Clinton-Bush: The Next Reagan-Bush

Frank Rich writes tonight in The New York Times a scathing cultural critique of our times. In it, he uses a moniker that jumped out at me: "Clinton-Bush."

When one analyzes the roots of our current fiscal calamity, the roots of the crisis quickly come to bear at the feet of Republican congressmen (yes, men) and the Clinton presidency which signed the seeds of destruction into law: namely, the repeal of the Depression era reforms of the Glass Steagall Act (known as the Gramm Leach Bliley Act) and the horrifically disastrous "Commodities Futures Modernization Act" of 2000.

So here's a minor paragraph from tomorrow's Sunday edition of The Times' Frank Rich column:

United States District Court judge in New York, Jed S. Rakoff, scathingly condemned the Obama Securities and Exchange Commission for letting Bank of America skate away with what Rakoff called an immoral and unjust wrist tap to settle charges that it covered up $3.6 billion paid out in bonuses when it purchased Merrill Lynch. How is this S.E.C. a change from the Clinton-Bush S.E.C. that ignored all the red flags on Bernie Madoff?

There's a reason Frank Rich earned his way into the Sunday Times column.

You Can Bet H1N1 Affects Real Estate & The Economy

From The World Health Organization, the public health division of the United Nations, in Geneva, Switzerland:

29 April 2009 -- The situation continues to evolve rapidly. As of 18:00 GMT, 29 April 2009, nine countries have officially reported 148 cases of swine influenza A/H1N1 infection. The United States Government has reported 91 laboratory confirmed human cases, with one death. Mexico has reported 26 confirmed human cases of infection including seven deaths.

The following countries have reported laboratory confirmed cases with no deaths - Austria (1), Canada (13), Germany (3), Israel (2), New Zealand (3), Spain (4) and the United Kingdom (5).

Further information on the situation will be available on the WHO website on a regular basis.

WHO advises no restriction of regular travel or closure of borders. It is considered prudent for people who are ill to delay international travel and for people developing symptoms following international travel to seek medical attention, in line with guidance from national authorities.

There is also no risk of infection from this virus from consumption of well-cooked pork and pork products. Individuals are advised to wash hands thoroughly with soap and water on a regular basis and should seek medical attention if they develop any symptoms of influenza-like illness.

Notice that the focus continues to be on sensible precaution, attention, prevention... This is not an emergency declaration.

However if things rise to the level of a global crisis, I doubt we will hear many more figures or warnings. Once the barn doors are wide open......

CDS's Strike Again: Screwing Up Bankruptcy

In Felix Salmon's excellent economics blog for Reuters (kudos for a positive indication of adaptation to new media by Reuters), Salmon points out how Credit Default Swaps (the unregulated "insurance" policies investors could take from swindlers believing they were protecting various investments, swindlers who never had the capital to begin with to pay out the claim if it happened and statutorily not subject to any regulatory oversight), anyway these CDS's after bringing capitalism to its knees are now complicating what would be a normal process of pre-bankruptcy negotiation with debt-holders who can normally be wiped out in a normal bankruptcy process. But finance and economics are anything but normal these days.

The problem now? As Salmon points out, bondholders in troubled corporations also hold these CDS insurance policies and some of their insurers are able to pay out. So what's the incentive for these bondholders to negotiate completely with the troubled entity whose bonds they hold if bankruptcy itself could actually lead to a higher payout than offered in pre-bankruptcy negotiations?

Let’s say that I buy $1 million of bonds. In order to protect my downside, I buy $600,000 of credit protection: if the issuer goes bust, I get $600,000, and a healthy 60% recovery value. I don’t want the issuer to go bust — I’d much rather the bonds continued to perform, and to be worth $1 million. But at least I can’t lose more than $400,000 in the event of default.

The issuer then gets into serious difficulties, and the bonds start trading at 25 cents on the dollar: my $1 million of bonds are now worth just $250,000 on the open market. The distressed issuer then seeks to avoid bankruptcy by entering into negotiations with its bondholders. “If we default and are forced into bankruptcy,” they say, “then bondholders will end up collecting no more than 20 cents on the dollar in a liquidation. But if you agree to a restructuring which keeps us out of the bankruptcy court, we can get you a good 45 cents on the dollar in value.”

Normally, bondholders would be well disposed to such an offer. But in this case, I might think twice. If the restructuring doesn’t count as an event of default for the purposes of the CDS contract, then I might end up with just 45 cents on the dollar — $450,000 — if I agree to the company’s plan. If I just let it go bust, on the other hand, I get $600,000.* And so I have an incentive to opt for the more economically-destructive option.

See that? Bondholders with good CDS policies have "an economic incentive to opt for the more economically destructive option." This is definitely something to watch. Oh, a caveat from Salmon - the example actually is worse...

*Update: Hemant, in the comments, points out that I actually get $700,000, not $600,000: I get $600,000 from the hedged portion, and also another $100,000 (25% of $400,000) from the unhedged portion.

I do not agree with Salmon's analysis after his example as to what should and should not happen. But in a response that I normally criticize when it comes from others, my only one is that I don't know enough at this point to offer an alternative.

But when you see mainstream media interviewing regular "Janes and Johns" on the street, just bear in mind how subtle and how very complex this entire economic and Wall St mess really really is.

A Brief History of Tea Parties & Taxes

I like to read good blogs as much as I like to write my own. This morning I ran across a post by a user named "Science Teacher By Trade" about the proper understanding of the establishment of federal taxes in the United States by George Washington (The Whiskey Rebellion) following the Revolutionary War. This is a very good recap of that moment in history.

History often has a way of becoming mere folklore over years until the truth of what actually happened is twisted beyond recognition many times. That effect is what creates the space for allegations of "revisionist history" particularly when an accurate recounting of history runs counter to how the folklore has evolved. Consider this phenomenon a quirk of evolutionary psychology in the modern paradigm

Anyway, some truth about the founders and taxes:

The first assumption to dispel is that our "Founding Fathers" were resolutely opposed to taxes, and that the Boston Tea Party was due to this opposition. This is true to a limited extent. Following the Glorious Revolution, parliament established a declaration or Bill of Rights. Among these rights was that reserving the ability to Tax for parliament alone. Since parliament was an elective and representative body, this implied that legitimate taxation was restricted to citizens with representation. This wouldn’t become an issue in the Americas for several decades. Following the French and Indian War, Britain was left with a standing army, something it had not really dealt with before. Because of a sense that it was necessary to continue to protect the colonies, as well as the benefits of maintaining an army to restrain French aggression, it was decided to maintain a large force in the Colonies.

This meant that funds had to be found to not only pay for the extremely expensive war that had just been fought, but also to pay for the standing army in the Colonies. Naturally, parliament decided that it only made sense to use taxation to pay for this, and it seemed to follow that since the colonies were benefiting from having an Army for their defense, as well as a war fought partially for their benefit, that they should pay for a large share of the expenses.

This presumption had two problems: first, it assumed that the colonists would perceive the troops as guarantors of security, rather than occupiers. Second, it violated the idea that taxes were linked to representation. In response, mutterings of anger began in the colonies. To be fair, much of the anger was simply due to the fact that taxes were going up to pay for troops that most people did not feel were necessary, especially since the colonies had voluntarily raised their own internal taxes for the war, and had never been fully reimbursed. As resentment strengthened, however, the colonists began to examine their conceptions of natural laws and rights. Ultimately they would realize that fundamentally, the new taxes violated their rights because they had no representation in parliament.

There would be ongoing protests in the future, many which would echo the mob violence of the Boston Tea Party. Curiously, due to a variety of factors, the Boston Tea Party would have no hint of simple anger at increased prices due to taxes. At this point in time, the East India Company had long been competing with Dutch smugglers for the tea imports market in the colonies. Recent acts of parliament had actually made it possible for the East India Company to import tea into the colonies for less than the smugglers were charging. Unhappily, there was a tax attached to these imports that the colonists refused to pay, even though the overall price was less. Due to opposition to the right to impose this tax, the colonists either forced the authorized resellers of tea to resign, or forced the ships importing the tea to return to England without offloading their cargo.

Finally, in Boston the Governor refused to let the ships bearing tea leave until they had paid the tax on the tea they carried. Since this would have forced the company to take a loss (paying the duty without selling the tea,) the ship captains refused to leave, although hostile colonists would not permit their cargo to be unloaded and sold. After a rowdy meeting led by Sam Adams, a large group of men raided the ships and dumped the tea overboard, declaring they would destroy the goods before they paid a tax on them.

Since price was not the issue, clearly the Boston Tea Party was not about paying extra money: it was almost exclusively about taxation without representation, combined with a dose of drunken mob violence. It still became a symbol of valiant resistance to tyranny, especially in American folklore, and would otherwise lose much of its meaning in terms of the specific grievances of the participants.

If more proof is needed that the founding fathers did not oppose taxation per se, but instead just taxation without representation, we can look at our most famous leader of the period: George Washington. In 1794, while Washington was president, an outraged group rebelled against what they perceived as an unfair tax on whiskey (meant to pay down debts from the Revolutionary War.) In response, Washington ordered the rebels appear in federal court, and summoned an army of militia of more than 12,000 men to suppress the rebellion. Whups! By today’s standards, conservatives would apparently be calling old Washington a fascist/socialist enemy of the United States. (Just for the record, Abe Lincoln also presided over tax increases. In fact, the first income tax was progressive and enacted during his administration. Such socialists, our best loved presidents!)

So much for the founding fathers being anti-tax. ...

Optimism Is Creeping Back

The following chart is from Pollster.com, a polling outfit that averages most major polls and then regresses the plot to show trend lines. Averages of averages are a relatively good measure for broad indicators. Fortunately, this broad indicator measures American economic optimism!

After long stagnation of relative pessimism, the gap is starting to narrow between those who believe the economy is worsening and those who believe the economy is getting better. Of course, no good analyst will confuse opinion polls with reality, but to the extent that optimism may reflect future spending patterns, this is really great news.

FYI, interestingly, the famous "right track/wrong track" number about the country's direction is continuing a sharp narrowing trend after a long wide gap that started a marked turn-around after the election last fall. It may reinforce or correlate with the above. Regardless, still great news.

Before Stewart vs CNBC: Stewart vs Crossfire 2004

To follow up on yesterday morning's comment about the power of satire, and particularly of Jon Stewart's satire, here is the following from 2004:



Mmmmm me loves me some Jon Stewart. Political satire has a rich American history and a critical role to play in a functioning democracy, and in the case last week of Stewart vs CNBC, in a functioning capitalist democracy. Sometimes satire is the most effective way to bring such large and discordant forces into sharp relief. Operative word: sharp. See clip above and prior posts to wit. Jon Stewart is an American patriot and national treasure.

Jim Cramer vs Jon Stewart: All You Need To See

If you know nothing about the current financial crisis and you can only handle so much before you go off a "thought cliff," then this is all you need to see. All week, Jon Stewart has been criticizing the complicity of the financial network CNBC with lying Wall Street execs to mislead the world on the crisis that they all should have known and been honest about.

We need independent investigative journalism for a functioning capitalist democracy. Just watch.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

And do not miss the shorter Part II:

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

There are several unedited outtakes at TheDailyShow.com. And for the record, this is not the first time that the comedian Jon Stewart has single-handedly changed the landscape of political media. But more on that another time. A small example: remember the long-running show "Crossfire" on CNN? Jon Stewart pretty much single-handedly destroyed the show with his searing on camera criticism, including on that very show confronting its hosts. Think about that.

This was an astounding interview with Jim Cramer of CNBC. That network cannot escape culpability (no matter how shared) in fueling the run-up to the current crisis, along with the other principals named earlier on this site.

Our Town & The United States of America

It's no secret I'm a living cliche at times and do enjoy the Sunday Morning Times, mainly its in-depth front-page reporting, and the always thought-provoking writing of their theater-turned-Sunday-columnist-culture-critic Frank Rich.

This morning, Rich provides insight into our collective national moment by highlighting the resurgent play, Our Town, the famous 1938 play performed by many talented and/or under-resourced theatres because it requires no set and a large cast of extras (a prescription for high school and community production if there ever was one).

But this morning Rich reminds us why the play is also enduring - its timeless call to a collective sense of ourselves and our nation, captured in these times by Barack Obama's famous refrain, "We are the United States of America," that has resonated with many Americans. Sometimes, though, we could do well to "remember" history so that we are not condemned...

Writes Rich:

“WHEREVER you come near the human race, there’s layers and layers of nonsense,” says the Stage Manager in Thornton Wilder’s “Our Town.” Those words were first heard by New York audiences in February 1938, as America continued to reel from hard times. The Times’s front page told of 100,000 auto workers protesting layoffs in Detroit and of a Republican official attacking the New Deal as “fascist.” Though no one was buying cars, F.D.R. had the gall to endorse a mammoth transcontinental highway construction program to put men back to work.

He continues to frame our current moment with references to Warren Buffet, AIG, and Bernie Madoff:

We’re still working our way through the aftershocks of the orgy of irresponsibility and greed that brought America to this nadir. In his recent letter to shareholders, a chastened Warren Buffett likened our financial institutions’ recklessness to venereal disease. Even the innocent were infected because “it’s not just whom you sleep with” but also “whom they” — unnamed huge financial institutions — “are sleeping with,” he wrote. Indeed, our government is in the morally untenable position of rewarding the most promiscuous carrier of them all, A.I.G., with as much as $180 billion in taxpayers’ cash transfusions (so far) precisely because it can’t be disentangled from all the careless (and unidentified) trading partners sharing its infection.

Buffett’s sermon coincided with the public soul searching of another national sage, Elie Wiesel, who joined a Portfolio magazine panel discussion on Bernie Madoff. Some $37 million of Wiesel’s charitable foundation and personal wealth vanished in Madoff’s Ponzi scheme. “We gave him everything,” Wiesel told the audience. “We thought he was God.”

Rich argues next a fundamental point discussed on this site. The American economy has no hope of recovery until we see a massive return of jobs and job confidence to restore broad-based consumer-driven markets, the cornerstone of real estate spending and values as well. A primary driver of the severity of this current crisis is the concentration of so little of our collective national income in the vast middleclass and working Americans, which I personally define as those earning less than $250,000 taxable income per year. Rich:

The simplest explanation for why America’s reality got so distorted is the economic imbalance that Barack Obama now wants to remedy with policies that his critics deride as “socialist” (“fascist” can’t be far behind): the obscene widening of income inequality between the very rich and everyone else since the 1970s. “There is something wrong when we allow the playing field to be tilted so far in the favor of so few,” the president said in his budget message. He was calling for fundamental fairness, not class warfare. America hasn’t seen such gaping inequality since the Gilded Age and 1920s boom that preceded the Great Depression.

From the link behind "such gaping inequality" above is the following chart demonstrating the magnitude of the widening gap:

The chart shows the share of the richest 10 percent of the American population in total income – an indicator that closely tracks many other measures of economic inequality – over the past 90 years, as estimated by the economists Thomas Piketty and Emmanuel Saez. I’ve added labels indicating four key periods. These are:

The Long Gilded Age: Historians generally say that the Gilded Age gave way to the Progressive Era around 1900. In many important ways, though, the Gilded Age continued right through to the New Deal. As far as we can tell, income remained about as unequally distributed as it had been the late 19th century – or as it is today. Public policy did little to limit extremes of wealth and poverty, mainly because the political dominance of the elite remained intact; the politics of the era, in which working Americans were divided by racial, religious, and cultural issues, have recognizable parallels with modern politics.

The Great Compression: The middle-class society I grew up in didn’t evolve gradually or automatically. It was created, in a remarkably short period of time, by FDR and the New Deal. As the chart shows, income inequality declined drastically from the late 1930s to the mid 1940s, with the rich losing ground while working Americans saw unprecedented gains. Economic historians call what happened the Great Compression, and it’s a seminal episode in American history.

Middle class America: That’s the country I grew up in. It was a society without extremes of wealth or poverty, a society of broadly shared prosperity, partly because strong unions, a high minimum wage, and a progressive tax system helped limit inequality. It was also a society in which political bipartisanship meant something: in spite of all the turmoil of Vietnam and the civil rights movement, in spite of the sinister machinations of Nixon and his henchmen, it was an era in which Democrats and Republicans agreed on basic values and could cooperate across party lines.

The great divergence: Since the late 1970s the America I knew has unraveled. We’re no longer a middle-class society, in which the benefits of economic growth are widely shared: between 1979 and 2005 the real income of the median household rose only 13 percent, but the income of the richest 0.1% of Americans rose 296 percent.

Penultimately and for fun here, Rich doesn't miss the opportunity to pile on to the emperor clothes of CNBC and the righteous skewering by Jon Stewart shown earlier on this site. What's troubling is that the clips Stewart assembled were presented in full context and told a broader tale of CNBC and Wall Street insiderism that has become all-too-apparent now, and which CNBC is terrified to have revealed broadly.

Last week Jon Stewart whipped up a well-earned frenzy with an eight-minute “Daily Show” takedown of the stars of CNBC, the business network that venerated our financial gods, plugged their stocks and hyped the bubble’s reckless delusions. (Just as it had in the dot-com bubble.) Stewart’s horrifying clip reel featured Jim Cramer reassuring viewers that Bear Stearns was “not in trouble” just six days before its March 2008 collapse; Charlie Gasparino lip-syncing A.I.G.’s claim that its subprime losses were “very manageable” in December 2007; and Larry Kudlow declaring last April that “the worst of this subprime business is over.” The coup de grâce was a CNBC interviewer fawning over the lordly Robert Allen Stanford. Stewart spoke for many when he concluded, “Between the two of them I can’t decide which one of those guys I’d rather see in jail.”

Led by Cramer and Kudlow, the CNBC carnival barkers are now, without any irony whatsoever, assailing the president as a radical saboteur of capitalism. It’s particularly rich to hear Cramer tar Obama (or anyone else) for “wealth destruction” when he followed up his bum steer to viewers on Bear Stearns with oleaginous on-camera salesmanship for Wachovia and its brilliant chief executive, a Cramer friend and former boss, just two weeks before it, too, collapsed. What should really terrify the White House is that Cramer last month gave a big thumbs-up to Timothy Geithner’s bank-rescue plan.

Finally, Rich brings it brilliantly together so as not to ruin our Sunday morning coffee:

In one way, though, the remaining vestiges of the past decade’s excesses, whether they live on in the shouted sophistry of CNBC or in the ashes of Stanford’s castle, are useful. Seen in the cold light of our long hangover, they remind us that it was the America of the bubble that was aberrant and perverse, creating a new normal that wasn’t normal at all.

The true American faith endures in “Our Town.” The key word in its title is the collective “our,” just as “united” is the resonant note hit by the new president when saying the full name of the country. The notion that Americans must all rise and fall together is the ideal we still yearn to reclaim, and that a majority voted for in November. But how we get there from this economic graveyard is a challenge rapidly rivaling the one that faced Wilder’s audience in that dark late winter of 1938.

Hell Hath No Fury Like Jon Stewart Scorned

Okay. Let's set aside "truthiness" for a moment and look at what a snubbed talk show host and staff can put together in service of the truth. For anyone who watches CNBC for financial news - following is a potentially life savings saving recap:

The Daily Show With Jon StewartM - Th 11p / 10c

CNBC Gives Financial Advice

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

And there's more...

The Daily Show With Jon StewartM - Th 11p / 10c

The Dow Knows All

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

What Really Happened
And here's where you find out what really happened at AIG and what brought down Wall Street...

The Daily Show With Jon StewartM - Th 11p / 10c

Joe Nocera

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Joke of the Day

There is a reason Jon Stewart is a cultural phenom and has been doing this show for ten years. There's a reason he's probably the leading news provider for young voters. It's as though the financial media and its guest executives think the public has a memory span of 30 seconds. But then, that's what Jon Stewart is for.

The Professor and the Pool

I received the following email in a chain about the stimulus bill. Suffice it to say it's from people who are frustrated and confused (and that's okay) about the stimulus policy. I'm "that jerk" who responds to these chain emails with my own opinion, posted below under the original email here...

I love this explanation. Makes total sense to me!! n

Shortly after class, an economics student approaches his economics professor & says, "I don't understand this stimulus bill. Can you explain it to me?"

The professor replied, "I don't have any time to explain it at my office but if you come over to my house on Saturday & help me with my weekend project, I'll be glad to explain it to you." The student agreed.

At the agreed-upon time, the student showed up at the professor's house. The professor stated that the weekend project involved his backyard pool.

They both went out back to the pool & the professor handed the student a bucket. Demonstrating with his own bucket, the professor said, "First, go over to the deep end & fill your bucket with as much water as you can." The student did as he was instructed.

The professor then continued. "Follow me over to the shallow end & then dump all the water from your bucket into it." The student was naturally confused but did as he was told. The professor then explained that they were going to do this many more times & began walking back to the deep end of the pool.

The confused student asked, "Excuse me, but why are we doing this?" The professor matter-of-factly stated that he was trying to make the shallow end much deeper. The student didn't think the economics professor was serious but figured he would find out the real story soon enough.

However after the sixth trip between the shallow end & the deep end, the student began to worry that his economics professor had gone mad. The student finally said, "All we're doing is wasting valuable time & effort on unproductive pursuits. Even worse, when this process is all over, everything will be at the same level it was before so all you'll really have accomplished is the destruction of what could have been truly productive action!"

The professor put down his bucket & replied with a smile, "Congratulations. You now understand the stimulus bill."

My friend who sent this to me, and with whom I'd previously discussed our nation's situation as we've discussed on this site, is a very very smart man, a PhD in fact, and I adore him and his family. He didn't deserve my frustrated tone, but he did deserve another point of view. He replied, "I obviously touched a nerve." Friends are great to remind us (me) of our outer bounds. Anyway, my reply:

That's wholly inaccurate and makes no sense, FYI. It's more like the pool is full of shared drinking water, and there was a catastrophic leak and the pool is now only half full. Nobody wants to put water in the pool because nobody's sure if it's still leaking, and nobody's really sure what happened, so everyone is hoarding their own water, what little they have left, and they are damming up every little contributory stream near them, diverting it from the pool, which only exacerbates the problem as water continues not only to leak but to evaporate.

Now the government, in charge of the pool, can piddle around complaining about who caused the cracks and blaming enemies and getting the people with little water left to get angry at those who have more water and those with more water to blame and make fun of the people who depend on the pool for daily needs and nobody pays attention to what caused the catastrophic leak or even verifying if the damn thing is still leaking. Even if the leak has stopped, how do we get the level back up so everyone will stop being afraid and restore the flows? Should politicians ask everyone just to pour their water back in on a voluntary basis and in the meantime everyone just stick it out while people with little water run out, and even those with more start running out?

Should the government put a garden hose in the pool to try to overcome any remaining leaks and maybe start to fill it back up and just hope for the best? Is a trickle sufficient? Is a garden hose insufficient? Are there enough people and neighbors who are willing to divert their own water through their own private hoses to try to fill the thing back up while nobody's sure if it's still leaking?

What if the government is the only entity with a firehose capable of shifting water -- with the promise to repay -- from big neighbor's giant pools back into our pool until we can a) stop and fix the leak and b) restart the flow of contributing streams in the system from the citizens? Mind you, our pool is already the biggest of them all, and all our neighbors' pools have unexplained leaks too, and we're all facing the same problem.

Scared water doesn't flow.

Scared money doesn't spend.

Krugman: The Deficit Reduction Plan Can Work

In Saturday's New York Times, Nobel Laureate Princeton Economics Professor Paul Krugman sounds an optimistic tone about Obama's proposed new budget while still sounding a cautionary note about long-term economic challenges. It's worth a read.

Can he actually reduce the red ink from $1.75 trillion this year to less than a third as much in 2013? Yes, he can.

Right now the deficit is huge thanks to temporary factors (at least we hope they’re temporary): a severe economic slump is depressing revenues and large sums have to be allocated both to fiscal stimulus and to financial rescues.

But if and when the crisis passes, the budget picture should improve dramatically. Bear in mind that from 2005 to 2007, that is, in the three years before the crisis, the federal deficit averaged only $243 billion a year. Now, during those years, revenues were inflated, to some degree, by the housing bubble. But it’s also true that we were spending more than $100 billion a year in Iraq.

So if Mr. Obama gets us out of Iraq (without bogging us down in an equally expensive Afghan quagmire) and manages to engineer a solid economic recovery — two big ifs, to be sure — getting the deficit down to around $500 billion by 2013 shouldn’t be at all difficult.

Note all the big "ifs" however. They include a) a successful stimulus policy, which is still a working policy, and b) an ability to extremely reduce defense spending by achieving successful plans in both Iraq and Afghanistan (the new monster on our backs). Krugman also points to successful reform of spiraling health care costs for individuals and over-billing of Medicare to achieve substantial budget savings. These are big "ifs" indeed.

But won’t the deficit be swollen by interest on the debt run-up over the next few years? Not as much as you might think. Interest rates on long-term government debt are less than 4 percent, so even a trillion dollars of additional debt adds less than $40 billion a year to future deficits. And those interest costs are fully reflected in the budget documents.

This is somewhat more optimistic than yesterday's post here about the risks of overextending the national debt as a) tax revenues decline with contracting production in the economy, and b) federal debt-spending is required to unfreeze credit markets and replace lost demand (to preserve jobs basically). This is a double whammy, but Professor Krugman says these dynamics could feasibly be limited to the short term, an assumption on which all policy planning seems to depend right now.

The overall outlook is best summed in Krugman's closing lines.

So we have good priorities and plausible projections. What’s not to like about this budget? Basically, the long run outlook remains worrying.

Early Indicator: Interest Rates to Rise

I received the following from a lender at Network Funding LP, but I can't figure out who owns the copyright. At any rate, very interesting headline and information.

Supply Concerns Boost Mortgage Rates

... [M]ortgage rates rose slightly during the week. The reason is that concerns about the enormous supply of debt that the government will need to issue outweighed the other factors. [emphasis added]

...This week, the Obama administration proposed a $3.6 trillion budget plan, with an estimated deficit of $1.75 trillion, which is enormous by historical standards. The Treasury will need to issue debt to borrow money to fund all of this. As the government issues more debt, the interest rate offered generally must rise to attract additional investors. Interest rates on similar investments such as MBS then move higher as well to compete for funds from investors.

Reflecting their concerns about an increase in supply, investors required higher interest rates at the large Treasury auctions during the week. The auction results showed that demand from foreign investors remained strong, which was very good news. If foreign investors should ever reduce their purchases of US bonds, then interest rates in the US would be likely to rise. [all emphasis added]

These are dynamics long discussed on this blog. Like day follows from night, so will inflation follow from the massive stimulus required to unfreeze credit and consumer markets where "scared money doesn't spend." Not to mention the very very real massive losses the banking sector faces from their catastrophic past lending practices, which further reduces available private money into the demand side of the economy.

These factors necessitate the enormous spending from the last credit-worthy entity capable of replacing all the lost demand (through debt-financed spending), namely the federal government.
Unstated in the quote however is the notion that investors/lenders require higher returns when loaning money even to the United States government because at some point, the investors/lenders begin to worry a little bit more about the government's ability to raise enough tax revenue from the economy's future production in order to pay for the national debt load (remember we're starting already over $10 TRILLION in the hole, with an actual doubling of the national debt in the last 8 years with nothing to show for it).

An important caveat: The United States will never default on its loans, that's the market assumption. But it may, if necessary, only avoid doing so essentially by printing money to pay down the debt, which only ends up causing inflation as new cash enters the system without being backed by any real production or assets. This raises prices of everything, yes, but it also reduces the real value of debt as "printed money" pays down the loan balances. Everyone loses.

To illustrate, imagine if you could pay off your mortgage not by keeping a job and making payments with the fruits of your labor or even by inheriting enough existing money to pay it off -- but rather you could just print your own money to pay it off, or successfully pay it off with a "valid" hot check. See? The only "winner" is the one printing the money, but then the printer will never get an affordable loan again either.

That's kinda the dynamic that gets figured in here, the risk level of that scenario above actually happening, as foreign and domestic investors consider issuing loans to the federal government. As the lenders' or "investors'" concerns rise, then so does the pay they demand in return for their loan -- the interest rate.

And all interest rates are related in some fashion. So when the federal government has to pay a higher interest rate for its debt, so too do individuals borrowing with mortgages, as no person or entity is seen as "more" credit-worthy than the United States government.

(In finance, the 10-year Treasury bond rate is often referred to as the "risk-free" rate.)

No, this will not be on the exam.

The Economy, Raffles, & Horses

I really do not forward chain emails, there are so many, but occasionally one comes along that's worth the read. As is the case with most email chains, I don't have proper attribution, though this is all over the Internet and in emails. But in our frustration trying to grasp the complexities of the economy and our own finances right now, it's nice to have a brief moment of clarity and humor. In case you haven't seen it yet:

Young Chuck in Montana bought a horse from a farmer for $100. The farmer agreed to deliver the horse the next day.

The next day the farmer drove up and said, "Sorry son, but I have some bad news... the horse died."

Chuck replied, "Well, then just give me my money back."

The farmer said, "Can't do that. I went and spent it already."

Chuck said, "OK, then, just bring me the dead horse."

The farmer asked, "What ya going to do with him?"

Chuck said, "I'm going to raffle him off."

The farmer said, "You can't raffle off a dead horse!"

Chuck said, "Sure I can, watch me. I just won't tell anybody he's dead."

A month later, the farmer met up with Chuck and asked, "What happened with that dead horse?"

Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $998."

The farmer said, "Didn't anyone complain?"

Chuck said, "Just the guy who won. So I gave him his two dollars back."

Our Pets Need Us Now & We Need Them

In the current financial challenge, many pet owners (I prefer "guardians") are choosing to give up their pets to shelters to avoid the extra expense of another mouth to feed and dependent to bathe. I understand. However I worry that viewing pets as another "expense" short-changes the very people who need their pets now more than ever.

Many people don't really understand their pets. Perhaps the guardian has never had a pet before or doesn't know much about their behavior, despite how much Dog Whisperer they watch. And then there is the very real issue of the expense.

However pets provide humans a distinct form of companionship unparalleled by anything else in the world. Pets are "beyond words." They have a unique tie therefore that bypasses our frontal cortex and speech center and goes directly to our emotional center, often dabbling with our unconscious minds.

Our pets allow us to project onto them and to work through difficult feelings through our at-times-complex relationships with them. They don't mind. We only need to feed and shelter them (they even don't need clothes). That seems like something I would not want to surrender, especially in difficult times. I'd reach out for help from loved ones and strangers before I would give up my companion dog, about whom I often say, "We're now like an old married couple."

It is sometimes said that a society can be judged by how it treats the least among them. I believe that, and most especially about animals that we humans have bred over the years to be domesticated and whose only defense is a faithful human guardian.

The best animal welfare organization I know and have ever been a part of is The Animal Rescue League of Boston, where I am a member of the President's Council and from where I adopted Tank. It was founded in 1899 by Ms. Anna Harris Smith, whose philosophy was "Kindness Uplifts the World." Kindness is indeed an end unto itself.

From the ARL Boston website:

The Animal Rescue League of Boston believes that the power and beauty of the animal human bond is intrinsic to efforts to stop all forms of violence in our society.

A fundamental premise of the humane community is that if a child is taught to be kind to animals, there is a greater likelihood that the individual will mature into a person who respects not only humanity, but also all living things. This premise has been the subject of sociological studies and is expressed in literature and the arts. With a deep belief in this premise, Animal Rescue League of Boston founder Anna Harris Smith initiated a humane education program for children by establishing The Kindness Clubs in the neighborhoods of Boston.

I look forward to helping ARL Boston expand its effectiveness and mission across the nation so that more people can hear this philosophy and experience the many rewards of animal companions.

The Surging Populist Rage

In this morning's New York Times, the invaluable social critic Frank Rich writes about a familiar theme on this blog, namely the catastrophic policies set forth by both parties in the 1999 repeal of the depression era reform bill "The Glass Steagall Act" and the even more disastrous foundation for our current crisis, "The Commodities Futures and Modernization Act of 2000." From Rich:

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

Truly any American should be concerned that the usual suspects of the 1990's whose policies caused so much international turmoil at the time, and whose policies (along with Chairman Alan Greenspan) set the stage for the gathering storm of the past eight years that culminated in this crisis of our own making we face today. Chillingly, Rich suggests that these players may not be fully rehabilitated.

A welcome outlier to this club is Paul Volcker, the former Federal Reserve chairman chosen to direct Obama’s Economic Recovery Advisory Board. But Bloomberg reported last week that Summers is already freezing Volcker out of many of his deliberations on economic policy. This sounds like the arrogant Summers who was fired as president of Harvard, not the chastened new Summers advertised at the time of his appointment. A team of rivals is not his thing.

Americans have had enough of such arrogance, whether in the public or private sectors, whether Democrat or Republican.

My greatest concern is about "the arrogant" Larry Summers. And while I have to honor a confidentiality oath, I can say that Summers is one of the creepiest people I have ever met and listened to in person, when he was President of Harvard University. One gets the sense that this man's sense of self-supremacy is unlimited and untempered even by recent years' evidence of his past failures. He is brilliant, the youngest professor ever to be tenured at Harvard University, practically at the moment he received his PhD. But academic brilliance does not translate into policy brilliance, which is fraught with unintended consequences if implemented poorly. This man rose too far too fast and was handed policy reigns when he should have been relegated to an advisory position and nothing more.

In 1999, he succeeded Rubin as Secretary of the Treasury. A year later, he was, with Alan Greenspan and Rubin, a leading advocate of the derivatives deregulation. Also during his stint in the Clinton administration, Summers was successful in pushing for capital gains tax cuts.

Larry Summers also deserves credit for advocating Washington Consensus policies during the Asian Financial Crisis. He eschewed Keynesian policies in favor of fiscal austerity, forcing the Korean government to raise its interest rates and balance its budget in the midst of a recession, policies criticized by liberal economists such as Paul Krugman and Joseph Stiglitz.[2] According to the book The Chastening, by Paul Blustein, during this crisis, Summers, along with Paul Wolfowitz, pushed for regime change in Indonesia. On May 4, 1998, when the Indonesian government began to raise fuel prices as part of an IMF program in exchange for hard currency, students started to protest, and in the ensuing riots, hundreds burned to death as blazes swept shopping centers in Jakarta.[2]

During the California energy crisis of 2000, then-Treasury Secretary Summers teamed with Alan Greenspan and Enron executive Kenneth Lay to lecture California Governor Gray Davis on the causes of the crisis, explaining that the problem was excessive government regulation.[4] Under the advice of Kenneth Lay, Summers urged Davis to relax California's environmental standards in order to reassure the markets. [5] It was later conclusively revealed that Enron traders were the cause of the California electricity crisis.

Here's a taste of the 1990's shenanigans by Summers and his ilk, and now ask yourself whether you want these "thinkers" in charge of turning around the American economic crisis we face.

Many critics of trade liberalization... see the Washington Consensus as a way to open the labor market of underdeveloped economies to exploitation by companies from more developed economies. The prescribed reductions in tariffs and other trade barriers allow the free movement of goods across borders according to market forces, but labor is not permitted to move freely due to the requirements of a visa or a work permit. This creates an economic climate where goods are manufactured using cheap labor in underdeveloped economies and then exported to rich First World economies for sale at what the critics argue are huge markups, with the balance of the markup said to accrue to large Multinational corporations. The criticism is that workers in the Third World economy nevertheless remain poor, as any pay raises they may have received over what they made before trade liberalization are said to be offset by inflation, whereas workers in the First World country become unemployed, while the wealthy owners of the multinational grow even more wealthy.

[C]ritics further claim that First World countries impose what the critics describe as the consensus's neoliberal policies on economically vulnerable countries through organizations such as the World Bank and the International Monetary Fund and by political pressure and bribery. They argue that the Washington Consensus has not, in fact, led to any great economic boom in Latin America, but rather to severe economic crises and the accumulation of crippling external debts that render the target country beholden to the First World.

Bear in mind that all the globalization of that decade still led to unending massive trade deficits that helped mushroom the national debt more in the last eight years than in all prior American history combined. Now our foreign debt is held by Japan and China, and our economy is subject to enormous economic and political threats by our adversaries. To me, that is not good policy, Professor Summers.

I had the good fortune to hear a small-room lecture by a past-president of a small Latin American nation, a man who experienced the ravages of the IMF first-hand and was ousted from his position because of his own country's crisis. This stuff is not theory.

Further alarming is Rich's claim that Paul Volcker, Alan Greenspan's predecessor whose leadership of the Fed laid the policy groundwork to save America from its last economic crisis in the late 70's to early 80's, is being "shut out" by Larry Summers today. Here's Volcker's previous work:

Paul Volcker, a Democrat[4], was appointed Chairman of the Federal Reserve in August 1979 by President Jimmy Carter and reappointed in 1983 by President Ronald Reagan.[5]

Volcker's Fed is widely credited with ending the United States' stagflation crisis of the 1970s. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.

While our current crisis is different in nature to be sure, it is no less urgent and its eventual solutions will be no less controversial than the policies Volcker implemented in the early 80's to arrest the inflationary spiral of that time.

The New "1/20" Rule
Here's where the new "populist rage" enters, as millions of Americans find themselves very recently out of work in the last three months alone. Again from Rich:

But we do know that the system has been fixed for too long. The gaping income inequality of the past decade — the top 1 percent of America’s earners received more than 20 percent of the total national income — has not been seen since the run-up to the Great Depression.

Yes, it's hard to believe, harder to fathom, that only 1% of the American population received more than 20% of the entire national income. When candidate Barack Obama said inartfully that he wanted to "spread the wealth," he wasn't talking about socialism. He was talking about this issue, about the need to rebuild the middle class, which brought this country to the peak of its economic and global power in the 20th century, so that more people can earn a better share of the nation's "pie," and so we can make it as big as we possibly can, together. That's not welfare. It's not socialism. It's how to build a healthy, diversified, and strong national democratic capitalist economy.

The strongest punch and thematic statement from Mr. Rich comes in his opening paragraphs this morning. And if the president, the senate, and the congress do not come to terms with this warning soon, it won't just be "the president's best-laid plans" that get "maimed."

SOMEDAY historians may look back at Tom Daschle’s flameout as a minor one-car (and chauffeur) accident. But that will depend on whether or not it’s followed by a multi-vehicle pileup that still could come. Even as President Obama refreshingly took responsibility for having “screwed up,” it’s not clear that he fully understands the huge forces that hit his young administration last week.

The tsunami of populist rage coursing through America is bigger than Daschle’s overdue tax bill, bigger than John Thain’s trash can, bigger than any bailed-out C.E.O.’s bonus. It’s even bigger than the Obama phenomenon itself. It could maim the president’s best-laid plans and what remains of our economy if he doesn’t get in front of the mounting public anger.

Entire Major Cities & States Unemployed

It's hard to get our minds around certain statistics like today's announcement that 598,000 (let's just say 600,000 can we?) jobs were lost just last month. This shows definitively that the horrific job loss trend is indeed accelerating. (Every American should be pressuring their congress-critters to pass a stimulus bill asap - it's already past due.)

To put this in perspective, it is as if the following entire major cities were put out of work just last month:

U.S. Cities with Populations around 600,000:

• Boston
• El Paso
• Milwaukee
• Seattle
• Nashville
• Denver
• Washington, D.C.

The following cities have far fewer than 600,000 people. Last month's job losses alone would have eliminated more than one job for every person in the following cities:

• Las Vegas
• Louisville
• Portland, OR
• Atlanta
• Sacramento
• Kansas City
• Cleveland
• Miami
• Omaha
• Oakland
• Minneapolis
• Raleigh
• Arlington, TX
• St. Louis
• Tampa
• Cincinnati
• Pittsburgh
• Newark
• Plano, TX
• New Orleans
• Orlando

Obviously this is not an exhaustive list, and remember that city populations include children, the retired, and others not in the workforce.

There have been over 2 million jobs lost in the last three months.

There are only four U.S. cities with populations greater than 2 million:

• Houston (2.2 M)
• Chicago (2.8 M)
• Los Angeles (3.8 M)
• New York (8.2 M)

There are only fifteen U.S. states with populations over 2 million.

And there are 26 -- yes, twenty six -- U.S. states with populations less than 600,000 - the number of jobs lost in the U.S. just last month.

We are not having an academic or ideological discussion in this country about the imminent need for stimulus.

Why Buyers Need Smart, Full-Time Professional Real Estate Brokers

Today's New York Times has a story about the new financial regulations under development in the new administration.

While there is a ton of badly needed regulatory reform that will address many of the problems already laid out on this blog to be included in the package, I will focus in this post on the impact of these wide-ranging changes on the real estate buyer. But first, an example of the broader much-needed reforms:

The administration is also preparing to require that derivatives like credit default swaps, a type of insurance against loan defaults that were at the center of the financial meltdown last year, be traded through a central clearinghouse and possibly on one or more exchanges. That would make it significantly easier for regulators to supervise their use.

Now to return specifically to real estate buyers. First and foremost, buyers will have to navigate a very new landscape of mortgage financing without necessarily understanding the recent history and context of the changes, which could lead to frustration and confusion. To wit:

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

Now more than ever before, financing is a huge complex piece of any real estate transaction. While it always should have been the starting point for buyers, in recent years when money was flowing freely, few people in the industry ever had to be concerned about a client getting financing for a deal, so long as the client had a pulse. Of course, things have changed dramatically, and directly as a result of that free-flowing period.

Therefore real estate brokers and agents of residential or commercial orientation, in order to fulfill their "market making" roles, will have to become far more involved in an ever-increasingly complex mortgage and finance environment to help buyers make their way through the complexity. We brokers can no longer just refer a buyer to certain lenders and leave them on their own. Doing so in this environment is a profound disservice.

As new regulations get rolled out, real estate brokers must stay at the leading edge to comprehend not just the rules, but their implications in any specific market. We must also help clients with their due diligence efforts when finding qualified lenders to help ensure clients find competent, informed, and ethical lenders with solid reputations. Bad financing is by far the most common reason a deal fails. This is a larger and far more complex obstacle than ever before.

The proposals that will come to pass in specific form are aimed, according to officials, at core regulatory problems and gaps:

They include lax government oversight of financial institutions and lenders, poor risk management efforts by banks and other financial companies, the creation of exotic financial instruments that were not adequately supported by their issuing companies, and risky and ill-considered borrowing habits of many homeowners whose homes are now worth significantly less than their mortgages.

Even high level regulations that affect lending way upstream will have to be understood by real estate brokers, not just mortgage brokers, as we move forward to manage fully the implications for buyers on the ground.

The new trading procedures for derivatives could also enable regulators to impose capital and collateral requirements on companies that issue credit default swaps that would make them safer investments. American International Group, one of the largest issuer of such swaps, never had to post collateral and nearly collapsed as a result of issuing a huge volume of such instruments that it was unable to support.

Going forward, real estate brokers and their agents who cannot understand the implications of such complex reforms for their clients in their specific market, and who cannot fully explain those implications to their clients if necessary, those brokers and agents will surely lead their buyer clients to failure, and that will undermine the market for everyone.

Bottom line: Brokers and their agents can no longer blindly refer buyer clients to a cadre of lenders they've used in the past. A higher standard for due diligence is required in this market, and while that responsibility falls principally on buyers, everyone assisting the buyer must support that effort. Those who don't understand the critical times and adaptation they require will not only be doing their clients a profound disservice, they will impede the progress and recovery of real estate markets for everyone.

When Elevators Attack

If I told you that someone was injured when their elevator fell from the 27th to the 25th floor before the emergency brake kicked in, you might ask, "What happened?"

But if I told you someone jumped off a 2-story building, you'd probably ask, "Did they survive?"

It's essentially the same thing though.

Granted, elevator travel really is the safest form of travel in the world. The best elevators in the world will only fall 6 feet, even if the suspension cables hypothetically snapped. There are redundancies upon redundancies, and aside from accidentally falling in an open door into the shaft, the danger couldn't be less given that the car travels along a fixed path cleared of all obstructions in only 2 directions.

But still, like anything, systems fail. When I first read of the failure in the linked article, I thought it would be a clear example of how our nation's aging skyscrapers are falling into extraordinary disrepair in an ever spiraling need for greater maintenance to fight against the ravages of physical aging. Skyscrapers weren't built to last 100 years on their own.

But the building in question, in downtown Houston, was only finished in 2003. Instead of being of comfort, it only alarms me more.

I am convinced that the era for central business districts consisting of dense roads and tall skyscrapers is fated for an end. Whereas prior to the telecom revolution, businesses required physical proximity for efficiencies of day-to-day business, this is just no longer the case. The falling costs of telecom technology, its rising efficiencies and capabilities, and the inevitably rapid rise of transit costs - auto or mass - point clearly to the future trend, which doesn't favor the downtown skylines of 20th century American triumphalism.

I expect that one day American history books will have a chapter with awesome skyline photos of American cities in the same way they now have photos of the 19th century American West full of buffalo herds roaming on open plains.

Whether it's an isolated instance of failure or not, this recent elevator failure foretells I think the kinds of infrastructure problems we are certain to see more as the next few decades unfold amidst ever-expanding telecom technology, rising transport costs, and declining urban and municipal tax bases.

Beyond that, how many horror stories like the following will the public tolerate?

From The Houston Chronicle:

On Dec. 9, DeRouen, who has been working as a contract consultant for Rosetta Resources on the 27th floor, said she finished work about 5:30 p.m.

“I pressed one, and it started free-falling really fast,” DeRouen said.

Sent airborne during the descent, she slammed hard into the floor when the elevator suddenly halted at the 23rd floor.

Her tibia bone tore through her leg between her knee and ankle, creating a long wound. Her ankle and toes on her left leg were fractured.

The elevator door wouldn’t open, so employees on the 23rd floor could not come to her aid as she pierced the air with screams, Boutros said. They kept her talking, though, worried that she might lose consciousness otherwise, she said.

It took a half-hour for help to arrive, Boutros said.

She has undergone several surgeries on her leg and will undergo at least two surgeries to repair the fractured lower vertebra and ruptured discs, Boutros said.

Oh, and there wasn't just one instance -- there was another one shortly after in the same building.

Both incidents are still under investigation by the landlord and its elevator contractors (and where are the police?), while the other elevators are still in operation. Naturally, many employees are taking 25 flights of stairs now instead of using the remaining elevators.

Just this week, roughly one month after the first incident still under investigation:

On Monday, Carleen Naumann, a sales representative for Besco Tubular, and Allan Keel, president of Crimson Exploration, were injured when an elevator dropped precipitously from the 27th floor to the 25th floor.

They were trapped in the elevator for a short time. Keel said he suffered a minor back injury and declined to be taken to a hospital.

Later, called ambulance
Naumann, of Katy, also declined treatment Monday. But she said she called for an ambulance after she got up Tuesday morning and her nose was bleeding. Her ankle also was hurting, she said.

Staff at Memorial Hermann Hospital in Katy determined she had fractured a vertebra in her lower back, she said.

“The elevator was flying. I thought we went down 15 stories. I was shocked to hear it was only two,” she said. “I was airborne and then it was as if we hit bottom.”

The nation's urban infrastructure problems are piling up so quickly from accelerating deterioration and a long history of deferred maintenance -- one day the costs of renewing the systems of the buildings, water systems, roads, fuel, and air will exceed the capacity of the nation to pay them. This is one of the biggest secrets in American municipal government and civil engineering. Few yet appreciate the full scope of the problem.

And if anybody else gets killed in their car from an exploding old gas main, or falls to their death in an open road hole from a water main break, or simply plunges into a river from a failed Interstate bridge, or especially if other cities see executives with bones sticking out of their legs or crushed vertebrae after an elevator falls two or three stories -- well, let's just say the suburbs and exurbs and rural areas will suddenly find new federal resources to support low-rise commercial development, and brand new sewer, water, electrical, and gas lines.

One day telecommuting won't be an HR incentive - it will be our way of life. It is destined to become the only affordable option for the nation's economy.

Peter Schiff is a Fool or a Traitor

See the following video of a Russian TV English interview with Peter Schiff, an investment manager in Connecticut. When someone starts talking like this, run don't walk away. Or change the subject. There is no hope of talking any sense on the subject.



If you can't see the embedded video: Click Here

This is an egomaniacal idiot who's dead wrong and severely misguided in his judgment. Many many people could see the current housing crisis coming; Schiff is no sage. Nobody wanted to hear a party-pooper though, as Krugman said. And too many people were getting rich playing the game to stop. It was a gambling addiction, pure and simple.

So it wasn't the housing bubble that needed foretelling. Who couldn't see it? Nobody knew when it was going to end exactly, and that was the problem. So what exactly really needed foresight that was nowhere to be found?

It was the $50 TRILLION DERIVATIVES MARKET.

We could solve the housing problem in no time if that's all it was.

The real economic threat was the shadow side-bets-with-no-bookie market of derivatives enabled by former Sen. Phil Gramm, a Republican congress with Democratic enablers, and a Democratic and then Republican administration. See the Commodities Futures Modernization Act of 2000, earlier discussed on this site.

Moreover Schiff thinks the U.S. is in isolated economic dynamics and pays no heed to the fact that the rest of the world is DEPENDENT on a U.S. RECOVERY, and so yes, the world will lend us whatever we ask for... for now.

You can bet this guy's firm is shorting the dollar and so he benefits by talking it down. In other words, if America loses, he wins.

He is only stating the obvious about the nature of the crisis without making any progress into what legitimate options we have to work our way through it.

That's always a fool's position. What we can't tell is whether he's really a fool or simply a traitor.

May We Live In Interesting Times

A fellow alum friend of mine who works for a custom builder on the east coast presented a very interesting idea in a recent email exchange.

what I don't understand is why the talk of a $1T stimulus package doesn't get evenly divided by the 305M Americans to send a tax-free check for $3k to every man, woman and child? then a typical family of 4 gets $12k

then tell the banks they can't foreclose in Jan/Feb so people have time to get current on their mortgage and debts, but in March the banks have 30 days to get it done

we will quickly find out who really wants to stay in their homes and who doesn't and all the uncertainty is resolved in 90 days to know what debt is good or bad and all the middle-men get taken out of the process so the funds go directly to those who need it
maybe I'm too cynical, but I doubt Congress will come up with any plan half as good, simple or effective

Now that's interesting. And creative. So I replied with what you've read about here, to see how he might fit it all together:

Honestly I think it's because housing is no longer the biggest problem, but rather the $45 TRILLION derivatives market in unregulated legal "betting" in a shadow market of CDS's -- like $45 trillion in bets with no bookie -- and mostly on the balance sheets of major financial institutions. Honestly I think that's why, because you're right, the housing problem alone would be solvable.

And bear in mind that the Alt-A's have yet to ramp up in resets, which will rise in '09 and '10 and could rival the subprime mess. With declining tax revenue & credit downgrades, muni's could be in trouble as well, then watch out all over again........

But with all the side bets representing multiple payouts on the same debt including houses, muni bonds, corporate bonds, etc...... well that's a much bigger problem and one that's very hard to explain to the public, much less congress and even CEOs wrapped up in it.

Add to that the liquidity trap and a growing deflationary environment and it gets really messy really fast.

All I know is that I think that deflationary pressures require inflationary responses. But that could trigger a currency war with China and petrocurrency. At least, however, we know how to kill inflation I think. Ain't nothin gonna be easy for a while.................... [Omitting gratuitous dig at Larry Summers]

So his reply? Fitting, insightful, pithy.

at least we're living in interesting times, right?
here's to a better 09

And then I laughed out loud.

And then I sighed. Interesting times indeed.