He found something antipathetic about the English lately. England was like a rich man after a disastrous orgy who makes up to the household by chatting with them individually, when it is obvious to them that he is only trying to get back his self-respect in order to usurp his former power.Which in turn suggests an interpretation of where the current crisis is putting the United States, in terms of imperial decline -- in some place analogous to where the European Great Powers found themselves after the war: bankrupt both financially and morally, but not yet at the point where another power is ready to formally replace them as the hegemonic center.
Sunday, March 29, 2009
Friday, March 27, 2009
The failure to do so shows how profoundly corrupt our political system is -- indeed, perhaps fatally corrupt.
Wednesday, March 25, 2009
- Theodore Roosevelt, August 1907, commenting on bankers' responsibilities for the Panic of 1907
Tuesday, March 24, 2009
The game of chicken that the American oligarchs are playing with the Obama administration is to say: "The only way we're going to stop looting the system is if you engage in forcible mass repression of capitalism (e.g. pay caps across all exec compensation, confiscatory taxation of the wealthy, etc.), which we're betting you don't have the brains, balls, or political capital to do."
The state is now being asked not just to call off its regulators or give tax breaks or funnel a few contracts to connected companies; it is intervening directly in the economy, for the sole purpose of preserving the influence of the megafirms. In essence, Paulson used the bailout to transform the government into a giant bureaucracy of entitled assholedom, one that would socialize "toxic" risks but keep both the profits and the management of the bailed-out firms in private hands. Moreover, this whole process would be done in secret, away from the prying eyes of NASCAR dads, broke-ass liberals who read translations of French novels, subprime mortgage holders and other such financial losers....
As complex as all the finances are, the politics aren't hard to follow. By creating an urgent crisis that can only be solved by those fluent in a language too complex for ordinary people to understand, the Wall Street crowd has turned the vast majority of Americans into non-participants in their own political future. There is a reason it used to be a crime in the Confederate states to teach a slave to read: Literacy is power. In the age of the CDS and CDO, most of us are financial illiterates. By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below....
These people were never about anything except turning money into money, in order to get more money; valueswise they're on par with crack addicts, or obsessive sexual deviants who burgle homes to steal panties. Yet these are the people in whose hands our entire political future now rests.
Monday, March 23, 2009
Friday, March 20, 2009
We have moved far beyond financial policy and into the kind of scandal that really gets taxpayers’ backs up. The greed of bankers slaps you in the face while the hubris of their leadership remains unchecked.Maybe we are finally witnessing the undoing of what John Robb acutely characterized as "an utterly complete cognitive regulatory capture of the US government" by the finance sector.
There is no sense of responsibility, no feeling of shame, no acknowledgment of any kind of mistake: read Lloyd Blankfein’s FT article again - or print it out and tape it to your wall. Because we now know, from the newly disclosed AIG counterparties list, that the wealth of Goldman Sachs insiders remains high solely because we saved their sorry bank, their failed risk management strategy, and their pretence of wisdom with our cash in mid-September.
This resentment against bankers pervades Congress, and even the Administration begins to get the message - being called "asinine" yesterday by Richard Kovacevich, the Chairman of Wells Fargo, may have helped underline to Treasury how deeply the bankers appreciate the help they have received. There can be no resolution and no moving on until there has been a proper congressional investigation, with full subpoena powers, into exactly what did and did not happen around AIG. This will take months and may well slow down the economy (Jamie Dimon’s clever point: if you vilify us, you will lose), but it is now inescapable. And, if channeled productively, this kind of hearing may lead to a better regulatory system (and smaller big banks) than the current anemic proposals on the table - as last weekend indicated, the G20 process is currently worse than useless on this issue.
For decades, the wealthy have been held up as people to be admired, victors in the Darwinian economic struggle by virtue of their personal ingenuity and hard work.As Michael Ledeen likes to say, Faster Please!
Americans consistently supported fiscal policies that undermined middle- and working-class interests partially because they saw themselves as rich-people-in-waiting: Given time, toil and the magic of compound interest, anyone could retire a millionaire.
That mind-set has all but been eradicated by the damage sustained by the average worker's nest egg, combined with the spectacle of bankers and financial engineers maintaining their lifestyles with multimillion-dollar bonuses while the submerged 99% struggle for oxygen.
(The price of admission to the top 1% income-earning club last year was roughly $400,000.) That may account for the near-total absence of public outcry over President Obama's proposal to raise tax rates on the wealthiest Americans -- except of course from the wealthiest Americans.
The shift in sentiment should surprise no one. As the management sage Peter Drucker once predicted, "In the next economic downturn there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions. In every major economic downturn in U.S. history the 'villains' have been the 'heroes' during the preceding boom." Drucker was speaking in 1997, two downturns ago.
There's a social value in suppressing income inequality. In a country with only a slightly less ingrained tradition of civility than the United States, the AIG affair would provoke rioting in the streets.
"We live in a country with tranquillity and good feelings toward each other, and that's precious," says Robert Shiller, a Yale University economist and coauthor of Animal Spirits, a new book about the psychology of economics. In the current crisis, "there's anger and a sense of injustice taking hold, and it's not in the interest of wealthy people -- you don't want people on the poor side of town to be angry with you."
Thanks to the financial crisis... the claim of the rich to play an indispensable role in the American economy will be treated with more skepticism than in the recent past, and their ability to preserve their loopholes and other advantages in the tax code will diminish
Will the economy suffer as a result? The experiment is about to begin.
Update: Simon Johnson and James Kwak point out that retaining all those employees who made the messes probably isn't a good idea, anyway. Money:
When insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. A.I.G. does not need to keep all of its traders, especially since it takes far fewer people to unwind a portfolio than to build it up.
Thursday, March 19, 2009
The first is that I think part of what’s happening here is a corollary to Hitler's famous thesis about the role of "Big Lies" in politics (something Small Precautions has commented on in other contexts, as well). What Hitler acutely observed was this:
The magnitude of a lie always contains a certain factor of credibility, since the great masses of the people in the very bottom of their hearts tend to be corrupted rather than consciously and purposely evil, and that, therefore, in view of the primitive simplicity of their minds they more easily fall a victim to a big lie than to a little one, since they themselves lie in little things, but would be ashamed of lies that were too big.
By contrast, using taxpayer money to pay the executives bonuses at a failed company seems like mere everyday corruption, petty and small. Instead of a sign of the government's awesome power, it is a sign of the Obama administration's weakness and impotence, a point underscored by AIG's message to Geithner that heand the taxpayers could basically drop dead.
My second thought about the anger about the bonuses is that what's really in play here is not just anger at taxpayer money funding executive bonuses, but a deeper resentment about executive excess in general. Whereas the bailout money could be justified as a necessary payout to prevent the sucker from going down, and thus as having some positive social benefits despite its hideous price, it's almost impossible pettyfogging to try to justify AIG executive bonuses as being somehow about protecting the system. What's more, the claim that those bonuses are a necessary part of the system (which is the basic argument for why the bonuses need to be paid), then it seems to underline the essential corruption of that system.
And therein lies the real danger for the GOP's Richistan constituency: that one of the longer-term outcomes of the economic crisis is a cultural shift away from tolerance for the excesses of the corporate elite. Long-term economic downturns, particularly ones that seem directly linked to the excesses of the rich, usually do produce "Soak the Rich" demands.
After yesterday's announcement that the Fed will be printing another trillion dollars, however, it occurred to me that the right way to envision Bernanke's use of the helicopter is not as a kindly humanitarian drop of necessary resources on suffering refugees, but rather something more like this:
Snark aside, isn't a U.S. hyperinflation rapidly becoming an inevitable surprise?
Tuesday, March 17, 2009
Monday, March 16, 2009
The problem with American foreign policy goes beyond George Bush. It includes a Washington establishment that has gotten comfortable with the exercise of American hegemony and treats compromise as treason and negotiations as appeasement. Other countries can have no legitimate interests of their own—Russian demands are by definition unacceptable. The only way to deal with countries is by issuing a series of maximalist demands. This is not foreign policy; it's imperial policy. And it isn't likely to work in today's world.Who cares if it works, though, if it makes you feel morally righteous?
Sunday, March 15, 2009
Saturday, March 14, 2009
The Washington Post, taking another step toward trimming the size of its newspaper, is folding its stand-alone Business section into the A section six days a week and drastically reducing the publication of stock tables...Columnists such as Steven Pearlstein and Joe Davidson will be moved..."What we're doing is eliminating things that readers can easily get elsewhere, where we don't necessarily bring value," Brauchli said.While the New York Times reports:
But in a change from previous downturns, CNBC is now a place for politics, to borrow a phrase from its sister channel MSNBC. The network’s journalists have been encouraged to speak their minds, making the line between reporter and commentator almost indistinguishable at times.Leading Nancy from Texas to opine:
"Get rid of the entertainment aspect and give us the news. Opinions and banter make me turn off the TV."Nancy is lying. I keep going back to Stewart Brand:
Information Wants To Be Free. Information also wants to be expensive. Information wants to be free because it has become so cheap to distribute, copy, and recombine---too cheap to meter. It wants to be expensive because it can be immeasurably valuable to the recipient.While the value may truly be immeasurable:
There’s also the not-inconsiderable question of capitalism’s ability to decide, if not on the value of a commodity, at least on some sort of price for the damn thing.Content is ubiquitous, commands almost no price, but nonetheless has a cost. To increase their returns the traditional media are shifting to context - bringing value in the words of the WaPo. But they are fighting the last war; context is also nearly ubiquitous, and since little of it is clever the price will bifurcate. To high-end prostitution:
Unlike most industries, escorts can charge higher prices when they are in greater supply. This is because price is one of the few metrics sex suppliers can use to convey quality. (In this way it is not unlike the hedge-fund industry.) The customer demographic is also wealthier, and a higher price deters customers from bargaining, which is considered poor taste.
The traditional media will never be able to compete on cachet and thus will have to be increasingly shrill and polarized to attract even a non-paying niche. On the high-end side a succession of saviors will continue to bilk the rich, both the new and the inbred. And all of this sound and fury will accomplish nothing, as Megan McArdle reminds us anyone who has:
"a good way to make money above and beyond broad, boring strategies like stock indices or bond funds, will not tell you about it."
Thursday, March 12, 2009
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.However, on further reflection about the political wisdom of insisting on transparency, I've become a little more ambivalent. On the strict merits, transparency is obviously a good thing, and I continue to support it.
News and banks analysts' reports suggested that Goldman Sachs (nyse: GS - news - people ) got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
But what I've also realized is that the political reaction to the revelation of the counterparty beneficiaries might not be the one that I might wish. Specifically, while there would undoubtedly be some left-populist outrage at the hedge fund plutocrats who are getting their taxpayer-funded checks from AIG, there would also likely be right-populist outrage at the foreign banks that are also inevitably getting some of this money. And that's a disconcerting prospect, since the one thing that would turn the current crisis from merely a possible Depression into a certain one, would be a series of jingo-inspired attempts to attack foreigners, including foreign banks, investors, and producers. Competitive nationalist financial reactions would really recapitulate the spiraling political economy of the 1930s.
The unfortunate fact of the current situation is that we must all hang together, or we will surely all hang separately.
Tuesday, March 10, 2009
If you've got a big insolvent bank and you need to make up a big hole on the balance sheet you've got, broadly speaking, four groups of people you can get the money from, or put a different way, who can take the hit: shareholders, depositors, bondholders and taxpayers.
Now, for most of these banks the stock price has essentially fallen to zero. So they're pretty much already wiped out. Not much to be accomplished there, although those folks want to hold on to their equity in the hopes that they may recover on the upside. Then you have the depositors. But in FDIC insured accounts, they've got a federal guarantee up to $250,000. And presumably those with really big sums on deposit have been proactive enough to spread their money around several institutions. So not much luck there either.
Which leaves you with bondholders (the companies creditors rather owners) and taxpayers. Now, on the one hand, this sounds like a no-brainer. If you lend money to a company that goes bankrupt, that's tough luck. Maybe you recover a percentage on the dollar of what you were owed. But too bad. Why taxpayers should cover those loses is really hard to answer. But let's try it.
The counter-argument is that if bondholders, especially the most 'senior creditors', take a big hit it, will create a big shock to the financial system worldwide, making bond-investing money extremely risk-averse for a long time and making the credit markets seize up again on far worse a scale than happened last fall in the wake of the Lehman bankruptcy.
A second issue is that a lot of these bondholders are other financial institutions, so you create a cascade of failure.
I am almost certain that many of the counterparties to AIG's credit default swaps, and thus the ultimate recipients of bailout expenditures, are hedge funds. There is no way to be sure because the information is confidential to AIG and the government has not forced public disclosure of those parties. Why am I so sure? Because 1) AIG was only one of a handful of entities that sold this type of protection and 2) the vast majority of protection buyers did not actually hold the underlying debt, but were instead making "naked" short trades betting that the paper would default, in other words, exactly the kind of trades hedge funds would make.In sum, taxpayer dollars are going, in large measure, to protect the profits (or at any rate staunch the losses) of hedge funds--organizations run for the wealthy by the superwealthy. The urge to go grab a pitchfork when you realize this becomes almost unbearable. It's hard to escape the conclusion that it turns out that the old socialists were right when they claimed that the main point of the state is to protect the property interests of the bourgeoisie.
If this is true, then bailout money is not being spent to shore up core capital ratios of our most important lending institutions, but instead is going to benefit hedge fund managers and their investors. Hedge fund losses, even up to the point of liquidation, do not threaten the overall economy. When Amaranth lost 9 billion within a matter of weeks a few years ago, the government did not step up. There was no systemic risk then when a few very wealth investors lost their shirts. Why should there be now? And, needless to say, counterparty risk -- the risk that a counterparty like AIG will not honor its contracts -- is a well-established business risk, one that investors pay their money managers to avoid. When the managers do not properly avoid the risk, the resulting losses are just like any other losses that a hedge fund may experience. Besides, the entire legal basis for the light regulation hedge funds is that their investors are savvy and wealthy, a group seemingly in little need of tax-payer-funded largesse.
Monday, March 09, 2009
Well, Warren Buffett said today that Berkshire Hathaway's 2008 profit fell by 62 percent, and its fourth quarter 2008 profit fell by 96 percent. If those are benchmarks for the profits of the entire industrial sector, we may be looking at an S&P500 bottoming out around 75, and the Dow in three digits, much as Professor Casti predicted.
(Comic footnote: In an apparent attempt to prove that American conservatism is the cognitive twin of Monty Python's Black Knight, AEI "scholar" James K. Glassman is still defending his claim that the Dow will soon hit 36,000.)
Saturday, March 07, 2009
Update: In the Google Finance user comments on the Sturm, Ruger & Company stock, we have this lovely thread:
A: Whats up with this stock?B: Everybody is buying guns, seeds, and other survival neccesities [sic] because Obama is destroying the country. Don't believe me? Try buying some ammo in the south.C: The south. Try the northwest... I didn't even think about investing in firearms stocks until I went to our local gun store and saw the Obama full print with the caption "Employee of the Month" underneath
It is high time for the general population and socio-political players to get ready to face very hard times during which whole segments of our societies will be modified, temporarily disappear or even permanently vanish. For instance, the breakdown of the global monetary system we anticipated for summer 2009 will indeed entail the collapse of the US dollar (and all USD-denominated assets), but it will also induce, out of psychological contagion, a general loss of confidence in paper money altogether (these consequences give rise to a number of recommendations in this issue of the GEAB).This is couched as a prediction, rather than as a possible scenario, and as such I am not convinced. With that said, the case for the realism of this scenario is well made.
Last but not least, our team now estimates that the most monolithic, the most "imperialistic" political entities will suffer the most from this fifth phase of the crisis. Some states will indeed experience a strategic dislocation undermining their territorial integrity and their influence worldwide. As a consequence, other states will suddenly lose their protected situations and be thrust into regional chaos.
And just to be clear, when the authors talk about "imperialist political entities" being likely to suffer the most, they're talking about the United States. Even the NIC hasn't had the temerity to say this directly.
Dmitry Orlov looks more prescient by the day.
Thursday, March 05, 2009
Tuesday, March 03, 2009
Sunday, March 01, 2009
"Because of the Web, we've actually increased the number of words that we write about state government and politics," says Robert McCartney, The Post's assistant managing editor for metro news. Reporters who may find it harder to get stories into the paper write in more detail, often several times a day, for the Virginia Politics and Maryland Moment blogs.Again with the assumption that because something was in print it was seen; like the newspaper is a daily multi-vitamin that if swallowed distributes its contents equally throughout the mind. As is evident by McCartney's statement newspapers are increasingly posting "o'er land and ocean without rest" and contrary to Gibson's accusation of elitism they clearly "also serve who only stand and wait." The fact that this audience is blind is not a failure of the press, it is a failure of the people.
Critics say that shift serves only the elite that's intently interested in state news, not the broader audience. "The insiders are still getting a full report on the blogs, but the rest of us see only what we want to see instead of the news we need to see," says Bob Gibson, executive director of the Sorensen Institute for Political Leadership at the University of Virginia and a former politics reporter for the Daily Progress in Charlottesville.