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.