Dienstag, Oktober 26, 2010


...but the man has a point.

Read this.

His fundamental point, that there is a real sense of betrayal out there, is fundamental for the development of what is generically called The Tea Party and which may well change the face of US politics.

Not because there are powerful backers, but because of the absolute frustration and disgust that so many have for politics and politicians.

It's not so much that so many are corrupt and enriching themselves, but more so that there a real sociopaths out there who really enjoy screwing the system up for profit and gain. Read this to understand what he means by that.

Systematic cheating, corruption and abuse of the system has led to the dysfunctional system we now have in the US, where if you do everything wrong, you end up getting the most in benefits: the rewards for bad behavior greatly outweigh the rewards for right behavior.

Appearance trumps knowledge.

Without realizing it, without seeing it coming, the Sophists have triumphed: the truth is no longer something to be desired and searched for, but rather to be manipulated and re-defined until there is no meaning to it whatsoever.

Of course, when the Sophists triumph, chaos and anarchy follow, as there are no virtues any more.

Read this for more to understand how the fraud and anger are going to lead to an interesting 2. November. That is, unless voter fraud - which, if you research this, has been an exclusively Democratic act since the 1960s - takes that away as well. If that happens, then all bets are off: political instability will follow economic uncertainty.

Communism, Mercantilism and China...

Two op-ed articles in today's FT (behind their paywall, unfortunately), got me to thinking.

The one, from Ilene Grabel and Ha-Joon Chang, argues for capital controls as a good thing for growth (ignoring, of course, the historical dimension of the days when capital controls also prevented growth), while Gideon Rachman argues that China can no longer plead poverty when foreigners criticize Chinese economic policy.

What both fail to understand is that China is and remains a communist country, which in terms of economic policy is dominated by two major traits: one, an obsession with preventing foreign meddling in their economy (because foreigners can't be controlled the way that domestic investors can) and two, a fundamental belief in the benefits and advantages of a closed economy, closed in the sense that the ownership of the means of production is fundamentally closed to anyone not of that country.

In either case - and indeed in both -  the fundamental problem is that such systems do not survive contact with an otherwise open and uncontrolled (and uncontrollable) world economy. The Chinese leadership apparently truly does not understand how the free and uncontrolled economy works - otherwise they would allow their currency to float - and, more importantly, nor do they care.

I'll quote from Rachman:

The Chinese government insists that foreigners have no legitimate interest in the country's political development.

He needs to expand on that: foreigners, in the eyes of the Chinese government, have no legitimate interest in China whatsoever: their interests are politically illegitimate (trying to destabilize the country for political purposes) or are an attempt to force the Chinese to pay for their economic errors and woes.

Ignoring the arguments for and against for the moment, the key point is that the Chinese government (and probably a large majority of Chinese) are economic illiterates: they do not understand that economic imbalances always lead to economic corrections that have unintended consequences.

Always. There is no way to finesse this, no way to manipulate and bully trade partners into continuing one-sided trade patterns. You can do this for a while - even decades - but you make the problem worse, rather than better. Controlling exchange rates means that a normal and completely natural change is prevented, resulting in sharp and disruptive changes, more often than not resulting in crisis and damage to those trying to control what cannot, in the long run, be controlled.

Communist ideology, given the dependence of Marx' international trade thought on Fichte's idea of self-sufficiency (taken to extreme in the Korean ideology of juche) where the government controls international relations and the value of money, is first and fundamentally a mercantilist philosophy, a zero-sum game where the best trade policy is one that destroys your foreign competitors and allows full employment in your country, supplying the world with goods priced at monopoly pricing levels (not currently the case, as competition remains, but most assuredly the goal). The world's economic history is littered with fixed exchange rate regimes that invariably fail. This will be no different.

Chinese trade and economic policies don't make much sense otherwise.

We are facing a return to poor and destructive economic policies if these trends extend and become mainstream policy. Free and unencumbered international trade in goods is first and foremost something that provides consumers with greatest value for their money: reverting away from this neo-liberal ideal means that consumers will pay more and receive less for their money.

Hence, and with little or no apology:

Consumers of the world unite, you have nothing to lose but your chains.

Mittwoch, Oktober 20, 2010

Well, Did You Expect Anything Different?

I've said it before: President Obama is a Chicago politician, through and through.

So this should come as no surprise. Corruption masquerading as incompetence. This is systematic and deeply, deeply ingrained in the political machinery of the Democratic Party. This is one of the most corrupt and venal administrations we've seen since Tammany Hall. The Columbian Order has returned (if indeed it has really ever left the spirit of the Democratic Party.

The key is exploiting immigrants in the guise of "helping them out". Watch for exactly this come, say, 2011, heading into 2012. Immigration reform that legalizes the illegals with the clear aim of turning them into Democratic voters, ones that will influence elections for decades to come. It is a problem that the Democrats have deliberately created in order to exploit. Fast-process "social integration" with massively expedited, legally dubious naturalization that will make a mockery of the system. This worked in New York, this worked in Chicago, and now it looks like this is going to be applied to the rest of the country.

It reminds me of the famous Brecht quote:

The people have lost the confidence of the government; the government has decided to dissolve the people, and to appoint another one.

That is exactly what the Democratic Party is trying to do: they are losing their base, and so they have decided to appoint a new one.

Be warned.

And Here's The Next Big Thing...

Be prepared, over the next several weeks, to be bombarded with yet another attempt to grab your wallet and impose Watermelon policies on an unexpecting populace.

The word to remember is an acronym: TEEB: The Economics of Ecosystems and Biodiversity.

Put simply, it's an attempt to put a price on the ecosystem to make it highly profitable for companies to behave as their betters demand: don't pollute, don't harvest forests, don't do anything that can be considered even remotely environmentally unfriendly. I've take a preliminary look at what they report, and all I can say is: meh.

First and foremost, it's a problem of valuation. They are trying to put a value on something that is fundamentally and inherently not out there on the market, meaning that the price is what they say it is. In other words, they are behaving as monopolists do, setting up monopoly rents for their "ecosystems services" to be what is most profitable for them.

In other words, it's yet another attempt to grab your wallet and take whatever they can from you: "proper" and "approved" behavior will be rewarded, all others, prepare to be taxed out of existence (they don't say that explicitly, but at the end of the day, that is their goal).

Here's a press release.

It's fundamentally an attempt to obtain control over any economic activity by requiring a cost-benefit analysis to be performed before the economic activity is allowed: in other words, if they think keeping a mangrove forest in place would be of greater benefit than using that forest as a shrimp farm, then if you want to put in the shrimp farm regardless of what they say, you'll have to buy offsets.

In other words, a tax.

The fatal flaw here is the subjective nature of the valuations and the fact that they are using an extraordinary simple analysis of future values: they take the current value of "ecosystems services" (determined, apparently, in an ad-hoc manner) and determine the NPV (net present value) of future "ecosystems services" to get a summed price, then compare that to the current value of the alternative usage.

Problems with this approach:

This always results in "ecosystems services" to be vastly more expensive than alternative usages;

The discount rate becomes critical (as we've seen with the absurdities of the Stern Report: anything deviating from a net discount rate of 0% is considered immoral...) and subject to abuse;

It completely ignores the costs to humans of deferred economic betterment across the same time periods.

Like I said, meh. Yet another attempt by those who really, truly think that they know better to run the lives of everyone else.


Geopolitics and Naïveté

Sorry it's been so quiet lately: reality continues to intrude...

This prompted me to write: yes, I do read the New York Times occasionally.

The naïveté of newspaper people - driven by their absolute dependence, it seems, on being told what to write by their masters - is once again painfully obvious.

China is and remains a country dominated by a communist party that is concerned about one thing and one thing only: power. Economic power is of greater interest than military power, to them, because the Chinese communists know how incredibly vulnerable they are in terms of population concentration and weak infrastructure. One good strike on several dam complexes and you flood out more than half of China's industrial potential, crippling the country economically. The Chinese know this - it's unavoidable, given the geography of the country - and also know that this makes them vulnerable, militarily.

Hence the push for economic power.

What the pundits have forgotten - or perhaps never considered - is that the Chinese government, while well out of the limelight and keeping a very, very low profile, remains unchanged from the government that has killed, literally, millions of its people without regret (and indeed has done so deliberately in order to meet political targets). Politics is a one-player game in China, despite the fervent and misplaced hopes for political liberalization in the wake of economic development. The Chinese government is, if anything, equal to the French in terms of playing their own game, more than happy to let their political opponents believe what they will (usually wrongly) whilst aiming at purely national advantages, all while disclaiming and touting their international interests.

China is at a cusp: while the Chinese population will continue to rise over the next several decades, the inner shift has started, with fewer people entering the work force than leaving it. Population here will start to decline in 2050, expected to stabilize at some 600mn Chinese in 2150. This means that one of the key tenets of Chinese economic development - increasing numbers of entry-level workers to expand their industrial base - will be coming to an end.

So what is to do? The Chinese government, which still effectively runs the economic development of the country, has started to behave like a classic mercantilist: it buys up raw materials to prevent competitors from even entering the market; it buys competitors to eliminate price competition; it is playing a zero-sum game.

Hence: the decision of China to cease supplying rare earths to anyone outside of China should be utterly unsurprising. Utterly. It should be expected and will continue. The government of China, while murmuring a commitment to free enterprise and capitalism, is in reality the last mercantilist out there. Mercantilism is economic nationalism, the notion that the prosperity of a nation is dependent on its supply of capital.

Why else would China be more than happy to amass such huge monetary reserves? There is no other real explanation: under normal circumstances, the Chinese currency would revalue in the wake of such high reserves and such a long-term positive balance of trade figures. Instead, the government here keeps the Chinese currency artificially low in order to perpetuate its accumulation of capital.

Without this in mind, Chinese economic policy makes little sense. Just like any other political intervention in markets, it is also doomed to failure: at some point, the markets will reset themselves and the Chinese currency will appreciate rapidly in order to bring trade into equilibrium. It is just a question of when and how badly markets will be bent before they restore themselves.

Of course, mercantilists don't care much about markets.

These are the corer tenets of mercantilism (from here):

The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively:

  • That every inch of a country's soil be utilized for agriculture, mining or manufacturing.
  • That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.
  • That a large, working population be encouraged.
  • That all export of gold and silver be prohibited and all domestic money be kept in circulation.
  • That all imports of foreign goods be discouraged as much as possible.
  • That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
  • That as much as possible, imports be confined to raw materials that can be finished [in the home country].
  • That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.
  • That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Sound familiar? Replace gold and silver with fiat money, and you've got China. Add to it a ... unique interpretation of intellectual property rights (i.e. if it isn't nailed down, steal it), and you can see China's approach to the rest of the world.

The naïveté of the West in dealing with China is legendary. It is also inexcusable.

Freitag, Oktober 08, 2010

Getting Back To Square One...

I'm not usually a fan of Jon Stewart: I find him to be a clown, twisting and manipulating the stories he tells via ignorance and deliberate misunderstandings.

But this is about as good as it gets:

The Daily Show With Jon StewartMon - Thurs 11p / 10c
Foreclosure Crisis
Daily Show Full EpisodesPolitical HumorRally to Restore Sanity

And, probably to the shock of most readers, I also give President Obama at least the credit that he did not sign the legislation aimed at making the whole problem "go away", instead using the pocket veto to stop it.

Those who in Congress were involved in making that bill richly deserve any and all epithets thrown at them: that was a vile and desperate attempt to sweep the problem under the rug.

PS: I replaced the original small-format with a larger-format link...and a hat-tip to Naked Capitalism!

Donnerstag, Oktober 07, 2010

A Bone To Pick...

Well, Steve Levitt manages to really screw things up here.

Some of what he says is fine: however, the idea that businesses don't need economists is simply absurd.

What he is correct about is that business does not need academic economists. But that's not what he says, and indicates that he actually has little or no idea of what business economists actually do.

What do they do?

Simple: bring an economist's skills and abilities to the company to help the decision makers understand their operating environment, what sort of challenges will show up (largely demographics) and what the implications of these are for the future of the company. While many companies either buy these services from external sources or continue to have a company economist, most rely on a non-economist to give that sort of input.

And that is exactly the problem: while many non-economists have a basic knowledge of economics, you will not get the same level of expertise and in-depth understanding that a right and proper business economist will give you. An MBA tries to provide some of this, but the relentless pursuit of the bottom line and office politics blinds many to the realities of the world.

Mr. Levitt has done all economists a disservice for not saying, clearly, that it is academic economists that are fairly useless for the rough-and-tumble real world economics out there.

What the business world needs are more business economists, not fewer: anyone watching this would come away with the idea that the business world doesn't need economists at all...

Dienstag, Oktober 05, 2010

A $9.5 Trillion Fraud...

There are some simple rules for financial folks who prepare financial instruments for investors: do your homework is one of them.

If a financial instrument has legal requirements and you do not follow those legal requirements, you commit fraud: you are selling something as something that it is not.

Consider this:the volume of mortgage backed securities in August 2010 was around $9.5 trillion.

Now consider this: it appears that the basis of mortgage-backed securities - the ownership of the mortgage itself, which is clearly defined as based on a transfer with real-world signatures - has been systematically destroyed. If this is true - and the class-action suites seem to indicate that this is indeed a problem - that means that anyone holding a mortgage-based security needs to determine if that security is actually bona-fide, i.e. that the legal requirements were actually fulfilled, rather than relying on the word of companies that have apparently not done what they have said they did.

This is developing into the world's largest fraud. $9.5 trillion? That's real money, folks.

Here is the key quote:

We've said for some time that document fabrication is widespread in foreclosures. The reason is that the note, which is the borrower IOU, is the critical instrument to establishing the right to foreclose in 45 states (in those states, the mortgage, which is the lien on the property, is a mere "accessory" to the note).

The pooling and servicing agreement, which governs the creation of mortgage backed securities, called for the note to be endorsed (wet ink signatures) through the full chain of title. That means that the originator had to sign the note over to an intermediary party (there were usually at least two), who'd then have to endorse it over to the next intermediary party, and the final intermediary would have to endorse it over to the trustee on behalf of a specified trust (the entity that holds all the notes). This had to be done by closing; there were limited exceptions up to 90 days out; after that, no tickie, no laundry.

It gets better:

Evidence is mounting that for cost reasons, starting in the 2004-2005 time frame, originators like Countrywide simply quit conveying the note. We are told this practice was widespread, probably endemic. The notes are apparently are still in originator warehouses. That means the trust does not have them (the legalese is it is not the real party of interest), therefore it is not in a position to foreclose on behalf of the RMBS investors. So various ruses have been used to finesse this rather large problem.

The foreclosing party often obtains the note from the originator at the time of foreclosure, but that isn't kosher under the rules governing the mortgage backed security. First, it's too late to assign the mortgage to the trust. Second. IRS rules forbid a REMIC (real estate mortgage investment trust) from accepting a non-performing asset, meaning a dud loan. And it's also problematic to assign a note from the originator if it's bankrupt (the bankruptcy trustee must approve, and from what we can discern, the note are being conveyed without approval, plus there is no employee of the bankrupt entity authorized to endorse the note properly, another wee problem).

In other words, the companies involved have sold people something that isn't what it is claimed to be. While this might appear to be a technicality, it fulfills the definition of fraud. Those who believe that they own the mortgages cannot enforce their rights: they have been defrauded.

Playing with public trust - corners were cut here apparently because of the volume of business, which is an explanation, but not an excuse - is deadly for anyone involved in the financial services industry. Trust is the most difficult thing to replace and the most damning indictment. Fraud is not a victimless crime, as investors here are going to find out.