Icebergs Ahead

I've had it in mind to post a "__ reasons why the economy is still fucked" post for about a week and a half now, and then the unsurprisingly crappy consumer spending data came back today, and it's all fashionable to talk about the "death of green shoots", so I done got scooped by facts, and accordingly, everyone. Basically.

But because I'm not really in the econ blog circuit, and it still might be interesting to compile and talk about some other things than consumer spending, I'm going to go ahead with it anyway.

I can always judge the public sentiment by listening to what people whom I know have done little or no research on a particular matter think. I don't mean this as an insult. It is simply impossible to know everything about everything. I hear myself doing this as well. If someone brings up a topic I know nothing about, yet I might have caught a bit of something on the radio the other day about it, I find myself reciting that one factoid as if I wrote a book on the subject. I think it's a way of compensating, and to try to draw out information from other people to learn more.

So when I hear people, whom I know don't know what PCE stands for, saying things like "it seems like the economy is getting better recently," I know they don't necessarily think that, but they've heard it.

So when it starts to be spring time after our current winter of our consumer discontent, and all of a sudden you start hearing "green shoots" from administration officials, one must wonder, have they really been reading the economic reports, or just the Hallmark Easter cards?

Wouldn't it be lovely if spring time meant we were coming out of the recession, just like we come out of the cold weather into the sunshine? Wouldn't it be great if this recession lasted a season or two, like typical post-war dips in the GDP? Wouldn't it be nice if we were older, and we wouldn't have to wait so long?

Yes--I'm currently listening to Pet Sounds; No--we aren't getting out of this damn thing with metaphors.

Green shoots? What a stupid phrase. You know if people are resorting to gardening metaphors, we're all fucked.

And you know what they were getting all excited about? You know what the green shoots were? Second derivatives. For those who don't remember calculus, second derivatives are the rate of the change of the rate of change. For those who don't remember calculus, this is like when you take off from a green light, accelerate, and then after you hit third gear you continue to accelerate, but not quite as much. Only we're going in the other direction.

But we're not coming to a stop, we're coming to a... well, let me try these metaphors.

You're driving at a brick wall, with your foot on the gas. A second before you hit the wall, you think, "what the hell am I doing?" and you start to take your foot off the gas. For that split second, you aren't accelerating towards death quite as fast.

Or, you decide to go skydiving. You have a lovely time experiencing weightlessness, and then you decide to pull the cord. Nothing happens. You continue to plummet towards the earth, scared out of your mind. The houses and fields get bigger and bigger, as you fall faster and faster. Then, at a couple hundred feet from your death, you suddenly think to yourself, "Oh thank god, I'm almost back on the ground." And you feel much better, as your internal organs explode from the inertia force of meeting those lovely green shoots of grass covering the planet.

The economy is in fact showing no signs of recovery. It has stopped deteriorating quite at free fall, yet is still deteriorating. Does that make sense? The ship is still taking on water, but the iceberg is no longer lodged in its crotch.

The only sort of person who would think a slowing but continual deterioration is a sign of recovery is someone who thinks all recessions are those V-shaped graphs. Here's a little thing about graphs--if the X axis is Time, you can't draw a graph until its all in the past. You can't graph the future. So, you would only assume you know what the graph looks like if you think you can see the future, or if you are assuming the future will be just like some other past graph.

This recession is clearly different, in many ways. The downside of economics, I believe, is that because of its Cartesian dynamic, it loves to isolate for certain variables. You know this--you get some crazy graph, and solve for Y. Makes it all look easier to have one variable alone, and everything else a function for it. You can make nice graphs, and attribute correlations, and make predictions. This is all well and good, but the problem is that the economists seem to forget these are variables, and by considering a play of one variable, or at most a handful, they are ignoring the complex interplay of other factors. They start believing they can see the upswing as soon as they stop seeing a downswing.

The horrible part for us, is that it means they are going to cut stimulus, reform, and other action short, because it makes them think the trouble is over. What happened to the crisis of capitalism? Did we forget that? Well, they'll remember it next year when unemployment is above %10 all year.

There are still plenty of icebergs ahead. I don't know a lot about macro-economics, so I don't know which one's are really dangerous. But here are a few things I can see as potentially causing a lot of trouble over the next year.

A quick note to thank Calculated Risk for teaching me about half of what I know about economics. That ever exceedingly wonderful blog is my source for these statistics, mostly because he produces wonderful graphs. (Graphs can teach you an awful lot.) I highly encourage you to follow my links to look at the lovely graphs.

Consumer Spending

The big news today was consumer spending, which decreased 0.4% month over month. Consumer spending, calculated by the Census Bureau, makes 70% of the GDP.

After a major decrease over the holidays, sales haven't recovered. They haven't gotten much worse either, green shooters argue. Let's talk about that for a minute.

You could look at the lack of change as a pure number, developed out of, I don't know, nowhere, or we could think about American's spending habits. In 2007 we were spending out of control. More money than we had, almost. Only at the end of last year did Americans start saving again, and still, barely at this point. Here's a nice graph showing the personal savings rate.

Consumer culture reached its zenith at about this time. Credit cards, designer handbags, etc. You know the deal. This all came to a stop, but not a crashing stop. We have less credit now, and are getting a little smarter, but we are still Americans, for heaven's sake. People are still going to the mall, they just aren't biting people for a chance to get widescreen TVs.

Consumer spending still has a way to fall. Look at this graph, showing the change in inventory, and then the second, showing the inventory to sales ratio. The ratio is still at 1.44. It's dropped considerably, but people are still buying things, and there is still inventory. They are still accumulating consumer crap, just not quite as much.

Another green shoot I saw was this article from Bloomberg saying Walmart same-store sales are up 5%. Think about who shops at Walmart. Walmart is the bottom of the barrel, when it comes to retail. Shitty products at reel low prices. There are the people who live in small towns, in which Walmart is the only thing close, and there are the people who live in big towns, where there is nothing as cheap. If Walmart's sales increase at this point, its not a brilliant ad campaign. It's because those edges of the consumer envelope are widening. People who shop at Walmart are not buying more; more people are going to Walmart because they are being pushed that far.

There are still plenty of rich people in this country--as I keep repeating, this is America. There is still money out there, but with no source of regeneration for the wealth of the upper-middle class and the lower-upper class, we're looking at a horizon that is getting closer all the time. The money can't last forever, and with credit still drying up for most people, I see consumer purchasing continuing to shrink. Where is the money going to come from? Still losing 500K+ jobs a month here... And wages are dropping too.

Shit-backed Securities

Foreclosures are continuing.

Now credit card companies are having problems too. A small credit card issuer stopped new lending because charge-offs (money "defaulted" on a credit card) were reaching as high as 20%.

Those are business credit cards, which is a nice transition into commercial real estate. Commercial property values fell 21.5% from 10/2007 to Feb, and defaults on commercial real estate loans are beginning to increase.

Residential home sales may be picking up, but new homes are hardly being sold at all, and many sales are foreclosures sold at discount. Prices still have a long way to fall.

All of this means banks are continuing to tighten lending standards to consumers, despite how the money market interbank credit has softened since the crisis last October.

Like consumerism, and perhaps the root of that consumerism, America was out of control round about 2007. Credit fell off a cliff at the end of the year, but will still continue to get worse. A lot of people are going to default on their credit, both individuals and businesses. This leaves banks very exposed, and makes new loans very difficult. There are going to be a lot more problems with credit-backed securities of all kinds, and while the government continues to be concerned with the big banks and the securities themselves, has seemed to give up trying to fix mortgages for every day people.

All in all, not very green.

Systemic Banks

The stress tests were kind of a joke. Not only did the banks get to bargain with the government about how they were tested, (you remember that teacher in high school/college everyone knew you could get a better grade with if you just went and argued it?) but some of the figures used in the worst-case scenario were not worse than the current conditions. Furthermore, all these banks have to do is figure out how to report earnings more than the amount they will have to write down. The government basically said, just figure out how to break even. I mean, yeah, that's a start.

The government is clearly willing to do everything to keep these banks from being nationalized, including playing paddy-cake all day long. I mean, they've made the case for this themselves over and over again, so why would we think they are going to do anything different?

The part that really troubles me is that these banks aren't "learning anything." Not that they really would learn, but it seems like everyone is getting a free 1-up on this. Hey man, you lost, pass the controller on!

What is going to be different about investment banking in the future? Anything? Just an implicit backing of the federal government from now on? They keep everything. Where are the Chrysler and GM ultimatums for these assholes? How can we expect better regulation if we can't even get legitimate accounting out of these institutions?

The banking system may be saved by (or at least tied to, non-committally and without control, the fate of) the US government. But what does this mean for the future?

I predict another bubble in less than fifteen years.

Treasuries

Part of the trouble with tying the banking system to the Fed, without real control of the banking system, is that the Fed doesn't get to preserve its status as general OMC bellweather. They've got their hands dirty. The Fed balance sheet is huge, as it tries to cover every else's problems. And it's going to get even bigger as it buys more treasuries.

Treasuries are very strange. They are debt sold by the US Treasury (which is different than the Fed, by the way). A Treasury is a bond with a set interest rate, that matures at some time in the future. However, these bonds are sold back and forth all the time, for prices that vary. If you factor the selling price of a Treasury into the interest rate and the intital cost of the bond, you can get a yield that is higher or lower than the actual interest rate of the bond. So, for example, if the price of a bond is lower than its initial cost, you could have a yield higher than the interest rate, because you will end up making more money by "buying it on sale", so to speak.

People buy and sell Treasuries because they are very secure, being backed by the Treasury. You can earn some interest without any risk, really. And because there is always a market for them, you can sell them to someone else to get cash if you need it. You can even make money in selling them, if you play it right. It is still confusing, because when the yield of a bond is high, it actually means the selling price of it is low, and vice versa, but I assume the sort of people who work in this market have a clever mnemonic of something for remembering this.

But this is not all fun and games. Issuing Treasuries is how the US gets cash. We can have a deficit because we sell debt, and pocket the cash. We can still pay the bills by selling IOUs to the rest of the world.

Specifically, to China. I'm not going to even comment on how much of the US debt is owned, in Treasury bond form, by China because nobody is really sure, they just guess. China buys our debt because it is a good investment, and because by putting lots of their currency out into the world (the cash they are exchanging for the bonds) they keep their exchange rate low, which is good for their export economy. People send the world currencies into China, and China sends their currency out, buying it back cheap, and keeping some of the world currencies. (this isn't how it works, but the principle is about right).

But China, as the demand of cherries slows down, they can't be buying quite as much debt from us. Also, there is the fact that we are selling a lot of debt. With all these bonds out there, the demand is waning. The yields of the bonds start rising.

But the Fed wants the yields to stay low. When the yields are low, the incentive is not so great to buy Treasuries, and so banks put their money elsewhere, like into the money market, or keep the cash to invest somewhere. This is the essence of liquidity.

So the Fed and the Treasury are somewhat against each other here. The Treasury wants to stimulate the economy by spending lots of money through the government and charging it to its tab. The Fed wants to convince banks to invest in consumer debt and each other's debt, rather than the secure Treasury debt. So the Fed is buying up Treasuries, to make their yields decrease, adding to its giant balance sheet with all the debt they've been buying from corporations and banks as well, flooding the markets with cash. So far, the Fed has enough cash. But guess where they get their money (besides the banks, who must keep a bit deposited with the Fed as part of their charters)? From the full faith of the US Government!

There is a good amount of breathing room in the phrase, "the full faith of the US Government", but still, it is certainly not a good long-term plan. The dollar has already been weakening on this, because it appears that the Treasury is writing IOUs with one hand, and cashing them with the other. All of this debt will eventually become due as well. And while the US, for all intents and purposes, will always be able to issue more debt, it appears the systemic problems of our debt-oriented economy, which has just crashed, are now being shouldered on the currency. There are no magic bullets here, or a pit of Tartarus to fling the debt into. We can keep a lot of balls in the air, but for how long?

The Poverty of National Calling Plans

The small-scale buzz around Bruce Sterling's SXSWi talk is pretty amusing, mostly because as he put it, "this offhand speech of mine -- truly a rant, delivered from notes -- is provoking a remarkable response specifically BECAUSE there is no crisp digital record of exactly what I was saying."

I love this sort of stuff (even when it doesn't involve shadowy Internet well-knowns). Literature is archaeology, man. And it's like we're digging through a city (well, maybe a hamlet) wiped clean by the sandstorms only a month ago. Is that a toothbrush? Maybe it's a shamanic scepter! Nah, maybe just a toothbrush.

But as our French Philosopher Phriends would remind us, the archaeology of truth is the sandstorm itself. None of this theology of the book! It's the Internet, after all. We all love the fact that it's okay that we make it up as we go along.

I'm pretty good at the making stuff up part. I have a degree in philosophy. The rule of philosophical scholarship is that you can make a dead guy say anything you want--you just have to manipulate the puppet strings. These puppet strings can be quotes taken almost of of context, the abstracts of papers somebody else wrote about someone else, or if you're of Zizek-stature (or first-year undergraduate) the mere name-drop may suffice.

Unfortunately, I also have these interests in stuff. Stuff makes me think. This means I can't quarantine my bullshit into academic papers alone--unfortunately for me, these reinterpretations, quotations, appropriations, and exhaltations are constantly circulating in my head, driving me slowly, but surely, to a state of being entirely boring. Unfortunately for you, I have a blog, which you seem to be reading. Hmm. I wonder what will happen next...

So, let's play the game.

WHAT DID BRUCE STERLING REALLY MEAN WHEN HE SAID THOSE THINGS?

What did he say anyway? Well, no one really knows for sure (this is going to be so easy).

Always start with the text.

"The clearest symbol of poverty is dependence on ‘connections’ like the Internet, Skype and texting. ‘Poor folk love their cellphones!’ (Sterling) said.”

"connectivity will be an indicator of poverty rather than an indicator of wealth," (note taken by Rohde).

The internet is poverty? Cellphones are poverty? What is he saying? These things GO AGAINST EVERYTHING MY INTERNET MARKETER TOLD ME!!!

Here is some actual Sterling text. From his short story (architectural fiction, no less) "White Fungus":

"Cell phones are the emblems of poverty."

Interesting enough. Would probably make some liberal cell phone users nervous.

But look at this--"symbol of poverty", "indicator of poverty", "emblem of poverty". Are we noticing a trend here? Call the semioticians!

Also of note: the quote from "White Fungus" is placed, in its original context, with the phrase "computers are not sources of wealth."

So what do we have here? We have wealth and poverty opposed. We have "source" as a flow of wealth, whatever wealth might be. We have "connectivity" as a given, of some sort. We have poor people with cell phones. And we have symbols, emblems, and indicators.

Wealth and poverty, the meaning of which these statements seem to circulate, have different applications. They are material concepts, but social as well. Generally involving value, the value may flucuate. Are we talking about social value? Are we talking about material value? Or are we talking about material value derived from social value? Or the other way around? What sort of poverty do cell-phones represent, and of what sort of wealth are computers not the source? Who is poor, and who is rich as a result?

The Twitter-phobic Internet folk have interpreted the point as purely social in message, and therefore at root, idealistic. We spend a lot of time on our cell phones, and therefore the precious, bourgeois "free-time" in which we would otherwise pursue such worthwhile, humanistic goals such as good, honest fire-side conversation, staring whistfully at clouds, and playing polo, suffers as result. It is an ironic musing worthy of a minor scenario of the Odyssey: through our frantic attempts at universal communication, a female cell-phone beast eats our ears, eyes, and mouth. Odysseus sails away on a plank, born on the gentle breeze of Athena's brain waves, thankful he never signed up for the cursed free internet-service.

If anybody is losing anything of value, it's happening materially. Material, of course, extends into the consciousnesses and compound consciousnesses of people, in less than solid, i.e. symbolic forms. But just because we assume a loss of something that never existed, like "true, meaningful conversation", does not mean we can declare a robber. Because somebody kicked over your invisible dandelion wine is not a cause for blows. If you're not talking to other human beings in a meaningful way, that's your problem, buddy.

We've written up the Internet to be some grand form of communication. It certainly is a form of communication (by way of good old fashioned reading and writing) but how grand is it? Those singularity morons aside, what exactly do we expect from the Internet, and how has it either surpassed or fallen short of our goals? These sorts of material questions deserve attention. So put down that pen and paper, junior Thoreau. Turn up your headphones, and let's dance.

Communication, as a flow of symbols throughout our conscious perceptions of the world, are not strictly the material facts of life, but they are the way we understand them, as the capacities of our sentience dictates. In addition to providing a smooth flow of sensation in the way we would hope between the ideally closed confines of our mind and the cold, cold world, they also get a bit tangled in the intermedium, the interpretive membrane of flesh. Is what you feel what's really there? Is what's there what you really feel? How sure are you that you feel what you feel? In these tossing seas, in which there is no Ithika, there is as much agonism between every drop of water as there is undifferentiatedness in the silence of drowning. Don't worry, we're pretty good swimmers. And maybe the gods do exist; you never know.

So we can worry about the hubris of the "real world" at the same time as we kick and thrash in the liquid of our minds. But you best not forget strictly material world--or else you will find yourself floating face down. The interfaces between the worlds of consciousness and the hard rock that may in fact be out there is important, but only important when we have a bit of each in both hands. Think about the world, but also world about the think. Right? Right?

In other words, cell phones: what do they do for us, and how do they work? What they do for us only goes so far as we know how they do it. Otherwise we're just plugged into our own sensory feedback loop. There are clear benefits of communication that don't require a list. But how do they work?

Poorly. And I'm not just talking about signal strength. Look at the material models for our high-tech communication networks. It's full of "pay as you go" reverse indentured servitude, credit/fee contract scams, and monopolies. I pay over a hundred dollars in "connection fees" per month to stay networked in the way I find useful. WTF? That's more than my car insurance. I could set up my own telegraph station a hundred years ago for less, probably. What future is this?

Not to speak of the hardware itself. Dropped calls, bad operating systems, bricked phones on their way to the e-waste fields of China. App stores? Fart programs? Are we serious?

Materially, (in the strict sense), we are all slaves. When I build a transistor radio set, perhaps I'm connected. But with a cell phone, I've mortgaged my flow of information.

This is the ongoing rebuilding of the credit economy. Housing collapsed--wait for the information infrastructure. People can't pay their data bills, and drop off the network. The content begins to shrink. There is a rush to "flip" domain names, but nobody is reading anyway. Eventually, land lines shut down, or are taken over by the government because they the tubes are too big to fail. It's not dot-com VC sink holes, its the crash of information itself.

So in a class sense, we are the texting, twittering, blogging poor, the proceeds of ill-gotten AdSense all being eaten by the Company to pay for our web hosting fees. If you advertise, you are basically sharecropping.

And I haven't even mentioned the fact that a cell phone will not make anything edible, does not cure a single disease, or reclaim a single molecule of CO2. All it does is call people! We'd be better off giving every person a good pocket knife than a RAZR.

Is ubiquitous connectivity useless then? A tool of the oppressing class to profit off our work, and nothing else? Should we burn the factories, and shove our clogs into Web 2.0?

Is there no benefit for the poor having cell phones? What about teenagers? I think it is safe to say there is a benefit. When I was trying to find an apartment and a job at the same time, with no mailing address or reliable internet connection, my cheap, free-with-contract cell phone was my only link to the material world. It was my access, and the only one I had--not to community or SMS, but to anything. Access is good--because then you can use it however you want and make it as utile as you wish, even if it is for mostly LOLing. In this world when few material things are concrete these days (think of rural Africa, where a cell phone connection is more likely than a water and sewage line) this shard of access is the only thing many can depend on--and we are rapidly re-organizing our material lives around this anchor. The problem is that we are kept poor by these anchors, because someone else is dolling out the rope.

The material use of a tool or object is a certain sort of value, and the control of that object, via less-material pathways such as "contracts", "property", and "debt" is another sort of value. I believe a bearded man other than myself wrote something about that once. Along with the rise of Access as a new axis in our material lives, other sorts of value appears, connected in different ways. There are various sorts of social value, with different amounts of relative worth.

For example, cell phones are status symbols, by which we judge relative wealth. Just like cars, before people decided they'd rather drive electric flat-screen TVs than new SUVs. The cell-phone is a commodity as well as a tool, and there are certain values of having a certain connectness; being able to say "you can always reach me on my blackberry" has a value in addition to anything that might be said in the email. And this is before you cover the damn thing in pink rhinestones.

But the act of communication, can be a commodity, as much as it is the use of a tool. Lots of people buy into the idea of communication more than they actually communicate. My Loyal Internet Marketers for one. (Yes, I have about twenty or so. They all follow me on Twitter. The best part is, they are just as useful whether I read them or not! And they are free! If one quits, s/he is replaced by two more!)

There is a certain idea of the Internet going around, one which you might be familiar with. It is a familiar story (though not perhaps as familiar as The Odyssey), and one much loved, especially in this country. It is a love story--Demos, our perennial hero, falls in love with Techne, and they decide to start a family. Because they believe their love is so perfect, they decide to adopt a child: Kratia. Kratia, unfortunately, is not a child, but a dark spirit from way back. Because of their love, Demos and Techne were blinded to the spells of Kratia, and did not see it in its true form. They thought, oh, its only a kid, give it a cell phone, and it will be fine. But then when the monthly bill came back...

We think that technology, somehow, is the final proof of democracy. We've merged our belief in the destiny of capitalism and freemarkets with our sleepy trust in democracy to maintain a fair balance of power. These two great tastes actually don't taste like anything together, but in fact continuing doing what they do best--democracy consolidates the power of the people into commodity leaders, away from the economy where it belongs; and technology continues to evolve like a tool, according to the actions of those who wield it.

As our economy gets more technologically rigorous, the powers that control the economy also control more technology. In the interest of maintaining this power, they use the tools they have at hand, lulling Demos to sleep with Techne's sweet songs.

Don't know those lullabys? Ever heard of American Idol? Vote early, vote often--the true democrat's popularity contest. How about the Obama SMS network? Feel connected? Feel like one of the people? Yes we can? How much do you get charged per text message?

The technology of the Internet has given democracy its return to populism, all right. You feel more like Demos when you're with Techne, don't you? You are so in love with her, you can't even remember who you were before. But don't blame Techne. She's under the spell too. It's the product of your love, that demon, bastard spawn that crawled off into the dark woods when you two were busy humming little love songs... Power... what gave birth to evil itself...

Anyway, that's enough with the stories. But wait, one more:

"The Internet — we used to call it a ‘commons’. Yet it was nothing like any earlier commons: in a true commons, people relate directly to one another, convivially, commensally. Whereas when they train themselves, alone, silently, on a screen, manifesting ideas and tools created and stored by others, they do not have to be social beings. They can owe the rest of the human race no bond of allegiance." - Sterling, in "White Fungus"

Did the true commons ever exist outside of the Arendtian notion of the agora, and those other high-minded Greeks and liberal humanists? Sure, we commune all the time. But humanity is not a commune--never was. There were always tools, people, and power. The relations shift around, but the players stay the same.

So what is worth? Where does the true value lie? Not in any particular person or tool, certainly. It's in the relationships between them. The pathways that guide certain people to use certain tools for certain goals. The path of a hammer to hit a nail; the text message to offer a friend a job; the processing of information to sort out a story--a story that might teach someone how to use a tool better. The objects, and even the people are mere symbols, emblems, and indicators of power and potential power. The symbols only have the value we give them, as we use them to mediate between ourselves and the world. Cellphones are emblems of our poverty. Computers don't make value (unless your desktop is at Moody's). And here we are, back in the beginning--people and symbols, symbols of people, people symbolizing tools, and tools symbolizing people.

Poverty--who is poor here? I suppose in the end, everyone with a cell-phone. They are the least common denomenator of Access these days. So we're all poor, in the respect of technology. Only some of us more than others, and and some of us, decidedly more materially than others. But maybe some day, a cheap, open-source free access to the networks will be devised... and then we can all be the salt of the earth. After looking at the bailout packages, I would rather we were all equally poor, frankly.

What does Bruce Sterling think? Hell if I know! Shit, that guy is crazy. Every read any of his stuff about global warming?

Derivative Narratives

It's been a long time since I posted some outrage about the financial system, mostly because there is a whole lot of nothing new going on.

But here's something new.

The news has been swarming around the tremendous about of "OUTRAGE" people feel over the AIG bonuses for the last couple of weeks. Of course, most of the folks I actually know don't know the difference between these bonuses and any other particular parcel of the bailout money, but hey, the media and the politicians say we're outraged, so we must be.

What is new is that a couple of AIG employees have responded in open letters to the public and their management. First Jack DeSantis' open letter of resignation [from AIG FP] was published in the NYT, and now "a letter purporting to be from en employee at AIG's Financial Products", posted on The Business Insider's blog Clusterstock. (Though there is no name on the second piece, it seems most are considering it legit. Also, I must "hat-tip", as they say in the econo-blog world, to FT Alphaville, for pointing me towards these interesting specimens, as they never fail to do).

These letters exhibit the good old OUTRAGE of employees who were told they would be paid a fee, which they have recently learned will not be paid because the gov'mint finds it expedient not to pay them. This is besides the fact they were not specifically responsible for the cartwheeling down-in-flames failure issue AIG seemed to have, and because they were hired to stay on after the failure to wind down the business. So they say.

But what I find really interesting is the tone of these two pieces. These voices are not the whinings of bankers who are crying as their car services and country-club memberships are torn from their claws, or those shredding documents and packing gold bars of US Treasury money into attache cases (though their salaries do make me want to spit). These are not the Wall Street class we see in the political cartoons, spending taxpayer money while the rest of us head to unemployment (though they may have had to cancel their drug and hooker delivery services with pain in their heart).

Despite who these men might actually be, these letters are from men who are pissed off, because they are trying to work a complicated system, which nobody seems to understand or acknowledge--especially the government charged with saving the system.

Here are some choice bits:

"I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you [Edward Liddy, CEO of AIG], I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down."

-De Santis

"have spent over 15 years waking up at 5am and coming home late at night, playing by the rules, making thought-through, ethical and conscientious decisions in the framework of an industry that has existed for thousands of years and currently employs hundreds of thousands of people in the major financial centers. None of What I did was illegal, none of what I did was unethical, none of what I did keeps me up at night. I will happily stand in front of congress and justify every deal, every mark, every decision I made."

-"Contestant #2"

"The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press."

-DeSantis

"What is happening in the US political system today is a travesty of fairness, basic rights and transparency. Where was this congressional outrage and mob-baiting over abu-ghraib, guantanomo, the failing educational system, the failing health care system, the incredible inequality of opportunity and outcome in the US, the illegal war in iraq and I'm sure this list can go on? This outrage is manufactured by the very politicians, Barney Frank, Chris Dodd, Andrew Cuomo and others who supervised the system, who took it's fruits as campaign contributions, to hide their own far greater culpability in the creation of the mess we are in. The crisis is systemic and the leaders of the system are trying to blame it on 10 guys in connecticut. Please, you should feel insulted to your core that the US political establishment tries to lie to you again."

-"#2"

"After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself."

-DeSantis

"We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house."

-DeSantis

"My team contained a Slovak physicist who in act of great courage and wisdom, defected from the eastern block during the cold war. A French civil engineer who would like to build bridges but couldn't resist the lucre of finance. A Russian-Jewish immigrant who has worked his way up from busboy in a brooklyn diner to key member of the the commodities business and an indian graduate of IIT who fixes his own broken electronics gear on his desk at work.. These people are not corrupt. They have earned their success. Their stories are even testament to the simple fact that anyone could come get a job in finance and succeed. If anything, the tragedy is that so many talented people worked in finance when they and society would have been better off with their efforts focussed else where."

-"#2"

"I am not shocked. I am an observer of US foreign policy. I see how the US corrupts, betrays, its principles lies, mis-names its deeds and turns on its allies all over the world all day every day. That this rot and corruption are now being evidenced domestically in the form of a McCarthy like witch-hunt of "bankers" is much less shocking than that they would kill a million Iraqi's and then declare victory for democracy. I am not shocked that in a country where only 30% of the population can name the three branches of government (but 70% can name an America Idol judge) that it does not seem important that congress is trying to pass ex-post-facto taxes or secure bills of attainder. It flows naturally that the vitiation of contract law doesn't seem worthy of remark. THE ENTIRE US SYSTEM IS COMMITTING SUICIDE. And why?
Because congressman only really care about the next election and care nothing about the long term. The same crappy incentive scheme that has destroyed finance is destroying the US government."

-"#2"

Whoa. I haven't heard many citizens that pissed off.

It strikes me that #2 is right--the entire system is crashing and burning. Not for the usual reasons: the sell-out nature of the capitalist system, the inequalities of materialist culture, or the contradictions of commodities. It seems to me, in the words of God Speed You Black Emperor, "The car is on fire, and there's no driver at the wheel." It used to be assumed that government was inept and do-nothing, but at least we had our strong market economy as the gears. Well, those gears slipped, and what we're finding out is that there is nobody, but nobody who can figure out how to put humpty-dumpty back together again.

Sure, folks can understand how derivatives work. Really, its just a complicated contractual give-and-take. There are even people who are fairly good at developing algorithms to track how these contracts are functioning, and determining worth, for lack of a better term. But for goodness sake, there is no fucking wheel on this ship. Nobody can steer the thing. How can you have direction, how can you have "growth", if there is no way to determine your heading? The boat tends to head west, with allowances for cyclical turns to the north, south, and east?

This is our system.

Nobody has confidence, because it is headed in the direction of failure. If we whip round again, some people will be confident. But when will people start to ask for a better boat? Are we really not capable of making one? We went to the fucking moon! Or are we just too scared to try, because we are worried about preserving our concept of "ownership", because goddamn it, the minute it's not "mine", someone is going to rip it out of my hands.

Well, I'm not going to solve that problem here.

But here is something else worth mentioning: in addition to no one knowing how to steer this thing, we barely even know starboard from port. The information is all locked up. These two letters divulge more about the finances of AIG than we know about just about any bank right now--because even if we can find the information, we don't know whether or not they are lying. You want to know whether or not we're headed west? [Paints arrow on deck, pointed forward, labeled "WEST"/enacts PPIP] There! We're heading west!

Letters like these are what we need. Alphaville called for a banker "Truth and Reconsiliation Commission" before things really get out of hand. I think they are right. Our new era of "hope and openness" or whatever is most likely not going to provide it, because "hope and openness" seem to actually mean "gloss and boundless optimism".

You know, right now I would settle for anyone who would say these things:

This is exactly what is going on
This is what I think it means
This is how we're going to fix it
And this is how we'll make sure it never, ever happens again.

The only people who are saying anything like this are the guys now resigning from AIG, because at least they've got the first two down.

We need a oral history team to Wall Street now, while all these guys are still pissed off. Otherwise, in another mess of years we'll be in the same place again.

Signed, Sealed, Insured, I'm Yours

Here is an excellent clip, re-posted from Calculated Risk. 60 Minutes went with the FDIC when they seized Heritage Bank in Illinois (number 15 of 17 so far this year, closed on 2/27/09).


Watch CBS Videos Online

This is good for a few reasons. One, because it shows how the FDIC really knows what it is doing. Two, it really hits home what it is like to have a bank fail. Imagine working for a bank for twenty years and then having the FDIC come in the door right before you are about to go home Friday evening.

Third, and most importantly: this is why we do not have a free market and why we should NOT, never, by no means have unrestricted capitalism. Can you imagine if all these people just lost their money? Sorry: we took your money and pissed it away. The FDIC is an institution that protects people, and frankly, we need more such institutions in this country.

Unlike Congress, for example, who seems more concerned with investors than taxpayers. Note when Sheila Bair suggests at about 12:00 that perhaps taxpayers should question the size of institutions who are being bailed out by the government. The FDIC protects taxpayers and their deposits, whereas Congress is protecting investors and their investments. Think about that.

Also, think about this. The CEO of MB Financial interviewed in this piece, suggests that closing weak banks is good for the banking industry. Okay, perhaps. But: the number of FDIC insured institions has halved in the past twenty years. Halved! It has largely sustained the growth of the banks who remain; even in recessions, when the amount of total FDIC-insured assets stops increasing, the average amount of assets per institution is increasing, because banks are dropping off the map left and right. How long can this sustain itself? How long before we end up with too few banks, all of which are too big to fail? Or how long before the MB Financial's of the banking world cannot shore up their balance sheets with cheaply bought fire-sale assets? There are only some 7,000 FDIC insured institutions left. How big of a banking system is sustainable? How small?

A Econo-Chorus Line

Just in case you thought I was talking out of my ass, here are some others who think the same thing (republished from the illustrious FT Alphaville, because I gather most of my readers don't frequent the econ blog circuit--though why I do, is anybody's guess):

ps. I especially appreciated the Naked Capitalism post, because she seems just as irritated as I am.

[snip]

The Geithner plan — what the pundits say

Posted by Gwen Robinson on Feb 11 07:56.

It’s not pretty out there, if you’re a newly appointed US Treasury secretary:

Kenneth Rogoff, Harvard professor and former IMF chief economist [via Bloomberg]: The risk is that the market reaction sabotages the plan before it gets under way, forcing Geithner to change his approach in response — a position that his predecessor, Henry Paulson, frequently found himself in. That may mean the plan “may just end being an interim step” .

Paul Krugman blog, NYT: The plan deserves praise for what isn’t in it, at least as far as I can tell. There doesn’t seem to be provision for mass purchases of toxic waste at premium prices; there also doesn’t seem to be a massive “ring-fencing” guarantee against private losses on bad assets. In that sense the plan is better than what the last few weeks of leaks led us to expect.

Justin Fox, The Curious Capitalist: The main message that Geithner seemed to be trying to get across was that, while he had no big plan to solve the financial crisis in one fell swoop, he intended to proceed with more clarity and transparency than his predecessor. Which shouldn’t be too hard. [Geither] reportedly fought off efforts by others in the Administration to come up with something more crowd-pleasing today. A long slog it is, then.

Yves Smith, NakedCapitalism: I cannot recall a major US policy initiative being met with as much immediate revulsion as the so-called Geithner plan. Even the horrific TARP, which showed utter contempt for Congress and the American public was in some ways less troubling. High-handedness was the hallmark of the Bush Administration; it was only the scale and audacity of the TARP that was the stunner… As we, and increasingly others, have said, the Obama economic team is every bit as captive to Wall Street’s interests as the Bushies were. The differences increasingly look stylistic, not substantive. Treasury Secretary Geithner presented today what in essence was a plan to come up with a plan.

Kevin Logan, senior US economist at Kleinwort Benson (HT to Yves Smith): They have a plan for a plan but they don’t really have a plan. The whole proposal is so vague as to create new uncertainty, and maybe the problem is really so bad that they haven’t worked out how to solve it.

Roger Ehrenberg, Information Arbitrage: The equity market certainly bought the rumor of the bailout plan (hereafter referred to as the “Geithner Plan”), rallying like crazy over the past week on nothing but bad news across the globe. But on the day when the big news was finally expected to hit, Treasury Secretary Geithner’s release of his “comprehensive plan,” he said absolutely nothing… I had hoped for so much more coming out of a stirring victory, broad-based enthusiasm and words filled with promise and action. Instead, we’ve gotten a plan and an ideology that appears frighteningly similar to that which preceeded it, which failed miserably by any accounting. No real accountability. No real acknowledgement of the magnitude of the problem. Deeply concerned with stock market reaction today instead of where it might be in three years, five years, 10 years. This is why I’m scared out of my mind.

Felix Salmon, Portfolio: I like the symmetry here. On November 21, when Barack Obama announced that he was nominating Tim Geithner to be his Treasury secretary, the Dow rose 494 points and broke through the 8,000 barrier. On February 10, when Geithner gave his first major speech as Treasury secretary, the Dow fell 273 points and broke through the 8,000 barrier… Geithner promises unprecedented levels of transparency for the new plan. So far, all we have is talk. The markets will wait to actually see the details — and, of course, will wait for Congressional approval of all this — before they start believing.

Joe Weisenthal, ClusterStock (on Geithner’s CNBC appearance after presenting his plan):
Dear Tim (and Obama): Simply saying over and over again, words like honest and clear aren’t actually the same about being honest and clear. Has it occurred to you that it’s this kind of obfuscation — during a time when we supposedly need exceptional clarity — is contributing to the problem?

WSJ — Opinion Journal: Judging by the hissing in financial markets, Treasury Secretary Timothy Geithner’s opening act as Rescuer in Chief yesterday was a bomb. What everyone saw was Geithner at the Improv, a routine with a few good lines but a lot of material that needs more, well, practice… If the goal was to reduce uncertainty, it didn’t work. One problem is that Mr. Geithner’s proposal puts a higher priority on adding more public capital first as a source of financial stability. More public capital also comes with the risk of more public interference or control, especially with Congress looking for heads. .. This is a deterrent to more private investment, to put it mildly. But there is a great deal of private capital ready to take risks again if the Obama Treasury lays out transparent, consistent rules — and if it makes clear that its goal is to restore at the earliest possible date a healthy, privately run banking system.

So that was it? See you in eight....

It took three weeks. My limited confidence in the Obama administration is dead.

I will be the first to admit I didn't begin with much confidence. I'm highly critical of the executive branch as a constitutional entity, and also critical of federal government on a lot of points. And what's more, I'm argumentatively dismissive (putting it mildly) of liberal idealism.

So to put it right out there, I was dismayed at the way Obama ran his campaign, because while it was deeply inspiring to millions of people, and he seems like a generally intelligent fellow who will certainly be a better president than his direct Republican competition, it did not detail any sort of plans for the next four years outside of general principles.

This put me in the unfortunate historical perspective of waiting for him to fail. And not without a certain schadenfreude, either. Since from the presidential race of 2004 I have been bashing my head into the liberal wall of Bush-hate, which I of course do not disagree with, but yet I am constantly frustrated by its hopeless belief in a Democratic messiah. This is the real problem--Obama himself can't be blamed for the failure of the political populace of which he has found himself the head. If the people ever really demanded actual change, we would get it. Instead, we get posturing, because that is exactly what the people demand. If it is so important to replace Bush, than wouldn't we want someone with a clear plan emphasizing the changes, rather than a nebulous plan based on a categorical emphasis of "Change" itself? The most frustrating part was the zeal of the liberals who would claim that any left-leaning or progressive cause one might suggest is of course included in the Obama platform, because if you are interested in any particular change, Obama must be your candidate. Naturally. It became impossible to argue with these sorts of liberals, because like any messiah-followers, they attributed miracles to their leader not based on refutable facts, but on Belief itself, (a key component of the ideology of Change and Hope, by the way). So, I thought: Obama will be elected, he'll fail to change much, and then all the liberals will finally wake up from their Bush-induced fever dream, and we can get down to actual political business in this country in 2016.

This isn't to say I didn't "hope" myself. Obama's language was quite relieving and stimulating, especially after eight years of bureaucratic bullshit. Hearing him across the debate podium from McCain almost made him sound like a college professor. I could like a techno-president. And the first African-American president is probably a history-book milestone long overdue. Furthermore, I feel anyone willing to step up and try and promote progressive change deserves a chance. After all, I'm not about to run for president. Okay, Mr. Obama, let's see what you can do. Here are the keys.

This hopeful attitude ended yesterday, when simultaneously the new Democrat Senate approved the stimulus plan, and when Geithner announced the financial rescue plan. All hopes for a new day are dashed, and it will be business as usual in America for the next eight years. Which, as you might be aware, is not very good at the moment.

First--the financial plan has no real change. It is the same things the Fed has already been doing, only more of it. Yes, the credit markets are easing, so it appears it is working. But the credit markets were always the effect, not the cause. We'll see what the "stress-tests" of banks reveal, and what is done about them, but when the banking system is only surviving with massive quantitative easing and still not lending money (in other words, everyone knows it is broken) what will a stress-test show? Why would they admit the banks are insolvent now, when they have not yet? It certainly isn't as if they have a plan for insolvent banks.

Second--the reason they don't have a plan for the banks is the biggest sign that Obama is just like every other president we've ever had. They will not nationalize, until it is a complete disaster. The well publicized interview of Obama by Terry Morgan says all: we will not nationalize. Why? For two reasons: one, because the amount of money in the banks needing nationalization is too large; and two, because the American of "private capital" will not allow it.

Do you see what he is saying here? American business is BIGGER than its government. The big banks are too large, too powerful, too culturally pervasive to be nationalized. Obama has capitulated--the capitalists are running the country. It's only because the banks are so publicly unpopular right now they can force them to do anything at all--the people's hate for the banks is even greater than their hate for the government.

This is the opposite of change--this is reinforcing the power and economic system of America simply because it is big and powerful. If Obama's commitment to do what needs to be done in the name of Change was anything other than a talking point, all the banks' books would be on his desk right now. He could nationalize them. Real people--us, out here in America, are pissed about getting ripped off by the banks everyday. What do we care? Serves those investors right, who are still profiting on our losses. But he doesn't. At who's word? Who would suffer if banks were nationalized? Bankers and investors. Who would gain? Us. Business as usual, we get the shaft.

Third--tax cuts?!?!? Are you kidding? All the economists with any statistics under their belt at all are saying massive spending is the only way out. And so the Democrats are adding tax cuts and cutting spending from the bills, in order to gain Republican support that isn't showing up when the votes are counted. What part of progressive change is bargining with the opponents of change? Especially in such a crucial piece of legislation, the failure of which could cause the failure of the world economy, why would anyone seek to water down the measures with appeals to the people who caused the problem? Tax cuts from the last eight years contributed to the bubble economy, and now they are the fix? This attempt at moderation is going to drive the whole thing into the ground.


It really is disappointing, but not as much as it is depressing. From a historical perspective, twenty years down the road, it will be disappointing. But when you see the end of the world coming, and people doing nothing to stop it, everything looks pretty grim. It's going to continue this way, too. The reason I say "in eight years" is because he will obviously be re-elected. Why? "Give him more time," they'll plead. Like a true messiah, he'll be allowed to re-predict the rapture as many times as he likes. Meanwhile: what will be the next thing to be compromised? Climate change? Maybe sea levels will only come up ten feet in Manhattan. Technology initiatives? Maybe the RIAA will only be able to read half of people's emails. The enivironment? Well, I hear pandas are mating pretty regularly in captivity now, so maybe we can do the same with all the polar bears who are getting tired of swimming. Think I'm pessimistic? You're goddamn right. Call me when you see the upside.

TARPs and MREs

Seeing as how the big news tomorrow will be the financial stimulus, I wanted to re-post this blog post from Robert Reich (Secretary of Labor under Clinton, all around economics guy, and adviser [I believe un-official] to Obama).

I'm going to intersperse my sardonic comments. To sum it all up, I think Reich gives some clear, albeit obvious guidelines on what should happen to any further money, so that it does not end up like the TARP. He is phrasing his comments in terms of the second half of the TARP funds, but I think it should apply to anything applied financial-wise.

(snip)

What Should Be Done With The Next $350 Billion of Taxpayer Bailout Money: Criteria for TARP II

It's difficult to make the case that the first $350 billion bailout of Wall Street -- so-called "TARP I" -- fulfilled its goals, unless one argues that the Street would have imploded without it, which is pretty much what Hank Paulson is saying these days. And since it's impossible to prove a counter-factual, especially when the Treasury was never clear about TARP I's goals to begin with, Paulson may have a point. But the easier and probably more correct argument is that American taxpayers wasted $350 billion. [seems to me that someone was arguing that this would happen back in the fall!] No one knows exactly where it went -- at least two recent reports reveal that the Treasury had no idea [he's talking about the "capital purchase program" as listed in the chart in my earlier post, which 'only' lost 18%]-- but we do know the money did not go to small businesses, struggling homeowners, students, or anyone else needing credit, which was the major public justification for the bailout. In all likelihood, on the basis of the skimpy evidence we now have, the money went instead to bank shareholders in the form of dividends; to bank executives, traders, and directors as compensation (directors of major Wall Street banks continued to pull down an average of $350K each in 2008 merely for sitting in on a handful of board meetings at which they obviously didn't oversee very much); to some holders of bank debt; and to platoons of lawyers, accountants, and other financiers who have advised the banks about other places to park the rest of the money in the meantime.

Congress is now about to give the next Treasury secretary an additional $350 billion, [or $800B, or make a bad bank, or whatever] as the second tranche of the bailout. One hopes that the new administration will use it better. Some suggested guidelines:

1. Do not use any of the money to buy stock in -- that is, to "recapitalize" -- the banks. This is a sinkhole of cosmic proportion. Citigroup, to take but one example, has so far received $45 billion of taxpayer cash since early October (along with some $250 billion in taxpayer-supported guarantees from the Fed for junky assets on Citi's balance sheets), and is in far worse financial shape than it was three months ago. Perhaps, someday over the rainbow, these shares in Citi along with Citi's lousy assets will be worth more than taxpayers paid for them. But we're not in Wonderland yet and probably never will be. Giving Citi or any other big bank more taxpayer money is analogous to giving it to Bernard Madoff. It's a giant Ponzi scheme. The money will disappear. [yes! this is what I, and those other economists I posted about are saying! BUYING STOCK IN A FAILING COMPANY HELPS NOBODY]

2. Do not use the money to buy the banks' "troubled" assets. This might have made sense a year ago when the proportion of such assets -- which include mortage-backed securities as well as loans to private-equity partnerships that pissed them away -- was relatively small. But these days a huge and growing proportion of bank assets are "troubled." (It's also a huge waste of taxpayer dollars for the Fed to exchange them for Treasury bills.)

3. Prohibit any bank that gets TARP II funds from issuing dividends, purchasing other companies, or paying off creditors.

4. Bar any bank that gets TARP II funds from paying its executives, traders, or directors more than 10 percent of what they received in 2007.

5. Require that any bank getting TARP II funds be reimbursed by its executives, traders, and directors 50 percent of whatever amounts they were compensated in 2005, 2006, 2007, and 2008. This compensation was, after all, based on false premises and fraudulant assertions, and on balance sheets that hid the true extent of these banks' risks and liabilities.

6. Insist that at least 90 percent of the TARP II money be used for new bank loans. If the banks cannot find suitable borrowers, they should return the money. [I think #3, 4, 5, and 6 should go without saying, if they get anything at all]

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning. [it is absolutely ridiculous that people seem to think we should have a banking crisis in which everyone gets to stay in business after they caused one of the largest asset bubbles in history] At least then we'd find out what was on their balance sheets, because they'd have no choice but to sell off some of their junk, even at fire-sale prices (believe me, if the price is low enough, there are investors around the world who will buy them); they'd have to negotiate with their creditors and pay some of them off; many of their CEOs would be fired and directors replaced, which they should have been already; and most of their shareholders would be wiped out, which is unfortunate for them but, hey, they took the risk. In other words, these provisions would force the banks to clean up their balance sheets. This is the only way to get them to start lending again. [or, maybe "somebody" should "take control" of these banks to force these things to happen.]

Meanwhile, Congress should attach to TARP II -- or to the upcoming stimulus bill -- a small change in the bankruptcy law allowing homeowners to renegotiate their mortgages on their primary residences (as owners of second homes and commercial real estate can already do). The practical effect will be to give homeowners more bargaining leverage with their mortgage banks, and save at least 800,000 homes from foreclosure. Yes, in theory, holders of mortgage-backed securities will take a hit but as a practical matter they've already taken a hit because the securities (and the securities in which they're wrapped) are already deemed to be junk. At the least, this change will put a bit of a damper on the rising number of foreclosures. A home that's occupied by a family paying something on their mortgage is far better than a home that's empty, on which no one is paying anything.

(snip)

The only problem is that this week Reich has taken a step back from the sterness of this post. Perhaps with the stimulus bill looming, or for some other reason (note in this one where he mentions that Obama's officials are nodding their heads at the bad bank), he is trying to be more diplomatic and picking his battles.

But one thing is perfectly clear: TARP was a lesson in exactly what not to do. The money vanished, and shit is still broken. No more buying assets, no more buying stock, no more cushioning balance sheets so that investors can get the hell out. It's time to shut the doors, and open the books. Somebody needs to take control, and it sure as hell isn't these bozos.

Trust me--time is running out here. The stimulus isn't going to come in time, not before things get bad. I believe the ticker symbol you are looking for is MRE.

On the... uh, "Moral-ish Problem".

If, I was (bear with me here), some sort of an intellectual, as it were, the point of this post might be taken to be a classic example of Adam Rothsteinism.

Luckily (for who?) I'm not, so I can post this argument for nationalization of the economy by simultaneously bashing moralistic humanism without feeling like I'm beating the dead horse of that one book that I'm known for writing.

I didn't write any such book, nor do I have any 'line', nor any students. I just have this sardonic blog, and a lot of vitriol against liberal capitalism.

To the point: a common thread of concern among liberal (that is, American political liberals, not libertarian-leaning) economists in the wake of the... you know, problems, is evaluating the "moral corruption" that allowed these events to occur.

The argument, if one can call it that, goes something like this:

"Were the flaws in the system the result of markets corrupting our morals? I think we relied too much on markets to regulate behavior, i.e. as a means of enforcing morality on agents operating within market systems, and we paid too little attention to the need for oversight. But the flaws in the system that created the bad incentives were not, for the most part, the result of moral shortcomings, they resulted from human shortcomings, unintentional mistakes in the design of the system that come from our "psychological limits"."

In other words, it's not so much an argument as a rhetorical question with an afterthought concerning a need for "oversight". (Please note: this is not a slight against Mark Thoma, the author of these words, so much as it is against the line of thinking. His blog and comments on the economy are profoundly enlightening for a student wading through the issues of macro-economics. I say this because he does seem to be very knowledgeable and keen on the issues; my point of contention is with a symptomatic point of argument that seem pervasive in all of humanist thought, from the best minds to the worst.)

The problem, as I see it, is that in dealing with humanity, there is irrefutable desire to attribute morality as the last bastion of any system involving... well, involving humans. We have the system proper, we have checks and balances, we have peer review, we have oversight; but at long last, the metahuman element which drives all of these mechanisms, and which will no doubt save our souls, is good old morality. Because humans don't do wrong knowingly.

Without, of course, remembering that a market is a forum precisely designed for one party to extract value from another party. So any market party wouldn't dare use systems of checks and balances to put one over on another, wouldn't manipulate oversight to benefit themselves, and wouldn't even drop to the level of swearing on the bible to uphold morality, only to sell this promise to the highest bidder? All because "humans like to do what's right?"

Hand over the keys, humanity. You've had enough. When confronted with folks breaking these very rules which we believe are intrinsic to being, our only response is to say, "Whoa, let's tighten the rules a bit." Yeah, and I've only had, like, four beers.

I am not proposing to take the humans out of the system (computers, while perhaps being ultimately correct, often don't come to much better conclusions than we do). I am proposing to take a reliance on morality out of the system.

By linking the market systems to monopolistic control circuits, we don't have to rely on humanity "knowing what's best". What is a monopolistic control circuit? Nationalization. You'd never think to hear me arguing for bureaucracy (or at least I wouldn't think to), but that is exactly what we need. Thermostats are surprisingly efficient, simple physical mechanisms. Why shouldn't flows of capital be under similar control? Of course, it would not be centralized--we know what happens if one person ends up controlling the heat for the whole house, or if that one circuit breaks. A strategic, networked system of flow control is precisely what would work. Like, for example, the Federal Reserve system. Or, any of the regulated market bourses like the NYSE or CME. These work amazingly well, compared to what it was like before they existed. Why not extend this principle to GAAP (generally accepted accounting procedures) or personal investment?

Secrecy is where morality has a chance to leak. It's where bubbles are allowed to form. The reliance on morality that allows for any sort of secrecy is where people are allowed to become insanely rich; it is the realm of confidence. If you have confidence in morality, even if this is directed into oversight, then you are just setting yourself up to have that confidence abused. Morality is the ability to think that someone will do right by you simply because; because they are just like you, another human just out there trying to make some money on the market. Any con man will tell you that getting the victim to feel akin to you is the way to make it work. Put the numbers on the table, don't trust that they're in someone's pocket.

Now, don't go spreading this around, because this information is special, only for you. We don't want everyone getting in on this 'critique of morality' thing, just me and you. We can make a fortune on it--trust me.

Consider Yourself Hyperlinked

I've been feeling a bit of a saucy braggart online lately; a lot of sarcasm, a lot of vitriol, and a general bad attitude.

This is not going to change for this post, but I'll keep it short. Joseph Stiglitz, in Vanity Fair, on causes of the current economic crisis.

Among other interesting observations, here's a bit on the bailout (emphasis, mine):

(snip)

The final turning point came with the passage of a bailout package on October 3, 2008—that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues—they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely—which they hadn’t—the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems—the flawed incentive structures and the inadequate regulatory system.

(snip)

Didn't some people say this at the time? Some people, meaning me.

Here's what I said:

"I promise, that any elected official who votes to support this bailout will never receive my vote again. Not for school board, not for dog catcher. This is the Iraq War all over again. People who knew warned that it was a bad idea; and then it was voted into existence anyway. Then later, when it fails, it's, "oh, we were misled! We had false information! The people who would benefit by what we did lied to us!" Bullshit. You are responsible."



I hyperlinked you so.


Anyway, enough of that. I promise much more interesting, non-self-inflationary posts shortly. I've had an idea for a series of blog posts for about a month now, and I think I'm finally going to get it underway. You might like it, especially because it is not me running my keys.

The series will not be about this guy.

Rationalizing Nationalizing

A little bit more exploration of the economy (call it alliterative easing):

So the Fed has admitted that quantitative easing is part of the plan. For those who are only learning what this means for the first time during this living-history lesson (like myself), it means increasing the monetary supply to grease the economy, doing what would ordinarily cause inflation in better times. Japan did this famously in the 90s, with little success, so the plan here is to do it better and quicker to make it work.

What they are doing is pumping money into the economy by buying up assets, increasing their balance sheet with cash drawn from, for lack of a better term, nowhere. More cash = more spending, which might ordinarily drive up prices, but now they are just hoping to increase revenue flows.

Unfortunately, it doesn't seem to be working yet. The banks from which the assets are being bought are just depositing the cash back into the Fed Reserve, which does serve to deleverage them from bad assets, but doesn't help the economy. The credit impasse seems to be sticking, because the banks aren't lending the money back out. Meanwhile, Treasuries are being sold like hot cakes, with the 3-month bill return being almost zero. Bad things that could happen include: the treasury market crashing and the dollar crashing, deflation, and more companies failing as a result of credit problems, which would only increase the amount of assets that the Fed would still need to take out of the market to keep it where it is.

But the main issue, as I see it, is that this shows that the Fed is not pushing for nationalization, as I had argued a couple of times previously. Or, at least they say that their not, because to say so could cause a HUGE panic among investors, who fear the phrase as much as they love "open market".

But, the fact that the quantitative easing is not working only pushes the case for nationalization, and not just from my teleological standpoint. Firstly, and most obviously: if the banks aren't doing what they need to be doing on their own, somebody (or some legislation) will eventually have to force them to do so. Secondly: if there is a currency crash, the country will have to take such drastic steps not only to prevent our economy from going down the tubes, but from all the dollar-backed currencies from going down the tubes. This is a lot more pressure than just the irrational red-baiting fears of "investors". Economists, eventually, always look at the facts. Thirdly: if Treasuries stop selling, something else must prop up the dollar. Now, I admit I'm not an economist, so I don't have a reference list of other options that aren't nationalization (my teleology laid bare). However, if the "open-market" policies of the Fed aren't having an effect, like for example, if treasuries aren't being bought and the value of the dollar is decreasing, controlling the supply of the bills on the open market could be used to control the price: like a repo to oneself. This would be more efficient than the open-market buying of assets, or of other repos. It could be carefully modeled and controlled.

And fourthly, aside from monetary policy: there is the matter of industry. This is the important one, because nationalizing the banks is all well and good, but if the industry is not coordinated as well, you might as well not even bother. The key to national control of infrastructure and economy, in my opinion, is coordination, direction, and execution. These are the benefits that a nationalized economy could have (stress the "could") that a free-market economy will never have.

Which brings us to that trying threesome, the American auto industry. They were sent back to Detroit in shame yesterday, because they could not convince Congress that they had a good plan. This is good, because it means that they will not just be handed cash, and also because it means the next time they will get the help they need. I hope it comes in the form of partial nationalization. I think that Congress realizes that they cannot convert themselves into profitable industries, let alone "automakers for the next century" without a drastic plan that will cost a lot of money to begin with. Operating cash is going down the drain. They need investment, and with investment comes direction, coordination, and execution (hopefully). And because the UAW will necessarily be included in any saving legislation, this could be a good beginning for nationalizing movements in American industry in concert with workers groups, and not just industrial leaders.

At least, I hope so. Or, the Fed and Congress could just keep pushing cash into the economy, hoping for a break in the liquidity trap, which may happen after long enough. Or it could all go down the tubes, and then, of course, the zombies.

The zombies do have a plan for the economy. Not nationalization, but cannibalization! (In America, first you get the assets, then you get rotting, then you get the flesh!)

Don't Worry About the Government

I'm watching my favorite show again: The House Committee of Oversight and Government Reform. Some day I will write them a theme song and intro-clip.

Today was Hedge Fund Day: lots of testimony.

I was enjoying Professor Andrew Lo's (MIT Financial Engineering Laboratory Director) testimony. He drew the distinction between risk and systemic risk.

Risk is easily understandable; one invests, and one may, via capitalization, achieve positive returns or one may lose. Systemic risk is the sort of risk that is currently driving the government's reaction to this evolving economic situation. It is generally understood as risk that would create a collapse of the system. This is the basis of the "too big to fail" phenomenon, that is spurring gigantic bailouts of individual companies. Clearly this is a problem, because the scale of the risk, the inherent denominator of capitalistic investment, is now being plied to the strength of the system as a whole. In other words, if a capitalist entity fails, capitalism fails. Others would put this as, if a market entity becomes market, then if that entity fails the market goes with it. I would say they are the same thing (in this case, systems of debt/capital commodification).

Above are some network diagrams of the correlations among hedge fund indexes. Sweet, huh?

Looking at things as a network is always a good schematic, in my opinion. Nothing is an island, and that certainly goes for financial systems. And, if we are discussing systemic risk, then certainly interconnections and correlations between risk is very important, as Professor Lo argues.

In fact, let's hear it from Professor Lo (from his written testimony before the committee):

"By looking at the financial system as a single portfolio, several useful measures of systemic risk can be derived by applying the standard tools of modern portfolio analysis."

WHAT??? verrrrrripppperrrrererrrrrrrrrrrrrrrrrr.... (the sound of the pdf being rewound)

"By looking at THE FINANCIAL SYSTEM AS A SINGLE PORTFOLIO, several useful... etc."

Now, let's cut to a single, modern portfolio, one doing very well right now.

The graph is shamelessly stolen from the excellent blog, Calculated Risk, which you should definitely read if you are interested in any of this sort of crap.

The portfolio, as you see, is that of the Federal Reserve. The president of the Dallas Fed predicted it will go to $3 trillion in assets by the end of the year. That is 20% of the GDP.

Let's recap. Because of systemic risk, the Fed is buying assets and lending out money like never before. The best way to analyze risk in the current markets is to view the market as a single system. And now the Fed is quickly, at an incredible rate, becoming the lynch pin of that single system, both in terms of the networks of where the debt flows are coming from (they have gone from being the lender of last resort to the biggest and only lender).

Get it yet? To fix the problem of an incredibly complex and massive system of value, it is best solidified into one system, for the continued maintenance of that value.

NATIONAL - IZ - ATION

Now: this isn't nationalization in the models of nationalization as it has occurred elsewhere in history. We are on entirely new ground here. This means two things, as I currently see it.

One: we will not have the economy "seized". Instead, companies will continue to try and save what assets they have by running to the Fed's door to keep their companies from going under, until eventually, the Fed controls so much of the country's economy (i.e. not only will the government determine monetary policy, they will control debt policy) and we will see a reverse panic. Everyone will take their money to the bank to keep it safe and valuable. To keep businesses operating, the government will have to spend, and, eventually direct large parts of the economy and its markets via its "owned" companies to keep the country going. Regulation will morph into direction/ownership, not by authority, but by de facto conditions.

Two: because this is a unique situation, it will become a positive feedback loop. Companies will not see it coming until it is too late, and they will be forced to go to the Fed like everyone else. This is the nature of the panic. But it will also be make it an unplanned nationalization, because it will be rolling, and not planned from the beginning. This means that many things could go wrong.

The question that I'm thinking about in my head is, what would the country look like with a nationalized economy? It would not be "state-owned", that's for sure. Not in this country, go back to Cuba! But it would be drastically different. If one considers American capitalism before the great depression to the SEC and Fed controlled economy afterward, we see an incredible difference in the philosophy of the market. No doubt there will be a major shift after this "second great depression", and nationalization is what it may look like.

Clearly companies will not be dissolved into worker combines. However, I can see carefully calibrated "free markets" of related industries that work within current anti-trust laws in managed competitions like those for federal contracts. This could mean strange things for free trade; I think it might drastically reduce the number of companies in particular industries, however, unless the economy, at the same time as it unifies into a "single portfolio", is managed into zones of much smaller size that will reduce the size of corporations and their national influence. Anti-trust could be taken along regional boundaries.

Bureaucracy would increase, with all these regionalized regulatory zones and entities. I think that this regulation would be the link that would be the national arm of the economy, and also divide it into regions and industries. Call them market divisions, if you wish. Fed banks, in addition to maintaining the reserves of cash, would also maintain those of debt, selling regionalized treasuries and industry securities, the way that it does government securities now.

The biggest question is what would happen to the individual worker. I would hope that an increase of union influence, combined with a larger number of member workers and an overhaul of their bargaining power would allow the workers to enter these new market zones as equals in the productive relationship, but I have a feeling we will end up the forgotten partner, and the better functioning of the macroeconomy will encourage its controllers to take more surplus value from the workers on the micro level.

Now, I'm going wildly out on a limb here, talking about things of which I have only a limited, amateur understanding. But, there will clearly be more regulation by the time we're through, and if this regulation is clever, it will act with a better understanding of systemic risk, which, perhaps, is what the folks in the Fed think they are doing now by buying tons of pieces of businesses. There's no doubt that we are moving towards nationalization right now, more than ever before. The only question is how far it will go, and by the fact that it does not seem to be having much more effect in the economy other than acting as a giant asset magnet.

we will see...