Business Ethics: Doing Well by Doing Better

In the 1990's there was a lot of discussion about "The Third Way" -- something "between" the private and public sectors. I had an opportunity to study the thinking at the time both in undergraduate and graduate school with the preeminent thought-leaders at that time. Truly I now believe that idea was merely an attempt to appease the prevailing dogmatic anti-regulation thinking of the prior 25 years, before Reagan's "government IS the problem" mantra.

Now today, I don't think there's a "third" way. I think we have the private sector, the public sector, and the not-for-profit sector, the third being entities that are exempt from their profit-making mandate legally to serve a social purpose of some kind, but are mostly privately funded with untaxed dollars (deductible) -- all three sectors very well established. Those are the three main entities we need I think and that we can work very well within: public, private, not-for-profit.

So we have the three great pillars we need for the strongest and most competitive economy in the world. But I think since the 80's and before, the past 30 years for this nation now have clearly demonstrated to the world that we need government. We need effective regulation. It's no ideological. It's sound economics. Free markets require a level playing field, and that's where regulation plays a critical role in any great global economic power.

"Government" (such a ridiculously sweeping notion) is NOT "the problem." I began my professional career in business ethics and regulatory & policy consulting to the Fortune 500. We need regulation to function. Business ethics is not about boy scout economics. It's my sense that business ethics is best advanced through a) effective regulation to level the playing field (which politically is an expression of the body politic's shared value system, like the law itself in many ways), and b) as "concerted advocacy" for best practices that achieve the best earnings results from a long-term fundamentals perspective. I think historical case studies taught in business schools around the world about the Ford Pinto, Tylenol, Alcoa and others clearly illustrate these points.

Our firm strives to be a platform from which to launch a) the strictest compliance with both regulation and organizational (National Association of Realtors) code of ethics, and b) advocacy for much higher standards of business practice designed to reform how real estate is transacted in the great State of Texas. There is so much room for improvement, and we think in our private brokerage that we have found so many practices that aren't obvious and yet produce very solid earnings results.

Under-regulated industries, as we all have seen, inevitably fall into a "dive to the bottom," a phenomenon that a marginalized ideologically-driven economics view have unfortunately demonstrated in any number of areas both macro and micro in the last 30 years.

It's not about "The Third Way." It's about "A Better Way." And we can do that already with what we all have. America has the best markets in the world. If we put our minds to it both politically and in our own every day business practices, we will forge that better way. It's hopeful and exciting.And it's a reason why we absolutely love what we do.

Health Insurance Corporation Whistle Blower: Wendell Potter

This is all you really really need to know in the health care debate.

The Public Option or Bust

Just this one time, I want to share my personal health insurance story below with you so you know why I'm adamant about real health reform *including* a Public Option choice as part of it. This message is entirely written by me.

I know we must have a Public Option - a CHOICE whether to buy into a government sponsored health insurance plan to keep big insurance corporations honest about competition, price, and access. Universal coverage is the most sound system, like other industrialized nations in some form, but a Public Option as the compromise is a good one.

Because I work in a small business, I am under-insured. I only have catastrophic coverage because I can only get an individual policy. My insurance doesn't even cover prescriptions, and if I wanted to switch to a different individual policy, even with the same company (Aetna), I would have to go through brand new underwriting, which would cause more pre-existing exemptions at this point for example. And while my premiums have raised several times since I've had this policy, I've had this policy since I was 27 or so, and so I can't give up this policy without a significant rise in expense that would come with brand new underwriting on a new policy.

I spend over 10% of my gross income every year on my own health insurance. That's true. When I had large corporate employers, I paid a fraction of that for gold-plated "Cadillac coverage" because large corporations can get and afford large group policies. Not so for small business, generally fewer than 50 employees.

It's not fair that I'm out providing jobs on the ground, but I can't offer health insurance with those jobs, and I also have to personally pay a "private profit tax" for the giant medical companies with my higher expenses on a lousy individual policy - just because I'm a small business owner. Why can't I join some other large insurance pool to get quality coverage? I can't. I've tried - with this much expense at stake, I've tried. It doesn't exist and anyone who tells you it does - is lying or misinformed.

Please help me help those who are holding the President's feet to the fire right now, in any way you can, even if you can just speak the truth to those who will listen.

The White House is still drafting the president's Wednesday speech, and he needs to advocate strongly for the Public Option. The public wants it, every poll shows it (once it's explained in basic terms)! The giant insurance companies -- seeing a potential windfall from mandatory coverage and only private companies offering it -- are the ones against it.

Wanted to share my personal true story with you. I contributed $20 to Act Blue's fund on this issue from the Progressive Change Campaign Committee.

I stlll just wanted to share my story and give a little "real world" context to what's showing on the ol' boob tube.

The President Needs Republicans? No. He Needs Me.

The DC media are saying that Obama needs to win over "moderates" on health care reform, the so-called "Blue Dogs" and so-called "moderate" Republicans (an oxymoron these days if there ever was one).

Really? Because I think Obama needs to win over ME. Because I'm the guy that made monthly and sometimes weekly contributions to the Obama campaign 2007-2008. I campaigned hard in 2006 and 2008 for candidates who promised long-needed reform. FDR first proposed health care reform in 1932 but backed away when he heard cries of "socialism!" (Socialism! Like Canada! Be very very afraid! Like England! Run! Run for your life!) Yes, the same tired old canard we heard in 1993 that made the Clintons turn tail and run.

No more. I'm standing up. I demand real reform, and I'm the one the president has to win over to keep his job and secure a lasting legacy. I'm the one, and the millions like me. I'm the small business owner creating jobs but can't provide health care to my employees, and I won't hire anyone who doesn't have health care from some place. The result? I can hire married people with spouses who have benefits, I can hire retired people, I can hire young healthy men who can afford individual policies. Everyone else probably cannot *afford* to work for me. Tell me in what country in the world is that fair? Is that a democratic employment market? Is that a free market for employment? No.

The Public Option is already a compromise. That IS the compromise. Most every thinking person that looks at both cost and coverage elements of a solid health care system knows that single payer is the only grand design of a sound solution.

But we are not unreasonable people. We will compromise. Even with The White House, The House, and The Senate, even with 60 Democratic votes in the Senate and an enormous majority in The House, even coming off two wildly successful national elections on which winning candidates campaigned on successful health care reform... EVEN WITH ALL THAT, we will still compromise.

That compromise is the Public Option. We won't even compromise the name at this point. It's done. The compromise is there.

If the Public Option can't get done, then we expect our work winning elections for Democrats for the last four years will bring real reform with something *better* not weaker.

Waterloo indeed. And in this fog, I'm looking around wondering who's really on my side in the end and who's on the other - because some of my opponents appear to be wearing my uniform, and I'm not okay with that.

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. ...

Local Option Appraisal Caps: An Assault On Property Tax

Texas is a property tax state. It has no income tax. The effect is that Texas counties have appraisal districts who appraise property values that are then used as the value basis for property tax rates. A property tax is calculated by multiplying the percentage rate (a sum of the rates of all taxing entities) by the value assessed by the appraisal district. Counties apply this to business property as well as to personal property, especially real estate.

The property tax is in many ways extraordinarily unfair and unreasonable. What could be the logic behind burdening property owners with almost the entire state financial needs? Yes, there are local sales taxes and some form of state franchise taxes on businesses, and god bless her Ann Richards got us a Lottery that was supposed to help fund education, but make no mistake the property tax is the staple of Texas state revenues.

I guess what bothers me most is this: someone could live in a modest home for 30 years and pay off their mortgage. They may never refinance or sell their property. But the county appraisal district has the power to raise the assessed value of the home over time to match or even exceed inflation in the district's sole judgment of property values. So the $150,000 home a person bought 30 years ago might be assessed today at $300,000 and at an average combined rate of 3%, this homeowner -- with her or his mortgage entirely paid off and even on a fixed income -- will have to pay $9,000 a year in state property taxes.

That's $750 every month to the state of Texas just for owning property that you might have entirely paid off and have held for 30 years.

Doesn't it make more sense to tax income? When someone makes income or converts investments into proceeds as taxable income, isn't it fair to ask for the good of society and its infrastructure that the recipient of the income pay a small share to the collective needs of the state? Wouldn't it make more sense only to tax income? Why tax savings or investments whose proceeds don't get tapped?

The idea that a person who has saved and paid off their house and is living on a fixed income (even if by choice) has to pay thousands a year on a house purchased 30 years ago but appraised at current value -- well it just strikes me as obscene.

But hey, we have no income tax. And that keeps Texas proud. Or something. I don't know.

Anyway, state representative Debbie Riddle of District 150 in Harris County includes an optimistic note in a recent email to some constituents about her "Option Appraisal Caps" plan, which would gut the state finance system as property owners concentrated in Harris County (the 4th largest in the nation and home to Houston), Bexar County (San Antonio), and Tarrant County (Dallas) would all surely go to the polls to limit annual appraisal raises to 3% of the prior year's assessed value.

It sounds democratic, and it is. It's a good plan. But the effect would be to force an income tax on the state. I don't think that would be such a bad thing.

From Representative Riddle's email:

LOCAL OPTION APPRAISAL CAPS

As focused as I am on the budget right now, this week is exciting for me for other reasons. Tomorrow morning, I will lay out HB 46 before the Ways and Means committee. This is a bill I have been filing since 2005, yet I have never received a hearing because the previous chairman opposed Appraisal Caps in all forms. Finally, the time has come to let the legislature know about the need for appraisal reform in District 150.

House Bill 46 would allow counties to hold elections to determine their own appraisal cap, anywhere from three percent to 10 percent. In my mind, this is the ultimate solution to the ongoing appraisal cap debate. I understand that many of my colleagues would not be reelected if they mandated an appraisal cap any lower than 10 percent for the entire state. But areas such as mine are desperate for relief from appraisal creep and cannot receive it because of concerns from legislators who live hundreds of miles away. Under my proposal, the people of each county would be able to make their voices heard and set their own caps. It takes the decision out of the hands of legislators in Austin and into the hands of local taxpayers, where it belongs.

The bill has widespread bi-partisan support, and I believe it has an excellent chance of being passed out by the committee and put before the entire floor this session. It does require a constitutional amendment, which has to be approved by 100 of the 150 members of the House. I will continue to gather signatures on the bill, but I believe this could be the breakthrough so many of us have waited years to see!

Kudos, Representative. But I won't hold my breath.

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.

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.

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.

Privatizing Gains, Socializing Losses vs Socializing Gains, Privatizing Losses

I thought, like most Americans, that the president gave a very effective speech last night to congress and the nation. But something struck me this morning as I listened to the chattering heads the morning after. Much of the argument from Republicans is the direct inverse of the argument Democrats have been making for several years, namely: it's all about whether we privatize or socialize gains and losses.

The progressive argument states that corporations and their private shareholders/owners aim to privatize gains through profit as much as they can, while shifting "costs" or losses onto society in general. A clear example is pollution. If a company profits by manufacturing something that creates severe pollution that the company is allowed to dump into the air and water, then society bears a significant cost associated with the production of that product, and the company profits by not having to pay all the expenses associated with their production.

So then the pollutants often lead to higher incidents of asthma in children and adults near chemical plants, or higher rates of cancer, etc. -- and so social health programs (with public taxes, not at the company's expense) or individuals suffering then carry the burden of the "socialized cost." This is why Democrats often push for tighter regulations of private enterprise, to minimize the degree of socializing costs, shifting costs to the general public, in order to increase private profits.

The conservative argument postulates that a great economic danger is in privatizing losses while socializing gains, the exact inverse of the progressive argument - this is how we can tell now that we are on ideological terra firma with both arguments. The conservative argument is almost always made as an argument against the perils of taxes, and it's why progressives often accuse conservatives of thinking tax cuts are the solution to every problem.

In the conservative view, the nation does far greater harm to itself by privatizing losses and costs through excessive taxation in order to create socialized benefits. This is, however, the basic dynamic behind any taxation, whether it is to build roads and schools (albeit most conservatives do not oppose this) or to build and operate a "common defense" in the military. Conservatives, however, think there is danger in over-extending this dynamic to include what they feel are other ineffective social and other programs.

Neither position is absolutist of course, but they often stand on slippery slopes.

But here in this moment, in this time of great challenge, we need to be careful not to retreat to these easy diametric ideological positions and thereby miss the most practical circumstances and solutions that are key to our collective recovery.

The most salient question is the one posed by the president in another speech: the question is not, "Is government too big or too small?" as it was in the 80's and 90's. Rather, the question is, "Is government being effective." That's the question today. That's our question right now as a nation facing great challenge.

Reasonable people will disagree on that question. But make no mistake, that is the conversation we must be having.

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.

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.

Suburban Blight

This article is terribly, horribly interesting. It is about certain community leaders' efforts to revitalize a corridor of north Houston that used to be the de facto suburbs just 30 years ago. The area is the FM 1960 highway corridor (really it's a 5-lane cement thoroughfare) from I-45 westward to about Steubner Airline. It used to feature a primary medical district for the north Houston region, family-oriented retail strips, major retail outlets, entertainment, restaurants, and mid-rise office buildings.

But in the past 30 years as the northern boundary of the city of Houston reached FM 1960, and as the suburbs sprawled ever northward into the next county and past one of the nation's earliest and most successful master-planned communities, The Woodlands, the FM 1960 corridor - along its many large adjacent subdivisions, many once affluent - fell into total disrepair.

Now, driving from I-45 westward on FM 1960 to Spring Steubner at night reminds me of driving through Times Square in its worst years. The once neighborly strip centers have bars on the windows, the nice restaurants now long gone, obscenely bright flashing LED lights untolerated in any dignified residential area, pawn shops every other block along with other "low rent" small businesses, and the office buildings that once spared nearby residents from long commutes have fallen into office-slum status.

So now a group wants to create a special taxing entity to tax commercial businesses in the corridor to make "improvements." And here is where suburban politics intersects with traditionally "urban" concerns: the Republican state representatives are sitting on their hands, reluctant to create "additional layers of government", "new taxes", or to do anything local businesses -- even low rent ones -- might find objectionable.

Call it suburban blight. And we'll be seeing a whole lot more of this.

From the article:

That management district would provide a method to raise money, through an assessment on commercial property, to carry out improvement projects in the 1960 area. The annual assessment charged to commercial property owners would range between 9-15-cents-per-$100-property valuation.

In the past two years, Renaissance 1960 has been working on projects aimed at spurring revitalization, including the creation of an Urban Design plan for the community, group “bandit sign” removal efforts and community clean-up days, but work on larger projects would require a larger, steady source of income, management district supporters say. ...Many see signs of deterioration in vacant and abandoned buildings, graffiti, signage, heavy traffic and the perception that crime is on the increase.

Well this is certainly new territory for suburban Republican representatives, such as state Reps. Patricia Harless and Debbie Riddle.

Harless said Renaissance 1960 and Houston Northwest Chamber of Commerce members worked the past two years to communicate the management district’s mission to property and business owners, and they sought letters of support from those constituents.

In the end, 39 businesses representing about 10 percent of the property value in the proposed district’s boundaries wrote letters of support. That is a substantial number, Harless said, but the questions remain about the overall level of support, and the district’s ability to raise enough money to make an impact on the area even if the bill is passed.

“So that leaves us at how do you create a new tax and new layer of government when several major property owners do not support it?” Harless said.

Personally, I think all the smart "major property owners" bailed on this area years ago. Can anything be done now to lure those quality owners and developers back?

Hmmm... this is sounding more and more like a particularly well-known phenomenon... called urban blight.

Riddle said the management district option is not generating a positive response among commercial property owners who would pay the annual assessment. She said there is a misconception in the community that a management district would have the powers granted to a homeowners’ association, but that is not the case.

Because of those limited powers, she said the vast majority of problems on FM 1960 could not be addressed by management district, and there are other ways the community could address those issues with that without creating a “taxing authority.”

“We are all in agreement that doing nothing is not an option,” Riddle said.

Well now that's an understatement, Debbie. Welcome to urban, or post-suburban, politics.

Sunday Followup: The Culture of Corruption

Here's another pathetic example of what fuels the current cynicism about "American" culture that has been undermining everything from our neighborhood lives to our national politics. It's not all because of politicians, political parties, or fatheads on Wall St:

An insurance company with a potential $25 million liability from a 2007 Houston office fire is claiming smoke that killed three people was "pollution" and surviving families shouldn't be compensated for their losses since the deaths were not caused directly by the actual flames.

And so here's the even more hideous part that makes my point for me. The name of that insurance company? Great American Insurance Company.

That's right, ISYN.

So does this make you think of our great nation, our "Great America"? Or does this make you think of cruel, inhumane, greedy corporate money-grubbers who are exploiting the foundational ideals of our truly great nation in order to get away with their unconscionable business practices?

Lest you think I make mountains of molehills, check out these choice 'graphs:

Seth Chandler, a University of Houston Law Center professor who teaches insurance law, said while the insurance company's maneuver wasn't out of bounds, it will test the limits of the law.

"This is pushing the boundaries of the absolute pollution exclusion," Chandler said. "We're going to have a battle between the literal language of the policy and the way people speak of pollution."

Really? The "insurance company's ["Great American's"] 'maneuver' wasn't out of bounds?" Really? So they're only "pushing the boundaries" of a technical contract exclusion? Just semantics? Ugh. This is why it hurts sometimes to think of what some people call "American."

Like I said Sunday, until this stuff gets exposed clearly for what it is, until we as a nation vilify the corrupt un-American perpetrators of these crimes against our nation, we will not have a sufficient base on which to stand in order to turn things around culturally and economically. Sickening. I think we all know who caused pollution in this story.

From the most popular reader comments online:

miesque wrote:
...The name of this insurance company, Great American, is a insult to America. They should call themselves "Traitors Insurance Company," and the management should be thrown in jail. If the courts let them get away with this swindle, then there is NO JUSTICE IN AMERICA anymore!
12/17/2008 1:15:50 AM

joseplummer wrote:
unbelievable. I'm not sure what the latest statistic is, but it is a well known fact that MOST deaths in a fire are from smoke inhalation. Even I know that.
12/17/2008 1:26:25 AM

bullwhip wrote:
What the ...? They need to rename themselves. It is against the law reguarding truth in advertising. #1. they are far from great. #2. They are unAmerican...
12/17/2008 1:10:36 AM

getrealfollks wrote:
All insurance companies pull this... When insurance was started, the concept was that you paid a premium and they took on the chance that something might happen, in which case they would lose and pay off. Now the concept is that they charge high premiums and they exclude any situation where they stand a chance of losing... Insurance was meant to be a gamble. sometimes they win, sometimes, they lose. NOT anymore. The courts need to slap this company with a fine...
12/17/2008 2:59:46 AM

And my personal favorite because of its ending:

johncoby wrote:
Please people, what do you expect? you live in Texas where the state is run by the insurance industry.

I mean seriously, have you even notice how much you are paying for insurance? And that Texas has the highest rates in the nation? And that our supreme court has ruled in their favor 85% of the time?

And you are SHOCKED that this is happening? Gosh.

I wish you guys would for once take this shock and awe into the voting booth.
12/17/2008 5:35:03 AM

We still live in a democracy, and as far as I can tell, the ultimate check on corruption -- and those who allow it -- are good common-sense citizens in elections. We don't get change until and unless we demand it. One of America's most beautiful attributes, however, is that we can achieve this by stepping no farther than into the voting booth. We're America. Unlike other nations, we control our own destiny. It's why we're the land of the free, and democracy is why we're the home of the brave.

More on Why Your Home Equity is Cratered: The Culture of Corruption

Some on the conservative right don't appreciate Frank Rich's heavy well-deserved criticism of the Bush Administration over the years, however this morning he is showcasing his equal-opportunity criticism, which we should see more and more as we transition into a new administration.

Parts of this morning's column is a helpful read for any lay person trying to understand why their home equity has cratered. First and foremost, I blame the new American culture of corruption. And until it is stopped, and I don't know how yet, or turned around, we won't be seeing the economic turn-around that America needs. And so we turn perhaps to America's leading cultural critic:

Warren Buffett’s warning in 2003 that derivatives were “financial weapons of mass destruction” was politely ignored. Much larger companies than Enron figured out how to place even bigger and more impenetrable gambles on derivatives, all the while piling up unseen debt. They built castles of air on a far grander scale than Kenny Boy could have imagined, doing so with sheer stupidity and cavalier, greed-fueled carelessness rather than fraud.

"[C]arelessness rather than fraud." Interesting because so many would immediately point to fraud as a major driver of our economic morass. But Rich is pointing to "greed-fueled carelessness." That's striking because it's worse than fraud. It implies a systemic lack of basic human empathy, and that is sociopathic. Has our culture of corruption fallen that far? Scary.

The most stupendous example as measured in dollars is Citigroup, now the recipient of potentially the biggest taxpayer bailout to date. The price tag could be some $300 billion — 20 times the proposed first installment of the scuttled Detroit bailout. Citigroup’s toxic derivatives, often tied to subprime mortgages, metastasized without appearing on the balance sheet. Both the company’s former chief executive, Charles O. Prince III, and his senior adviser, Robert Rubin, the former Clinton Treasury secretary, have said they didn’t know the size of the worthless holdings until they’d spiraled into the tens of billions of dollars.

Notice the denial of any responsibility whatsoever on the part of these top executives. (Earlier in the column Rich makes the same observation of Bush.) It seems now the standard MO for America's executives to deny all personal responsibility for failure. How American is that? If you say "very," then you're talking recent history and not the American ideal.

Once again, regulators slept. Once again, credit-rating agencies, typified this time by Moody’s, kept giving a thumbs-up to worthless paper until it was too late. There was just so much easy money to be made, and no one wanted to be left out. As Michael Lewis concludes in his brilliant account of “the end” of Wall Street in Portfolio magazine: “Something for nothing. It never loses its charm.”

But if all bubbles and panics are alike, this one, the worst since the Great Depression, also carried the DNA of our own time. Enron had been a Citigroup client. In a now-forgotten footnote to that scandal, Rubin was discovered to have made a phone call to a former colleague in the Treasury Department to float the idea of asking credit-rating agencies to delay downgrading Enron’s debt. This inappropriate lobbying never went anywhere, but Rubin neither apologized nor learned any lessons. “I can see why that call might be questioned,” he wrote in his 2003 memoir, “but I would make it again.” He would say the same this year about his performance at Citigroup during its collapse.

The Republican side of the same tarnished coin is Phil Gramm, the former senator from Texas. Like Rubin, he helped push through banking deregulation when in government in the 1990s, then cashed in on the relaxed rules by joining the banking industry once he left Washington. Gramm is at UBS, which also binged on credit-default swaps and is now receiving a $60 billion bailout from the Swiss government.

We have discussed the 2000 Commodities Futures Modernization Act, which legalized gambling on Wall Street, but we've said less about the equally destructive 1999 repeal of the depression-era "Glass-Steagal" act called the "Gramm-Leach-Bliley" act, which was enacted with Democratic support, championed by Gramm, and like the CFMA in 2000, was signed into law by a Democratic president.

It’s a sad snapshot of our century’s establishment that Rubin has been an economic adviser to Barack Obama and Gramm to John McCain. And that both captains of finance remain unapologetic, unaccountable and still at their banks, which have each lost more than 70 percent of their shareholders’ value this year and have collectively announced more than 90,000 layoffs so far.

The Times calls its chilling investigative series on the financial failures “The Reckoning,” but the reckoning is largely for the rest of us — taxpayers, shareholders, the countless laid-off employees — not the corporate and political leaders who led us into the quagmire. It’s a replay of the Iraq equation...

We can't just say that now is not the time for accountability. There has never been a more important time. The excesses that led to the tech bubble repeated themselves in the real estate bubble, and the corruption began in the 1990's continued unabated to today, even accelerating under the protection and encouragement of a corrupt and ignorant congress.

If you want to understand why your home equity is taking a hit, you can't fully understand without also understanding the crisis that is the modern American culture of corruption. And that culture has omni-partisan enablers at its roots.

And the Losers Are.....

This morning brings the frightening news that the U.S. Senate defeated the auto "rescue" bill passed handily by the House and negotiated with the White House. Make no mistake, this was pure political posturing on multiple levels.

And let's be clear also that Washington's politicians are gambling with the jobs of an estimated three million American middle class JOBS. And we've already discussed that there will be no economic turn-around without a turn-around in J-O-B-S. So what gives?

First, the pure politicking. Senate Republicans are taking credit for defeating the bill, and Minority Leader Mitch McConnell was quoted this morning on The Today Show blaming the unions' refusal to lower their wages by about $4/hr (from $27 to $23) immediately as a condition for the loan. Let's take a moment to appreciate how hypocritical and destructive this posturing really is.

American auto unions, despite their politics, are all about American working middle-class jobs. Period. And that is all you need to know in this current economic crisis. That means those jobs must be protected. Period. Period. And that doesn't include the other 2.5 million American jobs threatened by Congress's abject failure to lead.

Seriously, is congress going to destroy, or even threaten right now, 3 million jobs over $4/hour after the obsceneties of greed being subsidized by congress already? (Think AIG.) Really?

Furthermore, surely I'm not the only one who sees the hypocrisy of "small government" Republicans in the Senate trying to micro-manage private enterprises whose biggest political sin was to get "too big to fail," but who have been aided and abetted by congress for decades. This is crass partisan opportunism, and I don't care who does it, it is unAmerican and it is wrong, and it is a threat to us all.

Now is not the time to put the American auto manufacturers under a political microscope to try and diagnose and force change that has not occurred in the last 30 years. Now we are in an overall economic crisis, and we need every job we can keep. It is far more efficient to keep jobs than to create new ones. We are shooting ourselves in the thigh if we let any industry in America fail right now. Once the crisis is under control, then I have no problems with Congress revisiting its regulatory posture in any industry it chooses.

Should unions be scrutinized? Yes. Are American unions part of the car companies' problems? Probably. But they're not all of it. And to think that forcing a drastic wage cut -- in this economic crisis -- is somehow smart politics or smart business, without forcing a comprehensive change plan that is impossible to create in any reasonable amount of time in this crisis (GM says it may be out of cash by the end of the month), it is just the height of political stupidity or opportunism or both. And it disgusts me, not as a partisan, but as an American.

Without a turnaround in jobs, there will be no turnaround in the economy, and that includes housing.

The ironic part of this is that the failure of the bill may put political pressure for the president to use TARP funds (the $750 billion authorized in October with oversight required but still not yet enacted) for the auto companies. With AIG executives fighting for multi-million dollar "retention" incentives (aka "bonuses") all with taxpayer money, I don't see the problem giving the car companies $15 billion of the $750 billion for a bridge loan to keep them in business and 3 million Americans at work. And ironically, a Republican president may use those funds to cover the failure of congress to respond, over the objections of Republican senators, which will result in virtually no restrictions at all on the auto-makers in exchange for the government funds.

And frankly, that's the correct way to go..... if Wall St needed $750 billion with no questions asked and no restrictions, as the Treasury argued in September, then why in the world does it not make sense for the auto-makers to need $15 billion to maintain America's manufacturing base that underpins 3 million American jobs? Bottom line: the government can and should put the auto-makers under a microscope when the economy has stabilized again. It is the failure of congress that they haven't cared about American manufacturing for 30 years now. And now is not the time to put 3 million American jobs in that political crucible.

To even posture that it is that time is obscene, unAmerican, crass, opportunistic, partisan, and downright spiteful toward the dwindling and suffering American middle class.

If the auto-makers fail from political malpractice and economic treason, nobody should be surprised when Wall Street is flooded with 3 million unemployed Americans bearing pitchforks and torches.

What I Want to Know Is...

Here's what I want to know: Why in the world is congress giving American car makers such a hard time over a $35 billion loan, when the government has already allocated about $1 trillion for financial companies including American banks?

For instance, about $20 billion last week was allocated to Citigroup to prevent the failure of that massive bank. There was no public debate, no congressional approval... just an announcement. And make no mistake, Wall Street rallied, and it was the right thing for the government to do for the sake of America, and not for Citigroup's executives (jail them for all I care).

So why are the American car companies being publicly flogged for requesting a combined $35 billion -- less than 5% of the federal bailout law -- to get through this historical economic crisis?

Well, here's part of the answer, I think. Why does America only have 3 car companies to begin with, and all of them headquartered in the same failed midwestern city of Detroit? Isn't that odd for these modern times? There are no auto headquarters in California, or Texas, or Ohio, or Missouri? I could make a strong case for each.

If the Japanese and Koreans are going to force our industry out of business, and if we're going to let them do so, and largely with manufacturing plants even on our own soil, then why in the world can't America produce American competitors to beat the Japanese and Koreans? Maybe there's not enough competition within America and between American firms. Why would that be?

The thrust of the problem, I think, is that America has become hostile, even prejudiced, against American manufacturing. That's why it's held on in the city of Detroit, no innovation, no expansion, just old... thinking... and old... organizations.

Our primary concern as Americans right now needs to be American jobs. Without confidence in our jobs, America can never recover from this economic morass. Frankly, I don't know anyone right now who does not fear their job security at some level or another.

A rule of thumb is that a tenth of a percent of the unemployment rate equals about 100,000 jobs. Analysts suggest that a failure of "Detroit" could lead to a total loss of 2 million American jobs. That means unemployment would skyrocket by 2 entire points -- to maybe 8% (bear in mind that new calculation methods of unemployment make 8% equal to maybe twice that several decades ago).

So why is there a debate? I think Americans are tired of being ashamed of their auto industry. The truth is that Detroit has been making good cars in recent years, actually. Most people blame the unions. However if the unions did not exist at all, then Detroit would have to face the fact that their "failures" are really due to executive failures and a collective lack of imagination in design and understanding of market demand more than anything. To wit: GM and Ford decided just a couple of years ago that their best strategy was to create the big gas guzzling line of bland SUV's that had been so profitable for them. (There's not much room for a profit margin in a small, entry-level car.) Well, that was just the wrong decision and terribly short-sighted.

Global players such as Japanese and Korean firms have long marketed to European and Asian markets, of course, where highly dense metro areas require small, small cars. Even Mercedes produces the "Smart" car that is exotic in these parts but common on the streets of any major European city.

Maybe we need more than just 3 American auto companies. Maybe we need more competition. Maybe a California start-up will take a chunk of the market with advanced hybrid and electric technologies. Whatever happens, now is a time not for destroying our auto industry, but for paving the way for serious American innovation. History shows that when America innovates, the world has no choice but to follow.

I think it's time that America realizes that it's just as serious and worthy to have leading manufacturing sectors as it is to have leading technology and professional service sectors.

And congress should stop playing games with millions of jobs that underpin America's challenged middle class.

Best Explanation of the Crisis We Face

While I know DailyKos has become somewhat of a progressive bogeyman among the partisan right, not entirely unreasonably, some of its editors (authorized regular columnists) have extraordinary credentials who I find worth the read despite the partisan orientation. Frankly, the real polemics can be found in the largely unregulated "Diaries" posted by registered users in the right column. That can take a lot of sifting to find quality content.

That aside, on a technical basis both in accuracy and writing skill, this is the best post I've seen yet explaining the current state of the crisis that has been unfolding over a year now. It's critical to understand that what started as a "subprime mortgage" crisis last year has now expanded to reveal certain "shadow" financial instruments that Warren Buffett himself famously called "Financial Weapons of Mass Destruction" in a 2002 memo to his shareholders. The post I'm highlighting was written by a blogger named "Devilstower," however don't be fooled: this is no teenager proverbially blogging from his mother's basement in his pajamas.

In his November 16th post, the author reviews the biggest threat to our financial system currently, and that's the fallout over the failure of the "Credit Default Swap," a derivative that is essentially unregulated "insurance" at best, and worse, outright "gambling with no bookie." From his intro:

In essence, credit default swaps are (or were) nothing but insurance policies for loans. And yet in 2007 the total number of credit default swaps traded far exceeded the value of all loans. In fact, it may have touched $70 trillion dollars, which puts it above the gross domestic product of the entire planet.

Yes, $70 TRILLION. That doesn't mean the money exists, it just represents the value of all the "bets" outstanding. It's easy to see now what Buffett was talking about way back in 2002 when the government, regulators, and certainly investors had no clue what these things were really about.

If a person goes bankrupt and cannot pay back a loan, and the person insuring the loan for the lender cannot pay the insurance payout that was obligated, then the lender must bear the entire cost of the loan failure. In turn, the lender either a) cannot lend more money because of the loss it must now cover, or b) the lender may also be an insurer on another failed loan to another institution and now itself cannot pay out. This is over-simplified, but it's easy to see how multiple failures like this set off an extraordinarily dangerous chain reaction of radioactive proportions. That is what the nation is dealing with in large part right now.

I do not believe that now is not the time to begin diagnosing how we got into this mess. If we wait until we are out of this mess, history shows we are far less likely to bother with an accurate diagnosis that could lead to effective future protections. 2008 Nobel winner Krugman:

Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer ... is that nobody likes a party pooper. While the housing bubble was still inflating, lenders[, investment banks, and money managers] were making lots of money... Who wanted to hear from dismal economists warning that the whole thing was, in effect, a giant Ponzi scheme?

There’s also another reason the economic policy establishment failed to see the current crisis coming. ... [T]he crisis of 1997-98... showed that the modern financial system, with its deregulated markets, highly leveraged players and global capital flows, was becoming dangerously fragile. But when the crisis abated, the order of the day was triumphalism, not soul-searching.

Time magazine famously named Mr. Greenspan, Robert Rubin and Lawrence Summers “The Committee to Save the World”... who “prevented a global meltdown.” In effect, everyone declared ... victory..., while forgetting to ask how we got so close to the brink in the first place.

So now, following is Devilstower's very important point to build on Krugman: the current crisis can largely be traced back to a piece of legislation passed in 2000 and signed into law by President Clinton with bipartisan support, clearly before anyone except a few really understood what they were doing:

In 2000 Republican economic hero, Phil Gramm, with the assistance of a small legion of lobbyists [and Democrats], created the Commodity Futures Modernization Act [signed into law by then President Clinton]. Along with ushering in the Enron disaster, this bill provided the one thing that credit default swaps needed to grow and mutate -- invisibility. Thanks to the CFMA, not only were credit default swaps unregulated, they were impossible to observe directly. Like black holes in deep space, you could only spot swaps by looking at how other things acted nearby.

So, now you've made a loan to someone, and you're worried about it. I want to offer you a credit default swap so I can collect the fee. Trouble is, I don't have the assets to cover your loan. So how can I... hold on, credit default swaps are so unregulated that no one says I actually have to be able to deliver on my promise. Hey, over here! Have I got a swap for you, and it's a bargain.

So now the CDS is a means of moving the risk, but the risk is still as high (or higher, since the original lender might have been better able to cover the loss). In fact, credit default swaps have gone from being a risk mitigator, to a risk magnifier.

A risk magnifier indeed. And most of this, along with most of the activity of private hedge funds (extraordinarily aggressive investment funds using massive amounts of loans with very little cash reserves), went completely unregulated and unmonitored. So a big part of the current problem is that nobody can really figure out just how much of this stuff is really out there in the market and in what form.

Contrast this with the heavy regulation, for the public and investor good, required of public securities overseen by the SEC and also required of insurance products. The regulatory requirements for these classic instruments are legion, but they are designed to increase the availability and accuracy of information in the marketplace so that both investors and regulators can make the most informed decisions about their market choices.

It should go without saying that $70 trillion in undisclosed "positions" (bets) in the marketplace is not immaterial to the decisions that investors and regulators were making in the last 8 years before this crisis. But congress, through the 2000 CFMA, let all of this go under the radar, unregistered, unregulated.

Here's the crux of how things went so wrong and got so out of control. Again from Devilstower:

Swaps are unregulated. No one says I have to have enough resources to cover the swap, and even better, no one says I have to offer the swap to the person who actually made the loan! Hey buddy, see that loan over there? You may think it's iffy, but I think it'll hold up. In fact, I'm so sure it will, I'll sell you a credit default swap on it that pays off if it fails. You don't make the loan, you don't have to pay off on the loan, you don't have anything to do with the loan. You just pay me the fee. And if that guy loses his money, you collect. How sweet is that!

This mutation is enormous(...) At this point, credit default swaps [became] completely divorced from the original function. A single loan can be covered by multiple swaps. There's a complicated fiscal term for this. It's called gambling, and at this stage, that's all that remains of those little "insurance" policies. They no longer protect anyone from anything, they just offer a chance to place enormous overlapping side bets on everything.

So there it is. An instrument sold to congressional accomplices on both sides of the aisle and an unknowing, unsuspecting market as a "risk mitigator" actually mushroomed in a cloud of unregulated, invisible massive $70 TRILLION side bets with no bookie.

Financial weapons of mass destruction indeed.