infuriating for the American public to see executives being rewarded after the enormous amounts of public money that have been pumped into their companies. That being said, the bonuses in question are microscopic in comparison with the real story. In the context of the trillions of dollars the government has already used to prop up the financial system, $165 million is completely insignificant. By turning it into a public firestorm, our leaders are cynically exploiting the public’s inability to comprehend the magnitude of the amounts of money currently being thrown around. $165 million, $20 billion, $1.5 trillion, what’s the difference? They’re all staggeringly large numbers. That being said, there’s a very big difference between a hundred million and a hundred billion, and our leaders are counting on our inability to tell the difference.

Of the money that has been pumped into AIG, over $12 billion has gone to Goldman, Sachs, the company once led by former Treasury Secretary Hank Paulson. The President and the leaders in Congress have nothing to say about this, while they make an enormous stink about bonuses that represent less than 2% of that amount. This is a deliberate and cynical error of omission and emphasis. By making a spectacle out of a relatively insignificant issue, our leaders are hoping we’ll be distracted enough that we won’t notice the hundreds of billions that are being allocated according to a process that is both opaque and riddled with conflicts of interest. In other words, pay no attention to the man behind the curtain…

Thursday, February 05, 2009

Executive Compensation
Category: News and Politics

The more I hear about the specifics of the new bailout/stimulus package, the more I fear that we are squandering a once-in-a-lifetime opportunity to make badly needed changes in our fundamental economic arrangements and are instead indulging in an expensive exercise in populism and pork.

I suppose in any spending bill of this size, a fair amount of pork is unavoidable, but the blatant (and misleading) pandering on an issue like executive compensation is not only a distraction from more important issues, but it is also dangerous.

Prior to the collapse, the best and brightest in the banking industry could hope to earn millions (or even tens of millions) if they made it to the top of their field. Disregarding for the time-being the ethical/moral dimensions of the pursuit of mega-riches, let’s consider the practical consequences of capping executive compensation.

In a society that worships fame and fortune, the financial markets represent one of the only fields in which those not blessed with exceptional athletic abilities or good looks can hope to achieve success comparable to that of professional athletes or movie stars. For an ambitious college senior surveying the landscape of career options, there is an array of possible choices. Those who desire financial comfort but who also value stability and job-security might choose a career in law or accounting. Success in these fields is more attainable than in banking, but compensation is commensurately lower. A good accountant might make a couple hundred grand a year, never a hundred million.

Again, my point is not to judge whether it’s a good thing for the smartest members of our society to be motivated by the hopes of earning big bucks. The point is that the potentially outsized rewards ensure that the banking industry is able to attract people of the highest caliber.

If we now arbitrarily pass a law stating that bank executives’ compensation cannot exceed $500,000 per year, we will drastically affect the incentive structure facing the talent pool available to the industry. If a top-tier financial professional is faced with the option of running a bank with a salary of $500,000 or working for a hedge fund and earning $10 million, its not hard to see that banks will be unable to recruit and hold onto the most talented people. It is beyond foolish to expect that we can make such a change without causing a deterioration in the quality and performance of banking executives.

Furthermore, while the amounts of money earned by top banking executives seem excessive relative to what people earn in other fields, they are not out-of-line in terms of their impact on the bottom lines of their companies. Let’s imagine a bank that makes a profit of $5 billion and pays its CEO $100 million. If having the very best person in the position of CEO is responsible for a 10% increase in profitability (relative to a less talented CEO), the impact of the star-CEO is $500 million, so paying $100 million for his services is a good corporate decision. (Likewise, in an environment where we are seeing banks lose tens of billions, if a top-notch CEO is capable of paring losses even by a few percentage points, it is a good decision for the corporation to pay that CEO whatever it takes to prevent him from accepting some other highly lucrative form of employment.)

Yes, it is infuriating to see bankers taking expensive boondoggles to Monte Carlo or auto execs flying in corporate jets while their companies hemorrhage money, but this should not cause us to hastily make policies that will only further impair the ability of these corporations to recover. Simply capping salaries at $500,000 will only guarantee that we end up with less talented executives trying to deal with the most difficult banking environment of our lifetimes.

All of this is not to say that executive compensation is not in need of fundamental reform. But the simpleminded, populist fix of arbitrarily capping salaries is not the right solution.

The most glaring problem with compensation in the financial field (as well as others) is that tying bonuses to a company’s reported earnings in any given year creates dangerous incentives for executives. On one hand, it rewards reckless risk-taking, since if a gamble pays off the executive responsible can make a pile of money, while if it doesn’t, he can just walk away and get another job. Additionally, it creates incentives for executives, auditors, and ratings agencies to present fraudulent numbers in order to boost short-term rewards. Many of the problems that currently threaten the very survival of the country’s largest banks stem from these pay-related incentive issues. But to just deal with a complex and thorny issue with a simplistic and politically expedient fix like capping salaries at $500,000 is foolish and potentially harmful.

Monday, February 02, 2009

Say It Ain’t So, Barack!
Category: News and Politics

I had a strange experience today. For the first time ever I found myself agreeing with Sean Hannity. It was not a pleasant experience – in fact, it made me feel kinda dirty. But, when he rails at President Obama for standing behind Tom Daschle (nominee for Secretary of Health and Human Services), unfortunately Hannity is right on the money.

Daschle failed to pay over $100,000 in taxes resulting from private limousine services he received. Daschle only remedied the situation once it became clear that Obama would be President and that Daschle might have a chance to serve in the Cabinet. Regardless of whether this was a legitimate mistake, it looks terrible and undermines the credibility of the new Administration.

Given the enormous expectations that swept Obama into office, it was inevitable that some necessary disillusionment would set in. That being said, I’m shocked that the President would expend valuable political capital defending an establishment Democratic Party mainstay like Tom Daschle. I was willing to overlook Tim Geithner’s little tax hiccup, but Daschle’s is more glaring and indefensible. At a time when the American people are being asked to make painful sacrifices in order to put our country back on track, seeing a fat-cat like Daschle skate through a confirmation process simply because his party controls Congress just screams business-as-usual.

As someone who has high hopes for our new President and genuinely wishes him well, it is tempting to give him the benefit of the doubt. But it would also be a betrayal of the principles that Barack Obama built his campaign upon to overlook the fact that lately he is starting to look more and more like a typical Democrat. Where is the new blood in this administration? Joe Biden, Hillary Clinton, Leon Panetta, Larry Summers, Robert Rubin, Tim Geithner? And now we’re being asked to overlook a serious tax violation by a man who personified the divisive partisan politics of the last 20 years. Please, Mr. President, don’t make me agree with Sean Hannity. I don’t want to feel dirty anymore.

Wednesday, January 14, 2009 – 2:07 PM
“Pushing on a String”
Most people had probably never heard this phrase a year ago. It refers to the monetary phenomenon whereby the financial authorities find themselves powerless to stimulate the economy via the normal expedient of cutting interest rates. Ordinarily, interest-rate policy is a viable tool for speeding up or slowing down the business cycle. If the economy is sluggish, interest rates are lowered, and economic activity picks up. If the economy is too active and inflation looms, interest rates are increased, and the economy slows down.

There are times though where the efficacy of interest-rate policy falters (or disappears entirely). If sentiment is extremely negative, it doesn’t matter that businesses and individuals can borrow money at low interest rates; they will still refrain from spending and investing. This is precisely the situation that our economy is in right now. Regardless of how much money the Fed pumps out, the economy stubbornly refuses to respond.

Interestingly, despite Dick Cheney’s recent assertion that “nobody saw this coming”, Fed Chairman Ben Bernanke gave a now-famous speech in 2002 anticipating precisely this set of circumstances and outlining how the Fed could respond to it. The speech earned him the nickname “Helicopter Ben”, after the most extreme monetary measure he described, which was to literally drop money out of helicopters.

What Bernanke didn’t foresee was that sentiment could get so negative that people won’t spend even if money is dropped from helicopters (which is more or less what the Fed has been doing for the last several months). And – a point which virtually every mainstream economist, government official, and media commentator has failed to note – this is not a failure of monetary policy; it is a failure of money itself.

Banks, corporations and individuals are behaving in a perfectly rational manner when they choose not to spend or invest. After all, if you expect continued economic stagnation, why would you invest? And if you expect prices to fall, why would you spend?

Thus we are faced with a tragic paradox – i.e. just at the time when we most need the people who have money to spend it, they face the strongest disincentive to do so. And the reason why this is so is because money as we currently know it is improperly designed and fundamentally flawed.

If you ask an economist for a definition of money, it will typically be described in one of two ways – i.e. either as a medium of exchange or a store of value. In other words, money is expected to facilitate the exchange of real goods while at the same time serving as a tool for storing and preserving wealth.

Although it may not be apparent at first glance, these two functions are not fully compatible. As the German economist Silvio Gesell observed, it is impossible for money to serve as an effective medium of exchange if it is also designed to serve as a store of value. Money that is designed to serve as a store of value will systematically fail to serve its more important function as a medium of exchange.

To see why this is so, let’s consider an everyday phenomenon with which every human being is familiar – i.e. the fact that things decay. Virtually every type of physical matter deteriorates over time – some more quickly than others. For this reason, every producer of real goods and services is under a natural compulsion to sell their wares. Of course they will try to get the best price they can, but when push comes to shove, they have to sell. Just imagine a dairy farmer who refuses to sell his milk because he thinks the price offered is too low. In a couple weeks his product will be worthless. The compulsion to sell is so strong that he will ultimately have to sell his milk even if he takes a loss by doing so (since the loss would be even larger if he held onto his milk).

Money, on the other hand, is under no such compulsion. Holders of money suffer no penalty if they delay their purchases. As Gesell colorfully describes it, “Demand enters the market proudly confident of an easy victory; supply appears dejected like a beggar… On the one hand compulsion, on the other hand freedom; and the two together, compulsion and freedom, determine price.”

In other words, money enjoys an unfair advantage over real goods and services in the marketplace. And it is precisely because money is intentionally designed to serve as a store of value that this advantage exists. If money was intended to serve solely as a medium of exchange, it would be designed in such a way as to subject it to the same compulsion to circulate that applies to all other goods and services. It is the absence of this compulsion that causes money to systematically withdraw during times of uncertainty, thereby exacerbating financial crises. If money was subject to a “penalty to hoarding” just like all other goods and services, supply and demand would meet on a level playing field, and holders of money would not face an incentive to hoard their wealth just at the time when society needs them to do the opposite.

In order to achieve this result, Gesell suggested designing money so that it deliberately loses value according to a predetermined schedule of depreciation. This would create an incentive for holders of money to “use it or lose it” in both good times and bad. (In his time, Gesell proposed accomplishing this by requiring people to purchase stamps which would need to be affixed to paper currency periodically in order to maintain its full value. Given modern computer technology, a far more efficient and less cumbersome method could be designed.)

Obviously all of this would require a fundamental adjustment in the way we think about money. Up until now, money has been viewed as a form of wealth and has been regulated by the private banks that make up the Federal Reserve system. As Richard C. Cook observes in his book “We Hold These Truths: The Hope of Monetary Reform”, money is a creation of the state and ought to be viewed as a public utility, not as the domain of private interests. Just as we have seen how allowing private corporations to control the distribution of electricity can lead to harmful abuses, the same holds true for money.

And, to bring the discussion back to where we started, we should also note that money designed in such a way would eliminate the problem of “pushing on a string”. With money as it currently exists, there is virtually no way for the financial authorities to compel its circulation, as we now see with the Fed Funds rate near zero and the markets still failing to respond. If money were designed along Gesell’s lines, monetary policy would be far more effective in terms of its ability to compel money to circulate. In a crisis like the one we’re currently in, the government could simply increase the rate of depreciation of money. In that way, unlike our current system in which holders of money are behaving perfectly rationally by hoarding money, they would no longer have an incentive to do so. The ability of the government to adjust the rate of depreciation would allow the “penalty to hoarding” to be set at whatever level was required to compel money to start circulating again. The government would then be pushing on a ramrod rather than a string.

Nov 17, 2008 12:49 AM
What If We Let The Banks Fail?
Since the beginning of the financial crisis, one of the things that has been most striking is the unanimity of opinion that large financial institutions cannot be allowed to fail. The conventional wisdom is so one-sided in this regard that nobody (that I’m aware of) has actually gone through the exercise of asking what exactly would be the result if we simply did nothing and allowed the banks to fail. Given the enormous costs we are incurring to prevent this outcome, we have to at least consider the alternative. Would it not be more economical to simply let any bank fail that can’t stand on its own and let the government print money to pay off all the claims of the FDIC?

In broad terms, the banking industry uses three primary inputs in order to fulfill its functions. These inputs are capital, information, and human resources. Obviously much of the first category has been destroyed, but capital can always be rebuilt in time. The other two categories of inputs are largely unaffected by the current crisis. The informational infrastructure of the banking industry is completely intact (and will almost certainly be improved upon as a result of the hard lessons we are currently learning), and the available human capital is undiminished. So, even if the greater part of the banking industry were to cease to exist, new institutions would spring up (and would employ many of the same people – hopefully a little older and wiser now – who staffed the old ones). What would be so terrible about that?

As with a dilapidated house, sometimes the most economical choice is to demolish the existing structure and rebuild a new one from the ground up. At least in this case you know where you stand and your costs are fixed. If you instead refuse to accept reality and go on pouring money into a terminally-flawed structure, there is no end to the amount of money that can be wasted in a futile cause. What if we spend trillions of dollars in an effort to save the banking system but the problems persist? What then?

Our financial authorities seem to be turning a blind eye to the most recent and instructive historical parallel to our current situation. Everyone makes comparisons between the current crisis and the Great Depression, but a more relevant and contemporary example would be the case of Japan in the 1990s. Japan experienced a massive real estate bubble in the 1980s during which the Nikkei stock average reached a high of around 40,000. In 1990 the bubble burst, leaving the Japanese banking industry in shambles. Now, almost 20 years later, the Nikkei stands below 9,000. One of the main reasons for such a protracted period of underperformance is that, rather than allow economic forces to run their inevitable course, the Japanese financial authorities spent years and years trying to prop up an essentially bankrupt banking industry. As a result, the economy remained mired in a recession for the better part of 15 years. Had the authorities simply acknowledged and accepted the bankruptcy of the banking industry and started from scratch, the length of the ensuing recession would almost certainly have been much shorter.

I recently had a discussion with a former colleague in the investment banking industry, and he argued that, in spite of hopes that we have already seen the worst and that things will now start to improve, many existing financial institutions are basically insolvent and will almost certainly get significantly worse. He gave two reasons for believing that the worst is yet to come. First, corporations which have been forced to raise capital quickly have sold their best assets first. This only makes sense, since these are the assets for which there are both demand and observable prices. What is left on the books of these companies is the most toxic, unmarketable assets. Many of these assets haven’t traded in months or years and are therefore marked at prices far above their current value. If these companies are forced to start selling off these lesser-quality assets, the write-downs incurred will be far larger than the ones we have already seen.

The second argument for believing that many institutions (especially hedge funds) are likely to fail has to do with the incentive structure facing the executives of these companies. An ironic consequence of the public outcry against excessive executive compensation is that the best and brightest in the business have greatly reduced incentives to stay and try to turn things around at their present companies. Their compensation is tied to the performance of their equity, and since things have already fallen so far, they know that even if they succeed in avoiding complete collapse, they will never cash in to the extent they had hoped. This creates a strong incentive to walk away and start fresh somewhere else. This trend is already underway in the hedge fund community, and there is no reason to think that it won’t accelerate. So, if we continue to bail out existing institutions, it is likely that we will end up with companies which have sold their best assets and lost their best people. This is yet another argument for taking our lumps now in order to prevent even greater damage down the road.

A final argument for allowing the banks to fail is the message that our current actions send to corporations of the future. If we go down the road of bailing out banks and insurance companies, what is the message that is sent to executives of the future? Businesses will believe that they can always rely on the government to bail them out as a last resort. In an industry that is already based on “playing with other people’s money”, this will almost certainly lead to reduced prudence and less responsibility. In addition, what does it say to non-financial corporations which, in spite of having strong core businesses, are being forced into bankruptcy? Why is it fair that those who caused the problems get rescued while those who were innocent bystanders are left to their own devices?

Conversely, if we simply allow companies to fail, the message will be unambiguous and salutary. Executives in the future will understand that they will suffer the full consequences of their mistakes and their very survival depends on responsible and competent risk management.

All of this is not to say that nothing should be done to support the existing financial industry, but given the enormous cost that is being absorbed by the American public, we owe it to ourselves to at least consider the alternative.

Nov 12, 2008 7:25 PM
Why The Bailout Isn’t Working
Treasury Secretary Hank Paulson announced today that the government will not be purchasing troubled assets from banks, as they had previously planned to do. This is a startling reversal, given that this was the centerpiece of the original bailout package. Such an abrupt about-face is hardly encouraging as it begs the question of what exactly the government has been doing all this time and calls into question whether those in charge really have any idea how to solve our problems.

It is common knowledge by now that the root cause of our financial difficulties is excessive debt. Across the whole economic landscape – from individual homeowners to corporations to the government – everyone dug themselves into financial holes that they are now unable to climb out of. This being the case, doesn’t it seem odd that the government’s solution to the crisis is to borrow even more money to shower upon the financial sector in hopes that they will start lending again? This is like treating a patient suffering from alcohol poisoning by force-feeding him another drink.

Yes, functioning credit markets are an essential part of a modern industrial economy, but we seem to have lost sight of the fact that the ultimate health of an economy is based on individuals and corporations creating, buying, and selling valuable goods and services. Yet virtually all of the money the government is spending on its rescue efforts are aimed at Wall Street rather than Main Street. The credit markets ought to be the servant of the real economy, rather than the other way around.

Does nobody find it strange that, while hardly anyone bats an eyelash at the latest hundred-billion-dollar bailout of a bank or insurance company, we hear nothing of plans for increased public spending on infrastructure, technology, or education? Is it really better use of taxpayer money to pour countless billions into a financial black hole like AIG rather than investing in technology and education which will improve the long-term ability of American workers and corporations to compete in the global economy? What if, instead of spending a trillion dollars to help banks avoid the consequences of their own foolishness, we spent that money on building bridges and roads, developing alternative energy, and retraining American workers with outdated skills?

Forgetting for a moment the question of fairness, let’s consider from a purely practical point of view which approach to rescuing the economy is most likely to work.

All of the measures aimed at repairing the credit markets are based on the presupposition that once banks stop the financial bleeding they will resume “normal lending”, thereby rescuing the economy. The rationale underlying this argument is based on a very questionable assumption. Even if banks are willing to lend, borrowers need to perceive attractive uses for capital or they will have no incentive to utilize the available credit. After all, if someone offered you a zero interest loan to purchase real estate right now, would you do it? Two years ago virtually everyone would have answered this question in the affirmative, but things have changed since then.

In the absence of solid investment opportunities, the government can print all of the money it wants, but it may still be incapable of stimulating the real economy. I would argue that the trauma of the last several months has fundamentally changed public attitudes to debt and that a return to “normal lending” is neither possible nor desirable. Do we really want to go back to a state in which people borrow as much as they possibly can in order to buy bigger TVs and homes they can’t really afford?

If, on the other hand, the government announced that it was going to spend a trillion dollars to repair roads and bridges, build wind farms, and retrain American workers, the stimulative effects would be far more certain. Millions of jobs would be created and those millions of employees would have an increased ability to spend and invest. This seems like a far more effective way of battling the current crisis than pouring money into banks and insurance companies in the hopes that they will return to business as usual.

Sunday, October 12, 2008 – 1:49 PM
Mortgages, Troopergate and Flea Medication
Politicians and commentators on both sides of the political divide have predictably used the current financial crisis to bash their opponents. Democrats point fingers at the Bush Administration, while Republicans blame Democratic lawmakers who ignored calls to rein in Fannie and Freddie. Some blame Alan Greenspan. Others blame predatory lenders.

The truth is there is plenty of blame to go around, and there has been a complete failure of leadership from both political parties. But rather than comb through the minutiae of what went wrong and figure out just who to blame for what, I believe my cats can actually be more instructive than all of the talking-heads on TV.

I am the proud owner of two lovely one-year-old female cats. They are indoor animals and had never been exposed to biting insects prior to last week. I took the girls on their first road-trip to visit my family in New York, and they came back itching like mad. They had picked up a nasty case of fleas.

I was advised by a friend to get Frontline flea medication, so I went to the local supermarket. When I got to the pet aisle I was unable to find Frontline, but there were flea products offered by Sergeant and Hartz. I figured flea medication is flea medication, so I bought the Sergeant product.

Over the next two days the cats’ condition got significantly worse. They were scratching even more than before and were shaking and twitching, so I called my vet. When I told her that I had used the Sergeant product, she told me that I needed to bathe my cats immediately, since the product was toxic to cats. In addition, she said, it doesn’t kill fleas.

I was understandably shocked to hear this news. I’ve bought plenty of products before that don’t work, but I couldn’t believe that a product specifically designed for cats could be toxic to cats. When I did some research online, I discovered that there are numerous cases of people who have had similar experiences. Many pet owners recounted experiences in which Sergeant and Hartz products caused skin irritation, foaming at the mouth, convulsions, and even death. Both companies have received numerous complaints about their products, but rather than fix them, they simply responded by adding a warning to the packaging advising pet owners to contact their veterinarian in the event of an allergic reaction.

Now, I could call the FDA and do some research to find out why such products are on the shelves in the first place, but when I thought about it I realized the explanation is obvious. Sergeant and Hartz are both big corporations with deep pockets, while individual pet owners don’t have the resources to compete in the influence-peddling game in Washington. Therefore these corporations are free to put poison in a bottle and sell it as flea medication, and those who suffer the consequences are just shit out of luck.

It goes without saying that not all claims in advertisements are true. There are different degrees of untruth in advertising. Sometimes the falsehoods are inconsequential, as in the case of a diner that untruthfully advertises the “world’s best coffee”. Other times the untruths can be more harmful, as in the case of my cats. However, regardless of whether there are harmful consequences, the fact is that the public understands that it is being lied to on a regular basis. This may be more harmful in the long-run than any faulty or dangerous product. When we learn to live with untruthfulness, the consequences are dangerous and wide-ranging.

The degree to which the public has become used to being lied to has been on a noticeable upswing in recent years. The signs of this are everywhere. For example, I recently noticed that the “small print” (or “fast talking”) in radio advertisements now sometimes comes before, rather than after, the commercials. Fast talking was always a joke anyway, since it was too quickly spoken to be properly understood, but apparently marketing executives realized that they could guarantee incomprehension by putting it before the commercial so that the listener doesn’t even know what product it refers to. Obviously the advertisers are legally required to disclose this information, but they have become increasingly adept at following the letter of the law while violating its spirit.

The increasing deceptiveness of the American marketplace is one of the leading causes of the financial meltdown. For years I would listen to radio advertisements claiming that homeowners could “save” money by using subprime, rather than conventional, mortgages. The “savings” referred to the hundreds of dollars per month that borrowers didn’t have to pay in the early years of a loan. What the advertisements didn’t mention was that the up-front “savings” came at the cost of ruinous payments in later years. The purveyors of these products were allowed to lie to the public about their toxic products, make a quick buck, and leave the resulting mess to the American taxpayer.

At issue is a principle that is central to a free-market economy – i.e. caveat emptor, or “buyer beware”. Since it would be impossible for the government to monitor and regulate the claims of every company in America, it is thought that the burden ought to fall to consumers to educate themselves and make informed decisions. According to the principle of caveat emptor, it was my responsibility to research pet products to ensure that I didn’t end up putting poison on my cats.

Of course, we acknowledge that there must be limits to the application of caveat emptor. It would obviously not be OK for a company to sell cyanide pills and advertise them as vitamins. But we don’t need to have a government department in charge of going to every diner that claims to have the “world’s best coffee” and fining them if they don’t actually have the world’s best coffee. In a democratic, capitalist society, we must always be balancing our freedoms with the demands of public safety. Unfortunately, at a time when most Americans understand that our own President lies to us on a regular basis, this delicate balance has been thrown badly off-kilter, and millions of homeowners, pets, and others are suffering the consequences.

The presidential campaign is no exception to the increasing trend of untruthfulness. There are endless lies and half-truths told by politicians from both parties – from Hillary Clinton’s sniper fire in Bosnia to John McCain’s claims that the streets of Baghdad are safe. It has gotten to the point where we expect and accept the fact that our leaders are lying to us.

Case in point is Sarah Palin’s alleged opposition to the Bridge To Nowhere. Palin burst onto the national scene claiming to be an opponent of corruption and pork-barrel spending. She repeated over and over again that she had said “thanks, but no thanks” to the bridge. When the details of the bridge project came to light, it became clear that Palin had actually supported the project until it became a national emblem of wasteful spending, at which point she reversed her position. During her interview with Charles Gibson, she was basically forced to admit that her professed opposition to the project was untrue. The truly amazing part, though, is what happened next. Palin returned to the campaign trail and continued to trumpet the “thanks, but no thanks” line as if the interview with Gibson had never happened. Caveat emptor.

Another example of Palin’s embrace of caveat emptor is her handling of the Troopergate scandal. When charges originally surfaced that Palin had abused her power by trying to get her former brother-in-law fired from his job as a state trooper, she said she had “nothing to hide” and would fully cooperate with the investigation. In actuality, though, she did everything she could to hamper the investigation, from refusing to testify to setting up her own competing investigatory body. This so-called “maverick” and “reformer” tried every trick in the book to avoid taking responsibility for her own actions and even went so far as to release her own report to contradict the findings of the bipartisan investigatory body that she had “unlawfully abused her authority”. This would be like having the Sergeant Corporation release its own research stating that its products are safe, despite the obvious evidence to the contrary.

Palin, McCain, Bush, Sergeant, and Hartz are all symptoms of a common illness. Rather than refraining from telling lies or removing faulty products from the shelves, the onus is on the individual to separate fact from fiction. Those who are willing to take the time to research things for themselves will be able to make informed decisions, while those who don’t will continue to put poison on their pets and vote for corrupt “reformers” and phony “mavericks”.

The cats are doing fine, by the way…

Friday, September 26, 2008 – 11:26 AM
The Bailout
The other day I received an e-mail from my uncle asking for my thoughts on the economic crisis and the proposed bailout. Below is his e-mail followed by my response.

———

Josh,

Maybe you can help me. I am trying to apply an aging physicist brain to the current economic situation and I could use some help.

Admitted bias upfront, I tend to see things more positively by reflex.

Premise 1
Inflation is caused by an increase in the “money supply” without a corresponding increase in goods and services causing more money to chase the unchanged supply of goods thereby increasing the price.

Premise 2
The value of “bad” mortgages was part of the “money supply” when the mortgages were good
and therefore marketable. Now that the mortgages are “bad” and unsellable they are no longer
part of the “money supply”, or have radically decreased in value, thus the “money supply” has decreased as a result.

Question 1
If the government prints money to e. g. buy the illiquid mortgages, (for less than 100 cents on the $)is it not just replacing the money which the illiquidity of the mortgages removed, and thus is “neutral” effect on the “money supply”?

Premise 3
The root of the problem is the decline in housing prices which “removes” wealth from the system,
and is thus “deflationary”.

Question 2
Does not the effect of Premise 3 give the treasury room to “print money” to balance it without
increasing the overall money supply and thus being neutral on the inflation front.

Sincerely wanting to understand,

Unc

P.S. Henry Paulson is: A. a socialist B. an idiot C. Someone whose career evidences a solid understanding of the system, and who is a believer in “capitalism”. D. Other (Please specify)

———-

Hey Unc,

I’ve had a chance to think about your questions, and while I don’t have any conclusive answers, I do have some thoughts that might help flesh out the picture a bit.

For starters, I will observe that your premises/conclusions are based on an oversimplification that is typical of most mainstream discussion of economics – i.e. considering economic phenomena in terms of broad homogeneous categories rather than as aggregations of an infinitude of discrete and varied elements. For example, when the government measures GDP, no distinction is made between a dollar spent on a TV-set and a dollar spent on education, although obviously their effects on the economy are very different. Of course, we have to lump together many disparate things in order to measure them, but the fact remains that according to this type of analysis, we could redirect every dollar currently spent on education to providing children with cigarettes, and the economy would be just as “healthy” in terms of GDP.

The point is not to argue against using the standard tools of macroeconomic analysis. Obviously it would be impossible to quantify the consequences of every individual transaction in an economy, and we must resort to abstract techniques if we want to be able to measure anything at all, but we must also avoid falling into the trap of mistaking man-made concepts like “GDP” and “money supply” for the actual economy.

So, when we talk about the “money supply”, what we are really talking about is an infinitely varied collection of instruments which have potential purchasing power. A dollar hidden under the mattress of a miser does not impact the economy in the same way as a dollar in the hands of a drunk at a blackjack table, but from the point of view of a monolithic concept like “money supply”, the two are indistinguishable. And, while we are all familiar with the big-picture monetary hazards called “inflation” and “deflation”, in actuality what is harmful is monetary instability in general. In fact, the very worst monetary scenario is “stagflation” in which aspects of inflation and deflation occur simultaneously. [For a more detailed discussion of money and the consequences of monetary instability, see my article entitled “American Economy: The Veil of Money”.]

So, while it is conceivable that the government could exactly offset the amount of money that has been wiped out by the credit crunch and thereby leave the “money supply” unchanged, this doesn’t mean that the result wouldn’t still be catastrophic. For example, the fact that the government is creating money by buying bad debts from banks is of little consolation to the family that is losing its home.

Another way of thinking about the economy is by way of metaphor. I like to think of the role of money in an economy as analogous to that of blood in a physical organism. Blood flows in different ways throughout all parts of an organism, and the overall health of the organism is dependent not only on the quantity of blood but also on it flowing properly. Maladies occur whenever the flow is too fast or too slow or impeded or misdirected. This metaphor is useful for addressing your question about why the government can’t just print an equivalent amount of money to the amount that has been destroyed in order to achieve a neutral effect on the economy. It would be as if we took a trauma patient who has lost a lot of blood and gave him a massive transfusion without knowing his blood type (although, whereas a random blood transfusion might end up working just based on blind luck, in the case of the economy, since there is an infinite number of “blood types”, a random transfusion cannot possibly work).

Another metaphor that I like to use when thinking about the role of money in an economy is to visualize a fertile river valley in the middle of a desert. The volume of water in the river determines how far in either direction crops will grow. So, for example, while in a drought year crops might only grow right next to the river, in a year with abundant rainfall the margin of cultivation will lie at a greater distance from the river. Now, let’s imagine that the flow of water is suddenly increased by artificial means. This will allow crops to be grown over a larger area of land than usual for as long as the artificially large flow is continued, but as soon as the unsustainable flow is interrupted, all of the crops that ordinarily would never have sprung up in the first place will wither and die.

I would liken the monetary policies of Alan Greenspan to the artificially high river. Rather than allow the boom & bust of the dot.com bubble to run its course, Greenspan turned the spigots wide open and let the river flow at an abnormally high rate that averted short-term pain but assured much greater destruction later on. All you have to do to see this with your own eyes is to take an airplane flight into Las Vegas (or Phoenix, or Miami, or Los Angeles…) and look at the massive number of housing developments in various stages of completion around the margins of the city. These developments are the equivalent of the crops that under normal circumstances never would have sprung up in the first place. As a result of artificially abundant money all of this excess housing stock has come into existence and must now be reckoned with before we can get the economy back on a sound footing. And simply printing money will not remedy the fact that the economic organism developed along unsustainable lines.

All of that being said, I am not arguing against the use of fiscal and monetary policy to deal with the current crisis. I am just not optimistic about our chances of success. I believe we will be unable to avert a crisis for two reasons.

First, to use yet another metaphor, imagine that the job of the financial authorities is to steer a ship through a winding channel. One side of the channel represents unemployment and economic stagnation, while the other side represents inflation and “irrational exuberance” (to borrow a Greenspan-ism). Under ordinary circumstances it is a difficult but manageable task to keep the ship safely within the channel and not to err too badly in either direction. However, the steering mechanism of the ship is highly imprecise and cumbersome. Much like steering an actual ship, you must always be thinking ahead and compensating before your errors become evident. If you fail to stay ahead of the curve, you have to resort to increasingly risky maneuvers in order to avoid harmful divergences, and each of these risky measures makes the next maneuver that much more difficult to execute safely until a point is reached at which there is no way to avoid a painful crack-up.

I would argue that this is the position that Bernanke and Paulson find themselves in right now. They are steering a ship that is careening wildly in an ever narrower channel. The truth is that most of the blame for the current situation lies not with Bernanke or Paulson but with their predecessors. Bernanke and Paulson could be the most intelligent, upright people in the world and still fail to avoid a collapse. Personally I don’t have a strong opinion one way or the other as to the abilities or integrity of either one, although I think it is worrisome that Paulson is one of the people who profited most from the abuses which caused the crisis in the first place. Putting Paulson in charge of the bailout is like a bank hiring the best safe-cracker to run its security department. He might in fact be the best guy for the job, but you have to question his motives, and with the kind of absolute, non-reviewable power the current plan seeks to give him, I wouldn’t take it for granted that he’ll do what is in the best interests of the average American.

Add to all of this the fact that we are in the middle of a presidential election (which means that most parties in Washington are just as concerned with their own political futures as they are with the state of the economy), and I just don’t see much cause to be hopeful that they will be able to thread the needle and come up with just the right set of solutions to avoid a painful and protracted crisis.

What more do you need?

The ineptitude.

I would refer you first, to today’s stock market performance. Next, I’d like to point you to the likely failure of AIG and WAMU. Our nation’s largest insurance company and largest S&L respectively. Wall street will break a few records this week. Last but not least, I would have you read the last two blogs by my guest contributors, Josh and J.

The ugliness has begun.

The American economy and therefore that of the world, is a mere sigh away from spectacular collapse not seen since the towers on 9/11. Repercussions not felt since the Great Depression.

Now, who are you voting for?

We got trouble, right here in River City.

Here’s a big ass truth for you. The war is no longer an issue of morality and justice, it’s all about the Benjamins. For years we haven’t been able to afford this reasonless war. It’s been waged on credit, while contactors stink atop piles of filthy lucre. Fom now on, everyday it’s allowed to continue, is a guarantee of a dark day to come for every citizen in this country from the upper middleclass on down.

Just today Doubtfire said the fundamentals of the American economy are sound. Boys and girls, this man is an idiot. He’s either in denial or lying. The fundamentals of our economy are imploding you jackass. The banks are failing you moron.

McCain has admitted not knowing much about the economy and his running mate lies about earmarks while overseeing a cash cow of a state. The most government money per capita of any state in the union. Doubtfire, along with Phil Gramm, is the king of deregulation. From the housing bust, to the debt and the buckling of historied financial institutions, deregulation is the catalyst. Merrill fucking Lynch disappeared today. Remember the Keating Five? The original Enron.

Shut up, I know he was exonerated but he was in past his elbows. He got slimed. Got some on his face, gave him face cancer.

By the time we next inaugurate a President, our faces will have become familiar with the canvas. The question has become not so much about the fittest to be Commander in Chief, but rather about which team is best able to get us back on our feet.

He will begin to slip in the polls. The Republican Rovenesque juggernaut didn’t anticipate this particular strain from the virus of fear they so carefully nurture. Clearly, these asshats did not position adequately for the advent of cleaning up their own mess BEFORE leaving office.

What?

They were gonna just dump it on whoever. They got behind McCain because he’s more profitable and he mitigates the chances any of them will serve time. Either way, they’re cool. You can tell they don’t give a mad fuck. No worries.

They didn’t plan for the house to be on fire while they were in it though. They pass out marshmallows with a nervous grin, a sheen of sweat on their faces.

Boil and chop kids, boil and chop. Tell me you’re on the motherfucker.

Something wicked this way comes.

Drinks for my friends.

Sunday, September 14, 2008 – 10:53 PM

Lehman, Bear, Freddie, Fannie: What Does It All Mean???
With the ink not yet dry on the massive bailout of Fannie Mae and Freddie Mac, today Lehman Brothers is expected to announce its bankruptcy, making it the second of the top ten American investment banks to go under this year. The numbers involved are so staggering that it is difficult to put them in perspective. How are we to make sense of a $10 billion loss, a $100 billion loss, a $1 trillion loss? For most people these numbers are beyond comprehension, and many Americans are left scratching their heads wondering what it all means.

As John Maynard Keynes – the greatest economist of the 20th Century – remarked after World War I, “The vast expenditures of the war, the inflation of prices, and the depreciation of currency, leading up to a complete instability of the unit of value, have made us lose all sense of number and magnitude in matters of finance. What we believed to be the limits of possibility have been so enormously exceeded. And those who founded their expectations on the past have been so often wrong, that the man in the street is now prepared to believe anything which is told him with some show of authority, and the larger the figure the more readily he swallows it.”

The media and government tell us (with as much show of authority as they can muster) that the choices we currently face involve trade-offs between private interests and American taxpayers. This is a misleading oversimplification. After all, when the government backed the $30 billion takeover of Bear Stearns, our taxes didn’t go up. (In fact, the government sent us all a nice tax rebate check right around the same time.)

It is basic common sense that we can’t spend hundreds of billions of dollars on wars while simultaneously bailing out banks without a corresponding increase in taxes. The US government owes almost $10 trillion. It’s the biggest debtor in the history of the planet, so what does it really mean when the Treasury offers to lend money to failing financial institutions? Where does this money come from?

The answer is that the US government has the power to print money, and they have been doing so at an ever increasing rate in order to hold off the financial tsunami that threatens to sink the entire economy. The problem is that doing so does nothing to solve the problems that caused the tsunami in the first place and only makes matters worse in the long run.

So, in reality the trade-off involved when deciding whether to bail out a bank is not between private interests and taxpayers, but rather between debtors and creditors. There is nothing stopping the Treasury from printing $1 trillion every day. With that amount of money they could bail out every bank in the country. Of course, simply adding indiscriminately to the money supply (without a corresponding increase in production of real goods and services) would lead to a massive fall in the value of the currency (i.e. inflation).

Herein lies the real trade-off involved when the government prints money to bail out debtors (whether they be huge investment banks or millions of struggling homeowners). Since debts are denominated in dollars, they must be repaid in dollars. But no one ever said that the value of the dollar must remain the same between the time a loan is made and when it is repaid. If the government decides to drastically increase the money supply in the meantime, anyone who borrowed money will be repaying their debts with depreciated dollars. Thus inflation amounts to a windfall for debtors at the expense of creditors.

Since it is becoming increasingly obvious that individuals, corporations, and the US government have borrowed more money than they can ever hope to repay, the temptation is very strong to debase the currency. Its much more politically expedient than to institute the massive tax increases that would be required to balance our national finances. People don’t like tax increases and vote against them, but how do you vote against inflation? As Keynes said, “There is no subtler, no surer means of overturning the existing basis of Society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner than not one man in a million is able to diagnose.”

Just consider the uproar over rising gas prices. Everyone in government and the media tells us that it is due to increased Chinese demand, stagnant production, or speculation. Did they ever stop to think that maybe the value of oil hasn’t been going up so much as the value of the US dollar has been going down?

Of course, the financial authorities will always pay lip service to “maintaining a strong dollar”, but actions speak louder than words. For every problem we face today, the government’s response is the same – just print more dollars. The actions of the government make it abundantly clear that they are willing to sacrifice the dollar in order to avert a massive wave of defaults. Unfortunately, the ones who will pay are those who behaved responsibly – those who worked hard, avoided debt, and saved.

And, paradoxically, this state of affairs gives people more incentive than ever to act irresponsibly. If we know that the US government is going to cause the dollar to depreciate severely, the sensible course of action is to run out and borrow money to purchase real assets. After all, if the dollars we have to repay will be worth a fraction of what they’re now worth, that house, car, or gold coin will still be worth a house, a car, or gold coin.

This observation also sheds light on another aspect of the “credit crunch” that the government and the media never talk about. We are told that all of a sudden banks have “tightened up their lending standards”, and this is to blame for the horrible state of the real estate market. Could it also be that those who have money to lend are wising up and don’t want to lend money at 6% if inflation is going to run 10% or higher? (If there’s anyone out there who wants to lend me some money for 10 years at 6% interest, please get in touch!)

As Keynes observed, there is “an almost unbroken chronicle in every country which has a history, back to the earliest dawn of historic record, of a progressive deterioration in the real value of the successive legal tenders which have represented money… The creation of legal tender has been and is a Government’s ultimate reserve; and no State or Government is likely to decree its own bankruptcy or its own downfall so long as this instrument lies at hand unused.”

09/01/08 7:01AM
Sarah Palin: Government Corruption Up Close & Personal
As more information comes to light about Sarah Palin — the “reformer” Governor who supposedly “took on corruption” in state government — a fascinating recording has surfaced of a phone call from Palin’s office in which direct pressure is brought to bear on the Police Department to fire State Trooper Mike Wooten.

By way of back-story, Wooten was married to Palin’s sister, and the couple went through an acrimonious divorce. Prior to Palin’s election as Governor, the Palin family presented a list of 14 accusations against Wooten to the Police Department (including using his patrol car to pick his kids up from school and illegally shooting a moose). The charges were investigated, and Wooten was given a 10-day suspension.

When Palin took office, she, her husband, and her staff began putting pressure on the Commissioner of the department, Walt Monegan, to fire Wooten. Dozens of communications were made to the Department by the Mayor’s staff. Monegan resisted the pressure and did not fire Wooten. Monegan was subsequently fired from his job as Police Commissioner.

When allegations were made that Monegan had been improperly terminated, Palin initially denied that she or her staff had put any pressure on Monegan. (She then changed her story once recordings surfaced showing members of her staff directly pressuring police officials to fire Wooten, at which point she claimed that the calls were unauthorized.)

Following is a link to a recording of a phone call between Frank Bailey (the Mayor’s Director of Boards & Commissions) and Lieutenant Rodney Dial of the Public Safety Department. Its fairly long, so readers might not want to listen to the whole thing (although if you have the time, its a fascinating case study in the slimy methods by which public officials exert pressure without actually saying anything incriminating).

Recording of Phone Call Between Frank Bailey and Rodney Dial

Excerpt: After a lengthy discussion of all of the reasons why Wooten should not be kept on as a trooper, Bailey (the Mayor’s Director) says to Dial (the police lieutenant), “Todd and Sarah [Palin] are scratching their heads, ‘Why on earth hasn’t this, why is this guy still representing the department?’ He’s a horrible recruiting tool, you know.” Dial assures Bailey that the department wants to do anything it can to keep the Mayor happy. Bailey’s response is an example of classic back-room political sleaze:

Dial: You know, its very important for us that the Governor have a good opinion and impression of the [police] department. I mean we care very deeply about what she thinks about the department. And, you know, I don’t want it to appear that we don’t.

Bailey: You know, you know I appreciate that so much, and I’m telling you, honestly I mean, she um, you know she really likes Walt [the Police Commissioner] a lot, but on this issue, she feels like its… she doesn’t know why there’s absolutely no action for a year on this issue. Um, its very, very troubling to her and her family. You know, I can definitely relay that. You know?

Dial: Well, um, please tell her that, you know, I certainly am concerned, and I will immediately get on the phone after we’re done and see if there’s something that the department does not know about this, um something more that can be done, maybe some additional information that you don’t have that I can pass on.

——–

Hmm, on second thought, maybe Palin actually does have all the “experience” she needs to be Vice President…

note from admin:
This is a guest blog that originally included a hyperlink. I’m a smartard so it was fifty fifty. Here’s a a cut & paste for ya.

08/29/08 7:04PM
The Cynicism Of John McCain
I’ve never bought into the “experience” argument with regard to the presidency. There is no job on the planet that can adequately prepare someone to be President, so no one can be considered truly experienced for this job. Good judgment and values are far more important in a presidential candidate than experience. After all, look at all of the experience among the members of the Bush Administration, and look at the horrendous mess they have gotten us into.

But, the experience argument is really beside the point with regard to McCain’s selection of Sarah Palin as his running-mate. What this decision demonstrates beyond a shadow of a doubt is that John McCain has no integrity whatsoever and will do or say anything in order to get elected. McCain has spent the last few months making the argument that Barack Obama is “dangerously inexperienced” and that electing him would put the country at risk. How can he then turn around and put Sarah Palin (a woman with zero experience in national politics and a grand total of 2 years experience as the Governor of Alaska) a heartbeat away from the presidency? There is one (and only one) explanation for this unexpected move. John McCain is a pure politician and believes that putting Palin on the ticket will help him with key demographics that he needs to win in November.

This conclusion should come as no surprise to anyone who has followed McCain’s career over the years. The fact that McCain has been able to reinvent himself as a “maverick” and “straight talker” is one of the most impressive PR jobs in recent history. This is a man who was investigated and cited by the Senate Ethics Committee for interfering with a federal investigation of Lincoln Savings & Loan – a bank which eventually went bankrupt and cost the American taxpayers billions of dollars. Five Senators (the infamous “Keating Five”) were cited and investigated in the matter – three of them had their careers ended, while one of them re-branded himself as a “straight-talker” and is now the Republican nominee for President.

The only thing that is surprising about McCain’s selection of Palin is that he believes the American people will either not notice or will overlook the blatant hypocrisy and political opportunism that this move so clearly demonstrates. Does McCain really expect us to believe that his decision was motivated by the desire to select the most qualified person for the job of Vice President?

The selection of Palin is obviously motivated by two factors. First, many recent polls have indicated that a large percentage of Hillary Clinton’s female supporters have not lined up behind the candidacy of Barack Obama. McCain’s selection of Palin is an obvious ploy to try and win over feminist voters who feel slighted by Hillary’s loss. McCain supporter Mike Huckabee stated today, “Governor Palin … will remind women that if they are not welcome on the Democrat’s ticket, they have a place with Republicans.” What could be more simple-minded and cynical than this statement? (“Hey you disgruntled women, never mind that one candidate is for the war in Iraq and one has been consistently against it, never mind that one is for universal healthcare and one is against it, just vote for us because we put a woman on the ticket!” Man, they must really think the women they’re targeting with this argument are stupid. If I was a woman I’d be enraged by such an obvious insult to my intelligence.)

The second factor is McCain’s need to compete with the “historical candidacy” of Barack Obama. McCain fears that the standard ticket of two old white guys isn’t going to cut it against a candidacy that has captured the imagination of the world. So, what does he do? He goes out and tries to create his own “historical candidacy”.

There is nothing daring or “maverick” about this move. All it does is confirm the fact that John McCain is the ultimate Washington insider. He has been playing the game for decades and will stop at nothing in pursuit of the brass ring he’s had in his sights for so many years. John McCain is the embodiment of the cynical Washington status quo, and anyone who believes that he would provide anything but “more of the same” is simply not paying attention.

Of all that I read on myspace, this guy is always above it. He’s sharp, knowledgeable, original and consistent. I’m introducing him to you because I admire him and his thinking. I intend to post him regularly. Look for him under “Josh”.

What follows is his first contribution to brainspank:

Tuesday, August 19, 2008 – 12:26 PM

Hell Hath No Fury: The Legacy of Hillary

I truly thought I had written my last piece on Hillary Clinton once it became clear that Barack Obama would be the Democratic nominee for President. That was until I read today that 28% of Clinton’s primary voters don’t plan to vote for Obama and 18% of her female voters plan to vote for John McCain. At the risk of being labeled a sexist (it wouldn’t be the first time), I have to wonder whether disgruntled women are really willing to be responsible for the end of the world.

If I had an opportunity to converse with a member of this 18% (I don’t know any personally), I would ask her if it is really more important to avenge her mistreated sex than to avert World War III. I thought men were the ones who are supposed to be self-destructively stubborn, but if these 18% tip the scales from Obama to McCain, we men will at least be able to enjoy the vindication in knowing that women are capable of matching us, if not exceeding us, in pig-headedness.

In a broader sense, this is not about feminism at all; it is rather an example of a larger phenomenon which I believe is the greatest source of evil in the world – i.e. group identification. Whether it be patriotism, racial solidarity, school spirit, or any of countless other examples, we are taught from the cradle to the grave that it is a good thing to support those who are like us against those who are not like us. In fact, what could be a better example of this mode of thinking than the nationalistic orgy of the Olympics that we are currently witnessing? Why does is matter whether the US has more medals than China? Why should we root for an American athlete over a Russian athlete? What if the American is an asshole and the Russian is a nice guy?

Likewise, anyone who has the audacity to argue that an Iraqi life is of equal value to an American life is immediately branded as “un-American”. How anyone can hold such a belief and simultaneously claim to believe in a God who created heaven and earth is beyond me.

There is nothing wrong with being proud of one’s country, race, class, sex, etc., but when one crosses over to giving preferential treatment to members of the “in-group”, harm is necessarily done to everyone else who is not a member of the preferred group. (For a further discussion of this subject, please see my earlier pieces “Anti-Semitism and Jewish Solidarity” and “The Money Lender”.)

If this world is going to save itself, it will not be due to the efforts of any specialized interest-group, whether it be the labor movement, the women’s movement, the pro-choice movement, the pro-life movement, or any other movement. The very basis of all of these movements is fundamentally flawed. As a result, despite the best of intentions, they all serve to perpetuate the struggle of human against human, and by doing so they threaten to lead to the eradication of the human race. Only by moving beyond all forms of group-identification and truly embracing the “brotherhood of man” will we have a chance of drawing back from the brink and saving ourselves from the destruction that seems more likely with every passing week.

So, to those 18% of female Hillary supporters, I beg you to reconsider your stance. To allow your dedication to your “in-group” to cause you to withhold your support from Barack Obama (who you know damned well is a far better choice for President than John McCain), would be a tragic instance of cutting off your nose to spite your face. Like you, I look forward to the day when race and sex will be a non-issue in selecting our leaders, but if you pursue this goal from the limited perspective of group-identification, there may be no future at all for man, woman, black, white, American, Iraqi, Russian, Georgian…