Friday, 17 October 2008

Should we trust Warren Buffett?

So, it would seem that the one person both Barack Obama and John McCain would like to be Treasury Secretary is Warren Buffett, the Sage of Omaha. Warren Buffett is the CEO of Berkshire Hathaway, the outrageously successful insurance company that has appreciated in value at an outrageous rate of 21.4% a year since 1965. To put the power of that compounding appreciation in perspective, the stock was $4 in 1965, and is now worth $120,000, having fallen 20% during the financial crisis from its high of $150,000. If my father had bought me ten shares when I was born, it would be worth a million dollars today! This is an astounding record of achievement by any measure, and has earned Buffett the admiration of conservatives and liberals alike, though conservatives were devastated when Buffett endorsed Obama.

Would Buffett make a good Treasury Secretary?  Undoubtedly yes.  His insight into the markets, and his grounding in the real world make him an ideal choice.  Buffett famously decided to give away the bulk of his wealth to the Bill and Melinda Gates Foundation, rather than leave his children idly rich.  He is all too aware of the Third Generation syndrome, which leads to trainwrecks like George Bush, Paris Hilton, and the like.  

Buffett has made his fortune buying value-priced companies, and holding on to them.  He never bought into the tech bubble of the 90's, preferring stalwart investments that yield dividends and moderate growth. I can't imagine another person on Earth that understands the world economy like him.

Would he want the job? His biographer, Alice Schroeder, says no.  He doesn't like meetings, and would hate the job.  I am not so sure.  At age 78, what better way to cap off an incredible career than saving the world?  The financial system teeters on the edge of oblivion, and Buffett stands up to shape the new economy in his own image.  It is a play for immortality if I have ever heard one.  Buffett himself refused to comment on it, but I believe he would take the job if it was offered, assuming he was guaranteed a free hand in making sweeping changes.

However, should we really trust him? In the midst of this speculation following the 2nd Presidential Debate, when both candidates named him first on their short lists, Buffett has written an Op-Ed for the New York Times, in which he advises everybody to invest in stocks now:

THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.

So ... I’ve been buying American stocks. 

His explanation is persuasive.  It is the timeless contrarian argument:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
So, Buffett shares that his personal wealth is now 100% in US equities, and he warns people who are hunkering down in cash (like me), that we will miss the boat before the signals are clear for a recovery.  He gives historical examples from the Great Depression and WWII to show that people brave enough to invest after the crash make out like bandits:
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
So, given this airtight logic, why would I doubt him?  Because he has a conflict of interest.  First of all, his beloved BRK-A stock has dropped $30,000 since December. Berkshire Hathaway is basically a giant holding company, and the tide brings down all ships.  For the sake of his investors, and his own holdings, he wants it to get back on track.  However, this is in everybody's interests, so that's OK, right?  So far so good.

It becomes a bit more tricky given his $5 Billion investment in Goldman Sachs. One of the two surviving investment banks, Goldman Sachs wields incredible power around the world, but especially in the US.  Clinton's Treasury Secretary, Robert Rubin, was Goldman Sachs President, as was Henry Paulson.  Josh Bolton, Bush's Chief of Staff, is a Goldman veteran.  The 35 year old now running the $700 Billion bailout was one of Paulson's proteges at Goldman Sachs.  The bank profited mightily from this bailout, as well as the Mexican bailout in 1994. 

Worse than this opportunism are the allegations that Goldman Sachs is partially responsible for the current meltdown, and prolonged the Great Depression by encouraging the failed policies of Herbert Hoover. Naked short selling and speculation by Goldman hedge funds in the derivatives market could have started the dominos falling in the current crisis.  Goldman Sachs stands to make billions more when the economy recovers, and they stand alone with JP Morgan as the pre-eminent investment banks.

Now, taking off my tinfoil hat for a moment, I must say that I don't really buy into this assessment of Buffett's motives.  The man has more money than he could ever spend, and he has never shown much interest in spending it anyway. He clearly has no plans to leave it to his kids either, so nepotism is out as well.  We could hypothesize that he wants to increase his estate to benefit his philanthropic enterprises, but that is a stretch.   Perhaps he really believes what he is saying...

Sunday, 12 October 2008

Compassion for McCain

As we approach the election day, and my anxiety about Obama's chances are receding (though not gone), I have been watching in horror as John McCain's campaign implodes.  His Rovian campaign strategists have rolled out hate and fear-mongering as a last ditch attempt to scare voters away from Obama, and from the polls in general.  Unlike Bush in 2000 and 2004, it seems that McCain's crew has overreached.  He is being roundly condemned by people from his own party, and has made it increasingly likely that Democrats will take a 100 seat majority in Congress, and perhaps land the Holy Grail 60 votes in the Senate.  

From where I am sitting, I can't help but feel compassion for McCain.  He looks to me like a broken man.  He has unleashed forces he has no control over, and now wants to put the genie back in the bottle.  How pathetic is his recent effort to tell his supporters to be respectful? It seems to me that he knows he is going to lose this election, and is just looking forward to the end.  

I am an Arizona voter, and voted for McCain twice for Senator.  I never agreed with many of his positions, but have respected him as a person.  In 2000, I desperately wanted him to beat Bush, and thought that I could have lived with a McCain presidency if he beat Gore.  I don't think he is the same man today.  It is a shame that his legacy will end so poorly--I hope...

Friday, 10 October 2008

The hubub about ACORN

It seems that the Conservative blogosphere is going wild with outcries against an organization called ACORN, and Barack Obama's supposed association with the group.  Now, I must admit that I had never heard of ACORN until this week, and still do not know much about the group.  However, it seems fairly clear that this is a bogeyman created by the Republicans to stir things up.  It is a desperate attempt to get some traction against Obama.

Here is what I have discovered:

1) Conservative news, radio, and blogs have been pounding this for the last week.  Matt Drudge, who seems to be the main feed for the conservative media, has several articles on it. Rush Limbaugh has been bloviating nonstop. No Quarter has several blogs.  Fox has picked it up.  CNN is starting to touch it.  This seems to be a meme they are pushing right now, along with the "Obama pals around with terrorists" nonsense.

2) ACORN seems to be a liberal group that focuses on voter registration drives.  They also advocate for increases in the minimum wage, help for people with home forclosures, assistance to Gulf hurricane victims, etc.  Seems pretty innocuous to me so far.

3) The crux of the issue is fraudulent voter registrations.  In their registration drives, ACORN has received some fraudulent registrations, such as people putting down the names of dead people, prisoners or NFL football players.  It seems clear that ACORN themselves flagged most of these registrations, but turned them in as required by law.  Now they are being accused of perpetrating voter fraud.

4) In Nevada, an ACORN office was raided, which has cheered the Conservatives. They seem to assume that there was wrongdoing, despite the fact that no charges have been brought.

5) There are allegations that Obama organized for ACORN, and was a leader trainer for the group. I am not convinced this is a bad thing, but it seems to be false.

I think that this is just an attempt to set up people to contest the election on November 5.  At this point, I don't think that the efforts to purge voter rolls are not going to be successful.  So, I think the Republicans are trying to delegitimize the Obama Presidency before it even takes office.  Nothing to see here...

Tuesday, 7 October 2008

Preparing for the coup

Several blogs have been reporting on a little-known US military organization called USNORTHCOM. Established in April 2002 by President Bush, USNORTHCOM is the first military deployment on US soil since the Civil War. This is a very scary development, made possible by the exceptions to the Posse Comitatus Act of 1878 pushed through by the Bush Administration.

Posse Comitatus was enacted after the Civil War to prevent the US military from ever being deployed on US soil, and was meant to prevent US soldiers ever being ordered to fire on US citizens:
From and after the passage of this act it shall not be lawful to employ any part of the Army of the United States, as a posse comitatus, or otherwise, for the purpose of executing the laws, except in such cases and under such circumstances as such employment of said force may be expressly authorized by the Constitution or by act of Congress.
Note that exceptions to this law were limited to those permitted by the Constitution (namely fighting of an invasion force) or CONGRESS. However, the exceptions pushed through the Republican Congress has changed all of that. Now NORTHCOM has the authority to deploy on American soil, and kill Americans at the order of the President. Section 1076 of H.R. 5122, which was passed in 2006, says that military forces may now be used to:

"...restore public order and enforce the laws of the United States when, as a result of a natural disaster, epidemic, or other serious public health emergency, terrorist attack or incident, or other condition in any State or possession of the United States..., where the President determines that,...domestic violence has occurred..."

So, let's have a hypothetical. Let's say Obama wins, but Republicans are able to steal it again by caging voters, hacking voting machines, etc. I think it is safe to say that there would be mass demonstrations. I would join them if I lived in the US. This law would allow USNORTHCOM to gun down peaceful marchers if Bush (or a future President) decides that violence has occurred, even if it really hasn't.

Now, USNORTHCOM's website emphasizes their other domestic missions, including dealing with the aftermath of chemical, biological or nuclear attacks, natural disasters, etc. However, these have traditionally been the job of the National Guard. Of course, the Guard has been federalized to fight in Iraq, and is no longer available for state-level missions, as was famously declared by Kansas Governor Kathleen Sibelius (the future first female President IMO). Hence the supposed need for a military force for the homeland.

So, fresh off of near constant combat missions in Iraq, the Army's 3rd Infantry Division's 1st Brigade Combat Team has been assigned to missions on US soil. It is an ominous development that some of their first training for this mission has been for crowd control and civil disobedience response (from the Army Times):

They may be called upon to help with civil unrest and crowd control or to deal with potentially horrific scenarios such as massive poisoning and chaos in response to a chemical, biological, radiological, nuclear or high-yield explosive, or CBRNE, attack...

The 1st BCT’s soldiers also will learn how to use “the first ever nonlethal package that the Army has fielded,” 1st BCT commander Col. Roger Cloutier said, referring to crowd and traffic control equipment and nonlethal weapons designed to subdue unruly or dangerous individuals without killing them...

The package includes equipment to stand up a hasty road block; spike strips for slowing, stopping or controlling traffic; shields and batons; and, beanbag bullets.

Glenn Greenwald explains all of this much more coherently than me. However, I agree with Naomi Wolf (somewhat) that the Bush administration has been putting in place all of the pieces of a Fascist police state. Her 10 Steps To Tyranny read like the history of the last 7 1/2 years. Remember that we are not necessarily talking about Nazis when we use the term "fascist." Mussolini defined the term as "the convergence of state and corporate interests." It is not (necessarily) about racism or anti-semitism.

I take exception to Wolf's prediction that the Republicans are going to either cancel the election or throw it to McCain/Palin. Though they might like to do so, I don't think it will work. As Greenwald points out, a single brigade is not enough to enforce a police state, and there is little indication that soldiers will back the government in a coup of this type. The President also has his own private militia in the form of Blackwater, who were secretly deployed during Katrina. However, this is nothing like Mussolini's Brown Shirts. I am optimistic that the American people will elect Obama by a safe margin, and will not stand for such a thing. I also think that Obama, who is not the Messiah or FDR, will do a lot of good work to reverse Bush's damage to the Constitution.

That said, I think we need to be ready on November 5 to take back America if an attempt is made to flip the election. There are already signs that the Republican operatives are attempting to suppress the vote, hack voting machines, and incite violence against Obama. Americans of all parties, races and ideologies need to organize themselves to be ready to take to the streets on November 5 to PEACEFULLY contest a stolen election. We cannot repeat the mistake John Kerry made in 2004 when he chose not to contest Ohio, and just rolled over.

Enough for today.

An analysis by Jeffrey Sachs

How to Fix the U.S. Financial Crisis

Policies can avert disaster only if they interrupt the cascading threats to the U.S. economy

By Jeffrey D. Sachs

The origin of the [ ]U.S. financial crisis is that commercial banks and investment banks lent vast sums—trillions of dollars—for housing purchases and consumer loans to borrowers ill-equipped to repay. The easy lending pushed up housing prices around the U.S., which then ratcheted still higher when speculators bought houses on the expectation of yet further price increases. When the easy lending slowed and then stopped during 2006-07, the housing prices peaked and began to fall. The housing boom began to unravel and now threatens an economy-wide bust.

The U.S. economy faces four cascading threats: First, the sharp decline in consumer spending on houses, autos and other durables, following the sharp decline in lending to households, will cause a [ ]recession as construction of new houses and production of consumer durables nosedive. Second, many homeowners will default on their mortgage payments and consumer loans, especially as house values fall below the mortgage values. Third, the banking sector will cut back sharply on its lending in line with the fall in its capital following the write-off of bad mortgage and consumer loans. Those capital losses will push still more financial institutions into bankruptcy or forced mergers with stronger banks. Fourth, the retrenchment of lending now threatens even the shortest-term loans, which banks and other institutions lend to each other for working capital. Interbank loans and other commercial paper are extremely hard to place.

The gravest risks to the economy come back to front. The fourth threat is by far the worst. If the short-term commercial paper and money markets were to break down, the economy could go into a severe collapse because solvent and profitable businesses would be unable to attract working capital. Unemployment, now at 6 percent of the labor force, could soar to more than 10 percent. That kind of liquidity collapse was the basic reason why Asian national incomes declined by around 10 percent between 1997 and 1998, and why the U.S. economy fell by around 25 percent during the Great Depression.

The third threat, the serious impairment of bank capital as banks write off their bad loans, could cause a severe recession, but not a depression. Unemployment might rise, for example, up to 10 percent, which would create enormous social hardships. The ongoing fall in bank capital as the housing boom turns to bust is already forcing banks to cut back their outstanding loans significantly, because they must keep the lending in proportion to their now-shrunken capital base. Major investment projects, such as acquisition of new buildings and major machinery, are being scaled back. Some major nonfinancial companies will likely go bankrupt as well.

The second threat, the financial distress of homeowners, will certainly be painful for millions of households, especially the ones that borrowed heavily in recent years. Many will lose their homes; some will be pushed into bankruptcy. Some may see their credit terms eased in renegotiations with their banks. Consumers as a group will start to become net savers again after years of heavy net borrowing. That trend will not be bad in the long term but will be painful in the short run.

The first threat, the cutback in sales of housing and other consumer durables, is the Humpty-Dumpty of the economy that cannot be put back together. The inventory of unsold homes is now large; housing demand and new construction will be low for many years. Consumer spending on appliances and autos is also plummeting. All these consequences are largely unavoidable and will force the U.S. into at least a modest recession, with unemployment likely to rise temporarily to perhaps 8 percent.

The goal of any new policy cannot be to prevent a recession. It's too late to stop such a downturn. The goal cannot be to save every bank. The U.S. economy has built up too many imbalances—consumer debt, overextended construction, impaired capital of banks—to avoid an economic downturn and a major retrenchment of the banking sector. The goal must be to avoid an outright collapse or deep recession. Two actions are therefore critical, and two more are subsidiary but still important.

Most important, the government and Federal Reserve Board must prevent the collapse of working capital by supplying short-term loans and taking other measures to sustain the commercial paper market, interbank lending and the smooth functioning of money market funds. They have the instruments to do so, and should use them aggressively. The government should also aggressively promote a recapitalization of the banking system so that bank lending is not squeezed for years to come. It can directly inject some public capital into banks, and can both pressure and entice the banks to raise additional private capital. Unfortunately, the $700-billion bailout nearing approval in Congress does not focus adequately on those liquidity or recapitalization challenges.The legislation is better than nothing (to help forestall panic) but the real work of stabilizing and recapitalizing the banking system will now await the next administration, and the Federal Reserve will need to stay aggressive in preventing a liquidity collapse."

Two additional steps will be useful. The first will be to ease the repayment terms on existing mortgage holders, to reduce the flood of defaults and foreclosures that will otherwise occur. The second is to encourage expansionary monetary and fiscal policies abroad (most notably in cash-rich Asia), so that the decline in U.S. consumer spending is smoothly offset by a rise in spending in other countries. This overseas expansion would allow the U.S. to offset the fall in housing construction by a rise in exports, and would allow other countries to offset the fall in their exports to the U.S. by a rise in their internal demand. All these steps will have to await the next administration.


Monday, 6 October 2008

Tips for Saving Money

Here are some "Top Tips" for saving money in the economic downturn:

Good ideas here, though growing citrus in your basement using grow lights is not an option for many people (is "citrus" a euphemism here?).  I would add some, which my legions of readers can add to:

1) Sick Of It already mentioned hanging clothes to dry instead of using a dryer.  Just to amplify that, I wanted to point out the amazing energy sucking of the typical dryer.  The Which? Best Buy tumble dryer from Bosch, for example, uses about 2700 W (5.72 kWh per load).  As an example, using London Electricity's 19.86p/kWh, each load would cost you £1.14.  That doesn't seem like much, but my family seems to do about a wash a day (usually several on weekends and fewer during the week).  If we used a dryer, it would cost us £414.28 per year.  That savings covers the rest of our electricity use combined!

Now, you might be thinking that it isn't practical to dry everything on a line, especially in grey, rainy London.  Well, we worried about that as well, but it hasn't been a problem for us.  Even when we have to bring our wash inside to dry, it seems to dry in at most a day.  This might not work in extremely humid places like Lima, Peru, where I remember hanging jeans in the winter and finding them growing mold before they dried, but that is not the norm.  

2) Staying on the topic of electricity, it is a great idea to figure out which electronic devices in your home use "vampire power."  These are devices that use electricity even when on standby.  I bought an Ecosaver from, and checked out all of my electronics.  It turned out that my Freeview box, phone charger, washer, microwave, and computer all use about 3 watts when not in use, which would cost me £26 per year FOR NOTHING.  Now I switch them off when not in use.

I should note that I was pleasantly surprised to find that the charger for my new iPhone does not use any power once the phone is charged.  This is new for phone chargers, and burnishes Apple's eco-reputation in my book (despite the ignorant Greenpeace condemnation that was debunked by Steve Jobs).

3) I used to keep the water running when I washed dishes and brushed my teeth.  It turns out that this is extremely wasteful.  For some reason, Thames water does not disclose their rates on their website.  So, I can't easily calculate how much that cost me.  However, I did a little test, and discovered that I used 2.7 liters of water to brush my teeth with the tap on, and only about 350 ml when I turned it off.  Brush twice a day, and you save 5 liters per person per day just this way!  I did not check the dishwashing, but I am sure washing a sinkfull with the tap running uses tens of liters. 

I will be posting more information like this in the future as soon as the election is over, since that is the actual focus of the blog. However, I will keep riffing on economics and politics from time to time after November...

Saturday, 4 October 2008

Palin debate painful

I managed to restrain myself from staying up until 2 am to watch the Biden-Palin debate live.  I am a junkie, but I need my sleep, too.  My wife wanted to watch it too, so I waited until the next night to watch it in its entirety.  My reaction--painful.

I thought Gwen Ifil did a great job moderating the debate, but it irritated that she didn't pursue any of her questions.  When Palin stated clearly in the beginning that she would not answer the questions asked, she was never challenged.  She would be asked about Afganistan, and she would veer off into talking about her record as Mayor of Wasilla. In fact, she seemed capable of answering any question in terms of energy independence.

At first it bothered me that Biden never challenged any of her BS points.  When she went off about there being billions of gallons of oil in Alaska, Biden hardly laid a glove on her.  She talked about oil and gas in a question about climate change, for God's sake!

However, I now think that Biden was very smart.  Much of the punditry had written and talked about the danger he was in if he came off as sexist, patronizing, or arrogant.  He surely could have skinned her and made a pencil case from her shin bone if he wanted, but that might have backfired.  Instead, he treated her with respect, never attacked her personally, and so came off like a really nice, intelligent, and honorable man (which he is).  If he had gutted her (as I kind of hoped he would), the news would have been about the personal stuff, not the substance.  So, there was no benefit to that.  

So, what the Obama-Biden ticket has now done is to take her off the radar.  We will now see and hear little about her, which is very bad for McCain.  Palin is the only thing that has brought people to his rallies and phone banks.  Her negatives are rising, and the enthusiasm of the base is waning.  Great strategic move by the dems IMO.

Thursday, 2 October 2008

History Repeating Itself

Just listened to Thom Hartmann's show from 1 October.  He had dug up NY Times articles from the days surrounding the stock market crash of 1929.  It is absolutely SPOOKY how much it is like today's events.  

  1. First, the whole thing was caused by a mortgage crisis caused by a housing bubble--in Florida
  2. It was followed by a runup of stock speculation, and people buying stocks on margin.  Everybody and their mother was in the stock market.
  3. When things started looking bad, Hoover tried to bail out the BANKS. He used money from the treasury to buy up bad assets.
  4. After the stock market crash, Hoover stated that the "fundamentals of the economy are sound," and the Rockefellers announced that they were buying lots of stock.  This caused a dead cat bounce in the market.
  5. Things got MUCH worse after that.  
  6. FDR came into office and started the New Deal, which included sensible regulation of the banking and investment industries (many of which are still protecting us today), converting 5 year balloon payment mortgages into 30 fixed rate mortgages for people in danger of default, and transaction taxes for stock transactions.
  7. Things got much better, we won a war, infrastructure was strengthened, and the middle class was built.
So now we have:

  1. A mortgage crisis caused by a housing bubble and deregulation of the mortgage industry, development of the sub-prime mortgage crisis.
  2. Stocks have run up irrationally.
  3. Now that things are getting hairy for the investment banks, Paulson wants to bail them out using $700 Billion from the Treasury.
  4. McCain and Bush say that the "fundamentals of the economy are strong."
  5. After the crash, there was a dead cat bounce, which followed Warren Buffett loaning $5 Billion to Goldman Sachs and planning to buy $6 Billion worth of GE.
It looks like the Senate has passed a modified stinker of a bailout bill, and we can expect the House to follow suit.  In my opinion, Obama has tied his dingy to Bush's sinking ship, and has sold out his first term. This may prevent him from taking the kind of bold action FDR did, even if he is so inclined.  Very disappointing.  

Is there any chance we can skip 5, 6, and 7 of the old list?  Maybe.  The bailout bill is set up to go out in stages, not all at once.   Thus, Obama can get political cover for helping usher this bill through (McCain is getting hammered for it), but can then put on the brakes after the first $350 Billion.  That is not great, but maybe not catastrophic, either.  I hope that he will also encourage Congress to repeal the draconian powers afforded to the Treasury Secretary. 

Tuesday, 30 September 2008

Some financial musings

So, the bailout bill failed and the Dow dropped 780 points.  Egads!  There are some things I would encourage people to think about:

  1. It is not all gloomy.  Notice the price of gold.  I have written previously that gold is a good refuge investment for people in this crisis.  When the markets crashed in the Great Depression, we saw a very different pattern.  The price of gold tanked in 1931, from $20.69 in 1930 to $17.06 in 1931.  What this means is that wealth was destroyed in the crash.  The fact that gold is rising DURING our current crash means that at least some of the wealth is just moving elsewhere.  That is moderately good news.
  2. Why is it that we are bailing out investment banks in the first place?  If the problem we are facing is a lack of liquidity (nobody wanting to LOAN money), then why bail out the people who BORROW money?  Goldman Sachs et al. do not loan money, they borrow it!  We should be adding liquidity to the commercial banks instead.
  3. It is interesting that every time we have one of these bailouts, it seems that Goldman Sachs is the primary beneficiary.  This was true with the Mexican bailout in 1994 when Robert Rubin was CEO of GS (GS was Mexico's investment bank), when AIG was bailed out a couple of weeks ago, and again if this bailout plan goes forward.  Is it any coincidence that Paulsen is the former CEO of GS?  Now that all of the other investment banks have been bought up by commercial banks, they are all held to reserve requirements for commercial banks.  GS is the only true investment bank left (as far as I know).  

Just sayin...

Monday, 29 September 2008

Good riddance, bad bailout

Thank God that pig of a bailout bill did not pass.  The last thing we needed was another bill passed in a panic, without careful thought, and with more attention paid to the political calculus than the economic needs of the country.  This was a bad bill because:

  1. It was funded by borrowed money, as I discussed in my last entry.  Borrowing this amount of money would have driven down the value of the dollar, thereby spiking inflation.
  2. It rewarded the people who risked our money by reducing their exposure to risk.  Fat cats who gamble on the economy should be allowed to go broke, just like the thousands of people facing bankruptcy and foreclosure.
  3. It gave unprecedented power to the Secretary of the Treasury.
  4. Though Republicans claimed the government could turn a profit on the bad debts purchased by these funds, that is clearly rubbish.  If these were good investments, chances are they would not be considered worthless today.  That is why we are in this mess.
  5. The provisions that attempted to reduce executive salaries and golden parachutes were so full of loopholes, you could drive a truck through them.  For example, it said that companies couldn't write off salaries above $500,000.  Whoop dee doo!  It also did not prevent multimillion dollar golden parachutes as long as they were part of an existing contract.
  6. Remember that the Bush administration has a history of choosing not to enforce parts of bills it doesn't like using signing statements.  So, we have no reason to trust they would uphold any of the provisions in the first place.
This is not to say that nothing should be done.  I like Thom Hartmann's idea to re-institute a transaction fee.  Until 2007, there was a 0.25% fee for stock transactions.  This was a miniscule amount for retail investors such as myself (in comparison to my brokerage fees), but was enough to curb speculation by investment banks and day traders.  It also generated enough revenue to fully fund the activities of the SEC, which used to actually ENFORCE the law.  Thus let the speculators pay for the bailout, not taxpayers who are the victims of this fiasco.

I would also support a bailout for resident mortgage holders.  People who actually live in a property could apply for some kind of refinance package on better terms than their sub-prime rates.  This would put millions of Americans back on their feet, and fuel a true recovery.  This is what FDR did after the Great Depression.

We'll see how this plays out.  I am afraid that Congress will eventually fold on this, just as they did on FISA, torture, etc.  I predict that they will pass a revised bill before the recess.  Too bad. In 1931, Herbert Hoover tried to end the Depression by bailing out the banks.  It failed, and the banks failed a year later anyway.  I predict that this will happen again.  The Bush Administration is just trying to buy a few months so that the big crash will happen after the election.  Then the Republicans will try to blame Obama....

Here is a Hoover flashback:

Sound familiar?  

Sunday, 28 September 2008

Bad idea from left field

I was sipping my first coffee this morning with bleary eyes after my son had us up at 3am due to a nasty cold, and I found an email from my cousin with an interesting idea.  The Fed had just bailed out AIG, an insurance company that insures investment risk, for $85 Billion.  The email proposed that instead of bailing out anybody (including the $700 billion for the banks this week), the government should just divide it up between all of the voting aged population, and send it out.  It is called the "We Deserve It Dividend."  

Now, the email invalidated itself right off the bat with some atrocious math.  It claimed that dividing the $85 Billion between roughly 200 million people would give each of us $425,000.  I did a little double take, but my morning brain gave it a temporary pass.  Of course, it would really be only $425.  Snopes has already put this one to bed.

Once I had gotten past the voodoo economics, I thought about it a bit.  It does have some persuasive power as an idea.  If we reject the foolishness of supply-side trickle down economics, we could conclude that the exact opposite is preferable.  "Trickle-UP" economics would contend that giving the poor and middle classes money would drive up demand, stimulate production, produce jobs, and create economic utopia.  This is why this email has gone viral, and I received it from my cousin.

The problem is that both forms of trickling are equally oversimplified and wrong.  In the case of this "dividend," or Bush's "Economic Stimulus Check" for that matter, it just can't work out long-term.  Here's why:

1) Where is the money coming from?  
China mainly.  China holds about $1.5 Trillion of our debt, and continues to be our biggest foreign customer of US Treasuries.  In return for buying our debt, they expect a modest rate of interest in return.  However, it adds up when you are talking about such large sums.  So, it is not that the US government has money bursting from its coffers, and we can just ask for it back.  Taking this dividend would indebt our children and our children's children for generations.

2) Where would it go?
What would people do with the money?  Would they go shopping, and drive up consumption as it is hoped, and drag us joyfully from ruin?  I don't think so.  First of all, any sensible person would first use the money to pay off debt.  The average American has $9800 in credit card debt, and would be foolish to do anything but pay that down first.  Then there are back mortgage and car payments to make.  So, in essence, the vast majority of the dividend would just go right back to the banks, stimulating nothing.  

3) What would people buy?
Assuming some people were in good enough financial condition, or were stupid enough to go shopping while in debt, what are they likely to buy?  Since our manufacturing base has been destroyed by Reaganomics and free trade, buying things in the US has little overall impact on the US economy.  This is especially true for consumer electronics, which are nearly universally manufactured in Asia.  Therefore, much of the benefit from consumption fueld by this dividend would end up overseas.

So, though the government sending out money would probably prove popular (or populist), it would be a very bad idea.  Many of the people who received this email probably figured that out halfway down the page.  It is my misfortune to require a two-page research paper to work through it...

Saturday, 20 September 2008

Looking into the abyss

Several months ago, I was listening to the podcast of the Thom Hartmann radio show on Air America Radio and became exceedingly anxious.  His guest was Dr. Ravi Batra, the (in)famous economist from SMU, who is known for making doom and gloom predictions, AND BEING RIGHT.  Dr. Batra was predicting that the economy was going to go to Hell in a handbasket in July or August, and made such a logical case that I started doing some research. I read two of Batra's books--Greenspan's Fraud, and The New Golden Age.

Here is an audio YouTube of the interview. Listen to the other parts, too.

I am a politics and economics junkie by nature, and already had some background in the subject, but I delved deeper into his case.  When I was finished, I called all of my friends and relatives and told them I was getting out of the stock market, and into gold, Euros, Short-term US Treasuries, FDIC- insured CDs, and inflation-adjusted bonds (TIPS).  They thought I was a bit crazy at the time, but after Black Monday they paid a bit more attention.

How did we get here?
Under the mantle of "free trade" and deregulation, the Republicans in power since the Reagan administration have been dismantling the structures, regulation and oversight that created the middle class after WW2, and kept our economy productive and wages high.  Reagan began a war on labor when he broke up the air traffic control union, and with only a slight pause under Clinton, the Dept. of Labor has served corporate interests, NOT the interests of workers.  As a result, we have seen real wages decline, tax incentives for corporations to ship jobs overseas, a decline in union membership, and the erosion of our manufacturing base.

The current mortgage and bank crisis is down to the Gramm-Leach-Bliley Act, which destroyed the firewall between commercial and investment banks set in place by the Glass-Steagall Act in 1933.  Phil Gramm (McCain's main economic advisor) also wrote the Commodity Futures Modernization Act.  This allowed banks to gamble with bank deposits, and led directly to the disasterous invention of mortgage-backed securities.  Poor oversight also allowed banks to pursue sub-prime mortgages, naked shorting of stocks, and speculation in oil commodity markets, etc.

What's happening now?
Bush's military adventures and profligate spending have turned a $200+ billion surplus under Clinton into a $800 billion deficit. The debt is now close to $9 Trillion, up $5 trillion from 2000. The bailout of investment banks is essentially mitigating the risk the fattest fat cats in the world took with our money, while doing nothing to fortify the foundation of the economy--the demand fed by a healthy working middle class.  These bailouts will come in the form of further borrowing, mainly from China and the Middle East, further driving up our debt.

The way we have recently gotten out of recessions is by lowering interest rates.  This is what Greenspan did in 1982, 1991, and 2001. That will not work this time.  Lower interest rates are designed to encourage people to borrow money to spend, thereby stimulating consumption, production, jobs, etc.  The problem now is that people are tapped out. They have little or no collateral for further debt. I read that the AVERAGE credit card debt in the US is more than $9800. They are using credit to buy food and pay off other debt. People are upside down on their mortgages, and are losing their jobs.  Without the stimulus normally caused by rate cuts, these will just lead to more inflation.

The statistics seem to show that inflation is still historically low, but that is because the Bush Administration has been monkeying around with definitions and methodology, and reducing the information fed to the public.  Here is a great article on that:

The Political angle
I believe that Bush, Paulsen, and Bernanke are now attempting to kick the can down the road.  They know that the economy is crashing down around us, and hope that they can prop it up long enough so they can blame it on the Democrats after the election.  Notice that oil prices have mysteriously dropped, just two months from the election. This despite depreciation of the dollar, two damaging Gulf hurricanes, the threat of war with Iran and Russia, sabre rattling by Hugo Chavez, and potentially devastating revelations about oil reserves in the Middle East and elsewhere (Peak Oil).

I am not convinced that they really want McCain to win.  Conservatives hate McCain, and I do not find their feigned enthusiasm for Palin convincing.  The alternative view, which I don't find persuasive, is that they think they can get richer if McCain continues the current policies.  No, I think they secretly want Obama to win this time, even though it will hurt their short-term interests.

What's coming?
I think that we are in for a real catastrophe.  I fear that this might be WORSE than the Great Depression.  Now, before you accuse me of wearing a tinfoil hat, think about this.  The conditions that lead to the Depression were VERY similar to those today.

The problem is that we do not have the manufacturing base we had in the 1930s to backstop the slide.  We also have FAR more debt, which means that we have less capacity to borrow money to fund public works
and infrastructure improvements, which were FDR's primary tools for ending the Depression last time.

My opinion is that the bailouts being discussed this week will only buy a few weeks or months, and then the doodoo is really going to hit the fan.  Consumption will drop precipitously, which will cost jobs. Lost tax revenues will kill state and local government budgets, forcing them to reduce expenditures on services like fire, police, etc.  If foreign governments decide to stop buying our debt, or if oil-producing countries start denominating oil in Euros instead of dollars, we are SCREWED.

By the way, I am not convinced that Americans will be willing to stand in long lines for jobs and soup, and live in Hoovervilles, as they did in the 1930's.  I think there will be lots more violence and crime this time.

What to do?
I am writing because I think it is important to batten down the hatches. This coming depression will probably last several years. Dr. Batra's advice is to downsize your life as much as possible.  Get out of debt as much as possible. Stay far far away from the stock market.  Buy "refuge" assets, like gold.  Buy Euro-based assets, because the EU is more fundamentally sound, and the Euro should hold up if the dollar crashes further (I own FXE--an ETF that invests in Euros).

Batra also recommended selling your house and renting before the mortgage crisis hit.  I don't know if this is still good advice, but I am not going to do it.  I think we got our house for a good price, and that our area of London was lightly touched by the bubble here.  Our interest rate is 5.24%, and we will be able to make payments as long as I keep my job and the variable rate doesn't go above 10%.

Silver linings?
If you are in a position to maintain cash during this catastrophe, you may be able to profit handsomely on the other side.  Real estate should become very cheap.  You can bet that whomever wins the election in November will try to stimulate growth by investing in infrastructure.   So, there may be buying opportunities for infrastructure companies. Better to go for the picks and shovels companies, rather than the gold mines, to borrow a CA Gold Rush
analogy.  I have some shares in Mueller Industries (MWA), which sells water pipes and valves. It seems that both McCain and Obama will invest in alternative energies, so look there as well.  Energy efficiency will also be big.

That is enough for one post. Looks like a Kos post!  There is much more to be said. If you have any persuasive arguments to the contrary, I would be happy to hear about them.  Things are pretty grim from where I am sitting, and I am feeling increasingly anxious about my ability to provide for my family.