Freitag, Mai 29, 2009

Now the State Department is Involved...Because of Obama Administration Incompetence

So, to follow up on the last post: according to the Times, Secretary of State Clinton is now getting involved:

Hillary Clinton has intervened in talks over the future of Opel and Vauxhall at the request of German ministers as the American Government unveiled plans to sink more taxpayers' funds into the European carmakers' US parent, General Motors (GM).

Frank-Walter Steinmeier, the German Finance Minister, spoke by telephone today with Mrs Clinton to seek "support in the search for a solution," his spokesman said. Mrs Clinton pledged to intervene to demand "the greatest possible American support" from Timothy Geithner, the Treasury Secretary, the spokesman added.

Karl-Theodor zu Guttenberg, the Economics Minister, also denounced the US Treasury for dispatching a junior official who had to consult Washington through a video link at regular intervals during the night.

Mr Guttenberg said the talks had been "absurd in parts" and demanded "more seriousness and a greater willingness to compromise on the part of the US."


Overnight negotiations over the future of the US carmaker's European operation broke down when GM sought more funding for Opel despite Germany's pledge to provide billions of euros in state guarantees as well as a €1.5 billion bridging loan.

Now, perhaps, you can understand the incompetence of the Obama Administation. Of course, La Clinton can't actually get involved: she can only try to use her good offices to get Geithner to actually pay attention.

Ye Gods.

More Details...

In today's Handelsblatt there are some more details on how the Obama Administration has managed to really annoy the Germans.

Opel, with around 50 000 jobs in Germany, has to be purchased from GM by whomever before GM declares Chapter 11, because once GM does that, Opel can't be sold until GM comes out of Chapter 11 or until the bankruptcy court allows the sale.

Hence the German government wanted to work out a deal with the folks interested in acquiring Opel, basically Fiat, Magna and RHJ.

Let's capture a couple of the facts - facts, not speculation - about what went down.

First of all, on Wednesday PM, the German Chancellor (Angela Merkel), the Vice Chancellor, the German equivalent of Treasury (Finanzminister), the Economics Minister, along with their staffs, met in the offices of the Chancellor in Berlin,, along with folks from Fiat, Magna and RHJ, a financial investor. They were then joined by the representatives of GM and the American government.

Who did the Americans send? GM sent Carl-Peter Forster, GM's European Manager (indeed, GM isn't just looking to sell Opel, but its entire European division), along with staff members. The Obama Administration sent ... an unnamed investment banker from Rothschild.

I am not kidding: the US Treasury Department couldn't be bothered to actually send someone capable of signing anything, despite the fact that they are directly involved in the decision whether or not to sell Opel, since they are the only ones who can provide any sort of state guarantees that investors are looking for in these troubled times. To underscore the importance of having the right folks together, the German equivalent of the US Treasury, the Finanzministerium, has been pressuring Treasury to send a representative who can make the decision to close the deal. Peer Steinbrück has requested this directly from Tim Geithner: instead, an unnamed investment banker from Rothschild has been sent as an observer.

In other words, the lack of proper staff at Treasury - which remains a serious problem - has now led to a diplomatic faux pas. If you want something from someone, you don't send an underling to simply be an observer: you send someone who can make a decision so that you can get what you want. If you don't do that, you are sending the clear and unmistakeable message that you simply don't care.

To make things worse, since the unnamed investment banker from Rothschild does not have a portfolio from Treasury - in other words, he cannot make any decisions for the US government - he is not permitted to be part of the discussions between the German government, GM, Opel and the investors.

As Forster tells the German government that the price just went up by $500mn, the Germans are pissed off (rightly so, I might add): when the Germans finally get John Blum on the telephone to talk about at least some sort of government guarantee that the money will be paid back, he can't help them.

The Germans, are, at this point, speechless. They're supposed to send an additional $500mn within 2 (yes, that's two) days to GM in Detroit, immediately before bankruptcy, with no guarantees that they will ever see the money again?

Well, apparently the Obama Administration thinks the Germans are idiots.

The Germans then talk to both Fiat and Magna. Fiat sticks with its offer: Magna is willing to pay the additional $500mn, but only if the German state guarantees that the money will be paid back if GM enters bankruptcy. RHJ is now out of the running, since they are only willing to guarantee that two factories will continue to run if they take over Opel, which gets them tossed out.

Germans love to have things planned: the original idea was that the investors and the German government work out their deals, then the German government works out a deal with GM and the US government; then the investors and GM, with the blessings of the German government, works out their deals, papers are signed, and then the publicity folks do their thing.

Instead, chaos.

The Obama Administration, according to one person involved, sent, at best, backbenchers to the game. Those sent to represent the US were folks who appeared to have heard first about Opel while flying over.

The Germans are seriously pissed. Basically, the German government spent an entire night trying to work out a deal, trying to save 50 000 jobs, and the US government couldn't be bothered to even send a proper representative, even though they are directly involved in the deal. The Germans were prepared and organized; the potential buyers were there and were organized, ready to cut a deal; the representatives of GM were there, organized and ready to cut a deal; the Obama Administration, via the Treasury, couldn't be bothered.

Today the German government is trying to work out yet another deal. Chances that they will are, basically, null: as of the time of writing this, Fiat has withdrawn from discussion, Magna is trying to work out a deal, but increasignly it appears that GM, at the end of the day, is unwilling to sell Opel, despite having agreed to do so before this whole circus started.

The worst that has come of this is the deliberate incompetence of the US Treasury, who, despite repeated requests from the German government to send someone who could make a decision, sent a simple observer. This isn't about a diplomatic affront: the real problem lies in the increasing apparent incompetence of the US Treasury.

This will have repercussions. Perhaps not directly, perhaps not immediately, perhaps not visibly. But the sheer incompetence of the Obama Administration is bungling this is breathtaking.

But, apparently, the Obama Administration can't be bothered.

Donnerstag, Mai 28, 2009

How To Annoy Germans...

Here's a quick list of how to annoy Germans, especially Germans you want to have buy something from you.

1) At the very last moment, come up with new numbers that raises the price significantly, and pretend like it's no big thing.

2) When your Germans express annoyance, feign astonishment that anyone would react that way.

3) When the Germans have their own plans and interests, become angry and blame them for screwing everything up.

These are the lessons learned from the talks that the Treasury held with the German government yesterday on how to separate Opel from GM.

The Germans are now seeing the face of Chicago politics: that wasn't supposed to be a meeting to work out how the deal was going to go down, that was supposed to be a meeting where the Germans rolled over and begged for mercy. The Germans thought they had been informed and that they had parameters within which they could work out a deal that they could live with: they're partially in a state of shock that anyone would seriously use such tactics at such a late stage in the game.

It is going to be as much a learning experience for the Chicago Gang that the rest of the world isn't Chicago, as it was for the Germans to finally meet up with some real Chicago politicians. Opel is now pretty much doomed, unless, of course, the Germans come up with a deal that is acceptable to the Obama Administration: if GM enters Chapter 11 before that happens, then Opel is, to use the Chicago vernacular, truly fucked.

And here's a word to the Obama Administration: Germans aren't dumb. They don't pull their weight internationally because they don't want to. They know the world is a dangerous place and are experts in avoiding conflicts, avoiding having to take a stance and join a side, because it is opportune to do so and German politicians are, if anything, opportunists. Give them a way out and they will take it; give them a way to posture without making any commitments - like being the 20th country to condemn something - and they will spend a day in the Bundestag giving speeches about how something or other is terrible, but not their fault.

But this? This was gratuitous and completely unnecessary, as far as the Germans are concerned. We are seeing how the Obama Administration works: welcome to Chicago.

Mittwoch, Mai 27, 2009

Further Data Points For The Trend VI ...

First of all, we now see President Obama's Supreme Court nominee, chosen for her gender, ethnicity and, perhaps most importantly, a certain ... contempt for the law.

Put simply, President Obama appears to be espousing the view that personal experience and cultural identity are the key factors in judicial wisdom. Law shouldn't be, as the WSJ puts it, a voyage of personal identity, but rather based on a more fundamental understanding of what laws are and why we have them.

Here is the key quote to understanding what is at stake:

She is a judge steeped in the legal school of identity politics. This is not the same as taking justifiable pride in being the first Puerto Rican-American nominated to the Court, as both she and the President did yesterday. Her personal and family stories are admirable. Italian-Americans also swelled at the achievement of Justice Antonin Scalia, as Jewish-Americans did at the nomination of Benjamin Cardozo.

But these men saw themselves as judges first and ethnic representatives second. Judge Sotomayor's belief is that a "Latina woman" is by definition a superior judge to a "white male" because she has had more "richness" in her struggle. The danger inherent in this judicial view is that the law isn't what the Constitution says but whatever the judge in the "richness" of her experience comes to believe it should be.

In other words, this judicial view means that the judge is free to interpret the laws however she wants to, rather than what the law actually says: this way lies madness.

Not that she won't be approved, as the WSJ notices: she'd have to really screw up not to be. But what I fear is not so much that the Supreme Court will then start to turn to the left, but more importantly that the Supreme Court will start to "change", especially if she brings her contentious practices to the court that is expected to be sober and proper: what I fear is that the Supreme Court will, because of internal squabbling, become ineffective, which would have the effect of removing the final check on the Obama Administration. If the Supreme Court's functioning is damaged, if the Supreme Court is distracted because its newest member doesn't play the game, then it will not be able to pass judgment: that is the real danger.

Also in the WSJ is this, that the Gods of the Copybook Headings are waking up. The stupidity of trying to refinance loans for people who have no business have the loans in the first place is typical of Democrats: having dug themselves the hole of sub-primes, they are amazed that there really is no way that these people can ever pay back their loans, let alone service the interest rates: the default rate of refinanced sub-prime loans is between 65% and 75%. Duh: this has never, ever been anything but politics, and politicians who push this sort of idiocy through deserve the reaction that will come to drive them out of office. This is literally tantamount to calling for explosives to dig deeper when the hole is already so deep that no one can come out, and then being surprised when the detonation maims everyone down there doing the digging. Idiots.

Now, let's take a look at GM and Chrysler, their dealers, and how the decision is being made which dealers to close. In many ways I agree with this: the dealers aren't nearly to blame as much as GM/Chrysler and local politicians who made sure that the laws were set up to make sure that dealers couldn't be closed. No dealer can survive if no one wants to buy the cars (and that is the fundamental problem of both GM and Chrysler!). Hence the "slash & burn" closings round won't bring the solution to the problem: it will, however, leave a much smaller network of dealers that will, in many cases, have monopoly status when restructuring completes.

But how are the dealers being chosen? Duh: we're talking Chicago politics here, and the answer is that they are apparently being chosen based on the political contributions. Not a single dealership is being closed that gave Obama campaign financing money, and all the closed dealerships either gave to Republicans or to Obama's opponents. See here and here for the rest of the story. Hence the goal here is not to "save" GM and Chrysler, but more fundamentally to close down those who financially opposed Obama. As one commenter put it: if the surviving dealers were largely Republican spenders, then Team Obama would be idiots; if the surviving dealers are Democratic spenders, then Team Obama are marxist idiots.

I'd replace "marxist" with "left-wing", but the sentiment remains the same

The inmates are in charge of the asylum...

Understanding Where We Are Headed...

Economists lately have, to a large extent deservedly, been given a bum rap: there were few that saw the problems coming, and of those few that saw it, even fewer listened.

Here is a a commentary in the FT that shows that despite all this, there are those who do see the light whilst many colleagues remain firmly committed to business as usual, which is exactly the wrong thing to be doing.

These are the facts:

Under President Barack Obama's budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America's ability to service it. The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.

Let me reiterate: these are the facts, not opinions: ignore this development at your peril. No country - none, zilch, nada, keine - which has taken on severe debt levels for discretionary spending has survived. There is only one half-exception, Japan, where the government continues to fiddle while the Japanese Rome burns, but they are already strait-jacketed by government finances.

Discretionary spending is money spent on things that are nice to have, but not necessary: countries get into this kind of debt when they fight wars, when massive national disasters hit, but not to fund political babble and wishful thinking.

It's the job of economists to be dismal, to pour ice-cold water over overheated politicians and pundits.

John Tayler, the economics professor who writes these words, points out that there are really only two ways out of the debt: massive and punitive increases in taxes that would necessarily have to include not merely the rich, but most importantly the middle class and the working poor. These are not taxes to pay for health care (which could be offset by reductions in private insurance), but rather to pay for the debt.

The other alternative is inflation, i.e. making money worth less and less.

Done deliberately, this has devestatiing effects on currency values, as the currency will devalue to compensate for inflation. This is how economies work and cannot be avoided: devalue your currency massively, as would need to be the case, and you screw anyone who has every invested in your country. Really want to burn China and Japan for having invested in the US? Eliminate the people who are happiest buying US debt because it is the safest investment in the world?

But rather than facing up to facts, the economic illiterates - actually, they're not so much economically illiterate as actively economic denialists - that have power in Washington are already heavily invested in making excuses instead of changing policies that will clearly damage the US economy.

To put it bluntly:

The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis. The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.

Straight words, accurate, but if anything they will fall on the ears of Democrats who have put their fingers in their ears and are loudly crying "la la la I can't hear you la la la".

Which may be amusing to their political supporters.

But which is a disaster for the rest of us.

The only light at the end of the tunnel right now is that the Democrats will not be able to blame anyone for this in 2012. They have both the executive and legislative levers of power, and what they do must be clearly placed at their feet. Not that they won't try to deny, and will have their friends in the media support them.

Doesn't change the reality of the situation: we are on a very dangerous road, one that will take great skill to transcend.

Which is clearly and transparently missing in Washington today.

Montag, Mai 25, 2009

The Most Egregious Error Imaginable...

An editorial in Sunday's FT points to the fundamental error that will destroy the Obama Administration and put it clearly into the field of "failed Presidents", or at least those who don't enjoy much good press.

Bluntly, the real problem with the running up of the debt that the Obama Administration and the Democratic Congress is not that it will take decades to repay, putting a clear financial cost of future generations, but rather that those in the White House and Congress are playing with something so fundamental that only a complete fool and total idiot would mess with: US credibility as a financial safe haven.

To quote:

The US has long exploited its position as the supplier of the world's reserve currency, running up enormous debts which no other government could sustain. But there may be a limit to what even the US can get away with....Indeed, the US debt stock is higher and its deficits will remain larger for longer. Owing to the strictures of the US political system, the executive will find it harder to ram through any kind of emergency fiscal retrenchment. It is not obvious from the bond markets, where prices do not indicate the fear of runaway inflation. But be warned: currency traders are pricing in the tail risk that the US will be forced to resort to the printing press.

In other words, this isn't something that might happen, something that policy makers will have to consider, something that will impact decision making in the future, but rather something that is already happening. Do you understand this? The market, in all its ruthlessness and uncaring precision, has already decided that things are going downhill from here: if the US currency takes a nose dive - as it is being pushed to by the policies of the Obama Administration, either deliberate or via folly - this will have a massively negative effect on the position of the US dollar as safe haven. Up to now, no US administration would even contemplate changing this.

Playing with the creditworthiness of the US is plain flat-out stupidity. The Obama Administration seems to have plenty of that.

But it's worse than that: it looks like the Obama promise, of change, is turning out to be radically different than anyone who voted for them ever thought. It's going to be change for the worse, not the better. No one outside of the financial community knows what it means if the US were to throw away its financial rating in the name of some half-assed policy - per definitio, anything that would negatively impact the US financial rating is a bad policy.

Change here will be devastating and will lead to a new world order, one that is clearly not in the interests of the US.

But the Obama Administration either doesn't seem to care, or, even worse, seems to think that this is just fine.

One further step on the road to perdition. This is not speculation: if currency traders are pricing in this risk, it is because they see it happening. Lose the currency traders and you lose the currency. Period.

Watch to see who profits from this and who they supported before the election and thereafter: this is YADP (Yet Another Data Point)...

It's No Wonder...

...that this woman is being attacked. See the article here in the FT.

Dambisa Moyo is the wet dream of any NGO, but one who has turned into a nightmare for them. She could easily be a leading figure in the western aid business, given her degrees from Oxford and Harvard, her work at Goldman Sachs and the fact that she is black and from Zambia.

Instead she has written a book called Dead Aid, a deliberate play on the LiveAid campaign of Bob Geldorf, and she is calling not for an increase in aid to Africa, but rather its end.

And she's right: western aid has turned out to be the cause of most of the corruption in Africa, since the sheer volume overwhelms and makes it easy for the modestly corrupt to become severely so. Her story is that aid has ruined Africa, and she's right.

Which is why she is now being vilified by activists, who are increasingly desperate as aid budgets are being cut in the wake of not only her relevations, but also financial crisis. She is being dismissed as simplistic and dangerous.

As if the parasites of western aid, the NGOs, aren't the ones who are simplistic and dangerous.

The aid establishment, the gaggle of NGOs that live off of despair, hunger and chaos, are scared to death that African intellectuals will tear them apart. This could be a new start for Africa: how much do you want to bet that the neo-neo-colonialists of the supranationals, the transnationals and the NGOs will work their very hardest to stop this from happening? This is the best thing that could happen to Africa: let the African intellectuals of her calibre and quality have their voices instead of the parasites from the NGOs and the transnationalist community.

Freitag, Mai 22, 2009

New York, Disillusionment and New Yorkers...

Some may know I'm a native New Yorker. I still consider myself so, even if I haven't lived even a fraction of my life there, but I was born at Presby and for this international nomad, it's the city that for me feels like home, unlike most other places I've lived. When I get off the plane at JFK, it's like coming home, and every time I leave, it is with regret.

This in the WSJ brought back some memories.

In 2001 I was hard at work in Germany, right in the middle of a forecast cycle, writing texts to the forecasts, when my wife called and said that a plane had hit the WTC. At first I checked Drudge (yes, I was reading him regularly back then) for the first news - which was very limited - and let my boss know what had happened because of the effect it might have on the financial markets. We both thought it was perhaps a small plane, or an accident like what happened to the Empire State Building.

Ten minutes later I went to his office and told him that it was no accident, but rather a deliberate attack that would have a large death count and which would throw the markets into turmoil. He looked at me in confusion, not wanting it to happen.

Fast-forward to November: our staff members in the New York office quit, deciding to live their lives to the fullest instead of drudging away with us. They had both been at the breakfast meeting of the National Association of Business Economists at the Marriot and had gone through the worst. They gave 2 weeks notice - the usual in the US, but not in Germany - and I was sent over on virtually no notice (I went home and packed, went back to the office and picked up the ticket, my wife drove me to the airport and I was in New York by the end of business that same day) to take over running the office and hire new staff.

The day I arrived I received notice that a dear friend of ours had died, keeled over with a heart attack at a ridiculously young age, in front of his girlfriend just as they had gotten back together.

It took me 2 weeks before I had the nerve to go to Ground Zero. New Yorkers don't need to be reminded about the smell of that site, what it looked like and what it felt like to stand there.

Like Bret Stephens, I find the petty arguments and the petty political manouevering around what happens to Ground Zero to be appalling. We had the chance to do so well, to create something to be proud of, to creat something that would affirm.

Instead, we've got zilch. Worse than zilch: we've got something that, at best, at this point, be little more than an eyesore.

To quote Mr. Stephens:

Disillusion upon disillusion, compounded into a sense of disgust.

What has happened? New York local politics at its squalid best, everyone's gotta get a piece of the action.

Pardon the vernacular, but right now, New York is a Cluster Fuck of proportions not seen since ... Mayor Lindsay at best. Ask a New Yorker what they think of Mayor Lindsay.

This is New York at its absolute worst: petty, vulgar, corrupt (lots of the delays are the result of people delaying in order to get a cut of the action), and insensitive to the point of boorishness.

Oddly enough, let's look at the makeup of the New York City Council.

Fifty-one Council members. How many Republicans?

Three. Two from Staaten Island, one from Queens. The rest? One "Working Families" party (Brooklyn), the rest ... Democrats.

Now you might think it's not fair to lay the blame at their doorstep for this walking, talking cluster fuck of monumental incompetence, with the continuing and ongoing delays that will ensure that construction won't be finished until close to 20 years after the attack: sorry. It is their fault.

To repeat:  It.  Is.  Their.  Fault.

To the New York City Council: shame on you. You've made this a dismal, dismal failure. Your lack of leadership and your concerns about everything except getting the job of rebuilding actually done is pathetic.

To underscore this, again Mr. Stephens:

Rebuilding the site, as various responsible officials endlessly repeat, is a "three-dimensional jigsaw puzzle." What do they suppose the Apollo missions were? It took eight years for the U.S. to go from John F. Kennedy's 1961 man-on-the-moon speech to an actual man on the moon, a distance of about 240,000 miles. At Ground Zero, it has taken about as long to move just one corner of the site from 70 feet below ground to 100 feet above. The whole endeavor is fast turning into the American version of Barcelona's Sagrada Familia, under construction since the 1880s.

At least Gaudi's cathedral is majestic in its incompleteness. And at least its incompleteness hints at some higher purposes, perhaps, or suggests that tracing patterns of a divine will takes time. At Ground Zero, there is a pit. With broad slabs of concrete and some rust-colored steel. Testifying to a society in which everyone gets their say and nothing gets done. To a system run by craven politicians and crass developers and an army of lawyers for whom gridlock is profit.

Again, as I say: it's time to squarely pin the blame on who is responsible. Democrat to the core.

And if you take a look at the web site for the City Council, you'll find not a single mention of reconstruction. Not one. Just a mention of regret that two firefighters died because the city is too scared of lawyers to do a proper demolition job. Of course, that's not quite how they described it...

Gotta love that city. See you this summer.

How History Is Rewritten...

Something unusual happened over the last several days. Probably hasn't made it much to the English language press, but it's all over the German press.

It turns out that history wasn't quite what it seemed...

Let's go back a few years to Berlin, back to 1967. To be exact, June 1967. The Shah of Persia came to Berlin and was met by fairly large-scale protests, led by Iranian communists who found supporters amongst the various student radicals of the day. He had come to Berlin, among other things, to see the "Zauberflöte".

On 2 June 1967, one student, Benno Ohnesorg, was shot at close range and killed by Karl-Heinz Kurras, a "Kriminalobermeister", which would basically be the equivalent of a detective, criminal division in the US. The shooting was, as said, at close range, apparently without any particular provocation, and it led to riots over the next several days and, most importantly, it led to a significant radicalization of German students, with the "Bewegung 2. Juni" or "Movement of 2 June" leading the way to the Baader-Meinhoff band that terrorized Germany for the next several decades.

That's the history we know. Or at least know if you're interested in German history.

It's been changed now ... slightly.

It turns out that Kurras wasn't merely a detective, but also a member in good standing of the SED, the East German communist party, and what is euphemistically called an "Inoffizielle Mitarbeiter", or unofficial employee of the East German State Security organ.

Wow. In other words, the catalyst for the radicalization of German university students into extreme left-wing activity was, apparently, instigated by East Germany.

To put it in perspective: this would be like finding out that the Kent State shootings had been organized by the Cubans.

To give you an idea of what sort of effects this radicalization had: the family of Benno Ohnesorg were represented in court by Horst Mahler and Otto Schily. When Kurras was found not guilty - no one could prove that his claim of being attacked by 12 men in a courtyard was false - both men left to go their seperate ways: Mahler went on to form the RAF with the Baader-Meinhof Gang, while Schily went on to become the chief defense attorney for the RAF until he was one of the grounding members of the German Green party, and was a member of the German government under Gerhard Schröder from 1998-2005 as the Minister for Internal Affairs. Mahler was arrested in 1970 for Grand Larceny (he robbed banks to get money for the RAF) and was sentenced to 14 years in jail, defended by Otto Schily. Both men were radicalized by the trial, which they saw as a farce of justice.

Mahler got a new attorney in 1980. His name? Gerhard Schröder, who was later Chancellor of the Federal Republic of Germany. Mahler remained a radical, but took a turn to the right, joining the NPD, a nationalist party, in 2000, leaving them in 2003: he is currently back in jail, disbarred, for repeatedly denying the Holocaust and trying to incite racial hatred.

The body of Ohnsorg was transported to his home in Hannover via the transit lines through East Germany, accompanied by thousands of students from all over Germany: the East German government got the names and addresses of all such students, who were recruited by the dozens to work "inofficially" for the East German government.

It is impossible to understate how the murder of Benno Ohnesorg radicalized a young German populace that was fed up with the existing German system and wanted desperately to remake Germany. Most professors of that day had been professors under the Nazis as well, and while de-nazification largely worked, the kind of mentality that existed in those days was one that did not take lightly to change, even when needed. The German youth of 1967 - who themselves call themselves "68ers" - was dissatisfied with the safe and boring life that was ahead of them, wanting to break free.

But instead of the Summer of Love, as we saw in the US and to a lesser extent in the UK, we now see how the catalyst for change was trumped, created not by the hated system, but rather, most likely, instigated by the East German communists.

This can't be directly proved: there are no protocols of discussions amongst the East German Security Services to do this, nor is there any political documentation that this was ordered by the East German communists.

But the fact that Kurras was, basically, an East German spy, throws a rather different light on it all.

When I studied in Germany in the early 1980s, there were about 40 different left-wing groups at the University of Freiburg. For me, it was great entertainment to attend the U-Asta (independent student union) meetings, where left-wing splinter groups literally spend all of their time denouncing each other, rather than actually doing anything. Hugely entertaining.

When the wall fell, their financing dried up and they dissapated within just a few months. The vast majority had been financed, directly or indirectly, by East Germany, and without the money, the fires of revolutionary spirit turned out to burn a tad less brightly.

The history of Western Europe in the 1960s and 1970s has yet to be really written. Perhaps more exactly: we still haven't found out what actually went on to the extent that we can actually write that history, since so much is turning out rather differently than was expected. The generally accepted history of that time period needs to be significantly reviewed and rewritten to find out exactly how much of the outrage expressed by the radicals was actually not so much outrage, but direct action paid for by the Soviets and their various helpers in Eastern Europe. I dare say that not a few holy cows will have to be gored before the truth finally is revealed...

Donnerstag, Mai 21, 2009

Ouch...Why Journalism Is Deservedly Underpaid...

This I ran across via Jaymaster at Dean's World.


The man - a certain Professor Robert G. Picard - is absolutely right. But he misses one small point.

He's right that journalism, right now, is a profession that deserves low pay. Why? Because journalists aren't adding value to the inputs that they use to make their work.

Let me explain, if I may, a simple economic fact: the higher the value added in a business process, the greater the salaries are for people who can add that value. This is a basic, simple fact that no one can get around, and because so few understand this, economics remains for many a complete mystery. It fuels envy, greed and avarice: rather than becoming someone who adds value, people steal that value, don't want others to have it, and lust after it without understanding how to get there.

Adding value in a business process isn't the end all and be all of life: however, if you are good at it, you get to money to buy the toys.

Journalists today - probably close to the entire generation of journalists we now have - were trained less to be reporters of news, synthesizers of data points, investigators of the deliberately hidden and much more to be some sort of social heroes, the kind of people who bring down presidents and bring social justice.

As Professor Picard puts it:

It is clear that journalists do not want to be in the contemporary labor market, much less the highly competitive information market. They prefer to justify the value they create in the moral philosophy terms of instrumental value. Most believe that what they do is so intrinsically good and that they should be compensated to do it even if it doesn't produce revenue.

What strikes me particularly is that I am listening to an old radio show while I write this, one from 1960. During a commercial break - the commercials are included in this particular broadcast from 6 Nov 1960, on the CBS Radio Network - the announcer comes on and extols how good the CBS reporters are in getting you the news you need, day in and day out.

How far the mighty have fallen.

Professor Picard:

Journalism must innovate and create new means of gathering, processing, and distributing information so it provides content and services that readers, listeners, and viewers cannot receive elsewhere. And these must provide sufficient value so audiences and users are willing to pay a reasonable price.

What is missing, in my opinion? The small point is this: journalists aren't some sort of innocent victim of changing times and the persuasive saturation of media into every aspect of daily life (anyone with a cell phone and the ability to upload a video to YouTube has the potential of an entire television network in terms of technical ability to get the news out: whether the film is worth viewing is another question), but have, by trying to be social activists, fighting for social justice and being there to push a progressive agenda, brought this upon themselves, some knowingly, others unwittingly.

The journalist's idol for many years were the likes of Edward Murrow and those of his generation, culminating in many ways in Uncle Walter, Walter Cronkite, the man who spoke to America like no one before. These were the folks whose expertise and writing abilities made them famous, not overnight, but over the decades, where they rose to a position of trust, to the point where when Cronkite - wrongly -cast doubt on the ability of the US to win the Vietnam War, President Johnson rightly said that he had lost the public battle to support that sad and destructive war. Journalists were independent thinkers, people who did their research and dug out their stories, gaining trust by being right time after time after time after time. They had the value added that made them the first superstars of the business.

Of course, this is not what journalism is about nowadays: journalists are herd animals, with a low skill set, editors who accept poor reporting and encourage groupthink and a peer group that punishes independent thinkers severely.

The problem is that journalism has become nothing more than political activism camouflaged by a tradition that is fraying at the edges and falling apart: the industry is in denial that it has a political bias, preferring instead to believe that their perception of the world is the world. What journalists have lost is their objectivity, since objectivity doesn't get them peer approval and peer support that they need to compensate for poor pay.

It is not just a matter of embracing uses of new technologies. Journalists today are often urged to change practice to embrace crowd sourcing, to search specialty websites, social networks, blogs, and micro-blogs for story ideas, and to embrace in collaborative journalism with their audiences. Although all of these provide useful new ways to find information, access knowledge, and engage with readers, listeners, and viewers, the amount of value that they add and its monetization is highly debatable. The primary reason is that those who are most highly interested in that information and knowledge are able to harvest it themselves using increasingly common tools.

So where can journalists excel, where can they add value, where can they regain the trust that the occupation once deserved?

By doing their jobs: by throwing off the foolish and destructive mantle of journalist-as-social-activist; of getting the news down right, independent of simple regurgitation of press releases and lazy rewriting; of becoming objective and critical, rather than fawning and sycophantic of politicians; of laboring decades for relatively little money in the hopes of becoming one of the true stars of the business, be it local, national or international. Simply being there doesn't cut it, any more than the world somehow owes a liberal arts graduate a living just because they are a liberal arts graduate.

This is underscored by the Newspaper Revitalization Act recently introduced to try to help newspapers survive: it basically is oriented to granting the newspaper business a 501(c)(3) status, i.e., organizations that cover: "Religious, Educational, Charitable, Scientific, Literary, Testing for Public Safety, to Foster National or International Amateur Sports Competition, or Prevention of Cruelty to Children or Animals Organizations", i.e. organizations that are not businesses.

Neither, it appears, are organizations whose primary business was journalism.

Expect a new set of parasites lving off those who are productive and create value adeed: journalists. Rather than reinventing their profession, it's a lot easier to become part of the problem and not part of the solution.

Mittwoch, Mai 20, 2009

A Failure To Comprehend...

I usually read the Real Time Economics blog of the WSJ, more often than not there is something interesting there.

This one, however, takes the cake for egregious errors and a true failure to comprehend what credit cards are all about. Credit cards are a financial transaction instrument, one where you, the consumer, may access pre-approved short-term debt. Debit cards are basically the same, but where you access existing funds without having to carry around checks or cash.

In both cases, the key to understanding their use is the enormous convenience of credit cards: they allow you to make consumer purchases without cash or checks, reducing costs for the retailer (albeit it at a cost: the time lost waiting for a check to clear can be monetarized and compared to the discounted rate of reimbursement from the credit card companies).

However, and this is the egregious error from Mark Calabria of the Cato Institute, they are not in an of themselves credit instruments:

Credit cards allow the un- or under-employed to spend now out of future expected income. To limit credit solely to the financially stable leaves those most in need outside of our formal financial system, instead forcing such households to borrow from less efficient, and often more costly, sources, such as friends and family, or pawn-shops and loan sharks. The trend in recent months of households shifting away from mortgage debt to credit card debt has been essential in allowing households to maintain spending in the face of declining home values – absent such spending our economy would be in worse shape.

This understanding of credit cards is extraordinarily dangerous, to put it mildly: it assumes that those most in need cannot do the financially prudent thing, which is to forgo current consumption to achieve later financial goals.

This is called saving.

What a concept, I know.

Now, I'm taking this out of order, but he also writes:

The most basic function of all financial transactions is to allow households to more closely align their lifetime flows of consumption and income. While the most important mismatch between desired consumption and income happens over the life-cycle – workers earn less at the beginnings and ends of their lives than in the middle – shifting income from good economic times to bad also improves household welfare.

Uh, no: the most basic function of all financial transactions is to enable transfer of funds from one party to the other. What Mr. Calabria means to say is that it is the most basic function of all financial planning: this is not, however, what he says.

Financial planning is what we normally call budgeting: it may make sense to borrow money today to meet needs that will be paid back over future earnings, but that isn't what credit cards are about.

Or, more exactly, that's not what credit cards should be about.

Now, this makes more sense:

As credit risks in the economy change, so should credit pricing. While we want credit to be widely available, that credit should be accurately priced – to provide the right incentives for borrowers and lenders alike. Practices such as universal default – where credit card rates are raised upon the default of other loans – provides for a more accurate pricing of risk. Someone defaulting on their car loan is undoubtedly a higher risk to their credit card company than someone making their car loan. If we've learned anything, it should be that in times of stress, risks across various kinds of credit become more highly correlated.

Credit, unless accurately priced, will always distort markets. If the price of credit is too high, financing projects becomes difficult and they will then not be financed; if it is too low, resources are allocated poorly (at best) and are thus wasted, helping economies enter downturns when these scare resources, squandered on projects that failed to bring returns, are not available for needed investments.

Now, in the same article, Kathleen Keest  writes something significantly more sensible:

Sound, common-sense oversight doesn't constrain credit, lack of it does. That's because lack of oversight begets loans that borrowers cannot afford to pay, which causes losses to financial institutions and a lack of investor confidence. Investors no longer trust the lenders to know what they are doing because in fact lenders did not know what they were doing. That loss of trust and confidence has limited credit. 

Bingo. The problem is: whose oversight, and with which goals?

Equally simplistic – and misdirected — is the notion that more debt is required to encourage more demand. Americans have lost confidence in their financial future, and too many households are grappling with too much overpriced and risky debt. Credit card penalty rates, for example, can double the rate on existing balances and can be imposed for almost any reason, even if the cardholder hasn't violated the contract. We recently calculated that one year in the "penalty box" for an average revolving line of credit costs around $1,800 per year. That's money that cannot be spent in the real economy. The credit card reform bill being debated in the Senate would limit card issuers' ability to apply such rates retroactively and would ensure that being sent to the "penalty box" wasn't a life sentence.

Here is where Ms. Keest goes wrong: it's not so much that Americans have lost confidence in their financial future, it's much more that the banks, those granting credit, have lost confidence in the future of their customers, which leads to a re-evaluation of risks and, for the most part, a more appropriate setting of basis point differentials to compensate for that risk. While the blame for this can be spread all around, the one paying the piper is the one who wanted the money in the first place. Retroactive rate increases (not on unpaid balances, but on the original balances) are unlawful - it is a violation of the original deal - and that can be addressed directly: however, you cannot take the right to set rates appropriately away, as that means that granting credit will become highly restrictive and more expensive.

Why? Because if I cannot change the interest rate on outstanding balances due to an increase in the risk, I will become significantly more hesitant in granting those credits in the first place, and I will, as behooves due diligence, increase my risk rating calculations to take into account the risk of someone becoming a greater risk candidate during the lifetime of the balance.

Note that this is only a problem with credit cards, where outstanding balances can change quickly: it is not a problem with a fixed-term loan for a specific project that is secured by the tangible assets enjoined in that project.

The current business model of maximizing revenue in the short term is not working well because it's pushing more credit card customers over the edge. It's certainly not good for consumers. And it's not good for the economy, because access to more unsafe, unsound and uncertain debt is not what American households need to encourage them to face their financial future with confidence. Worse still is that abusive lending practices often end up in the taxpayers' lap, as the mortgage crisis illustrates. Who benefits when companies have to take massive losses on unsustainable loans? No one.

This is not maximizing revenues: it is, rather, a return to realistic assessment of risks and the application of risk premiums. Of course this is pushing more credit card customers over the edge: they are people who should never have had those lines of credit to begin with. What those people have to do is consolidate their debt and lose those credit lines in order to avoid paying high rates of interest: that, however, is prudent financial planning, rather than some sort of punishment.

Fundamentally, both writers seem to fail to undestand what the real problem is: a failure to live within one's means.

Credit cards are wonderful instruments for short-term consumer purchase financing, be it a new stove or a family vacation. They are terrible instruments if you carry a balance for any length of time, as the interest rates are usually quite high: they are supposed to be high, in order to ensure that people don't start using the credit cards as a permanent financing instrument, which is an indication of some sort of financial difficulty. Once someone has entered that path, they automatically become a higher risk: someone who carries a balance, say, of more than 30% of the credit line, for several months is showing behavior that is risky: no one should willingly pay high rates of interest if they can avoid doing so.

Dienstag, Mai 19, 2009

Corruption, Crony Capitalism and the US Image Abroad...

This is disturbing.

Sin-Ming Shaw, a former fund and private equity founding manager ins Asia, writes in the Japanese Times that he's making the connection between what the Obama Administration is doing and the kind of crony capitalism you see in the Third World.

Put simply, crony capitalism is a system where financial success is determined by close personal relationships between those in power and those who benefit from those in power. It can take the form, in its simplest version, of simple collusion in the marketplace; such crony capitalism is exemplified by keiretsu and chaebol systems, as well as the kind of family-owned systems in South America. One thing that aids crony capitalism is deliberate ambiguity in laws, either in text or enforcement, so that enforcement becomes arbitrary and, in order to survive by not being called to account, dependent on being on the good side of those who makes such decisions.

Starting to sound familiar?

What the Democrats did with Fannie Mae and Freddie Mac is a classic example of crony capitalism: politicians took the government backing of both to bring them to dominate mortgage underwriting, sent the party faithful to earn banker's salaries while running the companies into the ground, whilst turning them into major campaign contributors as well, preferably to favored constituents, all based on who you knew and what you did for them.

Mr. Shaw's article points to the fact that crony capitalism is increasingly alive and well in the US.

This is how it starts:

The recently completed "stress tests" of U.S. banks are but the latest indication that crony capitalists have now captured Washington. It is no surprise that stock markets liked the results of the tests that U.S. Treasury Secretary Timothy Geithner administered to America's big banks, for the general outcome had been leaked weeks before. Indeed, most professional investors trashed the tests as dishonest even as their holdings benefited from a rising market. Even The Wall Street Journal, usually financial markets' loudest cheerleader, openly disparaged the tests' integrity. The government had allowed bankers to "negotiate" the results, like a student taking a final examination and then negotiating a grade.

The tests were supposed to reveal the true conditions of banks saddled with unaudited "'toxic assets" in housing loans and derivatives. The reasoning behind the tests seemed unimpeachable. But was it?

As any seasoned banker knows, a well-managed bank should undertake internal "stress tests" regularly as a matter of good housekeeping. The financial crisis should have mandated a running stress test to keep senior management up to date daily. Why, then, did the U.S. need the government to conduct a financial exercise that bankers themselves could and should have done far better and faster?

The truth is that the tests were not designed to find answers. Both Wall Street's chieftains and the Obama administration already knew the truth. They knew that if the true conditions at many big banks were publicly revealed, many would have been immediately declared bankrupt, necessitating government receivership to stop a tsunami of bank runs.

These stress tests and the fact that the banks "passed" is the fundament of the collusion between the banks and the politicians: the collusion is to create the appearance of viability for these banks when, in fact, they were bankrupt. The payoff isn't going to be immediate, nor terribly obvious at first: however, it will take the form of political contributions and political influence-taking on where the banks do business and whom they hire.

The Democratic Party, in pursuing this path to .. fame and glory, is, if anything, abandoing any pretext of being for the common man and being the party of the working stiff. They haven't been that for a very, very long time (if, indeed, ever).

The key thing is what this does to the US image abroad: it cheapens the image of the US as the world's leading capitalist system, devoid, largely, of this kind of corruption. This damage is long-term and will take literally decades to repair.

Someone Else Is Starting To Get It...

It's even a member of the MSM.

In this unsigned editorial in today's FT, the editor wrote this key quote:

If you wanted to promote corruption, this would be a good way.

They're starting to realize the whole point of the Democratic Chicago Machine: it is set up to promote corruption, to make the corruption possible, by hiding and obfuscating how the corruption works. Further:

On the drawing board is a vast and unfathomably complex new system, which fosters corruption, raises little revenue and tries to suppress the incentives that are its entire purpose.

What we're talking about is Cap and Trade, which will go down in history as the largest and most blatant attempt to squeeze the public and put the money into political supporter's pockets.

Mark my words: cap and trade will be the most corrupt policy in the US since... give me a moment...

Darn. I really can't think of anything even remotely close.

If the editorialist in the FT can see this, where are the journalists in the US?

Soundly asleep at the wheel. Nowhere else.

We're talking something along the lines of $600bn over 10 years: that is the amount that the current Congress proposes to impose on the US consumer in the name of the environment, but in truth to line the pockets of those who made their election possible.

Welcome to Chicago. Welcome to the Future, as seen by the Democratic Party. Welcome to the world of the surreal.

Yet Another Chicago Connection...

This caught my eye in the WSJ, as the tone was ... odd. Almost fawning in its praise of how the Obama Administration is managing the automobile industry crisis, it basically says that the bond debt holders should be damned glad that they are getting anything, and that the UAW is doing everyone a major favor in taking on its new role.

So who is the author?

Scott M. Sperling, co-president of THL Partners, one of the oldest and most successful private equity firms in the US. So I googled to see where the connection between Mr. Sperling and the Obama Administration lies.

Our Common Values.


This is the name of a Political Action Committee (PAC) that is connected to the Democratic Party via ... Rahm Emanuael. It gave 99% of its money to Democrats.

Mr. Sperling, according to the Huffington Post, donated $5000 to the "Our Common Values" PAC in 2008. It was his only contribution to any political activity in that year. Oh, and his wife donated $5000 as well (see here and scroll down to see the Sperling's contributions).

There is the connection.

Of course, private equity companies are making out like bandits during this recession: they are able to buy parts of companies desperate to get rid of troublesome assets at extremely good rates. Almost like it was tailor-made for them...

This is yet another Chicago Connection: scratch my back, and I'll scratch yours. Expect to see more of this defense of the Obama Administration's policies by those with vested interests in seeing those policies succeed.

Just surprising to see it in the WSJ. I was able to find this within 10 minutes. Guess that being a co-president of THL Partners does get you some access...

Montag, Mai 18, 2009

Another Data Point For the Trend ... V

So, let's see: two new data points.

First, here. On the eve of a possible indictment of John Edwards, the former Democratic Presidential candidate, for assorted campaign law violations, the Democrats are looking at replacing the federal prosecutor that has been following the leads and uncovering the problems. Another Democrat, the ex-governor, is also under investigation for illegal use of vehicles and the like as well. Just the usual corruption: it looks like Edwards used campaign money to pay off his girlfriend, and the ex-governor has free travel from supporters and a questionable real estate deal hanging over him.

The reason that the North Carolina Democratic Senator Hagan wants to replace the prosecutor? What else: he's a Republican and he's going after North Carolina Democratic politicians.

The second here. If you read here regularly, you know how ACORN is anything but some sort of innocent get-out-the-vote organization. It's behind the politicians who created the sub prime mess, and has a history of incompetence at best and, more likely, outright collusion with the Democratic party in direct contradiction to its charter as a tax-exempt organization (if that alone isn't a reason for reforming tax law...).

So, a disgruntled former employee was found. Here's a hint to those who aren't journalists: disgruntled former employees are the bread and butter of investigative reporters, one that they rely on heavily.

Except when the trail leads to something that would be a "game changer". Which any - any! - investigation into the campaign finances of the Obama presidential campaign would reveal: his huge campaign contributions basically bought the election, as he outspent McCain tremendously, raising $745mn to McCain's $368mn. That's close to a 2:1 differential, unique amongst US presidential elections.

But where did that money come from? Hint: the campaign failed to implement the control mechanisms it was supposed to, enabling all sorts of dubious and untraceable contributions.

But rather than go investigate this, rather than nail ACORN for the political organization it is, the New York Times, the paper that "Prints All The News That Is Fit", the newspaper whose investigative abilities are rivaled only by the Washington Post (also strangely silent, but no surprise there...), saw fit to kill the story because... relied on a disgruntled former employee.

Right. The New York Times merely states "The Obama campaign has denied any connection with Acorn's voter registration drives."

And they accept that.

The New York Times, a paper I grew up reading, a paper that I dearly loved reading for several decades, isn't worth cutting down trees to print anymore. I suppose was can simply start referring to it as "New York Pravda", the paper that prints all the news that is politicallly fit.

It killed a story that would have severely damaged the Obama campaign to become President during the election in order to not "change the game".

Two more data points...

Conflict of Interest That Nobody Seems to Notice...

So, let me get this straight: the United Auto Workers, the UAW, has turned its political support of President Obama effectively into majority ownership of both GM and Chrysler (the devil is in the details, but it's obvious what is going to happen...).

Now, there are two conflicts of interest here.

1) The UAW represents both employer and employees. How's that one going to work?

2) The UAW also represents employees at Ford, which is avoiding bankruptcy and hence control by the UAW. How can there not be a conflict of interest in having the largest shareholder of both main rivals to Ford represent the workers at Ford?

That the MSM hasn't picked up on this is just another indicator that they are indeed asleep at the wheel after having drunk the Kool-Aide.

The first conflict of interest can be gotten around by selling UAW's equity share in both GM and Chrysler.

The second then becomes moot.

If the first does not happen, the second one will destroy Ford.

I expect that Ford will see not a small amount of industrial action at the first sign that it will become successful after restructuring efforts and when it is able to outshine both GM and Chrysler. Otherwise Ford's refusal to take government money will be seen as the basis for its success - and it well may be simply reduced to that - and that would, for the unholy trinity of GM, the UAW and the Democratic Party, simply be intolerable. Their legacy will be determined by the success that GM and Chrysler have after "restructuring", and we can expect that any threat to that legacy will be met with swift industrial action, be it strikes or be it protectionist actions by the government to keep others at bay.

Sonntag, Mai 17, 2009

Takes one to know one...

It's interesting how we see now how Congresswoman Pelosi is being left to slowly twist in the wind, with the White House ... oddly reluctant to intervene in her public exposure as a liar and her consequent humiliation.

Of course, Pelosi is a party politician: Jim Miller saw this in 2002 (hat tip: NeoNeoCon), and the history of how she rose to power has been fairly well documented.

But consider as well that President Obama is also a product of the party machine, but in this case the Chicago party machine: what we are seeing is how one party machine dismantles the power of another party machine, in this case by letting Pelosi's native abilities shine.

While her days of power aren't in doubt - she's too powerful for that - what this will do is to clearly demonstrate to the party faithful, those who have enormously benefited from the party machinery, that party discipline is important and that the best way for them to behave is not to create problems for the Chicago party machine.

Which means that she'll have to get used to her future role: of delivering the House Democrats to whatever it is President Obama wants.

Donnerstag, Mai 14, 2009

Proves My Point(s)...

Whilst getting my cohorts to stand up and sing - and sing they do - I saw not one, but four articles in the WSJ today that underscore several points I've been making recently.

This goes to underscore the endemic nature of political corruption in the US right now.

This underscores how it was not markets that failed, but rather how government-mandated interference in these markets that led to the markets punishing those who have forgotten the Gods of the Copybook Headings.

The last two are really interrelated: this one shows that unions have regained some of their political clout under the Obama Administration, and this shows how modern unions corrupt the democratic process.

All are clear and present dangers to the well-being of the United States.

Let's take a brief look at the first point...

I don't think that too many outside of Johnstown would disagree that the Representative of that city, John Murtha, has turned earmarking into an art form. Why has he done this? Simple: Johnstown lost its last major industry, and only through the earmarks that Murtha has brought in has the city managed to survive. This is understandable: without some sort of perspective for economic growth, cities collaps and decay. But this comes at a major cost, one that the taxpayers in general are paying for the subsidies that keep Johnstown from turning into a ghost town. The difference between Johnstown and, say, Akron in Ohio, is their elected officials: Murtha brings home the pork.

To quote the article linked to:

About all this, John Murtha has said something to ponder: "If I'm corrupt, it's because I take care of my district."

When we speak of public corruption, we normally mean an official has been convicted of breaking a law. The bad pols did it. We are at the point, though, where it is hard to say that the corruptions of government are only about the politicians.

Murtha may be right. We are all earmarkers now.

Here's another way of putting it: The U.S. budget is now history's biggest mountain of swag; it is uncountable goodie bags filled with tax revenue. Mr. Obama's swag mountain, the fiscal year 2010 "budget," is $3.59 trillion high (25% of total GDP of about $14 trillion). His $800 billion stimulus bill was another pile of public cash. We the people have concluded that if we don't use the Honorable John or Nancy or Ted in Congress to get our piece of it, someone else will get it.

For the longest time, we were able to believe that these corruptions were the inevitable but petty price of politics. But I agree with John Murtha. It isn't petty anymore. It isn't just about amusing "pet projects." The whole system has become an earmark. The politicians have been shaping the system so that more and more people have to buy in to the earmark philosophy -- we pay, they decide -- or get left out.

Barack Obama isn't a reformer. He's the president of Earmark Nation. We are about to enact the Obama federal health-insurance entitlement, which on top of all the other entitlements and their limitless liabilities will require pulling trillions of dollars more into the federal budget. Whatever nominal public good this is supposed to achieve, it means that they, these 535 pols, most of them gerrymandered for life, will decide in perpetuity the details of how to dole it out.

When this experiment called the United States began some 200 years ago, neither the "liberals" nor "conservatives" of that time imagined their successors would have such vast sway over the nation's income, or that U.S. politics would be mostly factions begging and fighting to have fragments of it disbursed back to them. The phrase "pay to play" would have disgusted them.

This is indeed endemic corruption, and the argument "everyone is doing it" doesn't make it right. As I have said elsewhere: I have seen the future, and it is Chicago.

The second point is how markets were distorted by government regulation in such a way that market-clearing economic activity led to the results that the critics are now calling market failures: the markets didn't fail. They just punished those who followed government-mandated development that no market could sustain.

This is the great tragedy of the recent crisis: that government, which got us into the situation, is actively making things worse. The markets obey the Gods of the Copybook Headings, the unavoidable effects of cause and effect, the inexorable meeting of demand and supply in clearing the market of available goods, what we economists call equiblibrium. Politicians sincerely believe that they can manipulate markets to give them the politically desired effects: that works only for a relatively short period of time, as markets will ruthlessly punish those who mess with them. The invisible hand of Adam Smith doesn't care about political goals and will destroy, in the long run, anyone trying to game the markets for political effects.

This doesn't relieve the banks of responsibility for their errors: they should have protested more and fought the legislation. They knew that these government regulations were going to lead to ruin, but failed to persuade. Of course, it may have been a virtually impossible task to persuade such completely ignorant politicians that dominate the body politic today.

The last point is how unions have perverted their role, how they have become completely corrupt and tools for political purposes that actually serve to punish and impoverish their membership.

More on that later: suffice to say, read the whole thing at both links.

Mittwoch, Mai 13, 2009

Why Chrysler Matters...

Looking at the Chrysler fiasco, two things are apparent:

1) political payback determined the nature and shape of the financial rescue of the company, specifically the lopsided gains for the unions, who in a normal bankruptcy court would have been low on the totem pole, rather than up at the top;

2) the disdain of the Obama Administration for the rule of law is appalling, to put it mildly.

Read this to understand why.

The key point here is that the government has made decisions about Chrysler that are not based on law, but rather on political calculations to please their base, in this case the UAW.

Let's try to understand why this is bad: under the Articles of Confederation, the predecessor to the US Constitution, debtor laws were highly different between the states, allowing companies heading to bankruptcy the freedom to pick and choose, invariably to the detriment of their debtors. As a result, the Constitution (Article I, Section 8) clearly stipulates that bankruptcy laws are to be uniform.

Why is this enshrined in the Constitution, of all places?

Let's take a look at Article 1:

The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate commerce with foreign nations, and among the several states, and with the Indian tribes;

To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States;

To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;

To provide for the punishment of counterfeiting the securities and current coin of the United States;

To establish post offices and post roads;

To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries;

To constitute tribunals inferior to the Supreme Court;

To define and punish piracies and felonies committed on the high seas, and offenses against the law of nations;

To declare war, grant letters of marque and reprisal, and make rules concerning captures on land and water;

To raise and support armies, but no appropriation of money to that use shall be for a longer term than two years;

To provide and maintain a navy;

To make rules for the government and regulation of the land and naval forces;

To provide for calling forth the militia to execute the laws of the union, suppress insurrections and repel invasions;

To provide for organizing, arming, and disciplining, the militia, and for governing such part of them as may be employed in the service of the United States, reserving to the states respectively, the appointment of the officers, and the authority of training the militia according to the discipline prescribed by Congress;

To exercise exclusive legislation in all cases whatsoever, over such District (not exceeding ten miles square) as may, by cession of particular states, and the acceptance of Congress, become the seat of the government of the United States, and to exercise like authority over all places purchased by the consent of the legislature of the state in which the same shall be, for the erection of forts, magazines, arsenals, dockyards, and other needful buildings;--And

To make all laws which shall be necessary and proper for carrying into execution the foregoing powers, and all other powers vested by this Constitution in the government of the United States, or in any department or officer thereof.

Bold simply underscores the point.

See where this places the central government? It clearly lays out what the central government not merely can do, but must do.

Uniform laws on the subject of bankruptcies...

What the Obama Administration has done is to subvert the rule of law here (to quote the WSJ article linked to above:

The Obama administration's behavior in the Chrysler bankruptcy is a profound challenge to the rule of law. Secured creditors -- entitled to first priority payment under the "absolute priority rule" -- have been browbeaten by an American president into accepting only 30 cents on the dollar of their claims. Meanwhile, the United Auto Workers union, holding junior creditor claims, will get about 50 cents on the dollar.

This was not done by changing the law but rather by a direct subvention of the law, i.e. ignoring the law for political reasons.

The silence of the rest of the MSM is deafening on this: this is a clear violation of the constitution that the President swore to obey:

"I do solemnly swear (or affirm) that I will faithfully execute the office of President of the United States, and will to the best of my ability, preserve, protect and defend the Constitution of the United States."

This isn't the first time that the Obama Administration in the first 100 days - only 100 days, and two Constitutional violations already! - has deemed it necessary to ignore the Constitution. The first was when pressure was put on executives under TARP to return their bonuses under threat of making them illegal retroactively.

This is part of Article 9:

No bill of attainder or ex post facto Law shall be passed.

Guess that the Constitution, for the Obama Administration, is not worth much more than the recycling value of the paper it was written on.

Freitag, Mai 08, 2009

Another Data Points For The Trend...IV

Here is another data point:

Pension Players.

This is the key quote:

But its emergence as one of six firms that collected finders' fees for securing public pension fund investments in both New York and New Mexico -- along with them Wetherly, Morris' firm Searle, and a firm called Gold Bridge run by a Sacramento lobbyist -- is the latest indication that the alleged pay-to-play scams that have roiled the nation's retirement funds involved a vast and deeply-enmeshed web of super-connected players. It's unlikely that the most prominent boldfaced names thus far dragged into the scheme -- like money manager turned car czar Steve Rattner, had any clue about the more brazen practices of the scheme's masterminds. But the investigation stands to shed considerable light on those players perceives as "normal" in the unregulated world of middlemen who control access to the pursestrings of public finance.

The key phrase: "a vast and deeply-enmeshed web of super-connected players."

Finding and identifying these folks is the key to identifying and ending the corruption involved with public pension fund investments via "placement agencies", which apparently exist as parasitical organizations off public pensions. No one needs these folks: getting investment instruments and public pensions funds together is something that the pension fund managers should be doing, if they were doing their job.

Which apparently they're not. While apparently nothing illegal is happening, the point is that there is no reason for these people to be getting paid literally millions of dollars to fulfill a service that the government is supposed to do. This is what the more subtle forms of corruption do: they replace government employees with private services without need. The fund managers are still there, but once the "placement agencies" are used, they get a commission.

Nice work if you can get it. Of course, you have to be part of that "vast and deeply-enmeshed web of super-connected players".

Oddly enough, if you take a look, you see that this connects back to the ... Clinton White House and the use of the Lincoln Bedroom as payoff for campaign contributions. Not exactly one of Bill Clinton's more stellar moments - he did have some, albeit not usually of his choice (welfare reform, which the Republicans in Congress pushed through, comes to mind, which really annoyed most of his supporters) - and clearly an ethical violation.

Who was it that said "not even the appearance of impropriety?"

President Carter, in a "pledge to avoid even the appearance of impropriety" in choosing his cabinet appointees, said that.

Looking at the data points for this trend, it is hard to avoid not finding impropriety. This is probably the biggest challenge facing not merely the Republicans, but the entire country: finding and rooting out corruption. Like the man said: a vast and deeply-enmeshed web of super-connected players.

Who are, in the vast majority, part and parcel of the Democratic Party machine.

Further Data Points For The Trend...III

So, yet another nail in the coffin: start stacking the court. See here.

Sorry, appointing judges that have "special empathy" for a group is a direct contradiction of the idea that the rule of law is a blind rule. Deciding if a law has been broken isn't a function of who you are - except in kleptocracies and dictatorships - but rather something that should be argued out in front of a completely impartial, uninvolved arbiter whose only job is to decide whether a law has been broken or not (and what penalties should be applied.

But apparently President Obama's vision, of an America ruled by an enlightened elite that Can Do No Wrong (and who may, when it is necessary, simply ignore the law in the name of "social justice"), is too important to allow someone to say ... no.

Donnerstag, Mai 07, 2009

A Brief History...

This is one of the best concise histories of the idiocy that has passed as policy in the US since the 1920s.

The decision to subsidize housing in the US was not one that immediately led to perdition: however, it compounded over time and that is why we are where we are.

Steve Malanga wrote:


The Times analysis exemplified our collective amnesia about Washington's repeated attempts to expand home ownership and the disasters they've caused. Each time we clean them up, then — as if under some strange compulsion — set in motion the mechanisms of the next housing calamity. That's exactly what we're doing once again.

This is indeed one of the fifth rails of US politics: don't dare touch housing subsidies, as entire industries were built upon them that throw more money at lobbying than anyone can really comprehend.

This cycle goes back nearly 100 years. In 1922, Commerce Secretary Herbert Hoover launched the "Own Your Own Home" campaign, hailed as unique in the nation's history. ...The great national effort seemed to pay off. From mid-1927 to mid-1929, national banks' mortgage lending increased 45%. The country was becoming "a nation of homeowners," the Times exulted.

But as homeownership grew, so did the rate of foreclosures, from just 2% of commercial bank mortgages in 1922 to 11% in 1927.

This happened just as the stock market bubble of the late '20s was inflating dangerously. Soon after the October 1929 Wall Street crash, the housing market began to collapse. Defaults exploded; by 1933, some 1,000 homes were foreclosing every day.

The "Own Your Own Home" campaign had trapped many Americans in mortgages beyond their reach.

Financial institutions were exposed as well. Their mortgage loans outstanding more than doubled from the early 1920s to 1930 — $9.2 billion to $22.6 billion — one reason that about 750 financial institutions failed in 1930 alone.

Sound familiar?

Following this catastrophe, the Depression-era federal government created many institutions to fix flaws in the mortgage market, from the Federal Home Loan Bank system to provide a stable source of funds for banks, to the Federal National Mortgage Association (later known as Fannie Mae) to purchase federally insured mortgages.

These were valuable initiatives, but they meant that by the end of the Great Depression, the government had become the dominant force in the mortgage market. Politicians could use that regulated market to advance their policy agendas — or careers.

In other words, the problem is part and parcel of the political culture of the US, which by definition means that it is a structural problem, one that will never go away due to the upswings that are part and parcel of the business cycle. The problems are also ones that any sort of downswing makes worse, as they are not sustainable: the longer the programs run, the larger the subsidies and the greater the imbalances, which then generate new legislation to address, beginning the positive feedback loop for a new cycle of worsening structural conditions.


As home ownership grew and housing prices rose, political pressure to allow riskier loans increased, too.

Under demands to keep pumping out loans, the government began loosening its mortgage-lending standards in subsidized programs, attracting riskier home buyers and provoking a surge in foreclosures on government-backed mortgages.

The failure rate on FHA-insured loans spiked fivefold from 1950 to 1960, according to a 1970 National Bureau of Economic Research study, while the failure rate on mortgages made through the Veterans Administration nearly doubled over the same period. By contrast, the foreclosure rate of conventional mortgages barely increased.

This latter is all you need to understand in order to see why the problem, the core problem, of today hasn't even been addressed and will not be as long as it remains profitable for politicians to behave otherwise: failure rates of subsidized mortgages increase over time as they are expanded, while failure rates of conventional mortgages are stable over time.

Rather than learn from this lesson, the government embarked on yet another failed attempt to increase home ownership: the FHA's urban-loan debacle of the 1960s. This time, the object was to solve America's urban discontent through ownership. In 1968, the federal government decided to give poor families FHA-insured loans that required down payments of as little as $250. The idea was that home ownership would bolster deteriorating cities.

Oddly enough, this is one I remember clearly from my childhood. The superficial understanding, which failed to comprehend the frustration and rage of the rioters and served to deny the real problem (that of the systematic racism of low expectations and the accompanying lack of social and economic mobility), was that those rioting didn't have a stake in the neighborhood, and by giving them, basically, houses, they'd then gain a stake in the neighborhood and wouldn't riot. This was at best superficial and rather condescending, since it implied that those who rioted didn't understand what they were doing. Riots are the symptoms of a society blind and unwilling to listen.

Not urban uplift, but urban disaster, followed. Unprepared for ownership, many families defaulted on mortgages or were fleeced by seedy speculators.Foreclosures spread, infecting at least 20 cities, where massive abandonments served to hasten urban deterioration. In the end, the government absorbed an estimated $1.4 billion in losses because of Washington's unexamined assumption that home ownership would transform the lives of low-income buyers in positive ways.

The road to hell is paved, of course, with the very best of intentions.

Not even the national FHA scandal could cure Washington of its obsessive housing disorder. It simply changed its sights. It now began pushing private banks to lend more in lower-income neighborhoods. In 1977 the federal government passed the Community Reinvestment Act (CRA) to give regulators the power to deny banks the right to expand if they didn't lend sufficiently in those neighborhoods. When banks responded that they couldn't find many credit-worthy customers in some neighborhoods, housing advocates backed by federal officials argued that banks had to change their lending criteria.

See the logical development? Rather than acknowledging that the programs weren't working and that the markets were telling a very different story, the government, in it's *infinite* wisdom, kept on digging and decided to bring in the heavy equipment to get to the bottom of the problem, while not realizing that it was the digging of the hole itself that was the problem. But at this point the hole started to get concrete sides...

Using protests under CRA, community groups like Acorn were able to pressure banks like Louisiana Bancshares in 1986 to agreed to new "flexible credit and underwriting standards" for minority borrowers. The advocates also attacked Fannie Mae, the giant quasi-government agency that bought loans from banks, arguing it was too strict in sticking to underwriting standards. The campaign gained further traction under President Clinton, whose housing secretary, Henry Cisneros, declared he would expand homeownership among lower- and lower-middle-income renters. His strategy: Push for no-down-payment loans; expand the size of mortgages that the government would insure against losses; use lending laws to direct more private money into low-income programs.

And that is the crux of the matter: using lending laws to direct more private money into low-income programs, of manipulating markets to be something that they could never be, which markets really don't like.

Soon after Cisneros announced his plan, Fannie Mae and Freddie Mac agreed to buy loans under looser guidelines. Washington also pressured nonbank lenders, which weren't covered by CRA, to lower their standards or feel the CRA heat.Then a coalition of nonbank lenders shocked the financial world by signing a 1994 agreement with HUD, pledging to join in efforts to rewrite lending standards. The first lender on board: Countrywide Financial, the huge mortgage firm that would be at the core of the subprime meltdown. Legislators pressed for more affordable lending and securitization of loans to clear them off bank books. The lending spree helped spark an increase in securitization of mortgages to people with dubious credit.

Bingo. See how the hole has been deepened, the sides reinforced by more and more concrete, that the hole started sucking in the equipment used to dig it...


Before we've even worked our way through this crisis, elected officials and policymakers are busy readying the next.

Barney Frank, the Massachusetts congressman who is chairman of the House Financial Services Committee, has balked at proposals to privatize Fannie Mae and Freddie Mac. Such a move would eliminate their risk to taxpayers because the government uses them to subsidize the affordable-housing programs that Frank supports.Republicans and Democrats, meanwhile, have scrambled to reignite the housing market through ill-conceived tax credits and renewed federal subsidies for mortgages.Behind these efforts is misconception among politicians that housing drives the American economy and therefore demands subsidy at virtually any cost.

Changing notions of fairness and equity also cloud policymakers' minds.

This is why the US economy won't be recovering sharply and why the desperately hoped-for stimulus effects will prove to be chimerical at best. The multiplier is well below 1, and we may well discover that there is a zero after that magic point as well...especially considering the corruption involved.


Our experience since the Depression should teach us that government's most important role in the market should not be to promote historically risky lending standards. It should be to ensure a sturdy economy and judicial system that protect the interests of buyers and sellers in the largest transaction that most will ever undertake.At the same time, government should do no harm, especially when it comes to the cost of housing.

This is indeed the needed structural change that would gut the baby-boomer generation and close down the liberal world for the intellectually, moral and increasingly fiscally bankrupt world that it is.

One reason politicians and policymakers increasingly feel they must subsidize mortgage rates and launch ownership campaigns is that since the 1970s, stringent housing and zoning regulations have raised the price of home construction and reduced the supply of affordable housing.One solution is for the federal government to tie aid to states to local regulatory reforms that reduce the cost of construction and encourage additional building.The federal government should also consider eliminating or capping the home-mortgage tax deduction, which drives up the price of housing in ways particularly damaging to lower- and moderate-income buyers.

Ultimately, the goal should be to end subsidies that amount to a government project to direct home ownership.That kind of political meddling in this vast marketplace has wreaked havoc and will continue to do so — if we keep letting it.

Hard to improve on this, suffice to say: this is the great myth of modern America, and until this myth is gored, taken down and buried with extreme prejudice, nothing will change.

It is the duty of the economics profession to be the dismal science, not merely its assigned role. By failing to make it clear that these kinds of systematic market distortions always ends in tears, it allows politicians and fools - sorry, I repeat myself - freedom of action to create the very problems that the taxpayers then have to clean up...

Silliness and Capitalism...

This article stands as a proxy for many others.

While I won't get into a complete fisking - not worth it - there are some memes here that bear analysis:

First and foremost lies a failed understanding of how the world economy actually works:

The entire contemporary financial system was based on the assumption that financial markets were always efficient and rational. That idea fell off the cliff along with the world economy that it helped to wreck.

Wrong. The contemporary financial system was based on the knowledge that financial markets were always efficient and rational. Not the assumption: what went wrong was that governments, in their *infinite* wisdom, gamed the system to move investment in the ways they wanted them to be moved. The markets have punished this stupidity. Failing to understand this lies at the core of the following errors and silliness...

Let me reiterate a God of the Copybook Headings: Markets are ruthless, impartial and deadly. Make a mistake there, misjudge the market, and you will be punished by failure. Do your homework and dot the i's and cross your t's and you will be rewarded by success.

Government manipulation of markets for political gain is always punished by the markets. Some of the time this is painfully obvious, such as now. Most of the time the political gains are greater than the financial losses, which is why politicians love screwing things up so badly.

Three broad steps must be taken to remake this failed, unstable model: one, regulating global finance; two, correcting global economic, social and environmental imbalances; and three, devising ways to make sure economic progress is aligned with social needs.

See what I mean? There isn't a single economic or financial point to the analysis. To paraphrase a Rahm Emanuel, a crisis is a terrible thing to waste. The arguments here are basically this: we must fundamentally change world economics in order to achieve the political goals that I want to have happen. This ignores the basics of the world economy, in the mistaken belief that governments can manipulate them in order to achieve political goals. Like I said: government manipulation of markets for political gains is always punished by the markets. This sometimes takes a while, but it always happens.


For balance to be restored, two things must happen.

First, the United States—which has disproportionately served as the market for global exporters—must increase its exports, either through devaluation of the dollar (something dollar holders fear) or industrial policies that encourage exports (not of financial services, but of manufacturing), or both

Too simple a story. Right now, the only way to fundamentally change the US current account and trade balances from long-term deficits towards either surpluses or at least a balance is to make the rest of the world a more attractive place to invest their money. The current account deficit of the US is based less on the financial side of the trade imbalance - the US has one of the smallest net trade quota, measured as net exports as a % of GDP, of the industrialized countries - as much more the fact that the US dollar and the US economy is by far the most politically stable, financially attractive and industrially productive countries around, making it the goal for those interested in both a safe haven and as a place to achieve the best returns on capital with the lowest risks.

Merely increasing exports doesn't change that. It's indicative of understanding symptoms and not first causes. Classic trade economics would indeed call for the US to massively increase its exports to much of the world, but this can only happen if two things happen: the dollar is devalued severely and the US decides to subsidize its export industries in order to compete with locally-made products. Neither of these "solutions" can happen without the government intervening in markets, and we know what happens to that.

And second, export surplus countries, particularly China, must raise wages, expand social safety nets and increase domestic demand. China's stimulus program includes first steps in this direction, and its proposal for a global currency would also help redress financial and trade imbalances.

Sigh. Looking at US trading partners, he chose the one that appears to fit with his solution: there are plenty of export surplus countries, especially Japan and Germany, who cannot do this. They already have high wages, extensive safety nets and domestic demand is, due to demographic developments, simply incapable of being increased. These economies, whose economies are severely distorted due to the steroids of both competitive advantage and export dependencies, are fundamentally not in equilibrium with their domestic demands, the inverse of what the author is arguing for.

Fundamentally, the world is slowly heading to a Heckscher-Ohlin equilibrium where comparative advantages will determine the economic health of any country: put simply, any one country's ability to excel in production of specific goods and services will reflect their ability to trade those goods and services world-wide and, in the case of developing countries, be able to finance the development of other developments.

World leaders must address other, related global imbalances with a combination of global and coordinated national policies, not leave solutions just to markets. In addition to being unfair and politically destabilizing, wildly uneven patterns of development, including rising inequality among nations and within most nations, threaten the global economy. The imbalance between growth and the environment, most critically manifested in global warming, threatens the planet. And the growing imbalance between the power of multinational corporations and workers endangers both popular democracy and wise regulation of the economy.

Sigh: again, the failure to understand that it was government interference in the basics of supply and demand was what created this problem, and hence cannot be part of the solution. The markets will always judge the solutions. The world economy is not threatened by markets: the politicians' political goals, to be achieve by manipulating the economy, are threatened.

As they should be. Big difference. Given the current quality of governmental interference in markets, to speak of "wise regulation" is a farce of the worst kind.

Resolving such imbalances and developing new mechanisms for control of finance ultimately requires finding new ways of making economic activity serve social needs, thus expanding democratic control of the economy. That means using markets, not being used by them. That means recognizing that markets are not the only mechanisms for delivering the goods and services people need.

Once again: sigh. Democratic control of the economy can mean only one thing: a reversion to command economy. The people hath spoken: I command the economy to make it so. Try to do this, and the markets will punish you the way they punish all who try a command economy. To reiterate: the idea that you can use markets is the fundamental reason we are where we now are. continuing to believe this is fundamentally silly.

Ultimately, trade is not an end in itself, but one means to the end—creating a better, more meaningful and stable life for all on a planet that is not endangered by the process. 

Yawn. While you're at it, I want a unicorn. And a pony for my girls.