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...

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

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

Ouch.

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.

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.

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.

Hah!

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...

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...

...it 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.

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.

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.

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.

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.

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.

Further:

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.

Further Data Points For The Trend...II

Looks like this is going to be an ongoing series...

First of all: there is a reason for the state to control gambling. While it cannot eradicate it, given human nature and the stubborn belief, especially those with a weak education in statistics and basic math, that there is somehow a realistic chance to win a huge jackpot, allowing wide-spread gambling is destructive, since it engenders a belief that it's easier to try to gamble your way to riches rather than working for them. This is the reason that numbers games were the bread and butter of the Mafia through the ages, appealing to the poor working class that hoped for a win.

Gambling, for the house, is always a rigged game: otherwise, the house loses money and the games will cease. Gambling is always - always! - organized to provide a constant high-value profit stream to the house, with minimal payouts and rigid controls about how winners get their money. It appeals to those desperate to become rich without the talent to do so; to those desperate to finally have some capital, but don't have the jobs or lifestyles needed to save money; it appeals to anyone wanting easy money, the lifestyle of indulgence and leisure, but who lack the right parents or the right skills and energy.

Morally, gambling is extremely problematic: while considered by some to be morally acceptable when the profits are used for good purposes, I'd argue that it this is, at best, morally ambiguous, as the basic idea - a small wager returning large sums - is insidious: gambling addiction is a real danger to gamblers, a psychological dependence, and it is invariably the exploitation of the many for the benefit of a few that is set up in such a way that any benefits, viewed as a sum, are invariably and deliberately biased.

So, what does Barney Frank want to do?

Surprise, surprise: he wants to legalize online gambling. See this in the FT. He wants to do so in order to "put an end to an inappropriate interference with their personal freedom," to quote him directly.

As the Bush Administration drew to an end, it told financial companies not to process payments to online gambling sites in order to reduce their attractiveness. PartyGaming, one of the lead UK companies involved in online gambling, admitted to bank fraud and other violations of US law and paid a $105mn fine in lieu of prosecution.

This is what Barney Frank, Mr. Subprime, now wants to legalize. This is one of the hallmarks of corruption: the legalization of illegal activities, of morally ambiguous and psychologically damaging behavior, which leads to fast money for a few and societal damage that takes years to deal with.

Moving on to the New York Times, we see how the Obama Administration wants to handle opponents and people it doesn't like: with threats and destruction of their livelihood. In this case, recognizing that they probably won't be able to make a decent court case, they want state Bar Associations to disbar their opponents, in this case the lawyers who drew up the legal opinions for the Bush Administration. The operative word here is opinion: these are not the folks who made the law, but who provided their opinions on the law as legal experts. This has a clear chilling effect: disagree with us, even privately, and we will ensure that you never work as a lawyer again.

This, from Amity Shlaes on Bloomberg, underscores how the campaign hasn't ended, especially the dirty tricks of the campaign.

And this goes to show that intimidation works: comedians are finding that making jokes about President Obama is, largely, taboo.

Further Data Points For The Trend...

Two further data points to underscore the developing trend of the Obama Administration's way to moving Chicago machine politics to the central stage:

This points to an attempt to reduce transparency and hide what unions are spending to influence public opinion and pressure public officials. The law in question, that the Obama Administration wants to get rid of, was put in place 50 years ago in order to fight union corruption. Before leaving office, President Bush pushed for greater accountability for union management - requiring that they document exactly how unions assets were acquired and disposed of - and one of the first things the Obama Administration has done is to delay that. The Office of Labor Management Standards has now declared that it will not enforce the reporting of conflict-of-interest disclosures, claiming that "it would not be a good use of resources".

Huh? Allowing union leaders to have conflicts of interest - for instance, owning buildings that the union decides it wants to buy - and not requiring that these be disclosed is not a good "use of resources"?

This is an invitation for union management to enrich themselves with no danger of being caught. Under the Bush Administration, over 1000 fraud-related indictments of union management were issued, with over 900 convictions: under the Obama Administration...

Less than 8% of US workers are organized via unions; 81% have said that they do not want one in their workplace. Under the grossly misnamed "Employee Free Choice Act", the right to secret ballots are to be taken away from employees, opening them up to intimidation and coercion from unions. Unions used to have around 35% of US workers as members: I guess the unions want the good old days back, when such upright pillars of the community like Jimmy Hoffa helped unions achieve the reputations they enjoy today.

This takes us to the second data point.

It's a political payoff, nothing more, nothing less. But has this not crossed that Rubicon between political payoff and outright corruption? The intervention into corporate insolvency in order to ensure that the unions effectively gain control of what is left of Chrysler, at the clear and direct cost to the bond holders of Chrysler, comes very close indeed to open theft, i.e. taking from private investors, without recourse to a court of law, and giving to political supporters.

If that's not corruption...

I Have Seen The Future...And It's Chicago

This has been a theme here over a number of posts here.

Such as this. And this. And this. And this. And this, this, this, this, this, this and this. Not to mention this, this, this, this and of course this. I then got tired and stopped going through the archives. You get the idea.

Now, here's a hat-tip to Dr. Sanity (see here): she pointed to this post on The Greenroom over on Hot Air.

I won't comment extensively on either post, but consider this: this sort of bare-knuckle, below-the-belt, send-a-bus-of-protesters-to-your-house type of political campaigning is characteristic of your typical Chicago thuggery.

I have seen the future of politics in the US, as far as the Democrats are concerned: it's Chicago.

Go and look at Chicago politics, and you will find the same kind of corruption, the same kind of arrogance and sheer contempt for the common man, the average voter. It's heavily entrenched in the city, based on a system of local governance that has, for over 100 years, yielded nothing but corrupt governments and corrupt politicians. It's called the party machine, and exists via corrupt cronyism, patronage and outright intimidation, extortion and not a few murders to keep the system in place.

What do I mean by seeing the future?

Simple: President Obama and the Democratic Party Machine behind him are trying to install the party machine in Washington DC, with the goal of achieving the same kind of permanently corrupt system of governance that the people of Cook County have been living with. You do this by making the system itself corrupt: in this case, the takeover of the banking system, of turning the automobile industry over to the unions - and don't think that Ford won't be able to escape this, just wait for a wave of crippling strikes towards the end of 2009/beginning of 2010 - and the imposition of massive debts on the good citizens to keep them in their place.

Watch for the following: watering-down of the civil service system in order to install greater number of political operatives on the public payroll; stacking the court system to ensure that legal challenges do not make it out of the lower court system; rewriting ethics laws to ensure that any recourse is through the most corrupt; demonization of any opposition; the personalization of politics, including character assassination to make it very costly to oppose the bosses; including in normal legislation key passages that effectively require patronage; the use of police and government offices for intelligence-gathering purposes; use of the power of the courts and the power of government attorneys to intimidate political opponents, ruining them via long, drawn-out court battles and finally, the most critical problem: the establishment of a large, if not majority, of voters beholden to the machine.

In other words, the destruction of the American Republic and the establishment of a Democracy gone wrong. The future is Chicago.



And it's not a pretty future at all.

Imagine not being able to get a mortgage because you're a Republican (and hence a risk to the Party Machine); imagine having your house seized for eminent domain, but then find that it's been sold for a pittance to a member of the Party Machine; imagine having someone beat up your wife in front of your house because you've blogged about something that's wrong; imagine your kids failing school because their teacher has decided that they're not worthy of the Party Machine. Imagine being in the Party Machine without a way of getting out.

Watch for an attempt to call for a constitutional convention following some major event, be it terrorist or yet another financial collapse, to "update" the Constitution, to "bring it into the 21st Century". Watch for intimidation of Republican politicians, of witch-hunts in the Senate and in the House - we're awfully close to them right now - and watch, most of all, how this is either papered over (boy, the state of the press in the US gives that new meaning), ignored, or tastefully spun.

Watch for how developing opposition is dealt with: it's already obvious that the Obama White House is, in terms of going aggressively after public opponents, has clearly trumped the Nixon White House for making politics personal.

That Public-Private partnership to work out the TARP deals? That's a nice name for corruption. This is just the start: let the Democrats set things up the way they have been, and you'll be looking at the permanent Democratic majority of bought and paid for votes, a national Party Machine with no functioning opposition.

That is how Republics fall.

Corruption or Politics As Usual...

A number of articles out there have pointed me to thinking about political corruption.

First of all, what is political corruption? According to Wiki, the narrow definition is that political corruption is the use of governmental powers by government officials for illegitimate private gain, whereby an illegal act by an officeholder constitutes political corruption only if the act is directly related to their official duties.

I refer to that as a narrow definition, as obvious corruption, such as bribery, extortion, embezzlement and nepotism are usually so obvious that politicians can only get away with these corrupt and corrupting practices in environments that are already severely corrupted, with the cities of Chicago and New Orleans coming readily to mind.

Patronage and cronyism is a greater problem, one that involves the principal-actor problem. I think the simplest way of showing this is to view it as a simple linear model:

total wage = base wage + intensity of incentive(unobserved effort+unobserved exogenous effects on decisions + importance of observed exogenous effects on decisions)

or

w = b + i(ue + uee + x)

For the corrupt politician, it is crucial to ensure that their efforts and effects on decisions be as large as possible, and that x be very modest. In other words, the incentive for a politician to be corrupt, given a certain level of certainty of being caught, lies in ensuring that his work remains unobserved, i.e. being the power behind the scenes.

This is particularly important when dealing with patronage and cronyism, political corruptions that are vastly more difficult to prove, especially when they become severely prevalent, such as in Chicago and New Orleans (and, to a lesser, extent, in many large US cities at the very least, such as Los Angeles, New York, San Francisco and the like).

What are these corruptions?

Political patronage is when politicians use state resources to reward political supporters. While political appointees, i.e. positions reserved for political supporters, are legitimate to ensure that bureaucracies implement political policies in a timely manner, it is another thing entirely when political supporters are granted state resources for their political support.

Cronyism is closely related and many distinctions may be rather fluid in the real world. Crony politics is when the key reason for political success and/or access to state resources are social contacts, rather than professional qualifications. Given the fluid nature of social contacts and professional qualifications, this is significantly harder to prove, if not observe. There are exceptions, to a certain extent: Enron's collapse was an example of crony capitalism, where mutual acquaintances share information is such a way that they can profit from them, such as knowing before hand about legislation, knowing in advance where infrastructure will be built, and making deals to take advantage of this information.

In both cases the costs are carried by the consumer or society in general: there's no clear victim as such, and those engaging in both generally tend to fail to see that they are doing anything wrong, as "no one" is hurt directly by their manipulation of markets and market distortions. Another justification is that "everyone" does it, hence it is an assumed privilege of office. Further, politicians will attempt to ensure that no one can investigate their friends or the politicians themselves, usually by packing the political appointees to the court system or the state prosecutors to ensure that no indictments are brought. Of course, having a passive or at least incompetent press doesn't hurt: it removes any pressure to reform or stop the corrupt practices.

Nonetheless: it's corrupt.


Now, why do I put this up?

This and this. Oh, and this as well.

In the first, we see how a political insider has used his political and business connections to wheel and deal his way to millions: he is corrupt in the sense that his success is due to social and political contacts. Without these contacts he would not have the money he has today.

In the second, we see how the general public is going to pay to reward political supporters of one party, providing subsidies to an otherwise bankrupt company in order to ensure that those supporters continue to have their jobs, despite the knowledge that these companies should be going through bankruptcy now, rather than continuing to be subsidized.

The third? How polticians are looking to prevent investigations before anyone even thinks of investigating, a preventive measure.



What makes this unsettling is that this is playing out right now, the country in question is the United States, and the politicians in question are Democrats to a person.

Of course, for them, it's just politics as usual.

Open Defeatism...

I used to read the German weekly newspaper "Die Zeit". Shucks, I used to subscribe to it when I was a student. Great big thick weekly newspaper, full of solid German research on an amazing variety of topics, well written and about as close to a Sunday New York Times as this expat could find back then.

Now? Greatly shrunken and openly defeatist.

Here is an English translation, here the original article. The author, Ulrich Ladurner, is based in Islamabad, in Pakistan.


This article drips of open defeatism: it's not a critical article, but rather one that blankly and clearly states that the war in Afghanistan is clearly lost and that we need to realize this and get out before there is more bloodshed.

Don't think that's true?

There is no real argument presented in the article, but rather the author simply states that because the West cannot stop the Taliban from making attacks, the war is lost.

Good lord, what drivel. Nothing more, nothing less.

I'm all for critical journalism: if anything, we don't have enough. But critical journalism, in the form needed, simply doesn't exist anymore.

This is not an article that analyzes power relationships and looks to see if and how the Taliban are winning: it is an article that merely states that the war is lost because we can't stop the Taliban from making attacks. Ye Gods.

Further, the author says that the idea that the Islamists would celebrate a victory if the West were to admit defeat is pure propaganda, distorting reality and reducing the Afghanis to "mere chess pieces", and that this is somehow destructive to the West.

According to the author, talking of defeat means abandoning our illusions and accepting reality.



Sigh.

The author, the foreign editor of Die Zeit, already has a reputation of being one of the biggest apologists for the Iranian government in the German press (see here, in German), and has apparently completely lost the ability to differentiate between propaganda and reality: his work is characterized by the usual silly blind acceptance of what people there say to western journalists as being naturally true and of course reflecting reality: there is little that could be farther from the truth than taking the word of islamists in Pakistan and his contacts in Iran as having anything to do with any sort of objective truth.

Which apparently is the core of his belief that the West cannot win in Afghanistan.

Actually, it would be quite easy for the West to win in Afghanistan and thoroughly destroy the Taliban. Of course, it would mean destroying the Pashtun nation that exists between Afghanistan and Pakistan, destroying the infrastructure in order to force the people out of the mountains and destroying their light infantry forces. It means accepting casualties, it means killing a lot of "innocents" (in quotes because in this asymmetric warfare, the only innocents are those who can learn and have abandoned the fight entirely in order to survive) in order to bring peace to the region. Given the sensitive nature of our societies and the need to appease the chattering classes, this won't happen.

The question here is not whether the West can win or lose, but much more fundamentally: how do we stop the violence in the region? The Afghanis are exhausted after 3 decades of war (the coup in Afghanistan that deposed the King in 1973 fell apart by 1978, and given that the PDPA, the People's Democratic Party of Afghanistan, was a tool of the Soviets, the collapse of the Doud regime in 1978 led to the Soviet invasion in 1979 to impose a Soviet-style revoltionary regime on the Afghanis, and that is 30 years ago this year...) and their interest is in survival and progeny. The Pashtuns in the region know this and exploit the exhaustion to take political control and impose yet another foreign regime on the Afghanis.

There would be no war if it were not for the Pashtuns out of the tribal lands of Pakistan. The Afghanis don't want the Taliban and the Pashtuns: they want peace. They want to be left alone, to tend to their gardens and to their tribal ways, including tribal feuds and the highly complex tribal relationships that make up such societies.

Giving the Afghanis away isn't achieving peace: Ulrich Laderner isn't looking for peace. He's arguing for submission to the will of the Taliban.

That's what makes him an apologist and clearly on the side of defeatism.

Why do I use the term defeatism? Because clearly Laderner thinks that defeat is better than victory. Submission is better than resistance, submission is better than independence, submission is better than anything else.

Which puts him on the same level as people like Quisling, Lord Haw-Haw, Tokyo Rose, Hanoi Jane and the other sycophants and puppets of totalitarian regimes.