Montag, Mai 31, 2010

Israeli's Actions...

Having watched the available video - one clip from the Israeli boarding of the vessel filmed by the members of the crew, the other clip from the Israeli Navy - I can only say one thing: this was a deliberate and carefully planned provocation designed to place Israel in yet another untenable situation.

The French would have sunk a ship while it was outside the harbor in Cyprus as a message to not even think about doing what was planned.

The Israeli clip shows what has been reported by other sources as well: that Israel offered an alternative to those on those ships, allowing them to transport the goods the ships were carrying via an Israeli port under the supervision of those on the ships, with no other strings attached. If the people on the ships - I don't want to call them protesters, as they are mostly clearly not - were serious about simply getting goods to a population purportedly in distress, that is the path open to them.

They chose deliberately to ignore this and proceeded on their missions, which was to force Israel to open fire on "unarmed" civilians and "violate international law".

Two things: when you are boarded by the military, you don't answer by swinging fire axes if you are on a peaceful mission. This is clearly visible on the clip from the Israeli boarding, as individual soldiers coming on board via helicopter are attacked immediately. This disqualifies the mission as being peaceful: any discussion of "appropriate force" is sophistic hair splitting and serves to ignore the real question.

What is that?

Whether Israel has the right to defend itself.

This incident - the loss of life is, as always, regrettable - underscores just how far Israel has been demonized. It is the consistent, never ending, hate-filled denial of Israel's right to existence, the cement that keeps virtually all countries in the Middle East from falling apart in an orgy of self-destruction, that is the problem here. There can be no dialogue with people who deepest, most sincere desire is the negation of your existence.

Think of the alien's answer in Independence Day when it was finally asked what it wanted from humans: "For you to die".

There is no difference here. This whole undertaking was a cynical propaganda exercise that will play extremely well to the naive, the ignorant, reinforcing their hatred and denial. Turkey is lost to the West (and membership in the EU will at this point never happen) because of the dominance of religious intolerance in the government there, despite the fact that Israel and Turkey enjoyed good relationships for so many years. Iran's continuing work to transform the Middle East after its own desires continues apace.

The West sleeps.

Donnerstag, Mai 27, 2010

The Long Hand...

According to Keynes:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

We can see the insight of this almost every day. The irony, of course, is that it is now Keynes who is the defunct economist that he himself refers to.

This gives pause for thought.

Keynes thought that such numbers were, at the end of the day, not really very important: he rejected the monetarist positions that basically said if you keep your money accounts in order, everything else will fall into place. He recommended ignoring them and watching the GDP numbers instead (let us remember that GDP was a fairly new concept when Keynes wrote his masterpieces (and don't get me wrong: they really are such), with emphasis on incomes. The business of government was full employment, inflation via monetary excesses easily avoidable.


The M3 in the US has been largely ignored over the last decade, reflecting both an ideological standpoint (Keynesian vs. Chicago School, with the Chicago School winning the hearts and minds of business, but Keynesian thought won in government and the Democratic Party) and the fact that indeed M3 and other monetary statistics can be erratic and are difficult to analyze in the short term.

It is now falling at the fastest rate since the Great Depression.

First of all, for those not conversant with the M1, M2, M3 and other monetary statistics, what is the M3?

It is the sum of notes and coins in circulation, traveler's check issues by non-banks, demand deposits (basically checking accounts and the like which are accessible at all times and without notice), other checkable deposits (OCDs), which consist primarily of negotiable order of withdrawal (NOW) accounts at depository institutions and credit union share draft accounts, savings deposits (also accessible at all times and without notice), time deposits of less than $100k and money-market deposit accounts for individuals, as well as large time deposits, institutional money market funds, short-term repurchase and other larger liquid assets.

The important part is: liquid assets.

What does it mean when the M3 starts to fall?

Well, let's understand what it means when the M3 starts to increase: it represents increases in money due to economic activity (aka "profit"), as well as inflation effects. Hence M3 in and of itself can't explain what is going on, as you can't tell if it is showing inflation (bad) or increases in economic activity (good).

But let's look at how money supply moves in conjunction with economic activity. Here we'll use what is called the M2, which is available, as the M3 was discontinued in 2005 (with the argument that the M2 did the job just as well: the M2 is the M3 minus the large time deposits, institutional money market funds, short-term repurchases and other larger liquid assets).

Something ... odd emerges.

The ratio of GDP (nominal) to M2 is fairly stable and moves around 42% from 1970 until around 1987, then starts to increase rapidly in the 1990s to over 53% in 1997Q3. It then falls in two stages, from down to an average of 48% in 2002-2005, then falls once again back 42% in 2009.

This ratio increases during strong periods of economic expansion: it falls when the economy cools. The reason? This is a measure of liquidity, of available monies. During economic expansions this increases as profits are not invested immediately, during economic downturns it decreases because monies are already tied up and profits fail to increase at the rate "needed" to keep M3 up.

Hence the answer to the question of what it means when the M3 falls is that the cash flow, as it were, of the entire country is in contraction, meaning not so much that there isn't any money out there, but rather that it's simply not easily available.

Hence while the economy may be showing signs of growing (ex the rather large stimulus programs, of course), a credit crunch is developing (shucks, it's already there and has been) that points to a severe brake on the economy.

The further drop in the money supply as reported here is disturbing: it means that despite the government acquiring, literally, trillions of new debt in order to prime the pump, that there is less and less liquidity in the market.

This deserves further observation: the less liquidity in the market, the less the real economy can finance operations. If they can't do that, then the house of cards falls down: it is akin to the speculator who is so heavily leveraged in their investments that they literally can't, despite millions of assets, afford to have the car fixed because virtually their entire income goes to financing their investments. One little misstep and insolvency is the result, of being unable to meet aggregated debt servicing.

Now, the US is far from that point, right?

Hmmm: let us look again at the Daily Treasury Statement from 25 May 2010: US debt (Table IIIC) is at 90.52% of the debt ceiling, and at 89.9% of GDP.

You can extrapolate from that: the US is, effectively, not even one paycheck away from insolvency, and the Rating Agencies, once again, have failed to properly downgrade a country that does not, at this point, deserve a AAA rating.

But if not the US, who?

Ye gods.

Mittwoch, Mai 26, 2010

The Core of the Problem...

The headline to today's FT says it all:

"Investors Flee Risky Assets"

Why is this the core of the problem?

First of all, the "investors" aren't investors: they are speculators. They didn't buy something that generated a cash flow, they bought something on speculation that its value would rise.

Second: what the hell is a "risky asset"?

An asset is something you own and is calculated, in the greater scheme of things, against your liabilities (things you owe) to give you an idea of your financial situation (i.e., do you, at the end of the day, have money, or do you owe more than you are worth?).

As such, no asset is risky: what is risky is the potential changes in the value of the asset. There is nothing particularly risky in and of the asset itself, be it stocks or bonds: what is at risk is the future value of such assets. That's been at the core of the speculative wave of the last 15 years, and those speculators now have the very real fear of losing it all. That's what's driving the market changes of the last few days.

Hence the headline really should be:

"Speculators Sell Off in Fear"

That's what's really happening.

The storybook fable of recent years, that you can hedge and fudge your speculative activity by finding someone who was willing to bet that you're wrong and he is right, is over. People in the markets have made - and lost - fortunes by playing with increasingly sophisticated bets.

But these folks aren't investors. They're speculators. There's a world of difference, and the sooner that people realize that you can only afford to speculate with money you are also willing to lose completely, the better.

Donnerstag, Mai 20, 2010

A Very Slow Motion Train Wreck...

When watching old films, silent films, there was a certain obsession with train crashes. Perhaps the most famous was the destruction of the locomotive "Texas" in the 1926 Buster Keaton film "The General", which was also the most single expensive scene in all of silent film movies (cost $42,000 back then, ca $1.7mn today).

We're seeing a return of the spectacular train wreck, but one that is happening in very slow motion. Regardless, it is as inevitable as the train wreck of the "Texas" in "The General".

Read this to understand.

A $1 tr bailout to union employees and government workers - who are making out like bandits here - is in the works, not today, not tomorrow, but over the next 20 years or so.

Why is this happening?

Simple: a simple and fundamental failure in understanding how pension funds actually work without being funded. The basic assumption that made such funds even remotely plausible was an overestimation of the returns these funds could generate (most assume 8% return on investments, a rate that today you can only find for junk) and, as a result, an underestimation of the funds needed to guarantee a set return.

These deals should repudiated as being, basically, fraudulent: instead of reducing worker benefits, the taxpayers are expected to bail out government workers instead.

Seven states are currently in trouble and will have to be bailed out within the next ten years. A total of 31 states are facing this over the next thirty years.

Why? Because they entered into pension deals that are, at the very worst, sweetheart deals. There are some where the pension funds have a higher priority than bond holders.

Slow motion train wreck indeed.

Let's quote Thatcher here, in a speech to the Conservative Party Conference (10 October, 1975)

And I will go on criticising Socialism, and opposing Socialism because it is bad for Britain — and Britain and Socialism are not the same thing. (...) It's the Labour Government that have brought us record peace-time taxation. They've got the usual Socialist disease — they've run out of other people's money.

Government workers and public unions are slowly running out of taxpayer money. One of the greatest swindles of all time is slowly unfolding before our eyes, but there are few taking notice, precisely because it is unfolding so slowly. $1 tr is no chump change.

The Day Of Reckoning...

Either the US government receives, from Congress, dispensation to increase US federal government debt above and beyond the $14,294,000,000,000 limit it currently has, or, given the current rate of increased debt acquired by the US government, in 45 working days, the US government will not be able to add to its debt, as the current debt (as of 18 May 2010: $12,984,667,000,000) will, at the current rate (some $27,000,000,000 per day additional debt), exceed this limit.

Either Congress has to raise the debt ceiling or the US will not be able to go further into debt.

That's today in nine weeks: 22 July 2010. Will Congress even be in session on that day?

Given the present Congress, I dare say that the credit limit will be extended. However, it doesn't change the fundamental fact that US debt is climbing at an unsustainable rate and that a day of reckoning will be coming.

Source: Daily Treasury Statement of the US Treasury (see here), own calculations. See Table IIIC.

Dienstag, Mai 18, 2010

US Has Used Up 90.4% Debt Limit So Far...

Found this place to really, really scare you.

It takes you to the Daily Treasury Statement that tells you exactly, as of the given day, the status of US debt in fairly decent detail.

The US debt ceiling is $14,294,000 million, that's $14.3 trillion dollars.

As of Friday, the US government had debt subject to the debt ceiling limit of $12,870,073 million, $12.9 trillion.

In other words, 90.4% of the debt ceiling has been used, and it's only May.

At the current rate of increases to the debt (some $267,273 billion per month), the debt ceiling will be reached in just over 5 months.

But that is only if the rate of the last 30 days is maintained, and it is low: the average increase in US debt for the year so far has been $839,774 billion per month.

If the debt were to continue at that past, the debt limit would have to be increased within the next month.

On Friday, the Treasury redeemed $253,741 million in Treasury Bills while issuing $190,725 million for a net change in debt of $63,016 million, on a single day. At that rate of increase, there are 22 business days left before the debt ceiling has been reached (actually, 22.6 days): that means on June 16 the debt ceiling will have been completely exhausted, barring a new increase or unforeseen need to increase the rate of debt accumulation.

I think this qualifies for the word "unsustainable".

Ye gods.

What happens when the debt ceiling is reached?

Simple: the Treasury may not acquire any additional debt, unless Congress raises the debt ceiling. Government finances grind to a halt, as the government may only redeem debt, not finance any new debt.

At the current rate, an increase in the debt ceiling would come up for approval in ... October. That's going to work very, very well in terms of timing for the upcoming mid-term elections.

In any case: yikes.

Hat tip: ZeroHedge.

A Hapless Presidency...

President Obama is hapless. Not hopeless - he may be that as well - but hapless, cutting a wretched and unfortunate picture of someone whose is apparently incapable of getting anything right.

This underscores how hapless he is. Seriously.

Nature abhors a vacuum, and politics abhors a leadership vacuum. This administration is turning out to be even worse than that of Carter: at least Carter still had the respect of countries like the Soviet Union and China when he turned out to be so terribly incompetent as President.

Obama doesn't even have that.

Why is this important?

Simple: we've seen the first glimpse of what a multi-polar world looks like. We see a rogue nation - Iran - cut a deal with two ambitious countries - Brazil and Turkey - to do business in exchange for political backing. We don't know the details of what sort of deal was cut, but we do know that one has been cut.

This is the re-invention of the classic old Machtpolitik, power politics, with secret deals, enemies masquerading as friends and deals being cut with a purported enemy. This is the face of a world where the US fails in its central role due to a lack of leadership.

President Obama couldn't be bothered with foreign policy: the only thing that the rest of the world is good for is making him look good when it comes time for elections. He's more concerned and interested in making sure that his gets theirs - that the people in and around the Obama Machine (which is what the Chicago Machine has become outside of Illinois) make out like bandits while not getting caught doing anything, dividing their opponents and creating a toxic environment in which only they can survive. Trillions in debt to bail out failed Democratic policies, trillions in debt in order to deny reality (that the welfare state can't be paid for and that the shibboleth of the Left, the War on Poverty, has abysmally failed as it must fail), and an enormous disinterest in what happens outside of the borders of the US except as it may impinge on election results.

Odd that the world doesn't play along with the Obama Administration and that other interests are emerging to fill that vacuum.

Hapless is actually being extraordinarily generous. He's being rolled, big time, and the damage to US interests will increase over time from significant to extreme. Secretary of State Clinton is failing to grasp the fact that the world doesn't operate according to her deepest desires: the move of Turkey here reflects the fact that Turkey has been lost, effectively, as a US ally in the area. She and President Obama can hope to positively influence Turkey, but the reality is that the Obama Administration has shown these countries that they have no reason to respect the interests of the US.

Ye gods...

Let Me Get This Right...

Nancy Pelosi, Speaker of the House, said that health care had to be passed so that people could read what was in it. No one knew what was in it, but they voted for it anyway.

Now we have Secretary of Homeland Security Napolitano saying that she doesn't know what's in a bill, but she's not going to vote for it anyway.

I wish they'd make up their minds. Either you don't know what's in the bill, but vote for it anyways, or you don't know what's in the bill, but you don't vote for it anyways.

Ye gods.

Montag, Mai 17, 2010

The Faces of Corruption...

This is an interesting list.

Robert Ruben, Greenspan, Summers, Gramm, Dimon, Friedman, Steel, Paulson, Buffet, and Goldman Sachs.

While I'd disagree with the choice of Greenspan, the others? Sounds like a fair cop: corrupt. Clear conflicts of interest, clear fraud, clear cases of people manipulating the system so that they and their friends can exploit the system for fun and profit. Ruben drove deregulation and helped repeal Glass-Steagall, which if still in place would have prevented much of what we've seen. I'd forgotten the role that Summers played in screwing Russia.

Again, it largely goes back to the Clintons. This has been festering under cover of darkness for quite a while.

Time to uncover and disinfect.

Fraud and The Implications If Everyone Does It...

If you haven't been reading ZeroHedge at all, get thee hence. It is not written for the layman, and you need to largely ignore the comments, which are full of BSD trying to impress each other. You also need to read carefully and understand what is being written, as a lot of it may not otherwise be terribly easy to understand.

But occasionally there are some gems there. For instance, the testimony of Galbraith before Congress, where he says:

An older strand of institutional economics understood that a security is a contract in law. It can only be as good as the legal system that stands behind it. Some fraud is inevitable, but in a functioning system it must be rare. It must be considered – and rightly – a minor problem. If fraud – or even the perception of fraud – comes to dominate the system, then there is no foundation for a market in the securities. They become trash. And more deeply, so do the institutions responsible for creating, rating and selling them. Including, so long as it fails to respond with appropriate force, the legal system itself.

Control frauds always fail in the end. But the failure of the firm does not mean the fraud fails: the perpetrators often walk away rich. At some point, this requires subverting, suborning or defeating the law. This is where crime and politics intersect. At its heart, therefore, the financial crisis was a breakdown in the rule of law in America.

If you do not understand this, then you will never understand what is happening: the financial crisis it is the breakdown of the rule of law in America, where fraud and corruption led to the enrichment of a few on an unprecedented scale. What's worse: this was all done deliberately in order to make that money.

Ask yourselves: is it possible for mortgage originators, ratings agencies, underwriters, insurers and supervising agencies NOT to have known that the system of housing finance had become infested with fraud? Every statistical indicator of fraudulent practice – growth and profitability – suggests otherwise. Every examination of the record so far suggests otherwise. The very language in use: "liars' loans," "ninja loans," "neutron loans," and "toxic waste," tells you that people knew. I have also heard the expression, "IBG,YBG;" the meaning of that bit of code was: "I'll be gone, you'll be gone."

Bingo: the fact that those in political control supported and abetted this should give you an idea of the scale of the disaster.

If doubt remains, investigation into the internal communications of the firms and agencies in question can clear it up. Emails are revealing. The government already possesses critical documentary trails -- those of AIG, Fannie Mae and Freddie Mac, the Treasury Department and the Federal Reserve. Those documents should be investigated, in full, by competent authority and also released, as appropriate, to the public. For instance, did AIG knowingly issue CDS against instruments that Goldman had designed on behalf of Mr. John Paulson to fail? If so, why? Or again: Did Fannie Mae and Freddie Mac appreciate the poor quality of the RMBS they were acquiring? Did they do so under pressure from Mr. Henry Paulson? If so, did Secretary Paulson know? And if he did, why did he act as he did? In a recent paper, Thomas Ferguson and Robert Johnson argue that the "Paulson Put" was intended to delay an inevitable crisis past the election. Does the internal record support this view?

The problem will be finding a "competent authority" before the files are misplaced underneath a table in the White House. This is not a new story, just a new chapter: the Clintons brought this corruption with them when they were elected, as all of their financial dealings stunk to high heaven, but were never properly investigated.

Let us suppose that the investigation that you are about to begin confirms the existence of pervasive fraud, involving millions of mortgages, thousands of appraisers, underwriters, analysts, and the executives of the companies in which they worked, as well as public officials who assisted by turning a Nelson's Eye. What is the appropriate response?

The appropriate response is to suck it up and enforce the rule of law. Otherwise, there is no difference, fundamentally, between the US and any other country enthralled to a corrupt and vindictive elite.


In this situation, let me suggest, the country faces an existential threat. Either the legal system must do its work. Or the market system cannot be restored. There must be a thorough, transparent, effective, radical cleaning of the financial sector and also of those public officials who failed the public trust. The financiers must be made to feel, in their bones, the power of the law. And the public, which lives by the law, must see very clearly and unambiguously that this is the case.

Clearer words have rarely been spoken: listen and heed his words. If those who have profited from the collapse illegally are not brought to justice, you've created a huge moral hazard because the system itself then becomes corrupted. Once that happens, literally anything goes, and you've got the worst of Chicago politics in control.

Turning Bankers Into Crooks...

Clive Crook, that is.

He's got a column in today's FT that richly deserves criticism, as he fails to understand just how he is adding to the problem, rather than subtracting from it.

This statement, for instance, is utter hogwash:

Democracies cannot embrace central-bank independence unreservedly – least of all now. What remains of the case must be based on a contingent weighing of costs and benefits, rather than sharp, principled and ultimately indefensible distinctions.

Sorry, Mr. Crook: you really don't understand why central banks must be independent or they will fail. The reason?

It's really very simple. Given political influence, politics will corrupt the central banks, reducing them to vassals of the politicians.

Central banks, as the organization where economic and financial realities come into direct conflict with political whims and fantasies, must deal with the problems that politicians cause: they are, in effect, the grown-ups at the edge of the playground, ensuring that skinned knees are cleaned and disinfected, that bullies don't run the playground, that everyone gets their turn, that toys are returned, at the end of the day, to those who own them and aren't taken home.

What Mr. Crook envisions is the subservience of central banks to the desperate political machinations of a generation of politicians who have become addicted to the idea that they are actually doing some good - hah! - whilst stealing, as it were, children's milk money.

Mr. Crook confuses as few others can that there is some sort of interplay between the central banks and politicians: that once the central bank strays, as it were, into political territory, that they must therefore be subservient to its masters.

Were that the obverse be true: that politicians were to be subservient to the central bankers when they stray into fiscal policies that require central bank actions to counteract.

Sadly, sadly, this is not the case: nor can a case be honestly made for the subservience of central bankers to politics when it is inconvenient for the politicians to understand that they are the people with a serious dependency - serial deficits show this - and that the central bankers are the sensible ones.

According to Mr. Crook:

Both have proved willing to conduct massive fiscal operations at the behest of treasury ministers. This is not what central-bank independence used to mean. As once understood, the idea is defunct.

By both he refers here to the US Fed and the ECB. But he is mistaken here.

Both the Fed and the ECB are not conducting massive fiscal operations at the behest of treasury ministers. They are conducting them in order to save those treasury ministers and their political jobs from utter and complete ruin. The central bankers are faced with a massive political cesspool and have absolutely no desire to clean things up, preferring instead to turn to those who have been wallowing around in the cesspool to stop thrashing about, we'll help you before the content of the cesspool, so to speak, reaches your ears.

That's not subservience: it is common sense and prudence, qualities that Mr. Crook apparently fails to understand. No central banker worth the name can afford to be anything but extremely practical and results-oriented. Sometimes the means to those results intrudes heavily into the political arena.

As Mr. Crook says:

Monetary policy was thought separable partly because it seemed simpler: all you have to do is control interest rates. But in a crisis monetary policy gets complicated. Quantitative easing erases the line between monetary and fiscal policy altogether. When central banks support troubled borrowers, public or private, they expose themselves to default risk: again, fiscal policy by another name. Such interventions involve choices about who will be protected and who will pay. Those are, or should be, political choices.

Sorry: these are not political choices. The idea that they are shows how thoroughly corrupted Mr. Crook is by politics, as what he is really saying is not that there is a real reason why these should be primarily political choices, but rather that it will be the ruin of political parties if their pet provenances and hobbies are gutted by the appalling errors of fiscal policy they have made.

Most fundamentally, why deny politicians access to the short-term trade-off between inflation and output in the first place? Because they will make a mess of it? Let me count the ways in which politicians might make a mess of things. Why not hand every area of policy over to an unelected group of experts who can be trusted to take the long view, confining politicians, if they are needed at all, to an oversight role?

Sigh. They won't merely make a mess of it: they will corrupt the process, ensuring that the mess will continue. In this case, Mr. Crook, we're not dealing with some nuances of health care coverage or decisions what weapons to buy for what's left of a military, but rather protecting a country's fundamental finances from corruption. That Mr. Crook cannot see this underscores how difficult it is to see when blinded.

Monetary policy in ordinary times is more separable from politics than fiscal policy and there are gains from maintaining some distance. One can say that much. But the balance of advantage depends on circumstances, and the particular country. In emergencies, independence has to give way – and it will, because central banks must bend to political demands at such times, at their own initiative or otherwise.

So central banks must bend because of ... circumstances. Let's give up independence, let's give up freedom, for the sake of convenience. I think Benjamin Franklin had something to say about that, and it was not flattering.

Economists who worry about infringing the independence of the Fed and ECB are right to. When central banks put themselves at the disposal of finance ministries, the results can be calamitous. But in emergencies they cannot stand aside – as the ECB has tried to. The reason is something that simple models of central-bank independence tended to ignore: fiscal incapacity elsewhere in government.

It's not so much that there is fiscal incapacity "elsewhere" in government, but rather that the government itself is fiscal incapacitated. Huge difference, Mr. Crook: the central banks are not part of the government, you see, because they are run not by politicians, not elected or under control, but rather are those who know how the system works and prevents it from being corrupted.

For different reasons, funding was choked off at critical moments in both the US (Congress was unwilling to vote resources at the required scale and speed) and the eurozone (cross-border fiscal transfers are problematic). Governments were unable to deliver adequate stimulus, or provide timely relief to distressed banks and shadow banks. The legislators and treasuries ordinarily responsible for fiscal policy failed, so central banks had to step in.

In other words, the adults showed up.

Where does that leave central-bank independence? Perhaps, as with other challenged orthodoxies, there is a case for revision not repeal. Central banks should avoid outright submission to political direction. That can stand. But sometimes they must cross the blurry line between monetary and fiscal policy, between separation and co-ordination. When they do, they enter into the world of politics. This goes with the territory, and it is pious to claim otherwise.

The let us be pious: they have crossed the line because politics has failed, and failed abysmally. For this the politicians should be rewarded with a say in how things are resolved? It wouldn't be fair otherwise, right?

Economics has nothing to do with fairness. Markets are ruthless and give not a fig for how capital was created, be it through hard-earned accumulation (savings) or inherited by fools: money is money for exactly this reason.

Or does Mr. Crook believe that we should create some sort of fairness doctrine for failed fiscal policies to save the political parties now so apparently in ruins? It would save Labor in the UK and it would save the Democratic Party in the US from the garbage heap of history, from the public display of their failings and the following turning out of the bums at the next elections, that is sure.

Let them lie there where they so richly deserve to lie. The Gods of the Copybook Headings would have it no other way.

Sonntag, Mai 16, 2010

Another Nail In The Coffin...

Here's another nail in the coffin (hat tip: Watts Up With That). Someone else has been caught falsifying the data behind climatology.

Key quote:

Science claims a special place in the trust of the public because of its unswerving adherence to certain objective methodologies, involving transparency, peer review, replicability and honest purpose. NIWA has forfeited that trust in so many ways.

NIWA is the New Zealand National Institute of Water and Atmospheric Research, and has been caught red-handed.


The official temperature record is wrong. The instrumental raw data correctly show that New Zealand average temperatures have remained remarkably steady at 12.6°C +/- 0.5°C for a century and a half. NIWA's doctoring of that data is indefensible. 

The NSS is the outcome of a subjective data series produced by a single Government scientist, whose work has never been peer-reviewed or subjected to proper quality checking. It was smuggled into the official archive without any formal process. It is undocumented and sans metadata, and it could not be defended in any court of law. Yet the full line-up of NIWA climate scientists has gone to extraordinary lengths to support this falsified warming and to fiercely attack its critics.

As the saying goes, go read the whole thing. This is another nail in the coffin for the arguments aimed at seizing control of the world's economy.

Dienstag, Mai 11, 2010

Utter Absurdity...Except More Of It...

This made my jaw drop.

Ye gods.

The disconnect between such people and the rest of the world is mind-boggling.

Who died and made the WHO the world government, able to impose taxes, completely irresponsible and out of control?

Ye gods.

And this is not some febrile imaging of Fox News: here is a link to the original.

It's Always Politics...

Elena Kagan's appointment to the Supreme Court (it must be confirmed by the Senate) underscores just how much emphasis the Obama Administration places on pure politics.

The Supreme Court is one of the three pillars of the American political system, next to the Presidency and Congress. Its primary job is to review disputes about interpretations of laws that have been bumped up from lower courts, generally because there is a dispute about the constitutionality of laws.

As such, a Supreme Court Justice, appointed for life to ensure impartiality (no need to run for re-election or to continue to curry favor with any administration), must be not only someone who knows the constitution intimately, but also someone with a proven track record that shows their ability to make, bluntly, wise decisions about what is lawful and what is not.

Consider, however, this:

Together with Justice Sonia Sotomayor, Elena Kagan's confirmation would represent a shift toward a younger, changing court, one that values experiences outside the courtroom and emphasizes personal interactions as much as deep knowledge of the law.

The key point here is that she is not being appointed because of her superior knowledge and interpretation of the Constitution, nor for her proven track record in judging difficult cases, nor for her extensive academic work. Having these qualifications is important: when discussing a case in conference, there are no law clerks present who can explain how the law works (see here):

Immediately following oral arguments in a case, the Justices retreat in conference to discuss the points of law at issue in the case. No clerks are permitted to be present, which would make it exceedingly difficult for a justice without a firm grasp of the matters at hand to participate.

In other words, the Justices have to know the law pretty damn well: without the qualifications needed, she can't participate properly.

The real reason to oppose her confirmation is because she could move the court away from interpreting the law towards making decisions based on non-judicial considerations.

In other words, politics.

She's a Chicago crony: she's part of the system, that lovely, deeply corrupt (while denying that there is annnnny connection whatsoever) web of personal favors, loyalties unto death (as the recent spate of "suicides" in Chicago have shown) and fabulous rewards.


Kagan describes herself as an "excellent" teacher and a consensus-builder among the fractious faculty of Harvard Law School, where she won praise from conservatives and liberals.

Note: she's not describing herself as an excellent constitutional lawyer, nor as a proponent of a clear ideological stance, but rather she is a "consensus builder". That's fine in politics, but not as a Supreme Court Justice: her job, apparently, would be to cajole the other justices into a consensus, rather than to lay out the law. This is the clear interjection of politics into the Supreme Court.

Perhaps more important to White House officials is her background as a policymaker in the Clinton White House. Obama described her as "a former White House aide with a lifelong commitment to public service and a firm grasp of the nexus and boundaries between our three branches of government."

What does that mean? She's first and foremost a policymaker, someone who in this case who is being appointed to the job not because of her qualifications, but because of what she can achieve for the Obama Administration by being on the Supreme Court.

Said William Galston, who preceded Kagan as a domestic policy assistant to Clinton: "What she would do is a bring a multifaceted understanding of the executive branch." He added: "She knows exactly how it functions and how it reacts to the other two branches. I do think that's a very useful experience for a member of the court to have."

The problem here is that she's not being appointed a policy adviser: she's being appointed to the Supreme Court to interpret the Constitution. If anything, she's a cuckoo's egg, an extension of the executive branch into the judiciary.

One issue for Kagan would be how many cases from which she would need to recuse herself. As solicitor general, she is the lawyer who decides how to handle all of the government's appeals at all judicial levels, not just the Supreme Court. She would have to stay out of cases in which she had played a role in lower courts.

Klain said Kagan would probably recuse herself from about a dozen cases in the upcoming term and five in the following term.

Great: if she is confirmed, she'd be limited in what she does. The Supreme Court considers some 10 000  petitions a year, hearing some 100 cases.

Consider this:

During the Justices' regular conference, the Justices discuss the petitions, and grant certiorari in less than five percent of the cases filed. (During the 1980s and 1990s, the number of cases accepted and decided each term approached 150 per year; more recently, the number of cases granted has averaged well under 100 annually). Before each conference, the Chief Justice prepares a list of those petitions he believes have sufficient merit to warrant discussion. Any other Justice may also add a case to the "discuss list"; cases not designated for discussion by any Justice are automatically denied review. The Court or a Justice may also decide that a case be "re-listed" for discussion at a later conference; this occurs, for example, where the Court decides to request input from the Solicitor General of the United States on whether a petition should be granted.

Do you see where the "consensus builder" fits in?

Her role would be that of influencing what cases are heard and, perhaps more importantly, which are not heard. If she can persuade the other justices that something doesn't need to be dealt with, then the case is automatically denied review.

This is the reason why she is being appointed: not because she is a constitutional scholar, not because she is a judge of impeccable quality and wisdom, and not because she is an outstanding lawyer whose commercial or criminal work is without peer.

She is being appointed because she can help suborn the independence of the Supreme Court. She is a policy maker: this is the interjection of the policy of a single administration, the Obama Administration, of someone from the executive branch, into the judiciary, suborning the principle of the separation of powers.

This Administration is increasingly looking like the most imperial administration since the days of Nixon. It's all about executive power.

Which, given the nature of the Chicago system, is unsurprising: it's all about who sent you and what you owe to the man behind the scenes. For them it's always politics.

For the rest of us, it's only more of the same liberal elitism that has utterly failed to perform, utterly failed to understand and utterly failed to do anything but be corrupted and self-serving.

Montag, Mai 10, 2010

Risk, Risk, and Risk...

There is risk and then there is risk, and then you have risk.

There is the fundamental risk, which is what you have when you enter into any kind of transaction, be it private, public, personal or whatever. Things never always work out the way they were planned, and it is the sign of maturity and responsibility to be on top of such risks: betting all of your money on having a horse win a race, for instance, in order to pay off debts, is highly immature and extremely irresponsible. When such a bet fails, it's your own damn fault, and the ruin is richly deserved. If you don't ask that pretty girl or handsome guy out, if you don't take that risk of rejection, you'll never know that they think the world of you and are just as hesitant as you were. Rejection is not fun and the fear of rejection is a huge restraint for most. Helping colleagues at work meet a common goal is risky when there's someone there who is more than happy to take the credit for what you have done and assigns to you the blame when something goes wrong. Hiding failure and poor performance is a greater danger than admitting it, as you take the risk of being found out as a liar and a cheat (for getting that bonus you know you didn't deserve). Having children is a risk, they may turn out to be the greatest heartbreak you have ever known when they're arrested for prostitution or child pornography or running Ponzi schemes.

This is the basic risk that we all go through every day of our lives, and it is the sign of a healthy personality that you can absorb setbacks and disappointments and yet take the risks needed to lead a happy and fulfilled life (and many psychological problems stem from an inability or unwillingness to take risks and/or recover from setbacks and disappointments).

Then there is the risk that can be hedged and canceled out. This is what drives the markets for credit default swaps and the similar derivatives: here the market sets a price on a risk that is based, basically, on the wisdom of the demand-clearing function of the markets. This is quantifiable and can be considered a simple cost of business, part of due diligence, a way of avoiding events that upset business plans and ruin bottom lines. The cancellation of this risk, of course, comes at a price, with the price set by what the market thinks the risk may be (set your risk premium too high and no one insures themselves against the risk if they think the risk is lower; set your risk premium too low and everyone's your friend, but at the cost of you taking on the risk without the necessary rewards. This is also what drives insurance policies of all kinds, including, at the end of the day, your basic social security programs. If you're worried about dying and leaving your wife and children destitute, then buy risk life insurance; if you're worried about someone hitting your car, buy car insurance; if you're worried about being able to pay doctor's bills, buy health insurance.

This is the risk that can be canceled out, removed from the calculations. Easy-peasy, if your know that it will cost you. In a perfect world, this kind of risk-canceling doesn't actually work, since if everyone knew the exact risk, the price would be set such that the risk premium would equal the profit premium, removing any incentive to actually take out such insurance: hence, there is imperfect information, with those offering risk coverage usually employing significant numbers of people whose only job is to quantify these risks and use that information to offer coverage for the risks at a higher price than the risk entails (after all, they're supposed to generate a profit from the business) and generating, as a result, a market with asymmetric information which is then hence biased to those offering risk protection.There is one fundamental aspect to these risks: they are the perceived risks, the ones that people think they can handle objectively, the ones that drive business markets for risks.

Then there the real risks out there, not just the Black Swan risks, but the reality of the risks involved that have been hidden from purveyance, of risks turning out to be different than expected.

These are the risks that the markets now face. Entire hedging systems have failed - the rating agencies failed to correctly identify the risks out there, Greece lied about its true levels of indebtedness, the Obama Administration is lying about the affordability of US debt - leaving people who thought they had bought insurance, instead realizing that they are completely exposed to these risks.

What do they do? First and foremost, panic and try to find the coverage that they want at any price in order to avoid carrying any sort of business risk.

Why do this? Why not embrace the risk and go with it?

Because careers have been built avoiding exactly this. Lawyers and accountants exist not only to provide risk coverage, but also to demand it, in an ultimately foolish and destructive pursuit of risk-free business.

Got news for everyone: while you can offer derivatives and CDS instruments for any and all kinds of risks, you still can't stop those risks from continuing to exist.

Now, consider this.

Credit default swap rates are used as a leading indicator of actual risks: the higher the likelihood - real or perceived, the difference is left to the perceptual psychologists (disclaimer: part of my undergraduate degree) - of a risk being realized, the greater these are. But right now we are seeing the market dry up for CDS instruments.


Because those in the business see too much risk and have the option of not offering the instruments at all. The risk involved for them has become too great: it is better in such a case not to do business. However, it drives up the prices for CDS when there are fewer and fewer offering them. It is a vicious circle that leads to fewer and fewer transactions as the fears mount.

Does that mean that the market isn't working? What does this all mean?

What it really means is that the bond market - and CDS instruments are (in)famously insurance against bond defaults - is facing a transition, one that is, in my opinion, a healthy and needed transition that corrects a market distortion.

What is this distortion? Simple: the belief that you can enter a risk-free transaction.

There is no objective basis for such a belief: there is only the increasingly desperate attempt to continue to believe this.

This is the sentence that led me to write this:

Investors seeking to protect themselves from losses on bonds or speculate on creditworthiness by buying credit-default swaps drove up benchmark indexes in Europe and the U.S. last week by the most since December 2008....

The problem isn't the fundamentals driving prices for bonds or creditworthiness, but rather the perceived need by investors to protect themselves from losses or to speculate on creditworthiness.

If investors would understand that there is no such thing as a free lunch (TAANSTAFL, thank you Robert Ansom Heinlein!) then markets can return to functioning normally. There is, after all, indeed no such thing as a risk-free investment, there is no such thing as a risk-free life, there is no such thing as a risk-free relationship. You cannot hedge all risks, you cannot buy broken-heart insurance, you cannot buy failed-career swaps.

Right now the market players are acting like dysfunctional and neurotic people, desperately trying to avoid living a life of risk when that is, in reality, the only game in town.

Until that changes, until adults return to the scene and both maturity and responsibility drive decisions, rather than the chimera of some sort of synthetic, risk-free world, the problems will continue.

Where's the derivative for that?

Sonntag, Mai 09, 2010

The Slow Wheels Of Justice...

One of the problems facing the financial community is that folks who screw up spectacularly aren't taken out of commission fast enough. Due process of law is not something to be ignored, but this is ridiculous.

Let's take a step back into time: Moody's Investors Services (MIS) made an astonishing, severe and entirely avoidable mistake in their rating procedures, despite rating committees and oversight. We're not talking a slight error, but rather a severe one, one that fundamentally compromises the rating quality (and rating quality is everything).

What happens? A "woops, our bad" and that's it?

Well, not quite (you have to scroll down to find this, but it is there...):

On July 1, 2008, Moody's publicly announced the results of the Company's investigation into the issues raised in a May 21, 2008 newspaper report concerning a coding error in a model used in the rating process for certain constant-proportion debt obligations. The Company's investigation determined that, in April 2007, members of a European rating surveillance committee engaged in conduct contrary to Moody's Code of Professional Conduct. On March 18, 2010, MIS received a "Wells Notice" from the Staff of the SEC stating that the Staff is considering recommending that the Commission institute administrative and cease-and-desist proceedings against MIS in connection with MIS's initial June 2007 application on SEC Form NRSRO to register as a nationally recognized statistical rating organization under the Credit Rating Agency Reform Act of 2006. That application, which is publicly available on the Regulatory Affairs page of, included a description of MIS's procedures and principles for determining credit ratings. The Staff has informed Moody's that the recommendation it is considering is based on the theory that MIS's description of its procedures and principles were rendered false and misleading as of the time the application was filed with the SEC in light of the Company's finding that a rating committee policy had been violated. MIS disagrees with the Staff that the violation of a company policy by a company employee renders the policy itself false and misleading and has submitted a response to the Wells Notice explaining why its initial application was accurate and why it believes an enforcement action is unwarranted.

 Cease and desist here means that Moody's may no longer calculate ratings and that the registration as a nationally recognized statistical rating organization may be removed. If so, end of story for Moody's: the SEC is finally actually doing something that it was intended to do, rather than willfully ignore ponzi schemes (Madoff) and other egregious breaches of securities law.

The shame of it all is that it took this long to get that far. Of course, Moody's says it was all the fault of those damned European weenies and we're completely and totally innocent.

Right. Believe that, and I have a great deal on a bridge...

Samstag, Mai 08, 2010

And Now For Something More Lightherted...

Ahhh, the futures that never were...

And, of course, the strangest set of ads for a car that literally could not be sold today: Wow.

And extolling the virtues of cheap and ugly:

Again, a future that never was and a past that can never be again: extolling the idea of a car fun to own and fun to drive, how, how, how dare they make pollution attractive!

Freitag, Mai 07, 2010

The World Is Broke...

As the man puts it: the world is broke and the emperor is not wearing clothes.

This is what I've been talking about: we are in deep, deep trouble and there are no adults around to supervise. May God have mercy on our souls.

Donnerstag, Mai 06, 2010

Something Else So ... Ironic.

In Germany, the SPD is trying to make political hay of the Greek Drama, opposing the bail-out as planned by the Merkel government. They want drastic controls imposed on the financial industry before they agree. Hence their strong opposition to bailing-out the Greek state.

What's so ironic about that?

Well, the President of the Socialist International is none other than the current Prime Minister of ... Greece.

So much for socialist solidarity.

Now that's ironic.

Mittwoch, Mai 05, 2010

Three Dead...

I'm reminded of the old Crosby, Stills, Nash and Young song "Four Dead in Ohio". But now it's three dead in Athens.

Anarchists have killed three in Athens, killed when a bank was Molotov'ed and set on fire. The three - two women and a man - tried to escape but were overcome by smoke on the stairs leading to the roof and then burned to death.

Nice going, there.

Back when I was a student, the Anarchist factions of the Left were considered to be the coolest, all dressed in black, their faces covered with bandannas (black, of course), and they were always up for a nice Molotov'ing to protest something or other. They were basically the political version of punks, dedicated to simply being against everything and enjoying the chaos.

In reality, they were the usual petty criminals and slackers, more often than not displaying serious affectation, and it was a great way to get girls.

There is nothing romantic about the left, especially anarchists. This popular mythology has been perpetuated far too long. Anarchists are posers, romantic cowards hiding behind a mythology without base or sense.

Requiescant in pace

Irony, Honesty, Fraud and Coming Clean...

Irony keeps on hitting me straight in the face.

Greece, we now know, committed state fraud on a large scale by cooking its books to hide the fact that the country's finances were a mess.

Geórgios Papandréou is the 182nd (!) Prime Minister of Greece, is not only the Prime Minister, he is also the President of the Socialist International and the President of PASOK, the Panhellenic Socialist Movement. While obviously a man of the Left, he apparently is also something rare: someone willing to face the truth. Or is he?

More exactly, he appears to be someone unwilling to perpetuate a fraud, but I have no way of saying that he is doing the voluntarily or involuntarily because of the fact that Greece had to come clean before its bankrupt state finances collapsed (as they would have when Greek debt had to be rolled over, as Greece could not have financed the roll over).

We are in a situation where perpetuating fraud - sometimes - brings vastly greater rewards than identifying it and correcting it.

Think where we would be if the Greek administration hadn't corrected the numbers that pointed out how broke Greece was: Greece could have kept its ratings, would have avoided the whole mess that is swirling around Greece and its government finances right now.

Or could it have?

At the end of the day, no: the fraud involved in Greece was perpetuated many years ago when the government embarked on an unsustainable path of economic development, consuming based on debt and, basically, lying about it. That can be laid directly at the door of PASOK and the current Prime Minister's father, the first Prime Minister from PASOK back when that party first came to power, where government wages exploded and heavy capital gains taxes instituted that initiated what has become the Greek Death Spiral (to coin a phrase).

Hence coming clean is, at the end of the day, always the best solution: honesty is the best policy. Fraud can only be hidden if it is small and, in the greater scheme of things, "harmless," whereby that threshold is damnably difficult to define. At the end of the day, however, the kind of systematic fraud that the Greeks - not alone, they, but in this case the most obvious and egregious failing - perpetuated represents the worst possible payback imaginable, made especially ironic because it was the policies not only of the party, but of Prime Minister Papandréou's own father which has now driven Greece into ruin.

I never thought that Greek Tragedy could be so bitterly ironic.

Dienstag, Mai 04, 2010

Not So Much The Crime, But The Cover-up...

Consider this: while the SEC and Justice will be investigating what really does appear to be a concrete case of fraud, a criminal offense (as opposed to civil), regarding Goldman-Sachs' information policy regarding some of the more obscure products they were selling or involved in, there is perhaps a greater problem brewing, one that could be truly destructive.


If you take a look at this at Naked Capitalism, you can see what the problem is.

The core of the problem: valuations of assets in order to be able to determine the true status of those holding those assets.

Yves Smith and Tom Adams seem to be on the trail to something here, one in which the cover-up is worse than the actual crime. In order to avoid having to mark-to-market, the use of mark-to-model has been used (and indeed needed when there is no market because of the financial crisis). The problem that arises is that there is virtually no way to assess the models used when determining the book value (as opposed to actual value) of the assets involved.

Back in the old days, before mark-to-market, assets were valued at their purchase price minus depreciation plus investments into the asset. Plain and simple, worked. Of course, in a strong market upswing, these assets were, if anything, undervalued, which limited the degree to which companies could leverage their equity to generate greater debt.

Mark-to-market corrected that, but in doing so made things infinitely worse: what if there was no longer a market, due to a market meltdown? Then companies would have to reevaluate their assets and discount their holdings to nothing, even though there was no intent to sell or to wind the company down (indeed, following mark-to-market principles, many companies would have to be unwound if the market for their assets crashed, regardless of how these companies were actually doing: absolute and complete madness brought upon us by the accounting profession, which to this day continues to defend the idea.

Given that no one wanted to go back to the simple asset valuation method, mark-to-model was what people came up with: in this case, somebody makes a number up.

Sure, it's statistically based and there's some sort of asset valuation model there, but at the end of the day, it's synthetic, something that someone made up, rather than something that actually has a connect to reality.

What this is increasingly looking like - and in defense of those doing it, it appears to be motivated by desperation, rather than greed or criminal intent - is nothing less than fraud in and of itself: it is the misrepresentation of a thing to be something that it is not.

No one knows what literally trillions (nominal face value) of assets are really worth anymore, largely because of the idiocy of mark-to-market (and the accounting profession really doesn't seem to comprehend how extraordinarily destructive the mark-to-market philosophy really is: it is the driving force behind the financial chaos and economic crisis), but the Fed is actively supporting, in effect, making up numbers that kinda sorta make sense and could be close, in the interest of avoiding further collapse.

It's not so much the crime involved here - if this is the case, the Fed is involved in fraud - as the cover-up which will bring the whole house of cards down. Like those of Nixonian fame, there was never so much the decision to cover-up, but rather there was never the question that there wouldn't be.

Key quote:

The Fed seems awfully keen to steer clear of the fate that befell Lehman. Lehman was grossly and verifiably misvaluing some investments, namely Archstone and SunCal, that confirmed doubts about the veracity of its accounting. If you can't check any particular valuations, it's a lot harder to ask difficult questions. And unlike Lehman, the Fed can continue to account to no one.

The Fed is engaging in same practices that caused the crisis: failure to make timely disclosures, obfuscation, use of off balance sheet vehicles to distance itself from losses. This posture alone should disqualify the central bank from assuming a greater regulatory role.

The Fed and Treasury's three card monte operation is anti-democratic and possibly illegal, and to add insult to injury, voters are treated as if they have no right to know when they are ultimately footing the bill. The Fed's persistent stonewalling and deep seated hostility toward the public provide ample proof of the need for an audit.

The last report from the FBI on mortgage fraud that I could find on their website was from 2008. There doesn't seem to be much from any younger date...

The Fed is apparently ensuring that no one can verify what assets are worth: this precludes the identification of mis-valuations. It may not quite be fraud, but covering-up so that no one can see if it is fraud or not is tantamount to the same damn thing.

It's not so much the crime as the cover-up.

Isn't It Ironic...

Normally, unions exist to work for the interests of labor, to work for a living wage and fair compensation, and to try and ensure that workers partake in profits that they, in no small part, generate.

Hence it is deeply ironic that the one industry where workers - and these folks have indeed regular contracts with a set wage plus a bonus structure - really do partake in profit-sharing to a very large degree is the same industry that unions love to hate. In other words, where workers have realized the unions' goal of being able to siphon off large portions of profits for the workers, the ones whose labor made those profits first possible, it is organized labor that is one of the most vociferous critics of exactly that which the unions would love to have for their membership.

The industry?

The Financial Intermediation industry, of course. Bankers, traders, brokers, all have their very large incomes not through their wages, but through the bonuses they earn by earning their companies very large amounts.

Got to love the irony in that.