This does not equal that, almost always

When I read this blog post, I was reminded (again) of something that happened in my youth. It was well after Joe McCarthy’s heyday, but still, it seems apropos.

When I was a freshman in college and Richard Nixon was President, I took a sociology course which sought to address some of the harsh political events and divisive opinions which were tearing the country apart. (The term ended with the killings at Kent State and – less remembered, perhaps – at Jackson State.) Over the term, a number of guest speakers offered their understanding of what was really going on locally and nationally in what seemed to me at the time to be a poisonous political climate.

One guest to the class was a local police official who told us the communists had infiltrated civil rights and anti-war groups to turn them against America. A fellow classmate – an upperclassman who was less inclined than I to grant that persons in position of authority were informed – asked the speaker “What is a communist?” I protested that everyone knew the answer, but he insisted that the official tell us over my objections. And lo, it turned out the man was ignorant: “They’re not like us; they don’t believe in freedom like we do; they’re…” His explanation petered out embarrassingly. He had no idea what he was talking about. He was almost totally innocent of the subject. And yet he had earlier produced a political thesis with the utmost confidence, a thesis which depended mightily on the presence of communists to justify both itself and his world.

While there were and are plenty of reasonable responses to the excesses of the anti-war movement of the late 60s and early 70s, lazily blaming them on a communist boogieman was patently stupid. It only served to shut down any reasoned examination of the opposition's motives.

This is of a piece with the “Obama is a Muslim” meme we live with today. Muslim is the new brand to freak out about here in America. Muslim is the new communist. What a Muslim is will not be pinned down in the current political discourse. It has become an unfalsifiable predicate. This is because being a Muslim is simply being other than me and mine. It's those other guys, who are not on my team. Islam exists for some only as a negative idea, the negation of their tribe which is engaged in some sort of Manichean struggle for “victory,” whatever that term may mean.

In this way, lazy thinking leads to violence.

Making a monster

Back in 1998, two big corporations merged. Citibank joined Travelers Insurance Group in the biggest merger of financial institutions in US history. The merger was most likely illegal. After the disastrous crash of 1929 and the coming of the Great Depression, Congress enacted a law (Glass-Steagall) forbidding banks from entering into brokerage businesses. Travelers owned Salomon Smith Barney, an investment bank and brokerage firm. So the merger brought together financial interests that had been separated by law since 1933 when Glass-Steagall was enacted.

No matter. By 1999, Glass-Steagall was repealed, and the new Citigroup was safe to bungle the economy in innovative ways. An informative timeline of these and related events can be found here.

Yesterday, in testimony before the Senate Banking, Housing and Urban Affairs Committee, John Reed, who was CEO of Citibank at the time of the merger, came out in favor of reinstalling at least some of the divisions between banks and brokerages he and Sandy Weill (Travelers CEO) effectively ignored and eventually got overturned 11 years ago. It wasn't the first time Reed had made noises to that effect: last fall he wrote a brief letter to the NY Times on the topic. But Reed seems to be on something a tear this week. He granted an interview with the NY Daily News yesterday as well:

Congress’ overhaul of U.S. financial regulations should include ordering banks to hold more capital, ensuring executives’ compensation is aligned with long-term profitability and banning firms that take deposits from also engaging in equities and fixed-income trading, Reed said.

“I would compartmentalize the industry for the same reason you compartmentalize ships,” Reed said in the interview in his office on Park Avenue in New York. “If you have a leak, the leak doesn’t spread and sink the whole vessel. So generally speaking you’d have consumer banking separate from trading bonds and equity.”

It's an interesting, if too short, article. But for compression, there's nothing like this from his testimony before the Senate: “There’s no question that when we put Travelers and Citi together we created a monster.”

Reed's prepared statement to the committee is here.

Ted Kennedy

Here's a bit from an admittedly liberal blog. When he attended the funeral of murdered Israeli PM Rabin, Ted Kennedy quietly placed earth from the graves of his brothers on the grave of the slain peacemaker. His brothers were known to us all as political figures which we associated with certain ideals, but he knew them as his brothers. Blood kin. The dirt was not just dirt. It meant something, if only privately

Ted Kennedy's sins and transgressions were very public. His position of privilege got him out of some really bad situations that none of us could have hoped to escape, and these situations were largely of his own making. These facts offend the small d democrats of America. We hate class privilege. It isn't right. Well it isn't.

And yet he did accomplish some really good things in his many years in the senate. At least I think much of what he did was good. He was a major influence on the laws of our country, shaping them in ways that served to uplift and make better the lives of people who were decidedly not privileged. Here's some of what he did: Title IX (gender equality in college athletics), the ADA, race-blind immigration legislation, bilingual education, Meals on Wheels, the National Commission on the Protection of Human Subjects (in med/sci experiments), stopping military aid to the fascist Pinochet regime in Chile, education for children with disabilities, expanding the civil rights act to protect persons with disabilities, the Civil Rights for Institutionalized Persons Act, the Refugee Act of 1980 (asylum for persecuted persons), Employment Opportunities for Disabled Americans Act, the National Military Child Act, Civil Rights Act of 1991, Americorps, Health Insurance Portability and Accountability Act, voted no on war with Iraq (one of 23 senators who did so).

Most of what he accomplished, he accomplished after that evil night at Chappaquiddick when Mary Jo Kopechne died. It is as though he had begun as the callow, drunken libertine his enemies call him -- a selfish irresponsible glutton who was rich enough and Kennedy enough to buy his way out of anything with money and social connections. But then something else emerged, something with a will and a capacity to make our nation better. In working to make America better, I think, he may have also worked to make himself better.

I am fully aware that some amongst us do not share my belief that he made our country better, and that is what it is. We will certainly disagree about many other things. It was always so. But the Americorps program has had a very real and beneficial effect on some of the little towns that dot this run-down portion of NE Texas. I've seen it. And allowing people from India and China and Jordan and Mexico to immigrate legally to the US the same as people from Western Europe has truly benefited this nation. Look what's happened to our national cuisine alone. I mean jeez!

Ted Kennedy did that for us. And he came to embody a certain attitude -- love it or hate it or whatever -- which may have died with him. He stood for something. He meant something.

Add to that the fact that he was a Kennedy. He was the son of Joe Kennedy, ambassador and alleged bootlegger millionaire. He was brother to Joe, Jr who died on an Air Corps mission in WWII, and brother to Jack who skippered PT 109 and survived to become a senator and later President of a Camelot White House before his murder. He was brother to Robert, murdered on the night of his triumphal victory in the 1968 California primary -- that terrible year of political murders. He was their blood kin, of their generation. My parents' generation.

And it passed with him.

I recall the November day in 1963 when John Kennedy as killed. We lived in a Dallas suburb at the time. I remember my mother sobbing on her bed. I remember not knowing what to do because I was still just a boy. And now the question arises. Why did she cry? She didn't know him. He was unrelated to her. He was a stranger. He was a glamorous, powerful man with a glamorous wife who lived a life so disconnected from the suburban reality of my mother's existence that they may as well have been separated by an ocean. But she sobbed that November afternoon for what had happened to him. And for what had happened to us. He meant something to us.

I once wrote a review of a show of Warhol's Jackie paintings which was presented in the building Lee Harvey Oswald used for his sniper's perch that awful day. My editor cut a line I'd written about our all being widowed after the killing of our President. But it was the memory of my mother sobbing that led me to write it. How can you explain that to an editor?

When Jackie died years later my mother bought a ticket to Europe. She had to get away even though she was retired and not flush with disposable cash. "That woman was too young to die" she explained. Jackie meant something. True or false, she meant something.

Ted wasn't John. Everybody knows that. He wasn't Bobby either. But he was ours. He was a Kennedy. And he was the last of them.

Dear Senators Sessions, Coburn, Graham, Hatch and Cornyn

Being. White. Is. Not. Neutral.

Sincerely,

Mike

Fog and death

Robert McNamara is dead. I hated him once. While he was Secretary of Defense, 16,000 American servicemen and women died in a terrible, purposeless war. Another 42,000 Americans would die before it was all over. Somebody knows how many Vietnamese people died in that war, but I don't.

John Kennedy called him the smartest man he ever met. A master of systems analysis, McNamara crunched numbers both from the Pentagon's organization and from the bloody data he got from Southeast Asia to figure the smartest solutions to problems posed by both. I'm reminded of the finance systems modelers whose far-too-smart "products" precipitated the current recession. Apparently he came to agree with this assessment:

“War is so complex it’s beyond the ability of the human mind to comprehend,” Mr. McNamara concluded. “Our judgment, our understanding, are not adequate. And we kill people unnecessarily.”

If you haven't seen the documentary The Fog of War, see it soon. Here's an excerpt:

Corporate profits and truth telling

Boing Boing contributor Cory Doctorow posted yesterday that the ways US companies choose to express their earnings has hidden an alarming decline in real profitability over the past 43 years. The source is the Deloitte Center for the Edge (via Jon Taplin's blog). A telling chart from the Deloitte report is reproduced above.

The Deloitte report is long on technical details about trends in worker productivity, mergers and acquisitions, rates of corporate taxation, and other macro trends in the US economy, but Taplin's point is about the differences between profitability considered as a return on assets (ROA) and profitability expressed as a return on equity (ROE). Quoting Investopedia, Taplin describes ROE as the classic Wall Street measure of profitability. Basically, it's the ratio of net income to shareholders equity:

Let's calculate ROE for the automotive giant General Motors for 2003. To get the necessary data, go to the GM's Investor Information website and look for the 2003 Annual Report. You'll see on GM's 2003 Income Statement that its net income totaled $3.822 billion. On GM's 2003 Balance Sheet, you'll find total stockholder equity for 2003 was $25.268bn and in 2002 it was $6.814bn.

To calculate ROE, average shareholders' equity for 2003 and 2002 ($25.268bn + $6.814bn / 2 = $16.041 bn), and divide net income for 2003 ($3.822bn) by that average. You will arrive at a return on equity of 0.23, or 23%. This tells us that in 2003 GM generated a 23% profit on every dollar invested by shareholders.

Many professional investors look for a ROE of at least 15%. So, by that standard alone, GM managements' ability to squeeze profits from shareholders' money appears rather impressive.

ROA, on the other hand is the ratio of net profits to all the assets the company owns -- factories, machinery, office furniture, money in the bank, etc.

Now, let's turn to return on assets, which, offering a different take on management's effectiveness, reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture. ROA is calculated like this:

Return on Assets = (Annual Net Income/Total Assets)

Let's look at GM again. You already know that it earned $3.822bn in 2003, and you can find total assets on the balance sheet. In 2003, GM's total assets amounted to $448.507bn. GM's net income divided by total assets gives a return on assets of 0.0085, or 0.85%. This tells us that in 2003 GM earned less than 1% profit on the resources it owned.

This is an extremely low number. In other words, GM's ROA tells a very different story about the company's performance than its ROE. Few professional money managers will consider stocks with an ROA of less than 5%.

(Block quotes from Investopedia.)

The difference is debt. In GM's case, large debt obligations reduced the equity value of the company and so made the profit numbers look quite good when expressed as a percentage of equity.

The chart above is an examination of all US companies' profitability expressed as a percentage of assets over the past 43 years, and it's a horrible picture indeed. Talk about a crisis in capitalism.

We all know he's ridiculous

But just how ridiculous is he? Consider this a challenge. I know you all can do better than I did.

Tehran art, Tehran courage

At least one pro-democracy activist in Tehran is putting up some very witty pictures around the city during the current civil unrest (to put a polite face on thuggish government agents beating students in the streets). The one above with the curious face card beastie obscuring Ahmadinejad's face on a political poster is typical. More pictures here. (via Andrew Sullivan)

Some of the protesters are very brave, particularly the Twitter posters who worked the past few days under the collective name of persiankiwi. I've been following them off and on for two days as they tell of danger and violence. A few of their tweets from today:

Militia still attacking people in sidestreets but main roads are peaceful marchers.

reliable soure from Ahvaz. Situation there is bad - violent clashes in streets.

confirmed - there is shooting in Azadi sq. protesters wounded and shot, no numbers yet, still hearing gunfire.

people are running in streets outside. There is panic in streets.people going ino houses to hide.

Baseej shooting in Azadi sq - army standing by and watching for now.

streets very dangerous now. groups of militia on motorbikes searching for protesters.

3 ppl from our group still not returned from march. no mobile contact. last phone contact 2 hours ago.

confirmed - khamenaie website hacked - the dictator of iran.

we honour and thank the people of Iran and especially the hackers. Baseej have guns we have brains.

tonight Kamenei will fight hard - he knows he is close to finish.

cnfirmed - karbaschi and karoubi heading to Tajreesh sq tonight at 11pm - now after 10pm

Tajreesh is close to Jamaran where Khamenei live. maybe marching to his house. unconfirmed

we are going offline to get a phone free for calling out. we are also moving location - too long here - is dangerous.

were attacked in streets by mob on motorbikes with batons - firing guns into air - streetfires all over town - roads closed;

3 of our group missing from afternoon - we have no news from them;

confirmed - homeowners in Rasht are giving refuge to people running from Baseej attacks.

Gohardasht in Karaj - confirmed - people in street batles with militia -

most activity is in north - Gheytarieh, Pasdaran, Gholhak and Niavaran still busy and noisy -

more than 100 students missing from Tehran Uni dorms - reports of several dead from last night

thanks to all people following us and trusting us. we are trying to give you correct info -

it is very hard here - we are under big pressure and risk - we are being tracked on twitter -

we are all tired - no sleep for 3 days - one of us is injured from baton - waiting for doctor

we only want freedom - we are peaceful - we have no life no future in IRI without freedom -

one of us is injured and we have doctor - we cannot go to hospital now as plainclothes are at all hospitals

we are routed thru mirror proxies - but service is unreliable - keeps cuting out - have to switch off lights now

our street is quiet now - we cannot move tonight but must move asap when dawn starts

All normal proxys out - all normal ISP's out in Tehran

reliable source - many arrested taken to Evin in past 24hrs - evin under heavy protectionwe must log off - will update asap - sources pls keep info coming - we thank u and will not print your id's - u know who u are

The dumb picture I had up in my profile changed to a green rectangle tonight. That's the color of the opposition, the color of that swatch covering Ahmadinejad in the pictur at the top.

I said it before, and I'll say it again

David Brooks is stupid. Slope headed, knuckle dragging, pissant waltzing stupid. His -- cough -- opinion piece in the NY Times today exhibits the kind of corporatist elitism and disdain for the values of ordinary Americans that only a guy who lunches with Wall Street honchos would champion. Exhibit A:

Recently we were uplifted when the president informed Chrysler’s secured creditors that they had agreed to donate their ownership stake in the company to the United Auto Workers.

Did this in fact happen? Well, no, not exactly. Setting aside the elision of secured credit and any putative ownership stake (the guys who got short shrift owned Chrysler debt, not equity -- bonds, not shares), there's the issue of what the UAW gave up: 50% of its retirees' health care fund in exchange for their equity stake in the company. Nobody gave them dick. They bought what they own. With their money.

Meanwhile, guys at hedge funds like Schultze Asset Management and Stairway Capital Management, who wouldn't agree to terms reducing their take in the Chrysler meltdown, put their interests ahead of what is best for the company and for the country. One line of reasoning was that the company was worth more as scrap than they'd get from the settlement they were offered. So let tens of thousands of Americans lose their jobs and hold a Chrysler garage sale. After it's all about maximizing investor returns, right?

Bloomberg reported on May 6:

The Chrysler Non-TARP Lenders are as follows, according to the filing: Schultze Master Fund Ltd. of Purchase, New York; Arrow Distressed Securities Fund at the same Purchase address; Schultze Apex Master Fund, at the same address; Uniondale, New York-based Stairway Capital Management II L.P; Group G Partners LP, based in New York; GGCP Sequoia L.P., at the same New York address; Oppenheimer Senior Floating Rate Fund, in New York; Oppenheimer Master Loan Fund LLC, at the same New York address; and Foxhill Opportunity Master Fund LP, based in Princeton, New Jersey.

Note that one of their number identifies itself as a "distressed securities fund." They specialize in risky debt. If they bought Chrysler bonds at face value, they plain aren't doing their job. Folks like that buy stuff at a discount. If any other members of that august group paid more than 50 cents on the dollar for the debt they held, I'd be mighty surprised. And yet they refused to settle for less. (The Feds offered 28 cents on the dollar for securities trading between 27 and 28 cents on the buck at the time of the offer, according to Bloomberg, that hotbed of Socialist, Stalinist, Batshit-Maoist ideology)

But I digress. The topic is how abysmally dumb David Brooks is. Consider this from his -- erm -- column today:

These events have heralded a new era of partnership between the White House and private companies, one that calls to mind the wonderful partnership Germany formed with France and the Low Countries at the start of World War II.

And this:

During the press conference with health care executives, I don’t even think Obama meant to give away $2 trillion of their money. He was going to give away just $750 billion, but he got carried away by the Era of Responsibility. “The stakeholders behind me have promised to cut costs by nearly 2 percent a year,” the president riffed. (The executives’ lips were like dead worms stretched across mirthless smiles. Their cheeks were like hardened clumps of concrete.) “They have agreed to support the administration’s reform package.” (Coronaries, epileptic seizures all around.) “They have agreed to donate their kidneys in my office right after this ceremony.” (The executives were now flopping about the stage, like a 3-D version of the Heimlich poster.)

Har har! German aggression! Donate their kidneys! What a wag!

You know what else is like hardened lumps of concrete? Both hemispheres of David Brooks' brain. In 2004, US spending on health care totaled over 15% of GDP. Think it's gone down since then? Big Pharma is doing just fine, even without two percent of its take. This is from Paul Krugman's blog last year:

Everybody knows that the US spends much more on health care than anyone else, without getting better results. Everyone also knows that health spending has outpaced GDP growth everywhere, thanks to medical progress. What I didn’t realize was just how clearly the evidence shows that the rising trend is steepest in the US. We have the biggest increase as well as the highest level.

He was responding to data that showed health care spending's share of GDP jumping from 7% in 1970 to 15.3% in 2004. During the same period, costs in Canada rose from 7% to almost 10%. Last year, the GDP of the US was about $14 trillion; 15.3% of that comes in at $1.989 trillion. Now Big Pharma isn't the whole pie, but when it comes to health care bucks, they certainly get their share. And that share is growing like a tumor.

And yet (back to my David Brooks is stupid theme) the Times's minister of dumbassery speaks of "enhanced negotiating techniques," disembowelment, shackles, Nazism, North Korea's totalitarian state, and Cossacks. The metaphors of violence multiply and surround his (as it were) argument. Eventually they become his entire case.

Brooks can use metaphors of violent coercion. That is what he has to say on the subject of economic policy.



Hey Ho Let's go! Shoot 'em in the back now.

Nevermind the ceiling, watch out for the bottom

Paul Krugman:

I think there are two big structural changes that we'd want to see. One is we need to reduce the role of the financial sector in the economy. We went from an economy in which about 4 percent of GDP came from the financial sector to an economy in which 8 percent of GDP come from the financial sector, and in which at its peak 41 percent of profits were being earned by the financial sector. And there is no reason to believe that anything productive happened as a result of all of that. These extremely highly compensated bankers were essentially just finding new ways to offload risks on to other people.

As I've written, we need a boring banking sector again. All of this high finance has turned out to be just destructive, and that's partly a matter of regulation. But in the political economy there was also a vicious circle. Because as the financial sector got increasingly bloated its political clout also grew. So, in fact, deregulation bred bloated finance, which bred more deregulation, which bred this monster that ate the world economy.

The other thing not to miss is the importance of a strong social safety net. By most accounts, most projections say that the European Union is going to have a somewhat deeper recession this year than the United States. So in terms of macromanagement, they're actually doing a poor job, and there are various reasons for that: the European Central Bank is too conservative, Europeans have been too slow to do fiscal stimulus. But the human suffering is going to be much greater on this side of the Atlantic because Europeans don't lose their health care when they lose their jobs. They don't find themselves with essentially no support once their trivial unemployment check has fallen off. We have nothing underneath. When Americans lose their jobs, they fall into the abyss. That does not happen in other advanced countries, it does not happen, I want to say, in civilized countries.

And there are people who say we should not be worrying about things like universal health care in the crisis, we need to solve the crisis. But this is exactly the time when the importance of having a decent social safety net is driven home to everybody, which makes it a very good time to actually move ahead on these other things.

A financial sector that generates 41% of all the nation's GDP, but fails to do anything productive is not a working system of finance. It is a fraud.

More here. (Via Ritholtz)

Where did those pig lips get off to?

There they are! I need them for Congressman Pete (I used to be district manager for marketing at Southwestern Bell so I'm an expert on economic realities) Sessions from Dallas. The Dallas Morning News reports Pistol Pete flapping his yap today:

Sessions told The New York Times that the administration intends to “diminish employment and diminish stock prices” as part of a “divide and conquer” strategy.

And he asserted that the Obama agenda is “intended to inflict damage and hardship on the free enterprise system, if not to kill it.”

Precisely how a nefarious divide-and-conquer strategy will arise from staggering unemployment numbers and slumping equity values I don't know. Just why an administration with Obama's very high approval ratings would want to divide and conquer anybody I don't know either. Nor can I know the congressman's ability to divine the President's intentions to undermine capitalism, given all the gigabucks he and his have poured into our ailing financial institutions in an effort to save capitalism.

Moreover, blaming current employment numbers and stock prices on an administration which has been in power for less than four months is patently bad faith partisan posturing in a recession that's a year older than that. Below is a screen grab of a chart for the S&P 500 during the previous administration.


Note the precipitous decline at the end of 2008. That stomach-churning drop at the right begins in September, when Bushman Hank Paulson let Lehman fail. And it is most important to remember that in the several years before that fall as much as 40% of all profits reported by US corporations came from financial institutions, companies whose earnings statements we now know involved magical thinking about the valuations of the derivatives like CDOs, CMOs, and CDSs they had on their books. This made their stock valuations a fraud and unreasonably inflated the whole index. That boom in '06 and '07 was made of air. Talk about inflicting damage on the free enterprise system.

So I just visited Pistol Pete's Web site and left him a message about his utter ignorance. I doubt he'll read it, but I had to say something.

The pig lips I reserved for my blog.

Competing narratives about the recession

A guest post on the Baseline Scenario blog by "StatsGuy" offers a reasoned, thoughtful and well researched take (or rather several takes) on what led to the financial collapse. The essay looks at the concept of "too big to fail" in the financial world as it relates to systemic risk, the decline of the US middle class, and irrational exuberance as causes (either necessary or sufficient) for the Big Bust. Discussing the causes of the debacle is important to deciding what to do about it, of course. And the gist here is that getting all TR on the oligarchs of Wall Street -- worthy as the cause may be -- probably should be a lower priority at present. Along the way, the essay links to numerous informative publications, including this exhaustive timeline of political decisions that led up to our current mess.

Unlike most blogs, the readers' comments at Baseline Scenario are often as good as the articles themselves. I recommend reading the whole shebang.

On a related note, William Black's 2005 book The Best Way to Rob a Bank is to Own One probably should be on my reading list.

Perhaps unrelated:



Some will rob you with a six gun and some with a fountain pen...

Torture and found lyrics

The artist is Jonathan Mann. His Web site is here. I labeled this "politics" only because some people want it to be political. It isn't. It's a matter of justice.

Via Andrew Sullivan.

Outrage

This video is rather long, but I think it's worth watching:




BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?

WILLIAM K. BLACK: Right.

BILL MOYERS: It was relatively a handful of people.

WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.

BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?

WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."

Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.

So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.

Taleb: one guy's prescription

From yesterday's Financial Times, ten principles to limit risk:

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail. Evolution in economic life helps those with the maximum amount of hidden risks – and hence the most fragile – become the biggest.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing. We have managed to combine the worst of capitalism and socialism. In France in the 1980s, the socialists took over the banks. In the US in the 2000s, the banks took over the government. This is surreal.

I find it interesting that so many commenters on the banking mess are saying the same things about the bailout. The pollution of the political process by banks, bankers, financiers, and fellow travelers is just plain wrong.

Update: Simon Johnson discusses turnaround scenarios here. Among his observations, this one stood out for me:

To me, fixing the banks - i.e., greatly reducing their economic and political power - is essential for all our futures, irrespective of when and how the economy recovers. We cannot allow the same kind of potentially system-breaking risks to be taken again, and we cannot assume that the solutions that failed in the past (e.g., tweaking regulatory powers) will work in the future. Next time, the banks won’t just be Too Big To Fail, they’ll be Too Big To Rescue - the fiscal costs if we let this happen again would likely be huge; where is it written that the U.S. will for all time have fiscal credibility and provide the world’s leading reserve currency?

It's come to this: Too Big To Fail is Too Big To Exist.

Oligarchs III

Oligarchs II

Not long ago I wrote here about the oligarchy the financial industry has become, concentrating wealth and political power in the hands of a few "Masters of the Universe" whose opinions about bailouts, regulations, and the wisdom of our financial system have all but become dogma for policymakers and the rest of us. Let me add to that this bit of information: the director of the Obama Administration's National Economic Council, Lawrence Summers receive more than $6 million as a managing director of New York Based hedge fund D.E. Shaw and Co. over the past 16 month, according to Bloomberg.

Now Larry advises Barry, and Barry (being the newest decider) makes the policy. But Barry's adviser Larry got $6 extra large from a big Wall Street player quite recently.

When Thailand, Malaysia, and Indonesia seized up economically speaking a bit over ten years ago, word got out here in the US that a large part of their problem had to do with crony capitalism -- a distorted credit market arising from an unholy comingling of finance and governmental power. Reading news reports at the time, we were led to feel superior to such undeveloped nations. America isn't like that.

Are we?

Populist outrage and oligarchs

One reason populist outrage over the excessive bonuses at AIG and elsewhere in the financial industry doesn't miss the point is discussed in an excellent Atlantic article by Simon Johnson and James Kwak. Johnson was the chief economist at the International Monetary Fund in 2007 and 2008. He's currently a professor at the Sloan School of Management at MIT. His experience with IMF bailouts of faltering economies gives him a perspective on the crisis in the US economy which is not shared by many of the people working to solve our problems in Washington and on Wall Street.

He sees what's happening here to have much in common with the collapse of the Malaysian economy in 1998 and other emerging market economic crises: It's a case of oligarchs manipulating the government to maintain wealth and power. However, unlike the methods of corrupt crony capitalism in emerging economies (bribery, political graft, extortion, etc.), what the US has is an ideological predisposition to follow the big players' lead in matters financial, even when they are precisely the ones who have conjured the current fubar situation.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

The argument continues by looking at who the big players in government are (and were) -- Geithner, Rubin, Snow, Paulson, Greenspan, et al. -- and how they are and were intimately connected with major financial institutions, particularly Goldman Sachs. The political/governmental decision makers are one and the same as the financial guys. Furthermore, their worldview has become just plain common sense among so many politicians and policy wonks. Thinking like a megacapitalist is just the way you think in the halls of power.

I'm reminded of Louis Althusser and his ideological state apparatus.


Meanwhile the money keeps piling up around the financial services people and their companies as more and fancier financial products are developed, making more and fancier ways to make more and (presumably) fancier dollars. (image from the Atlantic)

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

Keep in mind the capitalist rationale for having a financial sector in the first place: The bankers and brokers provide an essential service to the economy by aggregating savings and lending to business both so that goods and services can flow efficiently through the market and so that innovations and start ups can find necessary funding. For this the banks and brokerages deserve a profit (it is argued), and for this their employees and executives deserve a good wage. In recent years, however, wealth has been concentrated in the financial sector itself where it has flowed and eddied and swirled in a gyre of more wealth and (I'd argue) where it has created nothing but wealthy people. Well, according to Simon Johnson, it also created a worldview in which financiers could do no wrong and the rest of us were just too ignorant and innocent of economic realities to have anything worthwhile to say in economic policy discussions.

While it is true that the ginormous bonuses assorted AIG players received are only a tiny fraction of the many billions we taxpayers have so far poured into the company's ravenous maw, our outrage -- our populism in the face of a huge payday for the people who blew our economy to bits -- is exactly the right response. A populist pushback against the evident groupthink in Washington and on wall Street would be a healthy thing, indeed.

One pissed dude

Matt Taibbi is mad as hell. From his Rolling Stone article:

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That's $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG's 2008 losses).

But the major story for him is the transfer of power to the moneyed class. The transfer of cash is only a symptom of a political system purchased wholesale by oligarchs on Wall Street. The whole article is a wonderful, infuriating rant against a regulation-free financial system set up to make money and only money and nothing else but money.

AIG has pig lips

A big batch of lips goes to our national insurance company for their bonus policy. We give them money, they give it to foreign banks and to each other. They handed out bonuses to selected employees totaling $165 million AFTER getting bailed out with taxpayer money. From the New York Times:

[NY Attorney General, Andrew] Cuomo did not name the bonus recipients, but the numbers are eye-popping, given A.I.G.’s fragile state. The highest bonus was $6.4 million, and six other employees received more than $4 million, according to Mr. Cuomo. Fifteen other people received bonuses of more than $2 million, and 51 people received bonuses of $1 million to $2 million, Mr. Cuomo said. Eleven of those who received “retention” bonuses of $1 million or more are no longer working at A.I.G., including one who received $4.6 million, he said.

A.I.G., which is now 80 percent owned by the government, paid out the so-called retention payments, saying the bonuses were needed to persuade workers to remain at its financial products unit. But the payouts have caused a public furor, and the White House said on Monday that the Treasury would write new requirements about the bonus money in the next $30 billion that it provides to the insurance giant. Already, the government has given A.I.G. $170 billion.

An amazing 73 bonuses of $1 million or more went to people in the financial products unit, the outfit that ruined the company with its penchant for selling those nifty credit default swaps. And Bloomberg reports even stranger news: AIG "budgeted $57 million in “retention” pay for employees who will be dismissed."

Pig Lips!

Or maybe they'd prefer pitchforks?

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