Weekend Economists Hogmanay: Day 2 Jan. 2-3, 2010

[Demeter]

That's the second time I've typed the New Year's number, and I get such a lift from it. Was 2009 really that bad? On the national and international scene, especially the economic side, You Betcha! (to coin, or rather, PURLOIN a phrase).

On a personal level, 2009 was a great improvement over 2008, in spite of the Kid's emergency surgery. I'm on a comeback, folks! Just wish I were 10 years younger and still hopeful. Hope that 2010 is a comeback year for you all, too!

So instead of mourning and bemoaning our losses, let us celebrate what we held onto, and achieved in spite of them all: the fraudulent banksters, the war criminals, the deluded and delusional, and of course, the morans. (I realize that Moran is a real family name, so please note that I cast no aspersions on any member of that great family, unless they are voting GOP or attending later-day Tea Parties.)

This thread continues from the original thread, which may be found at:

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=103x506639

[Demeter]

1. Lowlights of a Downer Year: Dave Barry on the money, madness and misery of 2009

http://www.washingtonpost.com/wp-dyn/content/article/2009/12/18/AR2009121802219.html

Dave Barry made the Washington Post! I am NOT making this up! Way to go, Dave!

[Demeter]

2. Tom Tomorrow Also Did a Two-Part Retrospective

http://www.salon.com/entertainment/comics/this_modern_world/2009/12/21/this_modern_world/index.html

http://www.salon.com/entertainment/comics/this_modern_world/2009/12/28/this_modern_world/index.html

[Demeter]

3. And Dilbert Hit My Funny Bone This Morning

http://dilbert.com/dyn_file/str_strip/77972/gif/strip.print/

[Demeter]

15. New Year’s Resolutions from the Nation's Capitol

http://outsidethe-cardboard-box.tumblr.com/post/310175975/new-years-resolutions-from-the-nations-capitol

a FAR TOO PLAUSIBLE PARODY FROM "Outside The (Cardboard) Box"

[Sherman A1]

7. I am laughing so hard I am crying!

This was great! Thanks for the link!:yourock:

[Demeter]

10. You Are Welcome. Dave Does That For Me, Too

[Tansy_Gold]

17. I think Dave reads SMW and WEE -- a brief excerpt

from page 3:

"To correct this situation, some congresspersons propose a 90 percent tax on the bonuses, followed by beheadings, followed by the passage of tough new financial legislation that nobody in Congress will read or understand."


:rofl:



Tansy Gold

[Demeter]

20. Tansy Gold, I Must Confess, It's Not My Original Idea

I'm just a classically-trained engineer, who sees no reason to reinvent the wheel, or Medicare, or any other perfectly obvious solution to a modern problem...

[Po_d Mainiac]

34. Wheel out the FRSP...Talk about tried and true solutions! n/t

[Ghost Dog]

54. Here you go (wheeling out):

http://www.youtube.com/watch?v=nrdl4ijru8o

Fuck the masters, right?

[Tansy_Gold]

56. Aye. n/t

[Ghost Dog]

72. Aye. n/t

[Demeter]

4. In Local News, It's 9.8F Out There

At last night's party, I had the ineffable pleasure of being seated next to, and making conversation with, a double-amputee diebetic Mensan and Republican.

I should have been paid for my efforts at grace under fire. But the food was good, and it was above freezing when we got there, although it had already dropped to 16F when we left 2.5 hours later.

I felt positively genteel, searching for safe topics of a general nature, responding politely, biting my tongue, drawing out my dinner partner. It was so much like those period pieces one enjoys in film and literature: canny female indulging cantankerous male with her polite attention in a public setting from which she cannot graciously escape.

Pity had a lot to do with it. And the food was good.

Well, having done my kind deed for the year, it's onward with the machete. I will NOT be so forbearing to those who think they have us in their ultimate power!

[Tansy_Gold]

31. It's gonna be 75 here today.

not a cloud in the sky.

:hide:



TG

[kickysnana]

32. We might get up to 0 F n/t

[Po_d Mainiac]

35. Did the conversation

Cover healthcare costing an arm and a leg, or that the opponents to reform didn't have a leg to stand on? :spank:

[Demeter]

37. Since You Ask---

He confided the following items to me:

He has lots of money in the bank

He has guns in his house and knows how to use them

The GOP is never going to win if all they do is say NO (but no comment on Sarah Palin, which I raised as a topic (or red herring))

Women are genetically programmed to be depressed. He was probably leading up to complaining about the women in his life, but I short-circuited by declaiming that it was all situational depression brought on by the fact that no matter what a woman does, she cannot win.At least, not by this guy's standards.

He's suing his siblings over his mother's estate--and she's been dead 20 years--because he wants the ocean-front property in Maine (so beware, my dear!)

Remember that I am sitting there with my severely disabled Kid, trying to steer the conversation to something more edifying for tender and not fully cognizant ears.

And he shows signs of that trauma, that gut-wrenching fear, that is supposed to be characteristic of those predisposed to the Right wing fascist Leader/Follower folie a deux.

Definition: "Folie à deux" refers to a paranoid or psychotic condition shared by two persons, usually as a result of influence by one upon the other, and rarely as simultaneously developed delusions. When a paranoid belief, delusion, or hallucination is shared by a large number of individuals at one time, it is referred to as "mass hysteria".

I learn more doing this blog than I've learned any other way (except building my solar house).

I was also attacked concerning what I do, as a profession. He had to brag about his entire family. It was in reality, disgusting.

[Po_d Mainiac]

53. Ouch!! Wunner if the frontage is near Walker's Point? n/t

[Demeter]

62. I didn't ask for details, sorry

He said something about about a Golden River underground that made the well water superior, if that helps. And spitting into the ocean off a cliff, through the living room window, which was also gross.

I hate it when somebody lives out the ugly stereotype of his "class", and one realizes that some stereotypes are fully based in reality.

[Demeter]

5. JJ’s 36 favorite outrages of 2009

http://jaundicejames.com/2009/12/31/jj%E2%80%99s-36-favorite-outrages-of-2009/

"This began as one of those typical top ten lists you see popping up all over the political websites this time of year. But then I got to thinking about all that’s really happened this year and it became clear that this would have to be a much longer list. I mean, golly-gee, George Bush had such a long time in office in which to screw everything up, so it’s not surprising, then, that the first year we have a Democratic President after him – not to mention our first black President – is going to be one doozy of a year. (I know I feel a little bit dizzy, don’t you?) And that doesn’t include the surprises I’ve thrown in, that were unrelated to presidential politics, but an outrage all the same. Once I made peace with the fact that it would be a lengthy list, I was able to assemble a collection of all my favorite outrages of the past year.

I began with the least outrageous, least surprising, least interesting, least earth shattering and ended with my favorites – the ones that had me shouting obscenities and waving my arms. Now, I know that not everyone will agree with the content or order of this list. It may not contain all, or even the greatest WORST outrages of 2009, but these are the ones that were highest on my radar; these are the ones that really stuck in my craw.

So, here it is. Remember and weep:..."

CONTINUES AT LINK

[bread_and_roses]

6. Reading yesterday's entries I felt so grim

that I went searching for Michael Parenti, because a recording of him from wayyyyy back was featured on TUC radio and I was reminded that I've been meaning to buy his "Assignation of Julius Caesar" to take me far, far away from "In These Times." I ended up reading the first chapter of his "Against Empire" which is available on his website http://www.michaelparenti.org/Imperialism101.html and as I read it I was thinking that if you just replaced "nation" with "class" it could describe what's been happening to us:

By "imperialism" I mean the process whereby the dominant politico-economic interests of one nation expropriate for their own enrichment the land, labor, raw materials, and markets of another people...in this country persons who talk of U.S. imperialism are usually judged to be mouthing ideological blather...It creates a world after its own image." The expansionists destroy whole societies. Self-sufficient peoples are forcibly transformed into disfranchised wage workers. Indigenous communities and folk cultures are replaced by mass-market, mass-media, consumer societies. Cooperative lands are supplanted by agribusiness factory farms, villages by desolate shanty towns, autonomous regions by centralized autocracies.

Welcome to our present and by all indicators, our future.

(I realize this is not exactly in the spirit of your OP in this Day 2 thread....I'll try to come up with something less moaning and bemoaning and more celebratory later)

[Demeter]

8. Don't Worry, the Moaning and Bemoaning Are Next

I just wanted to open with a few jokes, in the traditional Toastmaster style...

[Demeter]

9. China: A Window on the Inscrutable East

China has become the elephant in the living room, and daily making the headlines in the financial world.

China news and commentary goes here.

For topics started in yesterday's thread, I will reintroduce the categories in this one. No sense hopping back and forth; my computer would probably crash.

[Demeter]

11. Wen dismisses currency pressure

http://www.ft.com/cms/s/0/3069c326-f2e5-11de-a888-00144feab49a.html

Wen Jiabao, China’s premier, has said Beijing would not give in to foreign demands for its currency to strengthen, taking an increasingly defiant tone amid mounting international pressure.

In an interview published by the Xinhua news agency on Sunday, Mr Wen said some of the demands for China to let its currency appreciate were an effort to contain the country’s development.

“We will not yield to any pressure of any form forcing us to appreciate. As I have told my foreign friends, on one hand, you are asking for the renminbi to appreciate, and on the other hand, you are taking all kinds of protectionist measures,” he said.

By keeping the Chinese renminbi stable against the US dollar, China was contributing to the recovery in the global economy, he said. “The purpose is to hold back China’s development,” he added.

China dropped its formal dollar peg in 2005 and has since allowed the renminbi to trade within a narrow band. But since the middle of last year it has operated a de facto peg. This has meant that the renminbi has depreciated about 9 per cent against the currencies of its main trading partners since early this year, even though the Chinese economy has rebounded quicker than any other major economy.

However, Chinese officials argue that its exchange rate against its trading partners is roughly in line with its level at the start of the global financial crisis in September last year, when the US dollar initially strengthened.

In recent weeks the demands for China to appreciate its currency to help rebalance the global economy have come not only the US and the European Union but also developing nations such as Brazil and Russia...

[Demeter]

12. Obama's Lost Face By J.R. Dunn

http://www.americanthinker.com/2009/12/obamas_lost_face.html

Why did Chinese premier Wen Jiabao choose to publicly humiliate Barack Obama at Copenhagen? In their eyes, and in those of much of the world, he has lost face, and with it, power and influence. While getting widespread play overseas, this story has been kept very quiet by our disinterested, nonpartisan media (I haven't seen it mentioned in any major U.S. outlet).

After promising to meet the Messiah at 7:00 p.m., Premier Wen stood him up in favor of a meeting with the leaders of India, South Africa, and Brazil. Rather than wait, a no-doubt infuriated Obama stalked into the room in question and demanded, "Are you ready to see me, Premier Wen?" No word on Wen's reaction, though he did submit to a discussion on the spot that evidently sealed the release of the immortal and glorious Copenhagen Quasi-Agreement on Climate Change.

So with Barack Obama, we've reached the point where the leader of record of the most powerful state in history has become a man you can casually stand up. But the question remains: Why? (ARTICLE CONTINUES AT LINK, AND THE COMMENTS ARE EQUALLY PROVOKING AND WORTHY)

WELL, GEE, I DON'T KNOW. I'LL GET BACK TO YOU ON THAT

[Demeter]

13. How not to solve a financial crisis By Edward Harrison

http://www.nakedcapitalism.com/2009/12/how-not-to-solve-a-financial-crisis.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

As we head into the New Year, I am trying to look back at the last one with some semblance of a coherent interpretation of events that leads to a strategic vision of the future. I have already touched on stimulus, kleptocracy and crony capitalism as dominant themes for the year 2009.

These posts have been critical of the economic vision presented by the Bush and Obama Administrations. I would stress that I see a lot of overlap in the two Administrations’ economic policies, which is why I use the phrase “the Bush and Obama Administrations” instead of focusing just on Obama.

But, now is the time to offer a review of alternative policy solutions. Bashing policy without pointing to an alternative doesn’t add value. I also believe quite strongly that this exercise will demonstrate that alternative policy solutions did exist – and that they were pointed out at the time. One can only assume that alternative policy solutions were rejected because the Bush and Obama Administrations preferred the solutions they crafted to these. And while, I am most concerned with outcomes, this juxtaposition between what could have been and what is points to the kleptocracy and crony capitalism I mentioned in my last two review posts.

Before I go into my spiel, I want to stress a point I made at the outset of a November post “The less optimistic view of Treasury’s handling of the crisis”:

one doesn’t have to take the view that its efforts to save the banking industry were a deliberate attempt to line bankers’ pockets by transferring money from taxpayers to the banking industry.

I will probably end up flexing my confabulatory muscles like every other pundit out there – making direct or unconscious assumptions about motives, agendas or intent. This is all just speculation – much of it false. It is outcomes that matter, not intentions. And it is the outcomes that leave me unsatisfied with the present policy course.

Change you can believe in

The key issue, in my view, is the desire for change in 2008.

For years, the U.S. had been lecturing others how to run a successful economy. The Mexicans needed to sell their banks to foreign behemoths to succeed. The Asians and the Argentines needed to take their depressionary medicine and eliminate crony capitalism. The Russians also needed to eliminate gangsterism and crony capitalism or no one would invest there. The Europeans were overly regulated and the state was too big. And so on.

Then, after a quarter-century of apparent economic success (1982-2007), the U.S. economic and financial system was close to collapse. The masters of the universe were seen to have brought the economy to its knees because there were vulnerabilities at the core of American-style capitalism. This was an ugly surprise for many – and it was humiliating, just as 9/11 had been on national defense. Change was the watch word.

What kind of change? Last month, I said:

If you asked 1000 people in those exit polls from November 2008 – or even last week, “what would make you know America was headed in the right direction,” you probably would have gotten 700 different answers.

But, one thing is clear: Since January 20th, a lot of people are saying to themselves, “I know change when I see it and this is not it.” That’s what all polls are saying. So, whatever Obama and the Democratically-controlled Congress are doing, it’s not working.

So, people wanted fundamental change and they felt Obama could deliver it. What the specifics were was less important. The key was that whatever changes were made, it reflected a more proportional connection between economic contribution and financial gains as well as elimination of the core vulnerabilities of our system.

More of the same

So, when Tim Geithner says:

I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

this is either cynical propaganda or self-delusion. People did not elect your President to do deeply unpopular things. They elected Obama to make the fundamental change that he is not delivering. You may think this is change we can believe in, but polls show Americans do not. This quote encapsulates why you can’t have people who created the mess clean up after it. They are prone to defend their prior policies tooth and nail to vindicate their actions. As I said when reviewing a recent Matt Taibbi piece:

What happens when a company is nationalized or declared bankrupt is instructive; here, new management must be installed to prevent the old management from covering up past mistakes or perpetuating errors that led to the firms demise. The same is true in government.

And Geithner and Summers do not represent change in the least. They were at the center of many of the past decade’s policy mistakes: Lehman, OTC derivatives, and anti-regulation of money center banks.

It’s not difficult to see what’s going on. For Obama, it’s kind of hard to get change when you surround yourself with insiders who have vested interests in the status quo.

Credit Crisis Options

A quote from “America needs a pre-privatization plan” is my jumping off point because it does a good job of framing the policy choices at the time.

To my mind, there are three ways to deal with an insolvent financial institution:

* Bankruptcy. Allow the institution to collapse (like Lehman Brothers)
* Nationalization. Seize the assets of that institution and nationalize it (like Northern Rock, AIG, or Fannie Mae)
* Bailout. Inject capital into the institution in order to allow it breathing room until it can meet capital adequacy levels.

As you can see, governments have tried all three solutions. However, there are vast differences between the three.

The bailout solution is the most ‘anti-free market’ choice and seems to be the favored solution of governments everywhere. It props up organizations, giving them an unfair advantage at the expense of other more prudent institutions. It also acts as a subsidy, which favors domestic institutions over foreign rivals. Bailouts increase moral hazard by rewarding risky and reckless lending practices. And they are often the result of crony capitalism due to the power of the financial services lobby. There are many other problems with bailouts. All around, bailouts are a poor solution.

As you know, the Bush and Obama Administrations chose the third option. Here are a few posts from the crisis detailing the Bush response (for which Geithner as New York Fed Chair shares responsibility). Paulson wanted to allow failed firms to fail. But, he quickly learned the same lesson that the Brits learned during the run on Northern Rock, namely this is a very risky strategy unless you have a well-thought out process to limit contagion (see the first post below).

After the post-Lehman panic, I see the policy as bailouts that are “a naked attempt to preserve status quo” as I say in the Dead on Arrival post below (and I present a coherent policy alternative there). Congress was asleep at the wheel, as usual.

* Lehman’s bankruptcy: putting the cart before the horse? – Sep 2008
* The $700 billion Paulson Plan is dead on arrival – Sep 2008
* The Paulson Bailout Plan is unconstitutional crony capitalism – Sep 2008
* The Paulson plan is not going to make it – Sep 2008
* Congress does need to act on the Economic Patriot Act – Sep 2008

So, when Obama was elected, there was an enormous opportunity to change course. I had pointed to Paul Volcker’s presence in Team Obama as encouraging in October 2008 (Paul Volcker: Obama’s other economic advisor) and November 2008 (Volcker warns how serious things have become).

However, after the election, Obama immediately put Geithner and Summers in charge despite their complicity in the policies that led to crisis. I will sheepishly admit to putting a positive spin on things pre-inauguration (see Crony capitalism in U.S. banking bailout should end from January). But, Geithner and Summers consolidated power over time as infighting begins within Obama’s team forced Obama to cast his lot with Geithner-Summers or Volcker. By March, Marshall Auerback was asking Where’s Volcker? as it became obvious he was being shunted aside.

The path not chosen

So, to sum up, we had an economic and financial crisis of a lifetime. The Bush Administration and the Fed were in disbelief and failed to make enough preparations for the obvious coming failures. An almost religious belief in market mechanisms and an incoherent policy led to disaster with Lehman – after which the Bush Administration got religion about bailouts and crony capitalism.

When Obama came to town, you might have thought his policies would be substantively different. But they were not – not on regulatory reform, auto bailouts or bank bailouts. His was the neo-liberal prescription of the Clinton era – substantively the same as the Bush policies. When I wrote Seven reasons to be skeptical of Obama’s economic plans already in January, this was why...

ARTICLE CONTINUES, AND LISTS MANY SUPPORTING LINKS TO REFERENCE MATERIALS. SEE ABOVE LINK.

[Demeter]

14. CONGRESS TRYING TO CLOSE THE BARN DOOR: War on Wall St. as Congress Sees Returning to Glass-Steagall

http://www.bloomberg.com/apps/news?pid=20601109&sid=aeQNTmo2vHpo&pos=10

A one-page proposal gaining traction in Congress could turn back the clock on Wall Street 10 years, forcing the breakup of banks, including Citigroup Inc.

Lawmakers in both parties, seeking to prevent future financial crises while soothing public anger over bailouts and bonuses, are turning to an approach that’s both simple and transformative: re-imposing sections of the 1933 Glass-Steagall Act that separated commercial and investment banking.

Those walls came down with passage of the Gramm-Leach-Bliley Act of 1999. A proposal to reconstruct them, made by U.S. Senators John McCain and Maria Cantwell on Dec. 16, would prevent deposit-taking banks from underwriting securities, engaging in proprietary trading, selling insurance or owning retail brokerages. The bill could also force the unwinding of deals consummated during the financial crisis, including Bank of America Corp.’s acquisition of Merrill Lynch & Co.

“The impact on Wall Street would be severe,” Wayne Abernathy, an executive vice president at the American Bankers Association, said in a telephone interview.

Resurrecting Glass-Steagall goes beyond the array of new regulatory powers that President Barack Obama has proposed to fix the financial system. It has also sparked debate among academics, regulators and legislators over whether the Depression-era law could have prevented the crisis of 2008 or might help avoid future ones.

‘No Difference’

“If you look at what happened, with or without Glass- Steagall, it would have made no difference,” said H. Rodgin Cohen, chairman of New York-based law firm Sullivan & Cromwell LLP, who represented one side or the other in more than a dozen transactions stemming from the financial crisis last year, including the rescues of Bear Stearns Cos., Fannie Mae, Wachovia Corp., and American International Group Inc.

Cohen and others say the law wouldn’t have saved Bear Stearns or Lehman Brothers Holdings Inc., both of which were pure investment banks, from collapse. And the government would not have been able to enlist JPMorgan Chase & Co. to take on the assets of Bear Stearns or allow Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies, giving them access to the Federal Reserve’s discount window.

Rather than split up banks, regulators should provide better supervision and require tougher capital requirements, said Cohen, who was also involved on behalf of banking clients in shaping the bill that dismantled parts of Glass-Steagall.

McCain-Cantwell

The McCain-Cantwell proposal, which has picked up four additional co-sponsors, could be considered by the Senate Banking Committee as early as January, if Senator Christopher Dodd, the Democratic chairman from Connecticut, and other members complete negotiations on a financial overhaul bill.

A similar bill has been introduced in the U.S. House of Representatives by Maurice Hinchey, a Democrat from New York. The House already adopted a measure on Dec. 11 to revamp financial regulation without Hinchey’s proposal. The chief sponsor of the overhaul measure, Representative Barney Frank, has said he supports giving regulators the power to apply Glass- Steagall in individual cases.

“It is fair to argue that if the bill picks up steam in the Senate, the House could have the political appetite to pass it as well,” Paul Miller and four other analysts at FBR Capital Markets in Arlington, Virginia, said in a Dec. 17 note.

One reason support for the idea is growing is that lawmakers see public anger building over what Obama called “fat cat bankers.” As industry profits bounce back and banks repay Troubled Asset Relief Program funds -- and also get set to hand out billions of dollars in bonuses -- Americans are still struggling with a 10 percent unemployment rate and home foreclosures. That’s leading Congress to seek ways to rein in the firms blamed for the financial crisis.

‘At War’

“Congress is at war with Wall Street,” said former Fed Governor Lyle Gramley, now a senior economic adviser at Soleil Securities Corp. in New York. “They perceive Wall Street as being the root source of our financial crisis, and they want to do something to make sure that doesn’t happen again.”

Splitting banking functions needed for the smooth operation of the economy from riskier securities and trading activities was proposed earlier this year by the Group of Thirty, a nonprofit organization made up of former government officials and bankers, including Paul Volcker, a former Fed chairman and head of the president’s Economic Recovery Advisory Board.

The group said the crisis spread like a contagion from firm to firm, putting both commercial banks and securities companies at risk. To prevent a domino effect, systemically important financial institutions shouldn’t be allowed to engage in proprietary trading that involved “particularly high risks” or “serious conflicts of interest,” the group said.

‘Failed the Test’

While that would not bar banks from underwriting securities, as some U.S. lawmakers want, it might force them to shutter or sell trading divisions. The financial system has “failed the test of the marketplace,” Volcker said in January. He added that “it’s been proven that they’re unmanageable, the existing conglomerates.”

Some Wall Street executives endorse such a split.

“What we need is a 21st century Glass-Steagall,” said Gerald Rosenfeld, deputy chairman of Rothschild North America Inc. and a professor of business and law at New York University.

Rosenfeld favors regulating commercial banks like public utilities, while giving securities firms and hedge funds more freedom, as long as they adhere to capital guidelines.

“The important thing is we have to have a structure that prevents the contagion from spreading when there are catastrophic losses in those riskier businesses,” he said.

Smaller Is Better

Others are guided by the principle that smaller is better. Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, firm that evaluates banks for investors, said the repeal of Glass-Steagall in 1999 was based on the false premise that bigger banks would be more competitive and efficient.

“I don’t think there are any efficiencies of scale in banking,” Whalen said. “Making them smaller would be far more efficient and also improve competition. If we had broken up Citi last year, we would have seen a couple of new market entrants buying operations. That is what creative destruction is all about.”

Roy Smith, a finance professor at New York University’s business school and a former Goldman Sachs partner, said reviving Glass-Steagall would affect Goldman Sachs less than other big banks because the firm focuses largely on investment banking and could give up banned businesses without difficulty.

‘Unwanted Stepchild’

For other firms, the fallout could be harsh, said Abernathy of the bankers’ association.

“If you restore Glass-Steagall, for some of them the banking operation would be an unwanted stepchild,” he said. “It would be the less profitable of the two because its business would be far more constricted.”

Bank lobbyists are targeting the Senate Banking Committee as lawmakers negotiate provisions of a regulatory overhaul bill. They’re arguing that a return to the pre-1999 era would reduce the diversity of revenue streams, make financial firms more vulnerable in a crisis, prevent them from acquiring ailing institutions, increase the cost of raising capital and undermine the global competitiveness of U.S. institutions.

“Reinstating Glass-Steagall misses the mark -- a point we intend to share with Chairman Dodd and other senators on the committee,” said Rob Nichols, president of the Financial Services Forum, a Washington-based trade group that represents the chief executive officers of the largest financial firms.

Dodd said he doesn’t favor reviving Glass-Steagall as a way of dealing with “too-big-to-fail” institutions and added “there are other things we can do to break them up.”

Leach, Gramm

Also lining up on the side of the banks are two sponsors of the 1999 bill that dismantled Glass-Steagall. Jim Leach, a former Republican congressman from Iowa and now chairman of the National Endowment for the Humanities, said the biggest problem was overleveraging by securities firms, not the mingling of businesses.

“Virtually all of the financial difficulty banks are in today relates to activities they could do before” President Bill Clinton signed his bill in 1999, Leach said.

Phil Gramm, who as a Republican senator from Texas was another co-sponsor, said that, rather than weakening banks, the law cushioned the impact of the subprime mortgage crisis by making financial institutions more broad-based and competitive.

“A lot of this is about trying to find somebody to blame,” said Gramm, now a vice chairman of investment banking at UBS Securities LLC.

‘Political Dynamite’

Hinchey, the congressman who introduced the House bill to reinstate Glass-Steagall, said in an interview that a comeback is “very questionable.”

“There’s a lot of pressure coming from the big banks to prevent this kind of thing from happening,” Hinchey said.

Those banks may have lost some of their political influence as their earnings have recovered, said William Isaac, a former chairman of the Federal Deposit Insurance Corp. “The TARP legislation and the way it was administered was political dynamite for the banks,” said Isaac, now chairman of the global financial services unit of LECG Corp., an economic and financial consulting firm in Emeryville, California. “The public feels that this was all about protecting Wall Street and did nothing for Main Street, and it’s largely true.”

[Demeter]

16. How the status quo can kill: the example of free trade

http://www.correntewire.com/how_status_quo_can_kill_example_free_trade

AN EXTREMELY LENGTHY AND DETAILED ARTICLE WORTH THE READ--AN EXCERPT:

"There is a fault line running through the left. It becomes particularly visible when a debate ignites over whether President Obama has “sold out.” A number of issues have become combustible agents for these conflagrations, most especially the financial bailout, the decision to escalate in Afghanistan, and most recently, the President’s perceived unwillingness to fight for “real reform” in health care. Glenn Greenwald has noted The underlying divisions in the healthcare debate in which Greenwald references a recent article in The New Republic by Ed Kilgore, Managing Editor of The Democratic Strategist.

In my own diaries and comments on DailyKos, in which I have been extremely critical of the President’s economic and financial policies, which I see as working to preserve the status quo, I certainly see a pattern.

It appears to me that many of those who argue against me in defense of the President’s policies are vested in the status quo. A few have made comments with references to their careers in finance or law, and it reminds me of the observation by early twentieth century progressive Upton Sinclair, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" Or as one commenter noted in a blog elsewhere that took an extreme position on HCR, “They don’t want to connect the dots, because they are part of the picture.”

I see more of a class divide than does Greenwald and others. Seems to me that people who have secured comfortable positions in “managerial class” and “creative class” occupations tend to support the President and an incrementalist approach to addressing the nation’s problems. They tend to be reflexively hostile to any sweeping changes, such as actually annihilating the health insurance companies, or actually doing away with the big financial houses like Goldman Sachs, Citigroup, and Morgan Chase. They seem to insist on solutions that rely as much as possible on market mechanisms, such as cap and trade to deal with climate change. They recoil in horror at the suggestion that “the system” itself is the problem. Generally, they appear to be economic neo-liberals, who have actually become acclimated to the results of the Reagan Revolution.

And there is one economic policy above all others that they believe in. Free trade. "

THREE GRUESOME EXAMPLES OF FAILED OUTSOURCING FOLLOW.

[Demeter]

18. Teflon Buffett BY Felix Salmon

http://blogs.reuters.com/felix-salmon/2009/12/26/teflon-buffett/

Warren Buffett is a lovable, avuncular chap, not one of those axe-wielding CEOs who are feared by employees and idolized by the kind of red-claw capitalists who think that firing lots of people is a major leadership skill. Yet somehow he seems to have fired 21,000 people — 8.6% of his workforce — over the past year. And the cuts are being felt hardest by Berkshire’s poorest employees: some 3,000 textile workers have lost their jobs at Fruit of the Loom in El Salvador.

Alice Schroeder, Buffett’s biographer, explains that Buffett is expert at hiring “bad cops” to fire employees and to insulate himself from any blowback:

At NetJets, Sokol has got an enormous challenge on his hands. The changes he’s making at NetJets are so significant that Sokol’s angry employees apparently took their complaints about him to the press.

Try to imagine Berkshire employees doing that to Buffett. It’s unthinkable, right? Buffett could order animal sacrifices on his birthday and his employees probably wouldn’t complain to the New York Times…

No matter who succeeds Buffett (Sokol, if he pulls off the turnaround) this part of the franchise will be “lost” after Buffett is gone, because it is unique to the way Buffett has arranged his image over the years. Buffett has gone to a lot of trouble to be universally liked. I can’t think of anybody else qualified who can replicate that.

Schroeder explains that being universally liked is a major source of Buffett’s wealth: it makes it a lot easier for him to acquire any given business. Absent Buffett, it’s going be much harder for Berkshire to acquire the privately-held companies that it specializes in buying. And more generally, it’s going to be a practical impossibility for Berkshire to be run by someone as teflon-coated as Buffett. Could anybody else fire 3,000 Salvadorean textile workers and receive essentially no bad press at all?

[Demeter]

19. The Case For the Millionaires Surtax BY Economists for Firing Larry Summers

http://firelarrysummersnow.blogspot.com/2009/12/case-for-millionaires-surtax.html

Greg Mankiw links a former student courageously trying to protect the rights of Millionares not to pay more taxes here:

http://www.aei.org/article/101464

Here's the thing -- there are no reputable studies on the elasticity of the effect of tax changes on total taxes collected, and there's no logical reason that that number should necessarily, a priori, be less than one.

Here's why: in 2007, there were 495,000 tax returns filed for millionaires. That means a significant fraction were corporate CEOs, CFOs, finance people, and professional athletes/best-selling textbook authors/TV celebs.

Peyton Manning makes about $30 million a year -- let's explore his potential behavioral responses to changes in taxes. Let's raise Peyton's taxes by 10%. Under the logic of Alan Liard, Greg Mankiw's student, and under the logic that all economists know to be the truth, people respond to incentives. Peyton Manning is a person, so he responds to this tax hike by working 6% less, and decides now he's going to sit for the Colts playoff games since he makes less money per game, and he enjoys watching Tom Brady play in the playoffs more than being there himself. Doesn't really sound likely, does it?

Of course, Peyton Manning is going to play 16 NFL games and the playoffs even if you raise his taxes considerably. The same is true of a wide variety of other professions -- corporate execs usually have two choices, they can choose to work or not work -- there are no part-time CFO jobs, and it's probably tough to be a "part-time" hedge-fund manager as well... So, let's say Greg the textbook publisher or Chuck the hedge-fund manager decides, due to higher taxes, that they are just going to retire. In that case, the government loses 100% of the taxes Chuck or Greg would have paid! The multiplier is -10!!!

Except, according to logic which is totally obvious to a pre-schooler, if Greg the textbook author doesn't sell textbooks, then Thorstein the textbook publisher will. If Peyton the quarterback doesn't play in the playoffs or appear in Gatorade commercials, then Tom the quarterback will. If the CEO of Anthem, who routinely makes $40 million, quits due to high taxes, Anthem will pay the next CEO extravagantly. If Chuck the hedgefund manager doesn't manage Peyton's money, then Emilio the hedgefund manager will manage Tom's money...

So, in this case, microeconomists might derive an elasticity of -1 (a 1 percentage increase in the tax rate reduces tax collections by 1% if 10% of the rich decide not to work at all), while the true Macro elasticity would be closer to 1.

Note that this logic does not apply to everyone, but it is likely to apply to the vast majority of those who make more than 1 million dollars per year, and Greg Mankiw's students are completely oblivious to this kind of perfectly obvious logic...

Of course, another thing higher taxes might change is how much someone might try to cheat in order not to pay taxes -- well, if this is the case, then what we really need is to beef up the IRS.

The third thing it also might change is the pay that CEOs get. For example, if the top tax bracket were 99%, for all income over $5 million, tax opponents always describe this case as having the effect that people will just stop working after they get to $5 million. That's just not an option for the likes of Peyton Manning, however. What Peyton Manning (or any corporate CEO in the same position) would likely do is settle for just $5 million a year, since all income after that goes to the state. Then, once you get a Republican in office, and they cut that 99% top bracket from $5 million-plus to $25 million plus, Peyton Manning will renegotiate his salary up to $25 million, even though he's still playing 16 NFL games a year...

So, in this case, tax rates down implies total taxes collected from Peyton Manning up but total "production" from Peyton unchanged, but worsening inequality for the economy and less taxes paid for someone else. So, we'd need to look at whether the consumption spending of people like Tiger Woods, CEOs with their corporate jets, and investment bankers is better for long-run economic growth than the spending of the poor, who spend a large chunk of their disposable income on things such as education and health care...

This is essentially what has happened in the US, and that is why you shouldn't believe it when economists tell you we shouldn't tax millionaires.

But then, you might object, *nobody* would have an incentive to become CEO if their salaries are capped around $1 million (if I was designing a tax system, I would probably not go over 50% on taxes before $3-4 million, but I would make Peyton Manning's marginal rate closer to 70%...)

Well, I once took a poll of the students in my TA section. I asked them who they would rather date -- someone w/ a bachelor's degree who works 40 hours/week, makes $40,000 per year and pays no taxes, or someone w/ an MBA who makes $80,000, works 80 hours/week, and pays $30,000 in taxes.

Most of the girls said they'd go for the person w/ the MBA, even though, per hour, the 40 hours/week job would be more, b/c the MBA has a prestigious graduate degree, is ambitious, and makes a whopping $10,000 more overall. (I had them assume that the above were peak salaries...) I also asked them if they would take a promotion from the $40,000 job to the $80,000 job, even though it's much more work, and, after tax, a pay cut per hour, and again, most wanted to go for the higher-priced job.

The study I'd really like to see is if, since the early 1980s, as wages on Wall Street have gotten out of control, what has happened to the average age of retirement at firms such as Goldman Sachs. "Standard theory" of course does not even predict whether the income or substitution effect dominates, but I suspect that there are quite a few I-bankers on Wall Street who do not exactly love their jobs or working 100 hours a week, and will just retire once they've put away $10 million in the bank. Tax them more and that just delays retirement. And to the extent higher taxes preclude the possibility of putting away $10 million for your average I-banker and talent shifts out of finance (or NFL quarterbacking), I fail to see how this is such a bad thing for society...

Put another way, suppose the CEO of Anthem made $4 million rather than $40 million due to high tax rates on multi-million dollar incomes (which we do not currently have). While in the micro context, this would greatly reduce the government's revenue, in this case, Anthem would have higher profits, or could afford to pay it's other workers more, could cut prices to gain more market share, or might even be able to deny fewer claims. In other words, it wouldn't make the whole pie smaller, it would just make it more equally distributed. And, to the extent that the Anthem CEO no longer flies around in a private Jet, owns 6 houses, and drinks $1000 bottles of wine, redistributive taxes would quite likely make the pie bigger...

UPDATE: An email and commenter pointed out that the question I asked the students in my class was reinforcing cultural norms and stereotypes and came off as sexist. They are correct and I apologize. I had not properly edited my own post however -- when I framed the question in class, I did it in a much, much more pc way -- asking everyone how much each individual would want to make/work, and also asked the question about the spouse in a completely gender-neutral way, and also asked a variety of other questions, with all questions asked to both guys and girls (I edited my post to reflect this). The guys tended to prefer spouses who worked and made less. The girls also tended to want to make and work less -- confirming what microeconomists have already found about how the female labor supply is more sensitive to marginal tax rates than it is for men. And yes, these are due to sexist cultural norms.

[Demeter]

21. In Search of Work, but at What Cost? By DAVID SEGAL

http://www.nytimes.com/2009/12/27/your-money/27haggler.html?ref=business



STILL in holiday peace-and-goodwill mode? Aww. How sweet!

Just a quick bit of advice: Read something else.

Seriously, beat it, O.K.? Because Christmas is so two days ago, and in this episode we are going to dive into the dark heart of the janitorial franchise world — which turns out to be really, really dark.

Q. I am writing on behalf of my housekeeper, Jagoda Walczak, a Polish immigrant who has been cleaning homes for years. She thought she could find new clients by investing in a franchise called Coverall Cleaning.

She borrowed $17,600 from her brother and friends to cover the franchise fee, and Coverall guaranteed that it would send her $5,000 worth of commercial cleaning business — basically janitorial services for offices — every month. They assure people that they can make $18 to $20 an hour with these accounts. More than three months later, she had been offered less than $2,500 worth of business, and the monthly payments for these jobs were so low that, calculated at an hourly rate, they were minimum wage.

She tried to get her money back, but Coverall will not send her a refund. Is there any way the Haggler can help?

Channa Steinberg

New York City

A. The commercial cleaning franchise world is a new one to the Haggler, but it’s been around since the mid-1970s, and Coverall is just one of several national players.

It works like this: You give Coverall a big fat check and it provides training, some start-up supplies and initial leads to companies in need of cleaning service. The goal is steady income from cleaning gigs that are serviced, ideally, with your own employees.

In theory, it’s not a bad idea, and the company, which is based in Boca Raton, Fla., says it has 8,000 franchisees servicing 50,000 customers in the United States. It also has a pretty lengthy record of settling lawsuits brought by former Coverall franchisees — more than two dozen suits since 1998, according to its 2008 franchise disclosure document, with one settlement as high as $450,000. In every instance, the company denies wrongdoing.

Read through a summary of the complaints, and themes emerge. Again and again, franchisees allege that Coverall presented them with a job at a set fee that required so much time and/or additional employees that the income, per hour, was a pittance.

Shannon Liss-Riordan, a lawyer in Boston who has filed a class-action lawsuit against Coverall, says that this is standard operating procedure.

“Companies like Coverall are competing for commercial cleaning contracts against regular janitorial companies that pay their workers as employees, which means they pay worker’s compensation and have to abide by minimum-wage laws,” she says. “Using the independent contractor model, Coverall doesn’t have to worry about any of that, so they underbid for contracts and obviously the person who gets hurt is the worker.”

Ms. Walczak says she was offered a job cleaning a Vidal Sassoon salon — six nights a week — for just over $1,300 a month. A Coverall manager gave her a tour of the premises and said the whole job should take two and a half hours an evening. It took five hours, minimum, Ms. Walczak said she discovered. After three weeks, she told Coverall that the job was financially unfeasible.

When she demanded her money back, Coverall refused and suggested that she sell her franchise. Ultimately, she was paid less than $700 for all of her Coverall-related work, including the three weeks at that Sassoon salon.

A spokeswoman for Coverall, Jacqueline Vlaming, sent a lengthy e-mail message in response to the Haggler’s inquiries about Ms. Walczak. In it, Ms. Vlaming says that the company doesn’t guarantee $5,000 worth of cleaning jobs a month, but instead promises an initial set of jobs worth that sum of money, after which you’re basically on your own.

She also said that Ms. Walczak declined nine perfectly good cleaning gigs — worth $7,000, altogether — and that the Sassoon salon is now serviced by another Coverall franchisee for the same fee that Ms. Walczak found inadequate.

“Ms. Walczak was difficult to work with from the outset,” Ms. Vlaming wrote. “We tried repeatedly to explain to her the methodology inherent in bidding commercial accounts. She simply did not want to hear it.”

For a competing perspective, we turn to Steven Cumbow, a former chief financial officer at Coverall who has left the company and was recently deposed by Ms. Liss-Riordan as part of her class-action lawsuit.

“Coverall has built its business around charging individuals — many of whom are non-English speakers — thousands of dollars in exchange for a promise that it will provide paid cleaning work,” a court document says, paraphrasing Mr. Cumbow’s deposition. “Instead of supplying this business, however, Coverall utilizes a ‘churning’ model whereby it offers business to workers who, Coverall knows, will be unable to accept or to adequately service the account, or revokes business for pretextual reasons.”

Ms. Vlaming called Mr. Cumbow a “disgruntled terminated employee with a grudge.”

The Haggler spoke to Ms. Walczak last week, and she described her struggles to make a living and provide for two teenage children. “I called the company and I just cried,” she said. “I told them: ‘You lied to me. You said I could make money and I can’t and now I’m borrowing money and I’m in a worse situation than before.’”

See? The Haggler warned you that this is not a feel-good story. But in the e-mail message, Ms. Vlaming said Coverall would be willing to discuss Ms. Walczak’s situation with her and to “work toward a solution.” The Haggler will follow those discussions and report on their outcome in a forthcoming column.

[Demeter]

22. What Iceberg? Just Glide to the Next Boardroom By GRETCHEN MORGENSON

http://www.nytimes.com/2009/12/27/business/economy/27gret.html?_r=1&ref=business



YOU might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies.

You would, however, be wrong.

Directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae have not all been banished from other boardrooms. In many cases, directors just seem to skate away from company woes that occurred on their watch.

To some investors, this is an example of the refusal of those involved in the debacle to accept responsibility for it. Whether you are talking about top executives loading up on leverage, regulators who slept while companies took on titanic risks or mortgage lenders that made thousands of dubious loans, few in this crowd have acknowledged culpability. Taxpayers and shareholders, meanwhile, who had nothing to do with the problems, are left holding the bag.

“None of these directors have stood up and said, ‘We made a mistake here by not calling management to account,’ ” said Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm. “They have certainly avoided the limelight as far as blame is concerned.”

Moreover, they continue to get work as directors at other companies.

Three large public companies provide excellent examples. They are Sunoco, the oil company; Paccar Inc., a truck manufacturer; and Tetra Tech Inc., a management consulting and technical services concern. Each of these companies has two directors who, until recently, were on the boards of institutions that were centrally involved in the mortgage meltdown.

...SHE THEN NAMES NAMES AND KICKS ASS...

This is not to say that these directors are not performing their duties. Indeed, some would argue that directors who have witnessed at close range the collapse of a company may learn a great deal from that experience and bring to their boardroom activities an increased sense of responsibility. But it is hard to blame shareholders for wondering whose side directors are on, given the broad failures by many board members to recognize and rein in risk-taking at so many companies.

As fiduciaries for the owners of the companies on whose boards they serve, directors have a duty to act in shareholders’ interests. After all, they are the shareholders’ representatives, and they are charged with ensuring that their companies are operated soundly and with long-term profitability in mind. Yet it doesn’t always seem to work out that way.

Frederick E. Rowe, president of Investors for Director Accountability, a nonprofit shareholder advocacy group, said, “Here’s a conversation you’ll never hear: ‘Yes, I get paid $475,000 a year. I play golf with the C.E.O.; he’s a personal friend. I go to interesting places for board meetings, I am around interesting people, and I would never say one word that would jeopardize my position on the board.’”

The main reason for director dysfunction is that board members have little fear of being fired for incompetence or sleepwalking through meetings. Because of the way director elections are structured, board members can win their seats if they receive just one vote of support. And even if a majority of shareholders withholds support from directors at annual elections, the directors who are singled out are often allowed to stay.

Shareholders interested in ousting a director or two must mount an expensive proxy fight to do so.

There is movement afoot to change this arrangement. The Securities and Exchange Commission has proposed new rules that would give large shareholders a way to replace incompetent directors with their own nominees. Two weeks ago, the S.E.C. reopened its comment period for these rule changes.

But the proposal has too many limitations, shareholder advocates say. For example, only those who have owned a stock for one year and who hold a stake of at least 1 percent in a big company may have their director nominees included in a company’s proxy materials and submitted to a shareholder vote.

“It’s a step forward, but a pretty embarrassingly baby step,” said John Gillespie, a former investment banker who, with David Zweig, is co-author of “Money for Nothing,” a forthcoming book on board failures. “The bigger problem is the culture of boards, which doesn’t allow directors to do an effective job even if they wanted to.”

Solutions to the culture problem, he said, would include instituting term limits for directors, in order to keep fresh blood circulating on a board, and separating the roles of board chairman and chief executive.

MOST important, Mr. Gillespie said, United States shareholder groups holding 10 percent stakes in companies should have the right, as they do in Britain and other countries, to call special meetings. Then and there, they could jettison directors who are seen as not doing their jobs.

“The reality of our human nature is to pay more attention to people who can fire you than to those who can’t,” Mr. Rowe said.

Even though the stock market has performed well this year, Mr. Hodgson of the Corporate Library says he thinks that many directors will face significant opposition, albeit still toothless, from shareholders at annual elections in 2010.

“I think we are going to see some of the highest levels of either ‘no’ votes where companies have a democratic process or withhold votes,” he said. “People were at fault there, and saying that nobody could have predicted it is not an excuse. If you are on the board, you have the responsibility to find those things out and not just believe what management is telling you.”

[Demeter]

23. Where We Are, Where We're Heading (2010) BY KARL DENNINGER

http://market-ticker.denninger.net/archives/1793-Where-We-Are,-Where-Were-Heading-2010.html

Let's score the 2009 edition first:

* The economy will NOT recover in 2009: I'll take this one, although some would argue I only deserve half (I said 8% unemployment U3, we actually got 10%.)
* Deflation, not inflation, will become evident well beyond housing. Miss. Valid if you look at energy, but the "well beyond" includes a meaningful subset of the various things people buy. Nope.

* Housing prices will continue to decline: Direct hit.

* The Fed's attempt to "pump liquidity" will be shown to be an abject failure: 1/2 a point. Certainly if you look at stock prices, it's a miss. If you look at whether credit creation was stabilized and increased, its a horrifying score. We did get the instability in the dollar, but no bond market crash. I didn't specify how, so I can't take credit for that which I didn't predict.

* GDP will post a 12-month negative number, Depression print. Clean miss.

* The stock market has not bottomed. 1/2 credit. It had not bottomed but my SPX 500 @ 500 call was not achieved. The 50% swing, however, got damn close. Lots of money to be made if you're quick and good, but an absolute minefield if you're a long-term investor - spot on.

* Precious metals will not be a safe haven: Clean miss. Gold and silver have both performed well.

* The Dollar will not collapse. Correct. It hasn't. It ended the year of 2008 at 82, it now trades at 78, down 5% or so.

* The pound or Euro - and perhaps both - will be where the FX dislocation initiates if it occurs. Early, which means wrong. Clean miss although the last month sure looks bad for the Euro.

* The US Consumer goes from negative savings to positive: Direct hit.

* Commercial Real Estate will effectively collapse: Direct hit although the effect has been well-hidden. Several Tickers have been written on this, including major banks walking off 50% underwater properties. I can't take full credit as the REIT explosion I expected didn't happen, so I only get half a point.

* Along with the above, expect 10% of retail stores to close. I don't have accurate numbers on this but it sure looks that way.

* Several states will get in serious financial trouble and the default of one or more may occur. Point. While the default didn't happen that wasn't a condition of the test, and the list of states in trouble is long and getting longer.

* Mortgages are not done: No kidding. Default/delinquency/foreclosure rates continue to skyrocket. Point.

* If you want to refinance you may get one brief shot with long rates around 4%. You got two, but I don't lose for multiple points of impact. Both of those were good opportunities IF your property isn't severely underwater (in which case there is no such thing as a good deal.)

* Those who have said that the corporate bond market is being "unreasonable" will start to look like the jackasses that they are. Maybe. Actual defaults did in fact skyrocket but new issues are coming to market and subscribing - even for crap-grade paper. I can't take a point on this one as my expectation when I wrote it was that issue would go in the toilet. Miss.

* The calls for "more lending" will go exactly nowhere. Bingo.

* GM and Chrysler will go bankrupt. Bingo.

* Protectionism and currency manipulation: Miss, at least in the way I described it.

* Commodities will appear to be headed for a new bull market (falsely): Hit. Soy, Wheat, etc - all looked to be going parabolic in June. Now, not so much. "Beans in the teens" eh? NOT!

* Sovereign debt defaults will number at least three: Clean miss. Greece and a couple of others are on track but didn't happen this year. No points for "on track."

* China will have its first large-scale rumbling of civil unrest: Clean miss. I have to admire how they prevented it - more capacity building into an overcapacity world. That won't end well but for now they've stove it off.

* Foreign uptake of Treasuries will be choked off - by necessity: Hit. Almost missed that one, but China has stopped buying as the trade imbalance disappeared. They have, as expected, turned resources inward.

* The City will get it worse than we are: Since the test was relative I get credit for it; they're doing things like imposing 90% taxes on banker bonuses.

* Things will get "revolting" in nations: Nope. Riots and such in Greece don't count - "revolting" meant what it said.

I count 14 "hits" (including half-points) out of 25, for a score of 56%. That's not so good, especially compared to last year.

Ok, so where did I go wrong?

That's pretty simple: I dramatically underestimated the willingness and ability of "the criminal class" (that would be those in DC and on Wall Street) to lie, cheat, steal, paper over insolvency and get away with it - at least for a while.

Will this ultimately lead to an actual recovery? No. It mathematically can't. A short-term bounce in various metrics, yes, just like an insolvent person can spend on his credit cards until they get cut off and look like they're improving.

The S&P 500 currently stands at roughly 1120. Most "market callers" are expecting another 20% increase next year, which would put it at 1350, just 15% off the all-time high of 1576 and fairly close to where it finished 2007 - that is, as if 2008 and 2009 never happened. Lunacy, says I, unless leverage can return to where it was in 2007.

Can it?

No.

Let's remember what happened in 2005 and 2006 that made those things possible. Investment and commercial banks were stuffing various sorts of securitized paper with garbage loans they knew could not be paid, then selling them off to "investors" (who would later be shown to be bagholders.) This allowed for an unprecedented expansion in consumer and financial system credit - and that, in turn, allowed the buying of "stuff", whether it was companies playing LBO or you buying a house to flip with an OptionARM.

That was the legacy of the "expansion" in 2005 through 2007, and it is not coming back.

In short this time it really is different, and the proof is right here:

WARNING: ARTICLE CONTINUES WITH GRAPHIC PORN AT LINK. THOSE WITH WEAK STOMACHS MIGHT WANT TO SKIP THIS PART...

I THINK KARL IS TOO HARSH A GRADER ON HIMSELF. HE'S JUST PREDICTING A BIT AHEAD OF THE CURVE...

[Ghost Dog]

24. 2010 is going to be hell

for a hell of a lot of fucked-up previously complacent people.

But then, I'm in (offshore) Spain.

You just keep your Spirits up, you hear, Demeter?

[Demeter]

26. I'll Drink to that! Be Safe and Happy, GD

You may get a boatload of refugees someday in the future...

[Ghost Dog]

33. Sorry. Frontiers are closed.

Deal with it.

http://www.youtube.com/watch?v=axfCjQEUziI

[Po_d Mainiac]

36. I heard that boat stopped in Somalia n/t

[Ghost Dog]

38. That boat was stopped in Vietnam.

Get over it.

http://www.youtube.com/watch?v=MnO28gOD50A

Heh. Vamos.

http://www.youtube.com/watch?v=JEBMPbIbWRM

[Demeter]

25. MUSICAL INTERLUDE for January--Remember Janus, the Two Faced God

http://www.youtube.com/watch?v=Akoukq5DvAE

http://www.youtube.com/watch?v=aNopQq5lWqQ&feature=related

http://www.youtube.com/watch?v=VVnU_WaTvdc&feature=related

http://www.youtube.com/watch?v=eC-MxuqE3u0&feature=related

http://www.youtube.com/watch?v=Jq44pOAjBDY&feature=related


The first month was called Januarius by the Romans, after Janus, the god of doors and gates. We see the same word in janua, the Latin for a gate or opening. From the idea that a door is a way in, an entrance, it became a custom among the Romans to pray to Janus whenever they undertook a new work. He was also the god of the beginning of the day, and it was only natural that when a new month was added at the beginning of the year it should be named after him. During this month offerings to the god were made of meal, frankincense, and wine, each of which had to be quite new.

Since a gate opens both ways, Janus was thought to be able to see back into the past, and forward into the future, and he was usually represented in pictures as having a double head that looked both ways. On the earliest Roman coins he is drawn with two bearded faces, with a staff in one hand, and a key in the other, He was also the protector of trade and shipping, and on some coins his head is shown with the prow of a ship. When people wished to picture him as the god of the year, they drew him holding the number 300 in one hand, and 65 in the other....

The name for this month among the Angles and Saxons was Wulfmonath (Wolf month), since it was the time of year when the wolves were unable to find food, and their hunger made them bold enough to come into the villages.

http://www.sacred-texts.com/time/smd/smd03.htm

[Demeter]

27. SHAMELESSLY STOLEN: Will a Small Group of U.S. and World Economists End Up Saving the World?

http://www.democraticunderground.com/discuss/duboard.php?az=show_mesg&forum=103&topic_id=506895&mesg_id=506895

Chicago, Illinois. September 24th, 2009. While the pundits argued about whether Chicago would get to host the 2016 Olympics, they ignored the much more important issues being discussed at a Conference there on Monetary Reform, which could overwhelmingly impact the world’s people in a positive way.

What if there didn't have to be any wars? What if you could have peace and prosperity as every human's birthright? What if it was not that complicated, but relatively simple to achieve this? What if it wasn't about left or right, black or white, liberal or conservative? What if it was about freedom versus slavery, prosperity versus debt, peace versus war? What if the solutions weren't all that difficult and you could see world peace in your lifetime?

Do you think that is an impossible dream? One that only little children and demented utopianists could even imagine? Throw your cynicism to the wind and dare to think again. Think outside of the box. That’s what a small group of monetary reformers has been doing now for the last 8 years under the umbrella of the American Monetary Institute. The Institute is the brainchild of Stephen Zarlenga, who throughout his lifetime studied economics and wrote a book called “The Lost Science of Money,” which elucidates the history of how peace and prosperity has been achieved before, and most importantly, how we can achieve it again.

While Obama attended the G20 conference where the status quo glorified itself and showered itself with more power to abuse and denude the people of the earth of their wealth and productive earnings, bonafide honest and caring citizens of this planet worked on their benevolent plan to stop the plunder, and return the resources of the earth back to the productive, civilized and gentle inhabitants who deserve it.

If you were an academic, and wondered why there are wars in the world, and you studied the issue, you would eventually reach the same conclusion as the American Monetary Institute.

There are wars in the world because bankers/financiers/corporate globalists love wars, foment wars, encourage wars, finance wars, utilize the media to propagandize the public to accept wars, in order to get countries into more debt, so that they can collect the interest, and consolidate the world's real wealth and resources into a few elite's hands. These are the same international bankers controlling the issuance of most of the world’s money at interest through private central banks like the Federal Reserve.

So how do you end wars? You eliminate the Central Bank's control of governments’ money (the people’s money). The U.S. Central Bank is the Federal Reserve. Would you like to end it and bring control of the U.S. government back into the hands of the people via their elected representatives?

Congressman Dennis Kucinich is soon going to be sponsoring the American Monetary and Financial Security Act in the U.S. House of Representatives which is the outcome of all of this economic brainstorming.

It would briefly,

1. Nationalize the Federal Reserve and put it under Treasury - making it a government function and eliminating Private Bankers from the issuance of our money.

2. End the Fractional reserve banking system and replaces it with one that has a 100% reserve requirement (meaning banks can no longer print money into existence through loans). It would also cap interest on loans at 8%.

3. Spends U.S. dollars (not debt money) into the economy to stimulate it and provide financing for infrastructure projects.

Many world economists care about what happens with monetary reform in the United States, because they know that whatever happens here affects all of their countries as well. They want to work on monetary reform here, because it can happen here. We could be a good leader once again. We could be a beacon of light rather than the dark force of empire building and war.

These economists know that if the U.S. fails, there is no hope for their countries. They are willing to put time, effort and money into legislation to save America, in order to save themselves. Are you? Be a part of the solution. Support the AMI and this legislation. Their website is www.monetary.org .

Currently the bill is with Kucinich staffers being harmonized with existing law. It will be introduced in the House when this process is complete.

[Demeter]

28. Blogger who blew the whistle on hedge fund STUART WASHINGTON

http://www.smh.com.au/business/blogger-who-blew-the-whistle-on-hedge-fund-20100101-llq5.html

THIS IS IN AUSTRALIA, FOLKS

WHEN John Hempton started a blog as he recovered from pneumonia, he did not expect to send shockwaves through the finance industry.

But that is exactly what the 42-year-old fund manager did through his Bronte Capital blog. His exposé of an unrelated US hedge fund would eventually lead to $426 million in investments being frozen and authorities seizing control of the Albury fund manager Trio Capital shortly before Christmas.

Investigators are focused on the fate of $118 million in Trio's Astarra Strategic Fund, which is supposed to be invested in international hedge funds through a British Virgin Islands company.

After receiving information through his blog, Mr Hempton blew the whistle on Trio in a letter to the chairman of the Australian Securities and Investments Commission, Tony D'Aloisio, on September 16.

''You should take this seriously,'' he wrote at a time when Trio was spruiking* nearly $1 billion in investments.

Mr Hempton was first told about Trio Capital and its link to a US hedge fund after his blog posts exposing US hedge funds were publicised in the Herald.

His anonymous letter to ASIC was sent through a former employer, the Treasury secretary Ken Henry, with Mr Henry's consent.

Like (spurned) whistleblowers in the Bernie Madoff fraud in the US, Mr Hempton focused on the improbability of smooth investment returns recorded by the Astarra Strategic Fund.

''I thought the returns were not consistent with any known hedge fund index or grouping of hedge funds that I knew of,'' Mr Hempton said this week.

In the letter, Mr Hempton wrote: ''These are the sort of results that have had a bad reputation since the exposure of Bernie Madoff.''

He also criticised Trio for recently awarding responsibility for its entire portfolio to the investment managers of the Astarra Strategic Fund, Astarra Asset Management.

The regulator acted promptly. By mid-October all Trio funds had been frozen. And on December 17, Trio Capital was removed as manager from all its investment roles. No charges have been laid and ASIC investigations are continuing.

''The simple test for ASIC was if they (Trio) could actually prove the existence of the assets, then ASIC could ignore my letter,'' Mr Hempton said. ''For a reputable fund, it should not take more than 20 minutes to prove the existence of the assets.''

Mr Hempton, who has since become the chief investment officer of his part-owned funds management business, also called Bronte Capital, says he is a ''creature of the globalised world''. The finance specialist has predicted the collapse of Latvia's banking system in the racily titled blog post ''Hookers that cost too much, flash German cars and insolvent banks''.

And he said his approach in his blog and his investment philosophy was simple.

''I find something interesting: you pull on the piece of string and mostly you find a piece of string. But sometimes you find something attached,'' he said. ''(There was) nothing that led to the uncovering of Astarra you could not find on the internet. This was not hard, I just did the work.''

....

*spruik

  /spruk/sprook

–verb (used without object) Australian Slang.
to make or give a speech, esp. extensively or elaborately; spiel; orate.
Origin:
1915–20; orig. uncert.

[Demeter]

29. For Some in Japan, Home Is a Tiny Plastic Bunk By HIROKO TABUCHI

http://www.nytimes.com/2010/01/02/business/global/02capsule.html?hp

REMIND ME AGAIN, WHY ARE WE FOLLOWING THE JAPANESE MODEL?
PHOTOS AND MORE AT LINK


TOKYO — For Atsushi Nakanishi, jobless since Christmas, home is a cubicle barely bigger than a coffin — one of dozens of berths stacked two units high in one of central Tokyo’s decrepit “capsule” hotels.

“It’s just a place to crawl into and sleep,” he said, rolling his neck and stroking his black suit — one of just two he owns after discarding the rest of his wardrobe for lack of space. “You get used to it.”

When Capsule Hotel Shinjuku 510 opened nearly two decades ago, Japan was just beginning to pull back from its bubble economy, and the hotel’s tiny plastic cubicles offered a night’s refuge to salarymen who had missed the last train home.

Now, Hotel Shinjuku 510’s capsules, no larger than 6 1/2 feet long by 5 feet wide, and not tall enough to stand up in, have become an affordable option for some people with nowhere else to go as Japan endures its worst recession since World War II.

Once-booming exporters laid off workers en masse in 2009 as the global economic crisis pushed down demand. Many of the newly unemployed, forced from their company-sponsored housing or unable to make rent, have become homeless.

The country’s woes have led the government to open emergency shelters over the New Year holiday in a nationwide drive to help the homeless. The Democratic Party, which swept to power in September, wants to avoid the fate of the previous pro-business government, which was caught off-guard when unemployed workers pitched tents near public offices last year to call attention to their plight.

“In this bitter-cold New Year’s season, the government intends to do all it can to help those who face hardship,” Prime Minister Yukio Hatoyama said in a video posted Dec. 26 on YouTube. “You are not alone.”

On Friday, he visited a Tokyo shelter housing 700 homeless people, telling reporters that “help can’t wait.”

Mr. Nakanishi considers himself relatively lucky. After working odd jobs on an Isuzu assembly line, at pachinko parlors and as a security guard, Mr. Nakanishi, 40, moved into the capsule hotel in Tokyo’s Shinjuku district in April to save on rent while he worked night shifts at a delivery company.

Mr. Nakanishi, who studied economics at a regional university, dreams of becoming a lawyer and pores over legal manuals during the day. But with no job since Christmas, he does not know how much longer he can afford a capsule bed.

The rent is surprisingly high for such a small space: 59,000 yen a month, or about $640, for an upper bunk. But with no upfront deposit or extra utility charges, and basic amenities like fresh linens and free use of a communal bath and sauna, the cost is far less than renting an apartment in Tokyo, Mr. Nakanishi says.

Still, it is a bleak world where deep sleep is rare. The capsules do not have doors, only screens that pull down. Every bump of the shoulder on the plastic walls, every muffled cough, echoes loudly through the rows.

Each capsule is furnished only with a light, a small TV with earphones, coat hooks, a thin blanket and a hard pillow of rice husks.

Most possessions, from shirts to shaving cream, must be kept in lockers. There is a common room with old couches, a dining area and rows of sinks. Cigarette smoke is everywhere, as are security cameras. But the hotel staff does its best to put guests at ease: “Welcome home,” employees say at the entrance.

“Our main clients used to be salarymen who were out drinking and missed the last train,” said Tetsuya Akasako, head manager at the hotel.

But about two years ago, the hotel started to notice that guests were staying weeks, then months, he said. This year, it introduced a reduced rent for dwellers of a month or longer; now, about 100 of the hotel’s 300 capsules are rented out by the month.

After requests from its long-term dwellers, the hotel received special government permission to let them register their capsules as their official abode; that made it easier to land job interviews.

At 2 a.m. on one recent December night, two young women watched the American television show “24” on a TV inside the sauna. One said she had traveled to Tokyo from her native Gunma, north of the city, to look for work. She intended to be a hostess at one of the capital’s cabaret clubs, where women engage in conversation with men for a fee.

The woman, 20, said she was hoping to land a job with a club that would put her up in an apartment. She declined to give her name because she did not want her family to know her whereabouts.

“It’s tough to live like this, but it won’t be for too long,” she said. “At least there are more jobs here than in Gunma.”

The government says about 15,800 people live on the streets in Japan, but aid groups put the figure much higher, with at least 10,000 in Tokyo alone. Those numbers do not count the city’s “hidden” homeless, like those who live in capsule hotels. There is also a floating population that sleeps overnight in the country’s many 24-hour Internet cafes and saunas.

The jobless rate, at 5.2 percent, is at a record high, and the number of households on welfare has risen sharply. The country’s 15.7 percent poverty rate is one of the highest among industrialized nations.

These statistics have helped shatter an image, held since the country’s rise as an industrial power in the 1970s, that Japan is a classless society.

“When the country enjoyed rapid economic growth, standards of living improved across the board and class differences were obscured,” said Prof. Hiroshi Ishida of the University of Tokyo. “With a stagnating economy, class is more visible again.”

The government has poured money into bolstering Japan’s social welfare system, promising cash payments to households with children and abolishing tuition fees at public high schools.

Still, Naoto Iwaya, 46, is on the verge of joining the hopeless. A former tuna fisherman, he has been living at another capsule hotel in Tokyo since August. He most recently worked on a landfill at the city’s Haneda Airport, but that job ended last month.

“I have looked and looked, but there are no jobs. Now my savings are almost gone,” Mr. Iwaya said, after checking into an emergency shelter in Tokyo. He will be allowed to stay until Monday.

After that, he said, “I don’t know where I can go.”

[Demeter]

30. THERE'S MORE TO COME

but I think I've earned breakfast, by now. Post them if you've got them. Be seeing you!

http://www.youtube.com/watch?v=14eUKogPF7s

[Demeter]

39. Derivatives and other zombie products

The conspiracy of silence is beginning to dissolve into recriminations and revelations concerning the synthetic financial products that brought global doom and destruction and a vast wasteland in their wake.

I will try to corral recent articles here, so that the sensitive may avoid exposure. You have been warned.

[Demeter]

40. How Overhauling Derivatives Died

http://online.wsj.com/article_email/SB10001424052748704718204574616470817688220-lMyQjAxMDA5MDIwNjEyNDYyWj.html

Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.

Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.

The two main issues concerning regulators were trading and clearing of swaps, which allow investors to bet on or hedge movements in currencies, interest rates and many other things. Swaps generally trade privately, leaving competitors and regulators in the dark about the scope of their risks. In November 2008, the chairman of the Senate Agriculture Committee proposed forcing all derivatives trading onto exchanges, where their prices could be publicly disclosed and margin requirements imposed to insure that participants could make good on their market bets.

But a financial-overhaul bill passed by the House of Representatives on Dec. 11 watered down or eliminated these requirements. The measure still allows for voice brokering and allows dealers to use alternatives to public exchanges.

A lawyer for one big Wall Street dealer said in an interview that the rollback from the first proposals in Congress was the result of an "educational" process by dealers and customers that resulted in "a grudging recognition" that many uses of derivatives didn't fit such a strict approach. At one point, House agriculture chairman Collin Peterson (D., Minn.) said he suspected dealers had dispatched their customers to lobby Capital Hill.

For Wall Street, switching to exchanges would have cut their profits in a lucrative business. "Exchanges are anathema to the dealers," because the resulting added price disclosure "would lower the profits on each trade they handle, and they would handle many fewer trades," said Darrell Duffie, a finance professor at Stanford business school.

Clearing is considered important by regulators because it requires parties to a trade to post margin or collateral meant to ensure that each side can absorb losses if the trade moves against them. With derivatives, often little margin was required, allowing risks to pile up. Another issue that emerged with the failure of Lehman Brothers was whether such margin should be held in central clearinghouses. Exchange trading usually involves clearing with margin.

Dealers persuaded lawmakers to make exemptions to the clearing rules for some customers, including those covering foreign-exchange contracts, hedging by "end users" such as energy firms and airlines, and activities to offset "balance sheet risk," said Adam White, derivatives analyst at White Knight Research & Trading in Atlanta.

Mr. White says the Dec. 11 financial-reform bill will exempt nearly half of the $600 trillion in outstanding derivatives transactions from clearing requirements. Ohio Democrat Dennis Kucinich said in a statement he voted against the bill because it "contains a number of loopholes that sophisticated industry insiders will exploit with ease."

In an interview, House Financial Services Committee Chairman Barney Frank, who led efforts to craft the bill, defended the legislation, saying it is tougher than critics say. He said its clearing and trading provisions would require greater disclosure of trades and resulting risks, and give regulators more power to monitor and manage such risks.

The Massachusetts Democrat disputed Mr. Kucinich's implication that Wall Street dealers will be able to exploit the bill's exceptions, but said House Republicans had blocked some of his own efforts to make the bill tougher.

Wall Street executives say requiring end users to post additional margin could boost costs. An executive from Chicago utility Exelon Corp. told the Senate in September that requiring it to execute its electricity hedges on exchanges could require billions in additional cash outlays for margin that could boost prices to consumers. 3M Co. and Boeing Co. also warned of costs.

The Obama regulatory reform plan unveiled in June envisioned imposing higher capital requirements on dealers for customized, nonstandard derivatives that aren't cleared—to encourage dealers to send more to clearinghouses. But the House bill said only that capital and margin standards for off-exchange trades should be appropriate "for the risk associated with the noncleared swap," leaving specifics to regulators.

Some credit-default swaps clearing has already begun this year at the IntercontinentalExchange Inc., known as ICE, and CME Group Inc. The biggest derivative clearing operation, LCH Clearnet Group Inc. in London, already clears about one-third of roughly $200 trillion in interdealer interest-rate swaps.

A report Dec. 17 by Morgan Stanley analysts estimated that the volume of derivatives cleared could increase from a current 20% of the total to as much as 60% by 2012—a backdoor confirmation of critics' charge that 40% of the universe won't be covered.

[Demeter]

41. Pricing a CDO - Not only Bad Math, Bad Computation too

http://www.economicpopulist.org/content/pricing-cdo-not-only-bad-math-bad-computation-too

A working paper, Computational complexity and informational asymmetry in financial products, Sanjeev Arora, Boaz Barak, Markus Brunnermeier, Rong Ge. sheds some light on the complex mathematical models upon which credit default obligations and other derivatives are based.

What Arora et al. prove is not only are many derivative mathematical models impossible to compute, never mind in real time, because they require more computing power than the world possesses, the missing information to run a mathematical model is a very good place to cheat with.

To understand what CDOs, derivatives are, see this post, complete with video tutorials. For some background on the mathematics behind derivatives, read We Want the Formula and this one on some of the probability functions.

Onto the paper. Firstly this quote:

One of our main results suggests that it may be computationally intractable to price derivatives even when buyers know almost all of the relevant information, and furthermore this is true even in very simple models of asset yields.

They ain't talking about your new PC cranking through these calculations, they are referring to massive supercomputers.

This result immediately posts a red flag about asymmetric information, since it implies that derivative contracts could contain information that is in plain view yet cannot be understood with any foreseeable amount of computational effort.

So, individual investors or even online brokerage firms can kiss it goodbye in verifying these values easily due to computational complexity of the algorithms themselves.

The practical downside of using derivatives is that they are complex assets that are difficult to price. Since their values depend on complex interaction of numerous attributes, the issuer can easily tamper derivatives without anybody being able to detect it within a reasonable amount of time.

The paper points out current variations in price can be 17% and they can give widely variable pricing evaluations, even within the same bank issuing the same tranch (little slices of rated assets) in a derivative.

Now here is the reason this paper is so mind boggling damning and I'm translating from computational research to Populist terms.

There is no friggin' way to crank these numbers in these models with typical processing power. There are not enough computers in the world. That means not only are many results invalid, but this:

Designers of financial products can rely on computational intractability to disguise their information via suitable “cherry picking.” They can generate extra profits from this hidden information, far beyond what would be possible in a fully rational setting

Translated to Populist blog speak: Derivatives are a way to scam and screw investors out of their dough through a lot of high fallutin' gobbledygook that sounds real technical.

How do sellers scam on CDOs? By taking a few of the ones they are peddling, a subset, and stuffing them with more toxic assets than the other ones. To load the derivative dice, one adds \mbox worthless crap assets = \sqrt{\mbox total assets}, to be precise. This puts that particular CDO at a much higher probability of default. So, instead of mitigating risk, one can increase risk! Supposedly one of the justifications of derivatives is to mitigate risk. Ho ho ho!

Now, because there are only some CDOs which are rigged, finding which subset of them is, in a sea of CDOs....computationally impossible. It wouldn't matter if you had gobs and gobs of super computers, and billions of years, you ain't gonna find them because one has to go through all sorts of permutations to calculate and determine them. To make matters worse, the CDO seller, can stuff CDOs with a subset of worthless assets in a way that even if one had all of the computers in the world and could crank through \mbox{n-sized subsets of} N, it won't pop up in the detection algorithm anywho due to the probability spread. In Math geek, this is technically a NP-Complete problem.

In layman's terms, the equation P \neq NP simply means even with a huge bunch of honking fast computers, one cannot get a concrete result or answer.

Then asymmetric information means that one guy has more info that you do when making a transaction. Say the seller of a house knows it has termites, but you don't and buy the house thinking you got a great deal because it was below market value.

Surely there is a way to guarantee these derivatives are not tampered with right? Uh, no! If ya can't prove these things are rigged, how ya gonna guarantee they ain't? Even more interesting, let's say a patsy buyer gets wiped out and suspects he's been scammed, this plan is full-proof because there is no evidence, thus nothing the screwed over buyer can do to get their money back.

Is there anything that can be done to make derivatives a computationally bounded problem to make them legit? Indeed there is, say the authors. One is a logic statement, an exclusive OR, although I don't recall seeing such a thing in any probability or statistical formula...(yet, there is integer mathematics)....and then they define a more realistic bound, what is called a tree of majorities.

Now, on regulation, here on EP we've called for the regulation of the mathematical models themselves. How can one sell a product built on bad math, that is not even valid by the mathematical properties themselves? One could also incorporate the ability to validate a price computationally as part of a regulation requirement. The above type of derivatives outlined in the paper? Plain just ban them would be my druthers.

The rest of the paper is an exceptional read, but be warned, it does use many computer science theoretical terms, equations and advanced probability and statistical concepts. I've broken down a few key concepts above.

I'm personally thrilled to see some computer scientists look into financial derivatives! When we first reviewed them on this site, we were shocked that the Mathematical and Scientific community had not flagged many of these models for being theoretically flawed, from the mathematics themselves. Good work Arora et al.!

The authors have also put up a derivatives FAQ of the implications of their paper. MANY SUPPORTING LINKS IN ORIGINAL ARTICLE

[Name removed]

42. Deleted message

Message removed by moderator. Click here to review the message board rules.

[bread_and_roses]

45. that is very interesting - and I have some familiarity with QA

as the SO has worked in that field for years. Certainly, his experience has been that whatever the CEOs or whomever spout, all they care about is getting product out the door. As for real worker participation, that's a laugh.

It's good to see someone going beyond "it's the banks" (though not to absolve them of any of their high crimes and follies).

[Demeter]

47. I Am Also Very Familiar with Demings QA Push

He took his program to Japan because the US businessmen wouldn't listen, and Japan became the manufacturing powerhouse of the world. US Engineers screamed about this endlessly throughout the 70's, to no avail.

Then the Japanese exported all their jobs to Korea, and Singpore, and other low cost labor markets. The US business tycoons copied them. And here we are, following them into the landmines and the death spiral of a hollowed out economy.

[ozymandius]

58. NAFTA

NAFTA was never designed to benefit workers. It was designed to benefit the employers and owners. That is: the middle class was sold a false promise designed by those who would seek to maximize advantage over them.

We all know the story. Work hard? Maximize productivity on a personal level? Want a raise? Employer moves the business overseas. In the aftermath, easy credit (read: debt) supplanted wages.

So when I look at this situation the correlation that comes to mind is the relationship between two parties in trade (as in stocks). The party that consistently is on the losing side of this trade becomes obvious. The deck is stacked in favor of the house. And the house makes the rules.

So I am fine with taxing, at Eisenhower-era levels, the individuals who have used the their power and influence to enact legislation such as NAFTA. Just as equitable solutions to recover expatriated American dollars could be realized by freezing out companies that have fashioned policy to benefit the few at the expense of the many. Likewise, corporations that have and continue still to socialize monetary losses, as in repaying bailout funds at a discount, and privatizing gains should be brought to heel with onerous regulation and taxation.

This is not to be merely punitive. The goal is to recover resources which have been hoarded and squandered on "wants" instead of directing these resources toward society's "needs". Much that has been undone in our nation's economy over the past thirty years must be either redone or reinvented. The primary way that I see our nation's economic and systemic rebuilding is through reallocation of resources, without drawing upon the familiar mechanisms of debt leverage.

2¢

[Demeter]

63. Amen!

Thanks for today's Lesson, Ozy! Hope you are keeping warm.

[Demeter]

43. The Secret Lives of Amazon's Elves

http://gizmodo.com/5433487/the-secret-lives-of-amazons-elves

If Amazon is Santa, 400 folks living in RVs outside the Coffeyville, Kansas fulfillment center this winter are the elves.

A few years back Chris Dunphy and Cherie Ve Ard flipped the bird to their desk jobs, packed their belongings in a custom 17-foot solar-powered fiberglass camper, and hit the road to live "at the intersection of Epic and Awesome." A couple months ago, while staying with friends, they noticed that Amazon was luring RVers to Coffeyville, Kansas, the site of the retail giant's original and largest fulfillment center.

"We were located in San Diego at the time," explained Cherie. "We're part of a community of younger full-time RVers on Nurvers.com, a group of non-retired-age folks who are living the mobile lifestyle and kind of going outside the norms of 'Wait for retirement to travel.'" They noticed other RVers were flocking to Kansas to work for Amazon. The pay wasn't great—just above $10-an-hour, typically—but Chris and Cherie were planning on being in St. Louis for the holidays. Why not kill a month in Kansas working for Amazon?

Fast forward a couple of weeks, and the self-styled "technomads" were putting down stakes at a state park about 20 miles from the four enormous but dull warehouses that comprise the Coffeyville hub.

Their first day inside, Chris was awed. "Walking inside reminded me of the scene from Indiana Jones when they abandon the Ark in that giant warehouse. It's three stories high. It feels like an industrial library. Shelves going up and up and up." Hundreds of employees scurried, some "orange-badges" or "green-badges" hired by two temporary employment services mixed with the sought-after blue-badges of full-time Amazon employees, guided to their next destination by computers that flashed lights when bins were full or guided workers through the maze with handheld computers. "Pickers are basically playing a human Pac-Man game. They've got a computer scanner that they carry around that tells them where to go. They find their little shelf. One slot might be a book. The next shelf over might be a toaster. Or an iPod. The next slot after that might be a pair of jeans."
Fiberglass City

Amazon didn't always lure in "workcampers" from the RV community.

"From what the agency people had told us, Amazon had a bad experience busing in people from Tulsa," says Chris. "There was a lot of theft and a lot of people who weren't really serious about the job."

Workers from Tulsa were adding a 4-hour round-trip commute to an already grueling 10-to-12 hour shift, Cherie is quick to add. "They'd get there exhausted."

Enter the workcampers, people making a go at living in their RVs full time—many of whom might be otherwise overqualified. "I think Amazon was skeptical at first," says Cherie. "But after the first trial year they were very, very impressed. Workcampers came in enthusiastic about working, since most are professionals. We've owned businesses or been managers." White collar workers, trying their hand at the gypsy life. Even better, the workcampers were able to stay locally.

Not all of the camps provided for the workcampers were exactly inviting.

Chris and Cherie pulled into the one just before Thanksgiving, but could tell it wouldn't make for a pleasant stay. "The closest one was a city park called Walter Johnson. RVs were very close together. Half the campsites had full hookups, which meant they had water, electricity, and sewer dump on-site. Half the sites just had electricity and water and they had what they call a 'Honey Wagon' that comes around and pumps your sewage out a few times a week." Some RVers had been in Coffeyville since August.

Worse, it was cramped and muddy. "Coffeyville also had a flood three years ago, so it was very, very wet and muddy because the area had been washed out, then rained on recently." They eventually moved on to a state park, which was lovely, but also four times farther away. They rarely had time to enjoy the scenery.

"We were on the night shift," says Chris, "Our day would start when we would wake up at three in the afternoon. Work started at five."

"Every shift starts with what they call a 'Stand Up.' You gather in one area with your usual department—ours was called 'Sortable Singles,' which sounds like it should be the name of a dating site—and they'd count off how many people they needed in each department. Run through a few announcements. Give you a few safety tips. And then they lead you through five minutes of group stretches."

Cherie was mainly a packer, putting items in the box and scanning them. Chris, on the other hand, was a "water spider." He explains, "A water spider is responsible for keeping all the packers supplied, so ideally they'd never need to stand up and leave their station to get any other supplies like all the different sizes of boxes, plus making sure their tape machines and paper-spitter machines are operating."

"I never quite exactly figured out why they call it a water spider. My guess is back in the history of assembly line jobs, the water spider would be the person who would bring people on the line water to drink. Nobody seemed to know!"
The Mocha Factory

Work was monotonous and—for a couple who had been living a relative life of leisure—full of endless hours of standing on one's feet.

"24-Hour Fitness, Amazon-style," laughs Chris. Cherie liked to think of it as having "a personal trainer for 60 hours a week."

Inside the warehouses, machines and man alike were controlled by Amazon's computerized assembly line.

In one part of the factory, Chris watched two giant elliptical carousels, each one the size of a football field, carry wooden trays around at 15mph. "All the items are coming in the totes on one side of this giant machine. There are people who take each individual item, scan them and put them on the trays as they go by. The trays get to a chute where their order is being assembled, tilt, and the product flies down into that space. When all the items for a particular order are assembled in one place an orange light comes on and somebody comes by." Above, another carousel brought an endless procession of empty boxes to be filled with the orders.

It wasn't exactly what Cherie had envisioned. "When we told people were going to do this, someone said 'Whenever I click the order button on Amazon, I always imagine a chorus of happy, singing Oompa-Loompas riding around on Segways and shipping my stuff.' Well...no. It's not exactly like that."

"The computer has to prioritize how it's going to send out all the pickers in this giant facility. So someone could order a book and a sweater and an iPod, and those could be in completely different corners of the whole facility. But somehow they all arrive within about 30 minutes of each other." It's efficiency even Willy Wonka could love.

Chris and Cherie wouldn't work another season at Coffeyville, but not because they were miserable. "Everybody treated each other really nicely!" says Chris. It's just that the two are "experience junkies, craving the new," even if working for Amazon certainly gave them a fresh perspective on American culture.

"You'd have a tote come down the line, and you'd have adult toys right next to kid toys in the same bin," laughs Cherie. "The Obama Chia Pet was an oddity. And the Bill Clinton corkscrew. And I did have a tote one afternoon that was full of mooning gnomes."

Chris geeked on it pretty hard. (Before he became an migrant worker, Chris was a founding editor for boot magazine—later known as Maximum PC. He also worked for Palm.) "Just getting to experience that type of work, to literally see consumer culture flow beneath your fingertips, was absolutely fascinating. You feel the pulse of the market."

Besides their paychecks, all they're left with are memories—cameras weren't allowed inside.

"One of the rules at Amazon is that you're not allowed to bring anything into the facility that they sell." Chris went through a bit of withdrawal. "One of the hardest things about the job was going without my iPhone for a month. It was a great way to break the addiction of wanting to Twitter about things. You'd be like, 'Oh my God, I just saw this Bill Clinton corkscrew and you won't believe where the corkscrew comes out.' But oh crap, I can't tweet."


Send an email to Joel Johnson, the author of this post, at [e-mail].

[Demeter]

44. High quality imports suffer more during recessions

http://www.voxeu.org/index.php?q=node/4152

The volume of world trade has plummeted with the global crisis. This column says that high-quality imports are more responsive to income changes than low-quality imports. This explains why world trade value fell faster during the crisis than world trade volume, which fell faster than GDP.

The volume of world trade plummeted between the last quarter of 2008 and the first quarter of 2009. Recent forecasts by the IMF (2009) predict a reduction of world trade volume by 11% (and value by 23%) for the year 2009. This is by far larger than the 1.3% contraction of the world GDP. The CEPR book edited by Simon Evenett and Richard Baldwin suggests that the availability of trade finance, the increase of protection, and the contraction of inventories contribute to explain the disconnection world trade volumes and the world GDP during the crisis this year. Caroline Freund (2009) also argues that world trade volume is more responsive to GDP variations during global downturns, suggesting that all the above-mentioned hurdles may be specific to bad times.

Another surprising pattern is the decrease of import price indices, associated with the disconnection between import volumes and import values. Joseph Francois and Julia Woerz (2009) argue that part of the decrease in import prices can be explained by the reduction of world commodity prices. But the contraction of markups and individual prices or the selection of varieties according to their price may have also contributed to the decrease of import price indices. Indeed, tougher competition following the contraction of income and demand may lead firms to reduce their profit margins. Also, consumers may shift their demand to low-price varieties in times of recession. Hence, the price evolution within each individual variety and the selection between varieties is responsible for aggregate price variations.
New evidence: A bigger drop for high-quality imports

In an upcoming paper, we test whether variations of income can affect differently the imports of varieties differentiated by their price, therefore contributing to the disconnection between volumes and values when income falls. Theoretical models by Bils and Klenow (2001) and Fajgelbaum et al. (2009) indeed suggest that variations of income are not only associated with variations in the quantity of goods consumed but also variations in the quality of those goods. Households prefer more expensive varieties as they become richer. This implies that a global recession is expected to decrease the demand for high-quality varieties.

Empirically, price differentiation within detailed product categories is usually considered a proxy for quality differentiation (Baldwin and Harrigan 2009, Fontagné et al. 2008, Schott 2008, amongst others). Accordingly, we use international trade data with the greatest level of product disaggregation, provided by the UN, to classify varieties as low or high quality.2 More precisely, on each individual market, varieties with an import price above the average import price observed on the market are classified as high-quality varieties, and those varieties with below-average import prices are classified as low quality.

We use this classification to compute the recent evolution of low and high quality import quantities for the EU (15). The monthly data are by Eurostat Comext are highly disaggregated, yielding some 8,000 product categories.3 Figure 1 reports the evolution of the import quantities for high- and low-quality varieties. The curves show that the decrease of the quantity imported has been larger for high-quality varieties (-23%) than low-quality varieties (-17%), between March 2008 and March 2009. The disconnection between high- and low-quality varieties was more pronounced during the fourth quarter of 2008. This helps explain why import values have decreased more than import volumes or quantity – demand shifted away from more expensive varieties more.

Figure 1. Evolution of import quantity by quality in the EU15

High-quality imports are more responsive to GDP variations

We complete the analysis by estimating the elasticity of import quantity with respect to variations of the GDP for low- and high-quality ladders. We use import quantity and unit values from the BACI database (CEPII) that covers the period 1995-2007. GDP and nominal exchange rates are provided by the World Development Indicators database. Import demand equations are estimated separately for each HS4 level of product disaggregation for 184 exporting and importing countries. We report the median of income elasticities in Figure 2, considering all coefficients.

The results show that a decrease in aggregate income (measured by GDP) reduces the quantity of goods imported (positive elasticity). However, the income elasticity differs significantly across low- and high-quality varieties. The income elasticity is almost 60% higher for high-quality varieties. These results are obtained by considering all countries, but they remain qualitatively similar when the elasticity is estimated for only OECD destinations or emerging economies destinations.

Figure 2. Median estimated income elasticity

The median income elasticity is always above unity for both high-quality (expensive) varieties and low-quality (cheap) varieties. This implies that variations in import quantity are always larger than variations in GDP. This matches recent experience, as trade volume fell much more (-11%) than world production (-1.3%) during the crisis. Applying our estimated elasticity to this decrease in world production, we find that the predicted contraction of world GDP in 2009 should lead to a 1.6% decrease of the import quantity for low-quality varieties, and a 2.6% decrease of import quantity for high-quality varieties.

Figure 2 reports that the income elasticity is larger for OECD destinations compared to emerging markets. The recession has also been worse for advanced economies. Taken together, these facts explain the recent collapse of world trade – countries with more elastic import demand have had the largest recessions. The example of Japan is suggestive. The IMF predicts a -6.2% recession for Japan in 2009, one of the most severe reductions of GDP among advanced economies (IMF 2009). Using the quality distribution of exports for each exporter on the Japanese market and the income elasticity for OECD destinations, we can predict the variation of imports from each country. Results are reported in Figure 3 for a selection of exporters. These predictions show that, due to quality differentiation, the difference between the reaction of Chinese export quantities and export quantities from the most advanced economies may reach more than 2%. The difference in the reaction of export quantity between countries specialised in low and high quality products can explain the decrease of import prices during the crisis.

Figure 3. Predicted change in exports following a 6.2% GDP decrease in Japan, by destination

Conclusion

We show that high-quality imports are more responsive to GDP variations than low-quality imports. This empirical pattern can explain the behaviour of world trade volume, world trade value, and import prices during the last crisis. Our findings also imply that high-quality imports should benefit more from the recovery, due to their larger income elasticity. In other words, countries specialised in high quality exports are expected to suffer more in times of crises but should also recover faster. This has important implications regarding policies in rich countries that promote specialisation in higher-quality product ladders. While this form of specialisation can isolate part of domestic production from competition from the South, it also implies greater volatility, as such exports are more responsive to the world business cycle.

SEE LINK FOR GRAPHS AND REFERENCES

[Demeter]

46. It is Japan we should be worrying about, not America SAID THE ENGLISHMAN

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

Japan is drifting helplessly towards a dramatic fiscal crisis. For 20 years the world's second-largest economy has been able to borrow cheaply from a captive bond market, feeding its addiction to Keynesian deficit spending – and allowing it to push public debt beyond the point of no return.

The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).

Regime-change in Tokyo and the arrival of Yukio Hatoyama's neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the "new social policy" – have concentrated the minds of investors at long last. "Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan," said Albert Edwards, a Japan-veteran at Société Générale.

Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised "a real risk that Japan could end up in a major default".

The IMF expects Japan's gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.

"Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving," said the IMF.

The savings rate has crashed from 15pc in 1990 to near 2pc today, half America's rate. Japan's $1.5 trillion state pension fund (the world's biggest) has become a net seller of government bonds this year, as it must to meet pay-out obligations. The demographic crunch has hit. The workforce been contracting since 2005.

Japan Post Bank is balking at further additions to its $1.7 trillion holdings of state debt. The pillars of the government debt market are crumbling. Little wonder that the Ministry of Finance has begun advertising bonds in Tokyo taxis, featuring Koyuki from The Last Samurai. If Japan's bond rates rise to global levels of 3pc to 4pc, interest costs will shatter state finances.

No one knows exactly when a country tips into a debt compound trap. But Japan must be close, even allowing for the fact that liabilities of the state Loan Programme (FILP) have fallen by 40pc of GDP since 2000.

"The debt situation is irrecoverable," said Carl Weinberg from High Frequency Economics. "I don't see any orderly way out of this. They will not be able to fund their deficit. There will be a fiscal shutdown, a pension haircut, and bank failures that will rock the world. It is criminally negligent that rating agencies are not blowing the whistle on this."

Mr Hatoyama inherited a country that was already hurtling into sovereign "Chapter 11". The Great Recession has eaten up 27pc in tax revenues. Industrial output is down 19pc, even after the summer rebound; exports are down 31pc; the economy is 10pc smaller today in "nominal" terms than a year ago – and nominal is what matters for debt.

Tokyo's price index fell 2.4pc in October, the deepest deflation in modern Japanese history. Real interest rates have risen 300 basis points in a year. It reads like a page from Irving Fisher's 1933 paper, Debt Deflation Causes of Great Depressions.

The Bank of Japan seems oddly insouciant. It will end its (feeble) quantitative easing in December by suspending purchases of corporate debt, much to the fury of the Finance Ministry.

"This is incredibly dangerous," said Russell Jones from the RBC Capital Markets. "The rate of deflation is shocking. The debt dynamics are horrible and there is the risk of a downward spiral."

Tokyo has let the yen appreciate violently – 90 to the dollar, 13 to the Chinese yuan – giving another twist to the deflation knife. Top exporters are below break-even cost, says RBS. The government could stop this, as it did in a wave of manic dollar purchases from 2003-2004. It could print money à l'outrance to stave off deflation. Yet it sits frozen, like a rabbit in the headlamps.

Japan's terrible errors are by now well known. It failed to jettison its mercantilist export model in time. It resisted the feminist revolution, leading to a baby strike by young women. It acquiesced in a mad investment bubble (like China now) in the 1980s, stealing growth from the future.

It wasted its immense fiscal firepower, scattering money for 20 years on half-baked spending projects to keep the economy afloat. QE was too little, too late, and this is the lesson for the West. We must cut borrowing drastically over the next decade, and offset this with ultra-easy monetary policy. Does Downing Street understand this? Does the White House? Does the European Central Bank? Clearly not.

[Demeter]

48. Dollar Homes Lack Buyers No bids in Barrington By STEVE RHODES

Suburb of Chicago

http://www.nbcchicago.com/news/local-beat/Dollar-Homes-Lack-Buyers-67566177.html

The housing market is so bad you can't even give away homes these days.

Officials in suburban Barrington put three homes up for a sale at just a dollar a piece - a dollar! - and didn't get a single bidder.

A dollar!

Let's review: For less than the price of a CTA ride, a Starbuck's coffee, or the typical tip slipped under a stripper's G-string, you could have bought a home in Barrington.

Sure, buying a house means assuming the future costs of upkeep, but a dollar!

"Even if you're offering a house for a dollar, sometimes all those logistics can make it difficult, especially in this market," Lisa DiChiera of the Landmarks Preservation Council of Illinois told the Daily Herald.

Though the homes aren't officially designated landmarks, they are believed to have some historic value; that's why Barrington officials want to sell the homes - which are located in the suburb's downtown - rather than just demolish them to make way for development, which is the alternative.

Buyers would be required to relocate the homes, but still. All three could be had for less than the cost of a Subway footlong. And your purchase would last a lot longer.

Steve Rhodes is the proprietor of The Beachwood Reporter, a Chicago-centric news and culture review.

[Demeter]

49. Icelanders petition president to veto Icesave bill

http://news.yahoo.com/s/nm/20100102/bs_nm/us_iceland_petition

Nearly a quarter of Icelandic voters have signed a petition asking their president to veto a bill on repaying $5 billion lost by British and Dutch savers when the island's banks collapsed, organizers said on Saturday.

The petition also called on President Olaf Ragnar Grimsson to call a referendum on an issue which has aroused resentment that taxpayers are being left to pay for banks' mistakes.

Earlier this week parliament approved the amended bill to reimburse Britain and the Netherlands for the amount, which was lost by savers in both countries in 2008 who deposited funds in high-interest "Icesave" online savings accounts.

But the president has yet to sign the bill into law and 56,089 people, who represent 23 percent of the island nation's electorate, have signed the petition, the organizers said.

"I consider it to be a reasonable demand that the economic burden placed on the current and future generations of Icelanders, in the form of a state guarantee for Icesave payments to the UK and Dutch governments, be subject to a national referendum," the text of the petition read.

InDefence, the group responsible for gathering the signatures, said the Icesave legislation represented a "huge risk" for Iceland's economic future.

"All projections based on realistic assumptions ... showed without doubt that Iceland would be unable to meet the payments stipulated by the Icesave loan agreements as set out in the disputed legislation," it said in a statement.

Passing the Icesave legislation would boost Iceland's hopes of swift entry into the European Union, but the deal is deeply unpopular with the Icelandic population.

Parliament approved the bill by a slim margin -- 33 members voted in favor, with 30 voting against -- and one junior government minister has resigned over the dispute.

The longstanding dispute has held up payment of some aid funds from international lenders, made it difficult to relax capital controls imposed at the height of the financial crisis, and clouded Reykjavik's chances of joining the EU.

[bread_and_roses]

50. 1. US Congress Sells Out to Wall Street - Project Censored's #1 story of yr

http://www.projectcensored.org/top-stories/articles/1-us-congress-sells-out-to-wall-street-sources/

Taibbi concludes, “The reality is that the worldwide economic meltdown and the bailout that followed were together a kind of revolution, a coup d’état. They cemented and formalized a political trend that has been snowballing for decades: the gradual takeover of the government by a small class of connected insiders, who used money to control elections, buy influence and systematically weaken financial regulations.”

Fraud and crisis continue to deepen and expand with significant conflicts of interest in Congress and the executive branch of US government. Simon Johnson, former IMF chief economist, says, “The finance industry has effectively captured our government.”

As I have said often here, I am not a Democrat. The fortunes of the Democratic Party as a Party

[Demeter]

51. Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

http://www.nakedcapitalism.com/2009/11/guest-post-galbraith-says-administrations-sole-goal-is-to-restore-system-of-5-or-10-years-ago-but-confidence-wont-be-restored-unless-fraud-which-caused-the-crash-is-investigated.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

Galbraith Says Administration’s Sole Goal is to Restore System of 5 or 10 Years Ago, But Confidence Won’t be Restored Unless Fraud Which Caused the Crash is Investigated

By George Washington of Washington’s Blog.

As I have repeatedly written, the largest U.S. banks have repeatedly gone bankrupt due to wild speculation which was blessed by the Fed, and then the government covered up their bankruptcy.

Indeed, the New York Times writes today about one of the too big to fails:

Over the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.

But prominent economist James Galbraith recently told Bill Moyers:

JAMES GALBRAITH: The overwhelming emphasis, in the administration’s program, I think, has been to return things to a condition of normalcy, to use a 1920s word, that prevailed five and ten years ago. That is to say, we’re back to a world in which Wall Street and the major banks are leading, and setting the path–

BILL MOYERS: To restore what was.

JAMES GALBRAITH: To restore what was–

BILL MOYERS: Instead of reform what is.

JAMES GALBRAITH: And I don’t think what was can be restored.

BILL MOYERS: And you say that’s the objective of the administration’s policies? Geithner, Bernanke, Summers, the President himself?

JAMES GALBRAITH: To the extent that there’s a defined objective, that’s it, yes. I think in the immediate day-to-day work, they’ve largely been preoccupied with keeping the existing system from collapsing. And the government is powerful. It has substantially succeeded at that, but you really have to think about, do you want to have a financial sector dominated by a small number of very large institutions, very difficult to manage, practically impossible to regulate, and ruled by, essentially, the same people and the same culture that caused the crisis in the first place.

In other words – as I have repeatedly written – the administration’s talk of reform is just talk … the boys are just trying to restore the status quo.

Galbraith also pointed out – as many other experts have – that confidence in the system cannot be restored unless the fraud which led to the crash is investigated:

JAMES GALBRAITH: That’s the point about the crisis, is that it could have been prevented. The people in authority two, three, five years ago, knew how to prevent it. They chose not to act, because they were getting a political and an economic benefit out of the speculative explosion that was occurring.

BILL MOYERS: You mean, the people who could have prevented the dam from breaking were too busy fishing above it, and reaping big rewards to want to fix the crack in it?

JAMES GALBRAITH: Sure. The Federal Reserve, in particular, knew that the dam was cracking. Alan Greenspan, I think, almost surely knew this, and chose to wait until it had washed away.

BILL MOYERS: Why?

JAMES GALBRAITH: They let all of this run, because they were getting a superficially stronger economy out of it. The ownership society, all that was a scam, basically, designed to lure people who could never afford these mortgages into accepting them. And yes, I think they, any rational person, certainly people in the industry, knew that this was not going to last. There was a little industry code, I’ve learned, IBGYBG. “I’ll be gone. You’ll be gone.”

BILL MOYERS: Really?

JAMES GALBRAITH: Yeah.

BILL MOYERS: The industry being the securities industry?

JAMES GALBRAITH: Well, and the mortgage originators and the bankers, generally.

BILL MOYERS: But that’s criminal fraud.

JAMES GALBRAITH: Oh sure. There was a huge amount of it. The Bush administration did not actively investigate the fraud that they knew, that the FBI knew was occurring, from 2004 onward. And there will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that’s a process which needs to get underway.

As the New York Times article notes, the lack of transparency is ongoing, even as between different branches of government:

Representative Lloyd Doggett, a Texas Democrat on the House Ways and Means Committee, recently registered unease about the government’s guarantee of $300 billion in Citigroup assets and how effectively the Treasury secretary, Timothy F. Geithner, was monitoring the bank.

“We cannot know the full scope of the taxpayers’ potential cost from these hasty guarantees,” Mr. Doggett said last week in an e-mail message. “Inexplicably, Secretary Geithner appears unwilling to commit to conduct an analysis, despite my specific request to him in March. A critical and transparent examination of the response to the financial crisis is essential not only to learn from past mistakes, but also to prevent further erosion of the public’s trust in government.”

Mario Seccareccia – editor of the International Journal of Political Economy – points out:

The Great Crash of 1929 taught us that a modern monetary market economy is governed by confidence. As John Maynard Keynes put it, monetary relations and, more precisely, asset values, are held up by one’s belief in the future. Without it, the whole credit-driven economic system comes to a halt and economic agents scramble for cover by seeking to acquire liquidity.

While in a non commodity-based monetary system a central bank can quite easily supply liquidity in its role as lender of last resort, a central bank cannot single-handedly instill confidence in the future. When confidence is lost, monetary policy is impotent in building up asset values, which can only be sustained if people believe in future revenue arising from future production. The economy remains trapped in a state of paralysis in which everyone is seeking to remain liquid. History tells the tale: Excessive optimism prior to the Great Crash turned to hopelessness during the early 1930s.

Without a thorough investigation like the Pecora Commission, and without prosecuting those who are guilty, confidence and hope in the future will not be restored, consumer confidence will remain depressed, and we will remain in an economic slump.

[Demeter]

52. Richmond Fed on the GSE’s – “They Encourage Defaults”

http://brucekrasting.blogspot.com/2009/11/richmond-fed-on-gses-they-encourage.html

The Richmond Fed produced a report that provides some useful information on the issue of non-recourse mortgage loans and their default rates. The report includes a State-by-State breakdown of the rules for defaulting.


This report was over my head...The conclusions are easier to read. I found this interesting:

“For homes appraised at $300,000 to $500,000, borrowers in non-recourse states are 59% more likely to default than borrowers in recourse states. For homes appraised at $500,000 to $750,000, borrowers in non-recourse states are almost twice as likely (100%) to default as borrowers in recourse states while for homes appraised at $750,000 to $1 million, borrowers in non- recourse states are 66% more likely to default.”

California is the largest State that is also a non recourse State. It is also a place where a significant amount of properties are worth >$300k. Given that the anticipated default rate is 70+% greater then in another State it tells you what is happening and what will continue to happen for Cali-jumbo mortgages. It is a black hole. Given this, why would anyone be willing to lend in California?

Also from the conclusion is the following. It took me a bit to understand the double negatives. When I see words like this I just assume that it is an effort to obfuscate something.

“We cannot reject the hypothesis that recourse does not have an effect on Loans held by the Government Sponsored Enterprises.”

In the body of the paper is a better explanation:

“Recourse does not have a significant impact on the probability of default for mortgages held by a GSE.”

I found that to be a startling observation. What this means is that people will more likely default on a GSE loan than a private lender regardless if they are in recourse or a non-recourse State. This can only be attributable to the following mindset:

“I owe this mortgage to the Feds. Even though they have the right to go after my bank account to pay this off I know they will not. So screw them, I‘m not paying. There is no downside”.

The confirmation for this comes from the Richmond Fed:

“The probability of default by foreclosure increases by 7% for mortgages held by a GSE as compared to the mortgages held by private lenders.”

This report was sent to Congress. I doubt they will read it. Barney Frank, one of the chief ‘deciders’ on all of this should read it. The conclusion is obvious. When the government makes mortgage loans they are encouraging defaults. As lenders they appear to have no teeth. This is a hell of a predicament given that the D.C. lenders are currently 95% of the new mortgage market. The total value of mortgages held by Uncle Sam is $7.5 Trillion.

The most significant contribution from this piece is a well-organized discussion of who can do what to whom and when can they do it on a State-by-State basis. That information can be downloaded at this site. The information on the individual State Laws starts on page 43 and ends on 54.

The following is a summary of that information. If you are thinking of defaulting on your mortgage you might take a look at these sources. Who says the government doesn’t provide useful information?

[Demeter]

55. Weather Update: It was 4F at 3AM Sunday Morning

which could be worse. After all, it wasn't snowing or blowing, which are the things a paper carrier hates most.

At 8 AM it's crept all the way up to 5.7F but the wind picked up towards the end, when I do the door to door papers. But it's over. And I've probably burned off the Xmas Cheer already. Both the Saturn and the new flannel lined weather proof pants performed superbly, too.

The Moon was just past full, and seemed to be passing Mars. Something big and red, anyway.--Yup, it was Mars, all right.

[bread_and_roses]

59. Brutal here too - still only 9F at 10:30

We have wind-chill advisories in effect - "STRONG WINDS HAVE BROUGHT WIND CHILL TEMPERATURES TO MINUS 15
DEGREES OR COLDER THIS MORNING."

We have wind, had snow last night, blowing snow now. Sorry you had to be out in such weather, glad you had the flannel pants - I was out for just a few minutes yesterday in jeans, and felt like my legs were naked.

[Demeter]

61. I had Two Layers

Last year I had to wear three layers, which is quite bulky. The investment in more Antarctic gear was worth it.

It is now up to 15.8F but the windchill is 2F. The sun is shining brightly and the cats and I are dozing it it. Or I was, but the Kid wants to go shopping again....

I do hope we don't get 2 months of this cold, like we did last year. It is a great blessing that winter didn't start on Veteran's Day, but waited until after Xmas.

[ozymandius]

60. 23º at 10:55 in Atlanta

Not that I'm complaining. This weather, however, is a surprise in its temperature extremes and duration. We should see 14º as a low on Monday.

[bread_and_roses]

57. Something hopeful - worker coops

http://www.inthesetimes.com/working/entry/5370/un_gives_nod_to_worker_co-ops_as_cleveland_communities_embrace_model/

... To most Americans, the image of a worker co-ops conjures up notions of a hippie venture. But collective business models have been embraced all over the world and have recently started gaining traction in U.S. cities like Cleveland, Ohio.

As autonomous voluntary associations, cooperatives are jointly owned and democratically controlled enterprises by a group of individuals with common economic and social goals. Cooperatives have 800 million members across 100 countries and account for about 100 million jobs worldwide, according to the UN...

...Even here in the U.S., 900 rural electric cooperatives serve 37 million people and own almost half of the electric distribution lines in the country. But more recently, unions and businesses have also begun to take a closer look at cooperative model in various sectors. Time is reporting this week on how communities in Cleveland are experimenting with the idea by taking inspiration from the successful Mondragon Corp., the world's largest worker-owned co-op with roots in Spain's basque region.

But the best of this is in an article linked to this one:

http://www.time.com/time/printout/0,8816,1947313,00.html

Several nonprofit and medical institutions in Cleveland have turned to the Mondragon model for a consortium of businesses that will provide needed services and bolster an impoverished community. Evergreen Cooperative Laundry, a state-of-the-art commercial launderer designed to be LEED silver–certified, opened for business this fall in Cleveland's University Circle, an area where the average annual household income is $18,500. Rather than just bringing home wages, its eight employees will gain equity through "patronage accounts," a portion of earnings put aside to both build personal assets and reinvest in the company.

Another company within the Evergreen Cooperative group, Ohio Cooperative Solar, offers weatherization services and will soon embark on solar-panel installations — the first a 100-kw system on the roof of the Cleveland Clinic. According to CEO Stephen Kiel, Ohio now has 2 solar megawatts of the 60 the state requires by 2012. "Most installations in Ohio are small," he says. "One hundred kilowatts is a pretty significant system."

And best of all, from my perspective, is that the USW's are getting involved (The Steelworkers are my "heroes" in the Labor movement - active in all sorts of labor struggles around the globe and on the forefront of building alliances with environmentalists, for instance - besides, Leo looks like a worker and talks like a firebrand, or at least, more like a firebrand than just about anyone else in labor leadership, including, alas, Trumka now that he's at the top)

In late October, the Mondragon Corp. and the million-plus-member United Steelworkers (USW) union announced an alliance to develop Mondragon-type manufacturing cooperatives in the U.S. and Canada. Says USW's Rob Witherell: "Initially we are looking to convert an existing manufacturing operation." As for financing new ventures, he adds, "There's a significant amount of infrastructure already in place in the U.S. to assist in the development of cooperatives, such as the National Cooperative Bank and the National Cooperative Business Association. It's possible the NCB could function in a Caja Laboral ... role for us here."

Witherell stresses that the union aims to implement the basic principles of worker ownership and democratic governance rather than precisely replicate the Mondragon model. Still, he says, success comes down to well-run companies that meet a need. "The people who formed these co-ops did not do so because of some egalitarian ideal — they did it out of the necessity to feed and provide for their families."

This model strikes me as possibly something that could bridge the divide between progressive labor and some of our Reaganite membership - after all, worshiping the "entrepreneur" as they do, might they not get behind being "owners" themselves? But maybe I'm letting "hope" get carried away on that one, lol.

[Demeter]

64. I Have Run Across this Co-op Idea Before

It is one of my goals to set up such an enterprise in my condo community--focusing first on food and energy production, later branching out into artisan and artistic productions. It is sufficiently resourceful and well-located to provide such a locus of activity when everything falls down and goes boom, and Ann Arbor is very receptive to the concept of a city market already, with farmers from as far as Petosky trucking in the fruits of their labors twice a week.

Certain members of Ann Arbor's power structure are still focused on turning scarce parking lots into city parks and other frivolities, like turning the only north-south street of any size and safety into a biking lane, but I'm hoping reality and budget constraints will stop the foolishness. There's plenty of pocket parks in this city--too many for the city to maintain, actually, and bikers already have sufficient access, and they could resort to the sidewalks without destroying what little traffic flow there is for vehicles. After all, 90 year-olds with artificial joints are not going to be biking their groceries home. Sometimes I really have to wonder at the blindness of the able and comfortably wealthy. Too many society-type do-gooders, not enough gritty organizers in this town. But that will change, or the town will die.

[Demeter]

65. The Dummy’s Guide to the US Banking Crisis

http://www.creditwritedowns.com/2008/09/dummys-guide-to-us-banking-crisis.html

Nice summary, hits the high points, links to timeline.

[Demeter]

66. U.S. Loan Effort Is Seen as Adding to Housing Woes (The Illusion of Fed Help)

http://www.nytimes.com/2010/01/02/business/economy/02modify.html?hp

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good...

[Demeter]

67. Goldman Sachs Evades Taxes, Takes Tarp Funds

ttp://open.salon.com/blog/anthony_m_freed/2008/12/18/goldman_sachs_evades_taxes_takes_tarp_funds

After being granted TARP bailout funds from good friend and former boss Hank Paulson, Secretary of the Treasury, it turns out Goldman Sachs is paying a whopping paying 1% on $2.3BB in profits for 2009, down from a more respectable 39% in 2008.

Although earnings were down and losses up in the end of 2008, Goldman sources reported that the astonishing tax windfall was more due to “changes in our geographic earnings mix.”

When I heard “changes in our geographic earnings mix,” I immediately thought of a document that a friend had sent me a while back, with a rather long list of off-shore hedge funds and other tax-evading rackets located in the Cayman Islands, Bermuda, Mauritius, and the British Virgin Islands -all infamous for their anti-American tax havens utilized by US corporations to evade their legal dues - all of which a re owned in one way or another by Goldman Sachs.

It kills me to think Goldman probably spends millions of dollars in order to avoid billions of dollars in taxes, and then turn around and ask the American people for a handout.

Oh, and then here come the layoffs…

Hopefully the Democratic led Congress will get to the bottom of some of the illicit relationships between regulators like Paulson and their Wall Street connections, unless they are too scared they will have to accept responsibility for some of the Fannie and Freddie mess.

How can we continue to subsidize tax evasion by our largest corporations while the nation is in an economic tailspin, and people are being thrown out on the streets.

It’s like asking the American Taxpayer to dig their own grave. It’s criminal!

The List:

Scadbury Funding Limited, Cayman Islands

Scadbury II Assets Limited, Cayman Islands

GS Killingholme Cayman Investments Ltd., Cayman Islands

GS Killingholme Cayman Investments II Ltd, Cayman Islands

Forres Investments Limited, Cayman Islands

GS Funding Management Limited (1), Cayman Islands

GS Capital Funding (Cayman) Limited, Cayman Islands

Goldman Sachs Investments (Mauritius) I Limited, Mauritius

Goldman Sachs LLC, Mauritius

Tiger Strategic Investments LTD, Mauritius

MLT Investments LTD., Mauritius

JLQ LLC Cayman Islands,

Goldman Sachs (Japan) Ltd., British Virgin Islands

GSEM Bermuda Holdings, L.P. Bermuda

GS Equity Markets, L.P. Bermuda

Goldman Sachs (Cayman) Holding Company, Cayman Islands

Linden Wood, LTD., Cayman Islands

Goldman Sachs Credit Partners L.P,. Bermuda

Goldman Sachs Specialty Lending CLO-I, LTD., Cayman Islands

Amagansett Funding Limited, Cayman Islands

Amagansett II Assets Limited, Cayman Islands

GS European Funding I LTD,. Cayman Islands

GS Funding Europe II Ltd., Cayman Islands

Sources:

http://sec.edgar-online.com/2008/01/29/0000950123-08-000857/Section57.asp

http://www2.goldmansachs.com/worldwide/cayman-islands/index.html

[Demeter]

68. Update on Our Brave New Slavery: Yes, It Applies to American Citizens, Too

http://chris-floyd.com/component/content/article/1-latest-news/1893-update-on-our-brave-new-slavery-yes-it-applies-to-american-citizens-too.html

I wrote a piece (SEE LINK) a few days ago on a recent ruling by the Supreme Court, in which the justices agreed with the passionate plea of the Obama Administration to uphold -- and establish as legal precedent -- some of the most egregious of the Bush Administration's authoritarian perversions. This was the gist of the ruling:

The Supreme Court acquiesced to the president's fervent request and, in a one-line ruling, let stand a lower court decision that declared torture an ordinary, expected consequence of military detention, while introducing a shocking new precedent for all future courts to follow: anyone who is arbitrarily declared a "suspected enemy combatant" by the president or his designated minions is no longer a "person." They will simply cease to exist as a legal entity. They will have no inherent rights, no human rights, no legal standing whatsoever -- save whatever modicum of process the government arbitrarily deigns to grant them from time to time, with its ever-shifting tribunals and show trials.


One of the attorneys involved in the case rightly likened the ruling to the infamous 1857 Dred Scott decision, in which the Court declared that any person of African descent brought to the United States as a slave -- or their descendants, even if they had been freed -- could never be citizens of the United States and were not protected by the Constitution. They were non-persons under the law; sub-humans.

I noted the grim irony that this principle of non-personhood had now been reintroduced into the law of the land by our first African-American president. (But this is only to be expected, given the law of opposites that so often governs American politics: only a lifelong Red-baiter like Nixon could make an opening to Communist China; only a supposed liberal like Bill Clinton could gut the federal welfare system. And only an African-American president could reintroduce the principle of slavery and get away with it. No doubt it will be a woman president who finally re-imposes a total ban on abortion.)

My piece was picked up by a few other sites, where it attracted some criticism for being too "extreme," too shrill, too panicky and exaggerated. After all, some critics said, this case involves foreigners rounded up in the context of a military conflict. (An undeclared, open-ended, borderless, lawless conflict, but still.) And while one might consider the captives treatment a bit too rough or unjust, it is still a far leap to conclude that the Supreme Court ruling implies some kind of general attack on the liberties of real, honest-to-god American citizens!

Ah, what bliss it must be, to dwell in such sweet ignorance. The many decisions by the Supreme Court and lower courts upholding the federal government's authoritarian power to strip Terror War captives of inherent and inalienable legal rights are part of a larger framework that applies both in theory and in practice to everyone -- American citizens included. What we are seeing is the construction of a new "social contract," the open codification of a new relationship between the individual and the state, in which all powers and rights reside solely in the latter, which can bestow them or withhold them at will, arbitrarily, unaccountable. In contrast, it is the individual who must be totally accountable to the state. The state is bound by no law, but the individual is subject to them all -- including "secret laws" and decrees and executive orders of which he or she has no knowledge.

The state has always tended toward the imposition of this feudal condition, of course -- hence the many balks and bafflements to state power that have been attempted over the years. But now the exaltation of state power over any claim of individual rights is being openly declared, avidly pursued, and judicially ratified.

And yes, Virginia, it all applies to American citizens as well. Chris Hedges demonstrates this clearly in a devastating piece on the case of American citizen Syed Fahad Hashmi. Below is an excerpt, but you should read the whole piece:

Syed Fahad Hashmi can tell you about the dark heart of America. He knows that our First Amendment rights have become a joke, that habeas corpus no longer exists and that we torture, not only in black sites such as those at Bagram Air Base in Afghanistan or at Guantánamo Bay, but also at the federal Metropolitan Correctional Center (MCC) in Lower Manhattan. Hashmi is a U.S. citizen of Muslim descent imprisoned on two counts of providing and conspiring to provide material support and two counts of making and conspiring to make a contribution of goods or services to al-Qaida. As his case prepares for trial, his plight illustrates that the gravest threat we face is not from Islamic extremists, but the codification of draconian procedures that deny Americans basic civil liberties and due process....

Hashmi, who if convicted could face up to 70 years in prison, has been held in solitary confinement for more than 2½ years. Special administrative measures, known as SAMs, have been imposed by the attorney general to prevent or severely restrict communication with other prisoners, attorneys, family, the media and people outside the jail. He also is denied access to the news and other reading material. Hashmi is not allowed to attend group prayer. He is subject to 24-hour electronic monitoring and 23-hour lockdown. He must shower and go to the bathroom on camera. He can write one letter a week to a single member of his family, but he cannot use more than three pieces of paper. He has no access to fresh air and must take his one hour of daily recreation in a cage. ...

“My brother was an activist,” Hashmi’s brother, Faisal, told me by phone from his home in Queens. “He spoke out on Muslim issues, especially those dealing with the wars in Iraq and Afghanistan. His arrest and torture have nothing to do with providing ponchos and socks to al-Qaida, as has been charged, but the manipulation of the law to suppress activists and scare the Muslim American community. My brother is an example. His treatment is meant to show Muslims what will happen to them if they speak about the plight of Muslims. We have lost every single motion to preserve my brother’s humanity and remove the special administrative measures. These measures are designed solely to break the psyche of prisoners and terrorize the Muslim community. These measures exemplify the malice towards Muslims at home and the malice towards the millions of Muslims who are considered as non-humans in Iraq and Afghanistan.”

...“Most of the evidence is classified,” Jeanne Theoharis, an associate professor of political science at Brooklyn College who taught Hashmi, told me, “but Hashmi is not allowed to see it. He is an American citizen. But in America you can now go to trial and all the evidence collected against you cannot be reviewed. You can spend 2½ years in solitary confinement before you are convicted of anything. There has been attention paid to extraordinary rendition, Guantánamo and Abu Ghraib with this false idea that if people are tried in the United States things will be fair. But what allowed Guantánamo to happen was the devolution of the rule of law here at home, and this is not only happening to Hashmi.”

The case against Hashmi revolves around the testimony of Junaid Babar, also an American citizen. Babar, in early 2004, stayed with Hashmi at his London apartment for two weeks. In his luggage, the government alleges, Babar had raincoats, ponchos and waterproof socks, which Babar later delivered to a member of al-Qaida in south Waziristan, Pakistan. It was alleged that Hashmi allowed Babar to use his cell phone to call conspirators in other terror plots.

“Hashmi grew up here, was well known here, was very outspoken, very charismatic and very political,” said Theoharis. “This is really a message being sent to American Muslims about the cost of being politically active. It is not about delivering alleged socks and ponchos and rain gear. Do you think al-Qaida can’t get socks and ponchos in Pakistan? The government is planning to introduce tapes of Hashmi’s political talks while he was at Brooklyn College at the trial. Why are we willing to let this happen? Is it because they are Muslims, and we think it will not affect us? People who care about First Amendment rights should be terrified. This is one of the crucial civil rights issues of our time. We ignore this at our own peril.”

Babar, who was arrested in 2004 and has pleaded guilty to five counts of material support for al-Qaida, also faces up to 70 years in prison. But he has agreed to serve as a government witness and has already testified for the government in terror trials in Britain and Canada. Babar will receive a reduced sentence for his services, and many speculate he will be set free after the Hashmi trial. Since there is very little evidence to link Hashmi to terrorist activity, the government will rely on Babar to prove intent. This intent will revolve around alleged conversations and statements Hashmi made in Babar’s presence. Hashmi, who was a member of the New York political group Al Muhajiroun as a student at Brooklyn College, has made provocative statements, including calling America “the biggest terrorist in the world,” but Al Muhajiroun is not defined by the government as a terrorist organization. Membership in the group is not illegal. And our complicity in acts of state terror is a historical fact.

There will be more Hashmis, and the Justice Department, planning for future detentions, set up in 2006 a segregated facility, the Communication Management Unit, at the federal prison in Terre Haute, Ind. Nearly all the inmates transferred to Terre Haute are Muslims. A second facility has been set up at Marion, Ill., where the inmates again are mostly Muslim but also include a sprinkling of animal rights and environmental activists...


I have been writing about this since November 2001, when George W. Bush's authoritarian claims over the liberty -- and lives -- of every human being on earth were first coming to light. (And not in dogged investigative reports, but in open, laudatory stories in the mainstream media.) It is very simple: all the government has to do is declare, arbitrarily, with no due process, that you -- yes, you, Mister and Ms American Citizen -- are a terrorist, or suspected terrorist, or an enemy combatant, and you can be stripped of your legal personhood, plunged into a gulag, confined indefinitely, plunged into isolation -- or killed.

I agree that this is a very upsetting situation, and not very pleasant to think about. But pretending that it is not a reality will not make it go away.

[Demeter]

69. my New Year's Tax Resolutions (for Congress and the Obama Administration)

http://ataxingmatter.blogs.com/tax/2010/01/new-years-tax-resolution-for-congress-and-the-obama-administration.html

...I also offer the following as the resolutions that I wish Congress and the Obama administration (and/or various administrative agencies thereof) would make (and follow through on) for this new year of 2010.

1) The Treasury should resolve that it will no longer provide special dispensation to the financial institution powers that be, such as its invalid notice indicating that it would not enforce the law on loss corporations for too-big-to-fail banks, thus allowing too-big-to-fail banks to become even bigger by buying loss banks, and then allowing them to use those losses in direct contravention of the law and avoid paying income tax for years (or perhaps decades). A similar "notice" went out recently--Notice 2010-12--stating that Treasury will continue to fail to enforce the rules under section 956 regarding what constitutes an obligation and hence relieving US shareholders of controlled foreign corporations ( many of them possibly the same too-big-to-fail banks) of further US taxpaying obligations. (This notice continued the nonenforcement decision Treasury had made in 2008, in Notice 2008-91. Too bad decisions do not make a good decision.)

2) The Supreme Court should resolve to deal with the problem of financial institutions claiming patent protection for all kinds of financial software and financial engineering "solutions" and for others claiming patent protection for tax planning strategies by releasing a decision in the Bilski case that clarifies the "abstract idea" exception. The Court should say that no patent can be granted for innovations that merely utilize the positive laws to assert that a transaction carried out in a particular way will have a particular legal result, or for other methods of conducting transactions or of organizing human activity that do not involve the technological arts, as understood under European patent law.

3) Congress should resolve to end the preferential treatment of those few Americans who own most of the financial assets of the country by ending the capital gains preference.

4) Congress should resolve to eliminate the preferential tax treatment of the earned income of hedge fund and equity fund managers (the so-called "carried interest"), and any other "partners" that manage partnerships and earn a share of the partnership's gains as their compensation (such as real estate partnerships).

5) In order to restore some sort of balance between worker and employer, Congress should eliminate the business deduction for any compensation in excess of 20 times the average salary (about $1 million). The cap on compensation deduction to apply to compensation in any form (stock, assets, cash), whether or not "performance related".

6) In order to treat the gifts of ordinary Americans to charities of their choice the same as the gifts of multi-millionaires to charities of their choice, Congress should repeal the special rule that permits a charitable contribution deduction for the value of stocks rather than the investment basis in the stocks. Will that limit contributions that are made? Perhaps, though it is clear that contributors do so for many reasons and not merely for the contribution deduction.

7) Congress should resolve to resolve the estate tax situation once and for all, before some do-nothing heir-to-be decides that 2010 is the right time for the wealthy person in his life to go. Congress should enact a modest exemption of $2 million but should make the estate tax rates progressive (beginning at2009s 45%, but moving up to at least 65% for the largest estates).

8) Congress should resolve to revisit the tax brackets. We have an economy in which the average income is around $50,000, but there are individuals who make more than $500 million a year. That spread is so large that it cannot be adequately addressed by brackets that focuse on the first $350,000 or so. Those who make $200 million a year have incredibly more freedom of choice, and the few dollars they pay in taxes are merely peanuts compared to the precious funds from an average family. We need to make the income tax more progressive by adding additional rate brackets--perhaps as many as 3 or 4 more. That would still be a far cry from the income tax system before Reagan took office, when we had top rates more than double today's top rates. But it would address the dire fiscal need of the country in a way that is doable without creating undue suffering.

9) Congress and Treasury should resolve to clean up the partnership tax rules so that they do not offer such extraordinary flexibility to partners to arrange their affairs to avoid taxation--for example, by eliminating the electivity permitted to partners in many places in the rules (make the remedial method the only method allowed for taking into account book-tax disparities in contributed property) and by changing the way that partners take account of partnership debt (such as being able to get distributions of nonrecourse debt that monetize partnership property appreciation).

10) Congress should re-visit the rules on mergers and acquisitions, so that a tax-free merger becomes an unusual event. Part of the problem we are facing today is that multinational corporations have grown so big that they wield enormous power globally and can sometimes appear to be able to order laws to suit them. Witness the fact that we are well beyond the beginnings of the financial system crisis, and no single piece of legislation imposing new and better regulations on the banks have been enacted. The size of corporations ensures that they will become as focused on raising rents for their managers as they will on making profits for shareholders, and that they will care not one whit for the ordinary American who is their customer, or their low-wage employee, or the resident of a town that they leave derelict when they move to sunnier shores. We say that the rationale for tax-free reorganization provisions is to encourage efficient organization of corporations. But efficiency is not God, and in fact focus on efficiency may leave democracy and fairness far behind. We should give tax-free treatment only to shareholders who get no boot for any of their stock, and only in transactions where a high percentage of the consideration is stock (perhaps 80% or more).

[Demeter]

70. John Kenneth Galbraith on the 1929 Crash

"In many ways the effect of the crash on embezzlement was more significant than on suicide. To the economist embezzlement is the most interesting of crimes. Alone among the various forms of larceny it has a time parameter. Weeks, months, or years may elapse between the commission of the crime and its discovery. (This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. there is a net increase in psychic wealth.) At any given time there exists an inventory of undiscovered embezzlement in – or more precisely not in – the country’s business and banks. This inventory – it should be called the bezzle. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there are always many people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and the bezzle increases rapidly. In depression all this is reversed. Money is watched with a narrow, suspicious eye. The man who handles it is assumed to be dishonest until he proves himself otherwise. Audits are penetrating and meticulous. Commercial morality is enormously improved. The bezzle shrinks."

-John Kenneth Galbraith, The Great Crash

[Demeter]

71. Since late 2006, 374 major U.S. lending operations have "imploded"

This is the headline on a most interesting website--the Implode-o-Meter:

http://ml-implode.com/

Ozy, we ought to have this as a reference source!

[Demeter]

73. Insecure Securities Hans-Werner Sinn

http://www.project-syndicate.org/commentary/sinn29


...For years, hundreds of billions of new mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) generated from them were sold to the world to compensate for the lack of savings in the United States and to finance American housing investment. Now virtually the entire market for new issues of such securities – all but 3% of the original market volume – has vanished.

To compensate for the disappearance of that market, and for the simultaneous disappearance of non-securitized bank lending to American homeowners, 95% of US mortgages today are channeled through the state institutions Fannie Mae, Freddie Mac, and Ginnie Mae. Just as there was a time when collateralized securities were safe, there was also a time when economies with so much state intervention were called socialist.

Most of these private securities were sold to oil-exporting countries and Europe, in particular Germany, Britain, the Benelux countries, Switzerland, and Ireland. China and Japan shied away from buying such paper.

As a result, European banks have suffered from massive write-offs on toxic American securities. According to the International Monetary Fund, more than 50% of the pre-crisis equity capital of Western Europe’s national banking systems, or $1.6 trillion, will have been destroyed by the end of 2010, with the lion’s share of losses being of US origin. Thus, the resource transfer from Europe to the US is similar in size to what the US has spent on the Iraq war ($750 billion) and the Afghanistan war ($300 billion) together.

Americans now claim caveat emptor : Europeans should have known how risky these securities were when they bought them. But even AAA-rated CDOs, which the US ratings agencies had called equivalent in safety to government bonds, are now only worth one-third of their nominal value. Europeans trusted a system that was untrustworthy.

Two years ago, Ben Bernanke, chairman of the US Federal Reserve, argued that foreigners were buying US securities because they trusted America’s financial supervisory system and wanted to participate in the dynamism of its economy. Now we know that this was propaganda intended to keep the foreign money flowing, so that US households could continue to finance their lifestyles. The propaganda was successful. Even in 2008, the US was able to attract net capital inflows of $808 billion. Preliminary statistics suggest that this figure has now fallen by half.

For years, the US had a so-called “return privilege.” It earned a rate of return on its foreign assets that was nearly twice as high as the rate it paid foreigners on US assets. One hypothesis is that this reflected better choices by US investment bankers. Another is that US ratings agencies helped fool the world by giving triple-A ratings to their American clients, while aggressively downgrading foreign borrowers. This enabled US banks to profit by offering low rates of return to foreign lenders while forcing foreign borrowers to accept high interest rates.

Indeed, it is clear that ratings were ridiculously distorted. While a big US rating agency gave European companies, on average, only a triple-B rating in recent years, CDOs based on MBSs easily obtained triple A-ratings. According to the IMF, 80% of CDOs were in this category. And according to an NBER working paper by Efraim Benmelech and Jennifer Dlugosz, 70% of the CDOs received a triple-A rating even though the MBSs from which they were constructed had just a B+ rating, on average, which would have made them unmarketable. The authors therefore called the process of constructing CDOs “alchemy,” the art of turning lead into gold.

The main problem with US mortgage-based securities is that they are non-recourse. A CDO is a claim against a chain of claims that ends at US homeowners. None of the financial institutions that structure CDOs is directly liable for the repayments they promise; nor are the banks and brokers that originate the mortgages or create MBSs based on them.

Only the homeowners are liable. However, the holder of a CDO or MBS would be unable to take these homeowners to court. And even if he succeeded, homeowners could simply return their house keys, as they, too, enjoy the protection of non-recourse. As home prices declined and one-third of US mortgage loans went under water – that is, the property’s market value sank below the amount of the loan – three million US homeowners lost their homes, unable to meet their payment obligations, making the CDOs and MBSs empty shells.

The problem was exacerbated by fraudulent, or at least dubious, evaluation practices. For example, homeowners signed cash-back contracts with builders to feign a higher home value and receive bigger loans, and brokers’ fees were added to mortgages and the reported values of homes. Low-income people who could not be expected ever to repay their loans were given so-called NINJA credits: “No income, no job, no assets.” Such reckless and irresponsible behavior abounded.

The US will have to reinvent its system of mortgage finance in order to escape the socialist trap into which it has fallen. A minimal reform would be to force banks to retain on their balance sheets a certain proportion of the securities that they issue. That way, they would share the pain if the securities are not serviced – and thus gain a powerful incentive to maintain tight mortgage-lending standards.

An even better solution would be to go the European way: get rid of non-recourse loans and develop a system of finance based on covered bonds, such as the German Pfandbriefe . If a Pfandbrief is not serviced, one can take the issuing bank to court. If the bank goes bankrupt, the holder of the covered bond has a direct claim against the homeowner, who cannot escape payment by simply returning his house key. And if the homeowner goes bankrupt, the home can be sold to service the debt.

Since their creation in Prussia in 1769 under Frederick the Great, not a single Pfandbrief has defaulted. Unlike the financial junk pouring out of the US in recent years, covered bonds are a security that is worthy of the name.

[Demeter]

74. Make Debt Collectors Give You Money By Suing Them

http://consumerist.com/2009/12/make-debt-collectors-give-you-money-by-suing-them.html

This may not work for everyone, but it worked for Jeff. He tells Consumerist that after he filed Chapter 13 bankruptcy, Sallie Mae representatives continued to call him, which is sort of illegal. So his bankruptcy attorney sued them. And won a $4,000 settlement.

“I have recently gone through Chapter 13 bankruptcy and had an experience that might enlighten others. After the filing, during the mandatory stay period, Sallie Mae continued to contact me about my student loan payment. I documented each call -- time, number of origin, and person I talked to if I could get the information. I mentioned this to my bankruptcy attorney, who made effort to stop the calls. He finally filed an order that stopped the calls. He then asked me if I wanted to file a suit against Sallie Mae. I assented.

He filed suit for $14,000 - a grand per call. Within DAYS, the Sallie Mae attorney offered a $4,000 settlement. I had my money in hand several weeks after that. The whole process took about a month.

I don't know if my case was unique, or if Sallie Mae illegally harasses everyone who files Chapter 13. Just wanted to let you know.”

Debt collectors don't have the right to harass you even if you haven't declared bankruptcy. If you're being hassled, learn what the limits are and how to make debt collectors stop.

[DemReadingDU]

75. better late than never

:)

[Demeter]

76. Never too Late

I'm often too early, in my experience--too avant garde.

I'll be posting into the night. I'm trying to get the email backlog down to 100. Besides, it's too cold to do anything else!

[Demeter]

77. National Irish moves to cashless banking

http://www.irishtimes.com/newspaper/ireland/2009/1222/1224261108475.html

IT MIGHT sound like a contradiction in terms, but for the first time one of the main Irish consumer banks is moving to cashless banking in all its branches.

National Irish Bank has written to thousands of its customers this month informing them of a “new style of banking” in which branches will not handle over-the-counter cash transactions.

The letter says branches will no longer handle cash withdrawals and lodgements, night safe lodgements and foreign currency cash. Branches will continue to lodge cheques, drafts and postal orders and issue drafts.

Customers are advised to obtain cash from “ATMs nationwide” or to seek “cash-back” on their debit cards.

A spokesman confirmed that cashless banking was being introduced across the entire NIB branch network over the next 18 months, and had already been introduced successfully in a number of branches. He said the feedback from customers was positive with few complaints.

“These branches provide better security for staff and allow us to spend more time, in a better setting, with our customers . . . Customers like them, as our staff have more time to discuss customers’ overall needs.”

However, NIB customer Frank Barry from Malahide described the change as hilarious and ridiculous: “A bank refusing to accept cash . . . I thought that’s what they are for?”

Mr Barry contacted The Irish Times after his wife Catherine Gralton received two letters informing her that the local branch would stop handling cash from next February.

“If I did have a cash lodgement, I would have to go to another bank, buy a bank draft and then go to NIB to lodge it,” he said.

An NIB spokesman said the changes followed the model used by NIB’s parent, Danish-owned Danske Bank. Cashless banking is far more common in Scandinavia. while Irish dependence on cash is among the highest in Europe.

The spokesman said it recognised that some business customers may need to lodge and withdraw cash and it would offer these a number of options.

However, he declined to say what these options were, citing security reasons.

NIB announced earlier this month it was cutting 150 jobs and closing 25 of the bank’s 58 branches because of the recession and changes in the banking sector.

ACC Bank, which specialises in business lending, has also moved to cashless operations.

The Irish Banking Federation said it was not aware of any other main banks introducing cashless banking at this stage, though a spokesman added that “they would all love to”.

Handling cash is more expensive than the non-cash alternatives such as internet banking or debit and credit cards.

Cash also poses greater security threats for the banks, whereas consumers bear many of the risks associated with non-cash transactions.

NIB in particular has suffered a number of high-profile robberies and one of the branches it has already converted to cashless banking, on Dublin’s Howth Road, was the scene of a so-called tiger robbery in 2006.

[Demeter]

78. That's a Wrap, Folks. I Ate Too Much Dinner.

Have a good night's rest and it will be warmer in the morning!