The Face of Corruption...

This is typical: in a largely Democratic state, more than $500,000 is being spent on a new film studio near Santa Fe, the first use of a $10mn package to help local industries. In addition, $3.6mn is being spent to improve the local infrastructure.

Doesn't sound so bad, does it? A film studio for New Mexico, what's so bad about that?

Simple:

Father and son Lance Hool and Jason Hool — longtime friends of Gov. Bill Richardson — are the principal shareholders in Santa Fe Studios. State Democratic Party chair Javier Gonzalez is also a partner in the venture.

Further, after initial approval, the agreement has been changed multiple times, with the local government paying for more and more of the project:

The most recent version of the deal includes the following commitments of public resources:

• Santa Fe County will administer the $10 million economic- development grant on the project.
• Santa Fe County will provide $3.6 million worth of infrastructure improvements to the project, including dedicating as many as 25 acre-feet of water for the studio.
• Los Alamos National Bank will loan the project developers at least $6.5 million, which Santa Fe County will guarantee by placing $6.5 million worth of "cash reserves" in a "lock box" account at the bank.

According to the motion filed Wednesday, if there is a default of the terms of the Project Participation Agreement, Santa Fe County will also be obligated to reimburse the state for any of the grant money spent on the project.

So, from a modest spending proposal, Santa Fe county is now administering the project and, most importantly, is guaranteeing the project, removing any and all risk for anyone investing...and those investing just happen to be longtime friends of the Governor and the State Democratic Party Chair.


This is the face of corruption today: instead of taking on risk in a commercial undertaking, your friendly local government takes that on instead, but only if you are the right people.

At least some is trying to fight this:

But Wednesday's filing claims the new agreement still violates laws meant to prevent the government from donating public resources to private developers or from lending or pledging its credit to aid "any person, association or public or private corporation."

The motion alleges that:

• Neither Santa Fe Studios nor its holding company, La Luz Holdings, qualifies for public assistance under Local Economic Development Act rules.
• Santa Fe County changed the terms of its own ordinance governing the use of county gross-receipts tax revenue to allow the use without posing the question to voters as is required by law.
• Only 16.5 of the 65 acres purchased by Santa Fe Studios and La Luz Holdings for the studio project will be used to build the studios that are named as the focus of the $10 million grant, while the remainder will be a private real-estate development.

See how all of a sudden there's something additional, something simply not mentioned? Only a small portion of acquired land will be used for the studio, the rest is a private real-estate development.

Corruption, in the eyes of the corrupted, is simply a way of doing business. It costs the taxpayers massive amounts of money, but because there isn't one single person "hurt", a blind eye is turned and those with connections make out like bandits. In a town facing real problems with oversupply of housing, foreclosures and bankruptcies, someone is using his leverage with the local government to build more housing.

But hey, what's the rule of law to these friends of the Governor and the State Democratic Party Chair?

At least someone is trying to stop this: it may well get nowhere, because all of those involved are either corrupt or complicit: oddly enough, no one involved could be reached for comment, or declined to comment because they weren't aware of what is going on.

Now that's convenient.

And kudos to the Santa Fe New Mexican: they are doing their job, reporting on what is obviously a sweetheart deal for political friends.

Ironic Is The Least I Can Say...

...to this.

Ye gods.

What is ironic is that the Democrats, the party that claims to represent the workers in the US, the friend of the little guy, the party so dead set against big business, is ... yep, lobbying for changes that big business desperately want.

Net neutrality is nothing less than an attempt by internet providers to rout internet traffic to maximize their profitability. Ignore all other arguments: at the end of the day, that is all that there is to this. This is commercial interests wanting to maximize their profitability, minimize their costs, and try to make monopoly profits.

The only way they can do this is to change the laws, changing the fundamental nature of the internet, allowing them to fiddle with packets and their routing. Don't pay enough? Then you get dropped into the big bucket of "well, your packet will get there someday"; pay enough, and your access is like it is now.

And that is supposed to be a consumer benefit?

Not.

What the Democrats also don't realize is that if you allow discrimination based on price, you can also discriminate against content and source. Which opens the internet to significantly more censorship than has been the case. But what do you expect from the party that desperately fought the Civil Rights Act.

A lot of money was invested in what are now called darknets, parts of the internet that are usually not very accessible because the companies that control them have largely turned them off. They are the fiber-optic networks that were installed during the Dot-Net bubble, when companies threw billions at infrastructure.

Now they are kept deliberately off the system in order to create artificial constraints on data flow in order to bring them back on only when the companies involved can charge monopoly prices for access.

The building of these networks is a classic bubble malinvestment, an investment that turned out to be completely useless. Now the companies involved want to turn that around and recover their invested billions. Right now, there is no cash flow, no revenues from these nets, and the investments, if they haven't been completely written off, are like lead weights on the balance sheets, reducing profitability.

Here's an idea: how about simply opening the nets up and start earning a revenue stream from them. The companies that blew billions on these nets need to feel the pain of making poor investment decisions rather than forcing consumers to pay for them (since pricing without discrimination doesn't let them raise prices due to competition: ain't capitalism grand for consumers as well?)

Sigh. Knowing the Democrats, this will probably go through, only to be repealed. But the only victories the Democrats are capable of, it seems, are Pyrrhic victories. Isn't it ironic...

Ha! Of course...

...trying to force folks to buy a commercial product whether they want it or not is not constitutional.

Duh. Been the problem from the start.

Eric Cantor has the right idea:let's put a stake through the heart of ObamaCare and repeal it in its entirety, end the nightmare that Pelosi wrought.

What a catastrophe she has been for this country. What a catastrophe both she and Obama have been for the Democrats. At this point, any decent conservative, especially a woman, could beat Obama hands-down based on his fiscal track record alone, and he would richly deserve the defeat.

The only good thing that has come out of this is the slowly dawning comprehension that if you want to redistribute people's money, you gotta let them earn it first, and that at some point folks are going to say "hell no". Only idiots think otherwise.


Then again, that's who was elected in 2008.

It Takes A Government...

There's a lot going on: outright fraud in securitization, with companies claiming that they didn't need to actually follow the letter of the law, since no one was paying attention; bond markets behaving in ways never seen before; failing economies that are too big to fail; banks so heavily leveraged that there can be no creative destruction ala Schumpeter (desperately needed, but being blocked by those with too much to lose) and at least two major bubbles that no one wants to see burst.

The last shall be first: two bubbles. Gold and China, and they are inter-related. The Chinese who can are buying up gold like never before - hence the gold bubble -  and for very, very good reason. China itself is a bubble.

Don't believe me?

Consider this:: as I've said time and time again, a cardinal, deadly sin of economics is the misallocation of capital.

Great portions of the Chinese economy are currently working without price information. See this here by Megan McArdle:

When you're in China, it's easy to get caught up in the constant extolling of the benefits of (modified) central planning,  After all, the Shanghai-Hangzhou train, which I rode, is awesome, and it's certainly true that the market probably wouldn't have provided it.  The Chinese argue that the new high speed rail network is critical not merely to move the population around, but to free up the existing railbed for more freight traffic.

On the other hand, there are great dangers to being able to point at an infrastructure problem like this and say: "Make it so."  We interviewed someone at the rail ministry, and initially I was going to ask him the normal financial questions you ask someone planning a major capital expansion in the United States: capital costs, cost-effectiveness, and so forth.  The answers are more often than not the fever dreams of the most optimistic consultant they could find, but at least there is some tether to reality: the head of the agency doesn't actually want to be fired because his budget overruns just ate the money allocated for children's health care.

In China, I was stumped as to how you'd even ask that question. These projects don't have to go to the market for loans; the government directs the state-owned banks to lend to them, at interest rates decided by the state.  There's no opportunity cost to the money, since it's not like the rail ministry would otherwise be building a chain of noodle shops.  And the ridership projections are vetted by the same people who want to build 16,000 km of high-speed rail.

Prices are really useful.  But in whole large sectors of the Chinese economy, particularly the  banking sector, the government sets those prices.  This means huge information loss, and the concomitant possibility that there is a vast misallocation of resources.

Understand, please, that China is not a market economy: it remains a controlled economy, one where prices continue to be made meaningless. It is first and foremost a government-owned economy with some privatization (but don't you dare think about behaving in ways that The Party doesn't like!) and a mercantilist attitude that exploits the openness of foreign markets to destroy competition and assimilate technologies in order for The Party to survive. It is, of course, not entirely that simple, but this remains the core of the Chinese political economy. They, The Party (which, of course, in its current incarnation is nothing but a collection of apparatchniks and thugs), is riding a wave of economic expansion and growth, one that almost literally has to grow at 8% a year in order to cover all the mistakes, errors and incompetence of The Party in order to keep peasants coming to the cities and entering the industrial workforce under conditions that should outrage, but don't because they are kept carefully hidden.

Further (same source):

To get a really catastrophic misallocation of resources, it seems to take a government; corporations can only screw things up on an artisinal scale.  For that matter, it's worth noting that our government has spent the last seven decades trying to keep the price of housing low, and that much of that intervention, such as the creation of mortgage securitization, ultimately significantly contributed to the crisis.

It's worth remembering that at the time they were built, all those useless houses looked like prosperity.  So too, massive mispricing in China may look pretty sweet--unless a hiccup suddenly leaves the government with a hell of an expensive white elephant.  Or lots of them. As anyone who has contemplated purchasing a luxury car will know, just because something is really awesome, doesn't mean it's a good idea, economically speaking.  Buying without knowing the price is dangerous no matter where you are.

This is what is facing us now: far too many True Believers in the Chinese economy, convinced that it will continue to expand at 8%+, coupled with the Chinese themselves, buying gold like it is going out of style.

If prices were accurate, you wouldn't have that: the uncertainties of missing prices (or, more exactly, the intuitive knowledge that capital is being misallocated right and left, largely because the Chinese government cannot bear to have someone point out that the Emperor has no clothes.

It really does take a government for really catastrophic misallocation of resources: this is happening in China today. We don't know if China can afford a HS rail network (not only for the reasons that Megan put forward in that link) as we don't know what it will cost and whether that will be an investment that really will pay back.

Especially when you consider that the Chinese are aiming at a vast expansion of inner-China flights, which is in direct competition to HS rain. In other wards, the left hand doesn't know what the right hand has done, is doing, and plans to do.


When China falls, it will fall very, very hard. Communist countries always do when The Party tries to hold onto power far too long. This is going to be a major catastrophe, an epic fail. It really does take a government to do that.

Happy Thanksgiving, Everyone!

A wonderful and happy Thanksgiving to everyone. Us expats gotta work.

But I wanted to pass this on from John Scalzi, a rather talented science-fiction writer: I'm guessing that he may not have a cousin named "Chet". But this remains a lovely prayer for Thanksgiving...

Dear Great and Gracious Lord,

This Thanksgiving, we pause to reflect on all the bounty and good fortune with which you have graced us this year. Thank you, Lord, for this feast we have in front of us and for the family and friends who are with us today to enjoy this bounty and this day with us, even our Cousin Chet. Thank you for our health and for our happiness.

We also thank you for the world and that in your wisdom you have not stopped the Earth's core from rotating, collapsing our planet's magnetic field and causing microwaves from the sun to fry whole cities, requiring a plucky band of scientists to drill down through the mantle and start the core's rotation with nuclear bombs. That seems like a lot of work, so we are pleased you've kept the Earth's core as it is.

We also thank you for once again not allowing our technology to gain sentience, to launch our own missiles at us, to send a robot back in time to kill the mother of the human resistance, to enslave us all, and finally to use our bodies as batteries. That doesn't even make sense from an energy-management point of view, Lord, and you'd think the robots would know that. But in your wisdom, you haven't made it an issue yet, so thank you.

Additionally, let us extend our gratitude that this was not the year that you allowed the alien armadas to attack, to rapaciously steal our natural resources, and to feed on us, obliging us to make a last-ditch effort to infect their computers with a virus, rely on microbes to give them a nasty cold, or moisten them vigorously in the hope that they are water-soluble. I think I speak for all of us when I say that moistening aliens was not on the agenda for any of us at this table. Thank you, Lord, for sparing us that duty.

Our further thanks to you, our Lord, for not allowing the aliens to invade one at a time and conquer us by taking us over on an individual basis. That you in your wisdom have not allowed aliens to quietly inhabit our bodies and identities -- the better to attack us by cornering us in the rec room or outside while having a smoke -- means that we can enjoy each other's company without undue paranoia. It also means that if we are obliged to set a flame thrower on Cousin Chet, as we are sometimes tempted to, we will not see his flaming head sprout arms and try to scurry away. And for that we are truly blessed.

Thank you for not allowing the total moral and economic decline of the United States, our Lord, that would turn one or more of our great cities into a prison or spring any number of apocalyptic scenarios upon us that would turn our planet into a vasty wasteland where only dune buggies and leather-clad miscreants have survived. It's not that we have anything against leather-clad miscreants -- I refer you, Lord, to the previously mentioned Cousin Chet -- but we prefer them to be in the minority, and also those dune buggies so rarely have seat belts -- that's just not safe.

Most specifically, thank you, Lord, for not sending a large meteor or comet tumbling straight at the planet, forcing the government to turn to oil-rig operators to save us all. That oil rig in the Gulf this year didn't exactly inspire confidence, if you know what I mean, Lord. And while we know that humanity would likely survive such a massive impact thanks to those underground cities the government has built, we are not at all confident that any of us at this table would get a pass into those cities, and we don't have either dune buggies or wardrobes made mostly of animal hide. So thank you, Lord, for not making us worry about that this year.

Finally, Lord, thank you for once again keeping the scientists from bioengineering dinosaurs back to life. While the idea of a pterodactyl with stuffing and all the trimmings seems like a good one at first blush, getting past the raptors in the supermarket parking lot would probably be a challenge, and we would end up having to stake one of our own to the shopping-cart return so the rest of us could get past, and I'm not sure that we could persuade Cousin Chet to do that more than once.

For these and so many other things, Lord, we offer our humble gratitude to you this Thanksgiving. However, I think I speak for everyone when I say we would still like speeder bikes, so if you could get someone to invent those by Christmas we would all be obliged.

Amen.

That is all. Let the tryptophane overdosing begin!

People feel misled and betrayed...

This is going to be a ongoing and developing meme as the general unraveling of the economic-political system of the last 45 years continues. It's not so much that the entire system will unravel - capitalism is simply too efficient for that - but rather it is the political system that has latched on to the economic system as a parasite, living off of it and now slowly strangling it. Those who can grab the meme and ride it will thrive: those who in the name of progressivism fight to keep the system will fail.

The title of the post comes from this. Key phrase, the only one that really matters:

The past week has been a traumatic one for the Irish electorate. People feel misled and betrayed.

This covers it all.

It is the reason for the dismal Democratic showing in the US as well: the people feel misled and betrayed.

We are seeing the culmination of literally decades of mistakes and errors, of sheer blind bloody-mindedness, all made in the name of "doing good."

Margaret Thatcher put it well when, in a TV interview for Thames TV This Week on Feb. 5, 1976, she said, "...and Socialist governments traditionally do make a financial mess. They [socialists] always run out of other people's money. It's quite a characteristic of them."

We have reached that point. The Welfare State is driving everyone into poverty. We have reached the point where there is no money left.

The collapse of the Soviet Union and "Real Existing Socialism" wasn't enough to kill this fundamental point: the basic tenets of socialism - that the great, unwashed masses need to be led to a glorious future where they will get what they deserve - have, implemented incompetently and led by the New Class of classless socialists (see Milovan Đilas and this for more), now led to the collapse of finances world-wide.

The slow, subtle and incremental destruction of wealth via redistribution of income via social spending plans must be manifestly visible by now. Decades of debt accumulation for welfare systems designed by do-gooders meddling with societies en masse are now crushing and increasingly reaching the point of no return.

The people feel misled and betrayed: they were misled by the promises of socialists promising them that they could have a future without work, that they could enjoy the fruits of success without having to work for them; they were betrayed because this is not possible. Repeat: Not Possible.

I've mentioned Kipling here time and time again: The Gods of the Copybook Headings. The poem tells you all of the reasons never, ever to believe someone who calls himself a progressive (which today is the cover-name for socialist, given the utter bankruptcy of socialism). Here are the last two stanzas:

As it will be in the future, it was at the birth of Man
There are only four things certain since Social Progress began.
That the Dog returns to his Vomit and the Sow returns to her Mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;

And that after this is accomplished, and the brave new world begins
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!

When all men are paid for existing and no man must pay for his sins: that is exactly what progressives have been championing for the last 45 years. The Gods of the Copybook Headings are nothing more than moral and economic truths of the most basic kind, the ones that stand firmly in the way of utopias of all kinds and fashions, the nemesis of the woolly-thinking, do-gooders of all times, and the shoals upon which all such pipe-dreams shatter and drown.

That is why the people are feeling misled and betrayed. As Abraham Lincoln once said: You can fool all the people some of the time, and some of the people all of the time, but you can't fool all of the people all of the time.

Old Abe had something there. The progressives have educated three generations to believe that they could bring prosperity to all by spending other people's money; the progressives have squandered the wealth of three generations to make it so; the progressives have given the next three generations a burden to bear that will grind them down as none of them has ever deserved; the progressives have betrayed the future and misled the people like almost none before (Communist governments did it better and collapsed just as thoroughly).

Progressives have bankrupted the West. It is time to throw off the shackles of progressive lunacy and turn out the betrayers, sending them into exile and despair for their sins.

The workers (blue and white collar both), the productive elements of society, are now oppressed by the New Class of Djilas, parasites living off their toil.

To paraphrase Marx: Workers Of The World, Unite: You Have Nothing Left To Lose. Government debt has taken everything else.

The Fox Has Opened Up A KFC Franchise...

That has got to be one of the best lines in recent memory, from here. Scroll down a tad to find:

The city's Health Services Board, which decides what medical plans San Francisco uses and how they're implemented, has seven members — a majority of whom are elected by city employees to represent city employees. Every step of the retirement process is controlled by people who have a vested interest in it — literally. Not only is the fox guarding the henhouse, the fox has opened up a KFC franchise.

The man is right: the purpose of San Francisco, at this point, is not to run the city of San Francisco, but rather to ensure that the workers of San Francisco have some awfully nice pensions that the taxpayer has agreed to pay for.

What?

You say that you didn't agree?

Sucker: your elected officials bowed before the public employee unions and you, the taxpayers of that lovely city, where you'll find people with flowers in their hair, are being sent the bills.

Ye gods.

Before you say that the politicians should have stopped this, understand that politicians and public unions are joined at the hip in San Francisco, Siamese twins that cannot survive or function without each other.

As it is, both have conspired to ensure that when push comes to shove, the taxpayer will be going to jail.

Ye gods.

And liberals wonder why they are unpopular? Why they lose elections?

We'll know that the lesson has percolated down to where it will really start to make a change when San Francisco gets its pension schemes in order and has jailed those responsible for fraud and conspiracy, The income from RICO should be enough to cover the court costs to tear that system down, but only public outrage - aka Tea Party - can ensure that it never happens again.

For the children's sake, you know. You can do this so that San Franciscans can still be known at people with flowers in their hair...

Environmentalism as Secular Religion...

This was interesting to read.

First and foremost, it's a bit of a hatchet job on someone that the author readily admits he can't understand, done in the name of discounting Dyson Freeman's arguments about anthropogenic global warming.

But the quote that really popped out was this:

Environmentalism does indeed make a very satisfactory kind of religion. It is the faith in which I myself was brought up. In my family, we had no other. My father, David Brower, the first executive director of the Sierra Club and the founder of Friends of the Earth, could confer no higher praise than "He has the religion." By this, my father meant that the person in question understood, felt the cause and the imperative of environmentalism in his or her bones. The tenets go something like this: this living planet is the greatest of miracles. We Homo sapiens, for all the exceptionalism of our species, are part of a terrestrial web of life and are utterly dependent upon it. Nature runs the biosphere much better than we do, as we demonstrate with our ham-handedness each time we try. The arc of human history is unsustainable. We cannot go on destroying natural systems and expect to survive.

Hence: when looking at what environmentalists write, say and propagate, this is what lies at the core of their thought. It is a religion.

The author continues:

Freeman Dyson does not have the religion. He has another religion.

"The main point is religious rather than scientific," he writes, yet never acknowledges that this proposition cuts both ways, never seems to recognize the extent to which his own arguments proceed from faith. Environmentalism worships the wisdom of Nature. Dysonism worships the indomitable ingenuity of Man. Dyson often suggests that science is on his side, but lately little of his popular exposition on planetary matters has anything to do with science. His futurism is solidly in the tradition of Jules Verne, as it has been since he was 8 and wrote "Sir Phillip Roberts's Erolunar Collision." On the question of global warming, the world's climatologists and scientific institutions are almost unanimously arrayed against him. On his predictions for the future of ecosystems, ecologists beg to differ. Dysonian proclamations like "Now, after three billion years, the Darwinian interlude is over" are not science.

Bingo: at the core of the AGW controversies is a religious dispute.

And finally:

Dyson, clearly a busy man, was extraordinarily generous with his time with me at an early stage of my career. His allowing me to be present at an intimate family affair—his reunion with George—provided the climax and denouement for my best and most successful book. In the field, Dyson was an amusing and never-boring companion. Never have I had a relationship of such asymmetrical understanding. Dyson always got the drift of my ideas and sentences before I was three or four words into them, but the converse was not true. When the physicist spoke of his own pet subjects—quantum electrodynamics, say, or certain characteristics of the event horizon in the vicinity of black holes—I had no idea what he was talking about. Dyson is a discoverer of, and fluent in, the mathematics by which the fundamental laws of the universe operate, and in that language I am illiterate.

This is something that constantly and consistently strikes me of being at the core of the problem: that there is no communication, largely because there is a fundamental lack of understanding because one side is functionally illiterate.

An example: when economists talk of consumption, we don't mean that the goods involved are destroyed. For the Club of Rome and others, they assumed that when copper was used for any particular purpose, it was effectively destroyed, never to be used again, which led to their fairly absurd dire forecasts. I've had enough discussions with secular religionists, aka ecologists, who whilst claiming to understand the complexities of the ecosystems to the point where they felt able to forecast dire results, were economic illiterates who, at the same time, were proscribing economic solutions.

Which makes about much sense as me, your humble economist, trying to tell farmers how to farm best. I can't: I can tell them how to perhaps be more productive, but I can't tell them how to farm. I don't know the faintest about farming except what I have read, and that tells me that I really don't know the reality of farming.

Democratic Debacle...

Now that some of the dust has cleared and it's clear that the Democrats lost yesterday, let's take a look at the extent of the damage.

They lost the House with a shift of 60 seats: that's the largest shift since 1948.

But read this as well: the Democrats lost massively in State races.

North Carolina and Alabama have apparently forgiven the Party of Lincoln and their State Legislatures are now Republican for the first time since the Reconstruction (1870 and 1876, respectively).

Also turning Republican: Wisconsin (!) and New Hampshire legislatures.

State Houses in Indiana, Pennsylvania, Michigan, Ohio, Iowa, Montana, and Colorado: now Republican.

Both the Maine and Minnesota Senates: now Republican.

Democrats in Texas and Tennessee saw their virtual tie eliminated, with Texas so solidly Republican that they have the absolute majority and can now pass state constitutional amendments of the the legislative process without Democrat support.

Awesome. Use that power wisely...

Oh, and a small prediction: many companies still in California will find that while the weather isn't quite so perfect in Texas, being able to stay in business is a worthwhile reason to move. California will apparently have to fall flat on its face before reforms can take hold there that will actually do anything to address the problems facing that state.

In one way, the radical environmentalists are right: people invariably destroy nature. The best example for that is now California, where that state, blessed with natural resources, a fantastic climate and scenery, will have to have an epic fail before the current, toxic generation of Democrats can be purged from the system. Governor Moonbeam will lead the way, I am sure, with the rest of the Californian Democrats following him like rats following the Piper from Hameln.

Disappointment Amongst Victory...

A gain of 65 seats in the House of Representatives ain't chopped liver: kudos to the American people for making some smart decisions.

But there is some disappointment for this ex-pat:

First and foremost, Barney Frank survived. If anyone (besides Harry Reid, Barbara Boxer and Nancy Pelosi) deserved to lose his re-election bid, it was Rep. Frank, who more or less single-handedly prevented anyone from taking a serious look at Fannie Mae and Freddie Mac when there was enough time to do something about them. For that alone her deserved to lose.

Harry Reid, Barbara Boxer and Nancy Pelosi are in the same category: for their sins, they should have lost.

One particular bright sign of sanity: Alan Grayson, Rep from Florida, was soundly trounced. The worst thug and bully ever to grace Washington DC (at least in recent memory) has been sent packing.

Generally, though: nice job. It's time for the Democrats to say "Well, that didn't go well" for a richly deserved change.

Now, for 2012...gonna be interesting.

Ouch...

...but the man has a point.

Read this.

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

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

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

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

Appearance trumps knowledge.

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

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

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

Communism, Mercantilism and China...

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

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

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

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

I'll quote from Rachman:

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

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

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

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

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

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

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



Hence, and with little or no apology:

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

Well, Did You Expect Anything Different?

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

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

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

It reminds me of the famous Brecht quote:

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

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

Be warned.

And Here's The Next Big Thing...

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

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

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

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

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

Here's a press release.

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

In other words, a tax.

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

Problems with this approach:

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

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

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

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

Meh.

Geopolitics and Naïveté

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

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

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

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

Hence the push for economic power.

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

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

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

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

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

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

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

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

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

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

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

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

Getting Back To Square One...

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

But this is about as good as it gets:

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Foreclosure Crisis
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

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

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

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

A Bone To Pick...

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

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

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

What do they do?

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

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

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

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

A $9.5 Trillion Fraud...

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

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

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

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

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

Here is the key quote:

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

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

It gets better:

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

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

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

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

Unintended Consequences...

One of the downsides of the lack of economists in the loop is that those making policies are making mistakes, serious ones: the law of unintended consequences applies here with a vengeance.

Case in point: this.

Good old Matt Yglesias is in form, ranting and raving about how health care reform is key to making progressive policy "irreversible."

He presses all the proper buttons, using the plight of a middle-class family with their adopted daughter as a keystone, talking about how forcing the insurance companies to cover her regardless of her pre-existing condition will be one of the cornerstones of the health reform efforts, and how mean and nasty everyone is who opposes this.

What he doesn't talk about are the unintended consequences.


What are these?

Simple: health insurance companies are not offering that type of insurance any more. Rather than provide coverage that virtually guarantees that they will lose money, the insurance companies are no longer offering the coverage at all. Zilch, nada.

Of course, that the insurance companies would decline to enter into business activity that would lose them money never, ever crossed the brow of folks like Matt, who know significantly less about economics than they think they do.

But ask any industrial economist, someone who understands how companies behave under competitive pressures and how companies move their center of business around to meet market demands - we call these companies successful and survivors, as opposed to those companies who stick to a business plan and cannot consider themselves being anything but a producer of widgets in an economy that no longer demands widgets - and you'd get a "duh".

Companies are in business to make money. Take away their ability to make money, and within a very short period of time the only companies left are either doomed or are paid to not make money (aka "subsidies").

This is not rocket science. This is basic microeconomics. Which apparently the health reform people wouldn't recognize if it came up in front of them, waving a flag, and smacked them upside their face with a 2x4.

I'll give you another example of unintended consequences when no one listens to economists.

The US once had a broad-based and very successful shipping fleet. US-crewed and registered ships were profitable and more than competitive. Personnel costs in shipping are basically irrelevant, as fuel and capital costs are the vast majority of costs.

What happened?

The US tax code changed and US shipping companies had to pay US corporate taxes on overseas operations. Given that the US is the only country that taxes its shipping companies in this manner - it is one of the reasons why shipping can be a very lucrative business, as it operates largely tax-free because the activities involve are not within tax jurisdiction - this meant that US companies either moved their corporate headquarters overseas (duh) or sold their operations off to competitors before these operations became a loss-center.

Hence in the attempt to increase tax revenues - the justification for this, after all, was that it was "unfair" that these companies have what amounted to a tax break - an entire industry was basically eliminated.

The funny thing is, the industry was paying taxes. Any stock owner got rather nice dividends, which were then taxed at the personal tax rate. But in its infinite wisdom, the government decided that it was better - more just - that the industry cease to operate as American companies.

As a result, there is now movement to open up intra-coastal shipping (shipping from one US port to another US port) to foreign shipping because there is not enough US shipping to meet demand.

Duh. Given these circumstances, there never will be.

The laws of unintended consequences are simple. Just ask any industrial economist how they work. Were that a few more folks would do so, rather than be blinded by the brilliance of their sophomoric ideas.

Epic Fail...

Six months into ObamaCare, and what do we have?

Broken promises, outright lies, and an Epic Fail.

I won't get into the details of the broken promises (see here, and yes, that is a link to the GOP website. Doesn't change the facts of the situation, sorry!)

What is more interesting is the fact that the Democrats are now facing an Epic Fail.

What is an Epic Fail?

From the Urban Dictionary:

A mistake of such monumental proportions that it requires its own term in order to successfully point out the unfathomable shortcomings of an individual or group.

What happens, then, when the President of the United States is responsible for an Epic Fail? When his party actually controlled both houses of Congress and where not a single member of the opposition thought his ideas were good and worth supporting? Where the political necessity of pushing the bill through took priority over giving anyone the time to actually read the bill and understand what was being pushed through Congress?

The Democrats were so convinced of the absolute, complete necessity of passing Health Care Reform (aka ObamaCare for now and forever) that they simply passed a bill that bears the mark of lobbyists and serves the industry, rather than the public. Costs aren't and won't be reduced; ObamaCare is the insurance industry's wet dream of being able to take more and more disposable income, helped along by the trial lawyers and aided by corrupt politicians who take their orders from unions and lobbyists.

Now we have the Epic Fail of the Democratic Party. It is going to be a very, very interesting couple of weeks to watch the moderate Democrats abandon their Great Leader and to watch the left go hysterical about how the mean and nasty Republicans are going to dump babies out into the streets and stomp on them while bayoneting social workers and tossing Grandma out of the airlock (or words to that effect).

This is where the absurdities of the Democratic Party have led us: a party dedicated to statism and fewer freedoms, all in the name of rights and maintaining power; a party incapable of cleansing itself, corrupt to the core and beholden to the rich (Soros) and criminal (unions); a party whose fundamental beliefs require perpetual denial of the laws of economics (and these laws are there: sooner or later you run out of other people's money...) and logic; a party indulgent and wastrel, concerning itself with the trivial, distracted from the greater truths, the lunatics firmly in control of the asylum and almost literally incapable of understanding why anyone could dare think different.

We haven't seen such an Epic Fail since the collapse of the Confederates in the Civil War.

It's gonna be an interesting fall. Pun intended.

RIP...

Martin Lukes, that is.

Parachuting accident.

Of course, given the fact that he was wearing a parachute, that shouldn't have made a difference, just as his purported upbringing gave him a cultural parachute that he also chose to ignore, preferring the head-long destructive path that was his life.

Looking back at his life, it strikes me that the thrownness to death is really what Martin exemplified. This is a primordial banality: we are thrown into the world with no preparation, with zero readiness, thrown towards our final destination, death and the unknown that comes with that. During life we are being-here, a nexus of being, localized and within a lived-world, a life-world that moves and changes according to our perceptions and our being's state in the world.

Much like Martin lived his life.

He is survived by an ex-wife, a son from his first marriage, a wife and twin children from the second marriage. Funeral ceremonies were not mentioned in the press release.

His last communication, by twitter, was "AARRRRRGGGGGHHHHH..."

Seldom was he so eloquent as in his final and departing statement.




After many years of providing head-shaking humor, the editors of the FT (one in particular), has finally, apparently, killed him off.

Of course, consider this (and I doubt the FT had thought of this): the thrownness is translated from the German "Geworfenheit", which could be construed to point to a crime involved in his death, not an accident: he was thrown from the plane, probably by all the women in his life.

He will be missed, but largely because reading his exploits almost invariably induced a visible cringe.

A Balance for 9/11

Read this and judge for yourself. I am not as pessimistic has he is, but he has some good points on the downside.

Why am I more optimistic? Because in less than 2 months, the makeup of the Congress shall change. This is the best feature - some say the only redeeming one - of democracy as practiced in the American Republic: every two years, you can throw out scoundrels and bums, charlatans and fools. You can't throw them all out, but you can get started.

Best form of government ever.

Worth the read...

This in the Weekly Standard is worth the read. Seriously: Read.The.Whole.Damn.Thing. The indictment of parts of the French military is damning, and it would have taken so little to change the outcome. So very little indeed.

The incompetence of politicians...and the resulting futility of sacrifice. That one led to mutiny and revolt, the collapse of a government and a military dictatorship.

"We had been told, on leaving our native soil, that we were to defend the sacred rights conferred on us by so many of our citizens settled overseas, so many years of our presence, so many benefits brought by us to populations in need of our assistance and civilization. We were able to verify that this was true, and because it was true, we did not hesitate to shed our quota of blood, to sacrifice our youth and our hopes. We regretted nothing, but whereas we over here are inspired by their frame of mind, I am told that in Rome factions and conspiracies are rife, that treachery flourishes, and that many people in their uncertainty and confusion lend a ready ear to the dire temptations of relinquishment and vilify our action. I cannot believe that all this true, and yet recent wars have shown how pernicious such a state of mind could be and to where it could lead. Make haste to reassure me, I beg you, and tell me that our fellow citizens understand us, support us and protect us as we protect the glory of the Empire. If it should be otherwise, if we should leave our bleached bones on these desert sands in vain, then BEWARE THE ANGER OF THE LEGIONS!!"

This is attributed to being from a letter written by Marcus Flavinius, a centurion in the second cohort of the Augusta Legion serving overseas, to his cousin, Tertullus, in Rome, quoted in the Prologue of Jean Larteguay's, "The Centurions." However, it is unclear whether this quote is actually legitimate (largely due to the phrasing: if it is indeed based on an actual letter, then it has been heavily transliterated over the years into something more powerful than a probable original (I know from my Latin that this would be a very heavy text indeed).

That said: those who would throw away military accomplishments - indeed, victories - in the name of political gain and who would vilify soldiers for doing what they do should bear this well in mind.

Moving From Infuriation To Rage...

This got me back on the track of something I've been contemplating for a while. Sorry for being scarce lately, but reality intrudes.

The point that Auerback makes is correct: that TARP didn't address the problems, but rather enabled fraud to be unrolled in its entirety.

This is the core of what is being said:

Calling the TARP a success is like claiming your wastrel son is getting his life together because he's settled his gambling debts, while omitting that you are paying for his apartment, got him an overpaid job at your company, and handing him $100 bills more than occasionally.

and this:

...inadequate capital didn't cause the financial crisis. Lying and corruption did.

and this:

Congress adopted unprincipled accounting principles that permit banks to lie about asset values in order to hide their massive losses on loans and investments, which allowed them to raise the capital.

and finally:

The problem is that the policy was not shaped by finance or sound economics, but by politics. Both administrations have sought to keep the American people from knowing about these cover-ups and secret subsidies because they know that we would not tolerate either policy. The cover-ups and secret subsidies are not simply awful financial policies; they are also a betrayal of democracy. And our press has gone from clulessly enabling this treachery to actively promoting it.

This should be sending the American voting population into a collective rage: this goes beyond the usual (largely Democratic) corruption of Congress and is the active defrauding of an entire generation, the generation which has given so richly to the Democrats and their smokescreen of liberalism and "being for the common man".

Nothing could be further from the truth: that is the fundamental of any fraud.

I think you need to consider this: TARP did save the US banking system from collapse, did prevent The Great Depression 2.0, and did prevent an even worse world-wide melt-down that would have seen most of the world's economy collapse.

It did so at the cost of bankrupting US government finances.

Who profited?

Those who were liars and who were corrupting the banking system in the name of profits. In other words, a significant number of folks. All the subprime lenders, all those who aided and abetted them, as well as their political lackeys. All the derivative sellers who were betting on the other side, buying insurance on their neighbors' houses while selling gasoline and matches to known pyromaniacs (and making it clear which houses weren't to be burned down).

If you look at the real, underlying economy, ignoring the feel-good numbers, you can see that the real economy is in a depression: employment remains way down, consumer spending remains weak, and there is a very, very long way to go before we approach pre-recession employment and wage levels.

The economy is in a depression, not a recession. It was caused by moral hazard and is characterized by "Too Big To Fail", which at the end of the day really means "I Can't Allow My Campaign Sponsors To Go Bankrupt" or words to that effect.

This isn't merely infuriating: it should generate genuine rage, since it literally means that our children's futures are being sold down the pike for a pittance today. The only ones profiting are those who were deeply invested in the fraud that drove the collapse: unless that fraud is addressed, nothing will change, as Mr. Auerback correctly says.



Oh, and as an afterthought (and this is something I have repeated here a number of times): mark-to-market accounting valuations are pro-cyclical and guarantee that normal business cycle movements become crises. Mark-to-market is, in any trading environment, an invitation to mass bankruptcy and unemployment, as well as extremely risky investments and loans made during any upswing. As such it is something that only accountants can love, since they don't care about the real-world effects of accounting rules.

For the economy to really, truly, recover, we need to get both accountants and lawyers back to where they belong: support services that serve the real economy and those who create real value, rather than the parasitical entities they have become today, who aim at controlling the real economy in their own interests. Being a lawyer or an accountant should be a hindrance to your career as a businessman, not an asset.

Hell Frozen Over...Really.

Yes, hell has frozen over.

I am going to link to two articles by a certain writer, one whose name has become a verb.

Read this.

And then read this.

While normally I would love to fisk Mr. Fisk, this is an occasion where I cannot, will not, would not.

Read the whole thing and understand my repulsion. This is not propaganda, trying to make things worse than they seem. It is an indictment of an entire culture, one richly deserved, an indictment of failed societies, without any sense of honor or faith, without any sense of morality.

All done in the name of honor and morality.

Read the whole thing. Both of them.

Learning From The Master...

There's an article in today's FAZ. Just in German, but let me give you the gist of it. It's too precious for words...

German development aid is largely organized by something called the GTZ, the "Gesellscahft für Technische Zusammenarbeit" or Society for Technological Cooperation. The GTZ is active in the Congo, it's one of the key countries for German development aid.

The accounts of the GTZ have been frozen and the building they own there has been confiscated.

What happened? Someone take off with the books, disappear with the petty cash, run away from the bills with a new car for a mistress?

Scarcely.

Instead, it's the lawyers. In this case, Congoese lawyers.

Tabura Kashali trades in wood in Goma. Back in 1994 he was supposed to deliver wood to a refugee camp. Of the 3400 cubic meters he was to deliver, 2820 never arrived, and he claimed it was stolen. He demanded $47k for the entire delivery, although security was his job. The GTZ paid him $8500. Four months later, Kashali sued the GTZ in the Congo courts, demanding $15k additional payment. The judge awared him $150k, i.e. 10 times the amount. The GTZ appealed, and Kashali counter-sued, asking for $33.8k, $80k in lost profits and $190k in damages and interest, using the same judge. The GTZ lost the appeal and was sentenced to pay the sum total of $280k. This was 2006.

At this point the Congo government intervened and paid $150 920, which at that point was exactly half of the sum owed (with interest). That was 2007. This year - three years later - Kashali demanded the other half plus interest, which had grown to $91 150 on top of the $150 920. Otherwise he would request that GTZ property by seized to pay these debts. The GTZ went to the German Ambassador, who tried to talk to the Minister for Development, who couldn't be bothered to meet with him. On 2 June 2010, Kashali demanded, on top of the monies owed to him, $1.5m dollars in damages. The GTZ had to set up a deposit account with close to $250k in it to avoid having their accounts seized.

In a second case, the "Initiative congolaise pour la gestion autonome des populations" or ICGP, was hired by the GTZ in 2002 to help after the volcano eruption in Goma. The ICGP, which is an NGO, received around $1mn to help, but it became quickly apparent that they were both incompetent and corrupt, and the GTZ cancelled the contract. The ICGP promptly sued, found the right judge, and has now seized the GTZ building in the Congo and has frozen over 44 GTZ accounts.

Adding insult to injury, the GTZ now has to pay $20k/month to use their own building, reflecting a rental contract that they did not even sign. If they don't pay, they will be locked out of the building and would have to leave the country.

The Germans (as opposed to the ex-colonial powers, the French and the Belgians) now have a reputation for being easy prey. After being fired, one former employee sued for $1.9mn damages, his wife (who quit her job) has sued for $51k in damages.

There is a treaty between Germany and the Congo which expressly acknowledges that the GTZ does not have immunity before the courts, but which expressly also states that accounts can't be frozen. This is being explicitly ignored by the courts.

It doesn't stop the Germans from investing in the Congo: they are to deliver new turbines for the hydroelectric plant in Inga, near Kinshasa, for between $15mn and $40mn, depending on the size of the project.



Well, one thing is clear: the Congo does not need any help whatsoever in regards to lawyers, they seem to have learned well enough from American trial lawyers to strike out on their own.

Fair Enough...

One of the text-book definitions of a depression is a decline in overall economic output of more than 15% with a recovery that takes more than five years.

Fair enough.

Today's Wall Street Journal runs this headline:

The Obama Economy

How trillions in fiscal and monetary stimulus produced a 1.6% recovery.

Fair enough.

Consider this: this may actually be the good news.

Bluntly, it will be at least another 2-3 years before the economy starts to approach pre-recession levels. Given the time already lapsed, we are looking at least five years before the economy recovers to where it once was.

Hence: one condition of a depression is fulfilled.

Now, one of the mantras coming from President Obama and the Democratic Party is that the massive upswing in government debt is really all Bush's fault, that they inherited this.

Fair enough.

Of course, that really means that the avoidance of Depression 2.0 (or at least the really, really bad parts of it, i.e. that -15% growth) can't be claimed by President Obama and his administration.

Make up your minds, Democrats: either pony up, accept the debt as the necessary evil to avoid Depression 2.0 and claim the moral ownership of recovery, or blame it on Bush, but then accept that avoiding Depression 2.0 is something that Mr. Bush can lay claim to. Not the Obama Administration, which seems hell-bent on redistribution policies that are so 20th century.

Can't have both.

Fair enough?

Quote of the Day...

In this case, I'm not sure where I read it.

The best description of the state of the economy is that we are now in a supermodel economy. The curves just keep on getting flatter and flatter.

While obviously true for interest rates, it's also indicative of the general malaise: no one is investing, no one is buying big-ticket items, no one is building worth a damn. Even government spending is flat, given how the US government shot its wad buying off the unions and democratic interest groups (with the pretense, but really at the expense, of creating jobs).

Why are the curves so flat? Because we are going to be very, very lucky if we can continue to tread water and not go under.

Banking is all about getting rewards for taking risks. No one can risk, right now, the collapse of government finances if interest rates were to increase. This is an inverse risk, where nothing happens because no one wants to go there, rather than everyone wanting to get a piece of the pie that got us in the trouble we are now in.

Quote of the Day...

Just intuitively, if the inflation rate is at a 50-year low and the unemployment rate is near a 50-year high, it's hard to believe that the monetary dials are set right.

From here.

The man's got a point: there are too many who believe that the orthodoxy will come up with a solution. Keynes does not have a solution for our problem (he'd be aghast at the idea that during an upswing, government finances worsened, rather than having gotten better) and there really are no solutions that do not include either the gutting of holy calves or the dismantling of what are effectively Third Rails in US politics (the concept that the government can be the best solution for things like pensions and health care).

Anything else means you are living in denial of the problem.

Inflation at a fifty-year low and unemployment near a 50-years high = does not compute in the standard macroeconomic models.



Something has to give. The way things look right now, when it does give way, watch out downstream.

An Uncomfortable Truth...

Thilo Sarrazin, a German politician (SPD) who is on the board of Germany's Central Bank (still around after the establishment of the European Central Bank for reasons too arcane to go into here). He's professionally trained as an economist (PhD Bonn 1973) and is in a world of trouble right now. The SPD is thinking of throwing him out of the party and the Bundesbank (the central bank) is under pressure to fire him.

Why?

Because he isn't afraid to rattle cages and point out some very, very unpleasant truths.

He recently wrote a book called ""Deutschland schafft sich ab", or "The Cancellation of Germany" (this is often translated as "Germany Abolishes Itself" or "Germany Is Doing Away With Itself", but those translations are, I think, clumsy).

Why?

This is a popular quote:

„Integration ist eine Leistung dessen, der sich integriert. Jemanden, der nichts tut, muss ich auch nicht anerkennen. Ich muss niemanden anerkennen, der vom Staat lebt, diesen Staat ablehnt, für die Ausbildung seiner Kinder nicht vernünftig sorgt und ständig neue kleine Kopftuchmädchen produziert."

My translation:

"Successful integration is the result of those who integrate. Anyone who does nothing (to integrate, ed.) deserves no recognition. I don't have to recognize anyone who lives off of the state, who rejects the state, who fails to ensure that their children become productive members of society, and who only produces new little girls wearing headscarves."

Provocative? Yep.

But not in any way different from what, say, Rush Limbaugh would say: he has the facts on his side and is in the process of goring the sacred calves of modern-day German liberalism, goring them beyond the ability of any veterinarian to save them.

While many have called for his head, there are dissenters who think that maybe the man has a point.

One of them is here. Unfortunately, it's only in German, but the article was written by a woman, muslim, with a doctorate in Sociology, who was used by Sarrazin as a reference in his book.

His fundamental thesis is that Germany is removing the basis for its success: demographic and societal factors that have led to the success of the German economy (and society!) are being dissolved, one by one, through political errors and mistakes that are leading to a different society than Germans realize. Not today, not tomorrow, but inevitably the pillars that support Germany's wealth creation and hence economic and political success are being undermined and destroyed, in some cases actively by those with agendas that do not match those of the German mainstream.

Fundamentally, the autochthone portion of the German population (meaning the "German" Germans) has too low a birth rate and that the German population is starting to decline. The non-Germans have a significantly higher birth rate, which leads to the population of those living in Germany (but not the Germans!) remaining relatively constant, but with problems.

Part of the problem is schooling: the schools with the smallest sized classes and the largest budgets are producing students with the lowest abilities and qualifications, a theme that, unsurprisingly, correlates with the US experience: the classic school system in Germany, for all its warts and problems, does produce kids with some great skills. Unless, of course, everything is watered down to meet low expectations for immigrant kids whose parents couldn't give a shit.

The other part of the problem, of course, is that the German birth rate is too low: while Germany provides support for families in the form of monthly subsidies for kids, etc., the core of the matter is that Germans have been having fewer and fewer kids not merely for a few years, but rather for over 100 years. It is the result of improved living conditions and the realization, for women, that when they do have kids, they are going to survive the first couple of years and that there is no need to have five or six kids in order to have two or three reach maturity. While obviously not true of all individuals, the tendency of wealthier societies to have fewer kids is normal.

So what is to be done?

Simple: immigration. It is the only real way to maintain the number of workers that Germany needs to continue its economy without decline. The problem? Current immigration laws prefer immigrants with relatively low qualifications, a remnant of the 1950s immigration policies during the "Wirtschaftswunder" when untrained factory workers were needed in large numbers because WW2 had decimated that cohort of workers in Germany.

Today? There are enough blue-collar workers because the industry has moved from blue-collar work to greater and greater value-added: this is also characteristic of developed economies and societies.

German immigration policy is broken: the facts speak volumes, with 65% of immigrants not willing to be integrated, with 15% of second-generation residents unable to speak German at all (and relatively few able to speak it like a native, i.e. without heavy accent and with proper grammar and vocabulary).

These are the uncomfortable truths. Sarrazin is under attack because he has the numbers on his side, the facts: his opponents aren't interested in facts, but rather in protecting the holy calves of their belief system. They are the ones doomed to failure, that now have a track record of 20 and more years of failure, that are sitting on the railroad tracks with their fingers in their ears, singing loudly so that they cannot hear the locomotive approaching.

What Sarrazin is saying is not racist, not populist, not derogatory and insulting. Unless you think that the truth will not make you free, of course.

The danger? Two-fold.

One: that Sarrazin's warnings will be dismissed out of hand and actively defamed. That is already happening.

Two: that Sarrazin's warnings will be taken out of context, abused by right-wing groups (Germany, of course, is particularly sensitive to this because of fairly recent history...) and outright racists and opportunists.

A sensible discussion could defuse this entirely. Of course, denying that there is a problem and denying that this is a topic that needs to be addressed makes the situation worse.

If you are not a part of the solution, you are part of the problem.

Worth Watching...

...not the least because it is telling the truth. The financial policy of the Obama Administration is unsustainable. Period.

VAT Redux...

I think that it can be taken for granted that the US will face severe fiscal and financial restraint whilst dealing with the deficit that the Obama Administration has created for the US taxpayer (and yes, it is his problem, not one he can blame on others: the fact that he tries to underscores the weakness of his character...).

One approach to increase tax revenues would be to impose a VAT, a Value Added Tax. This is a tax on every stage of value added in the economic chain: when raw materials are processed into semi-finished goods, a tax is added; when semi-finished goods are transformed into factory goods, another tax is imposed (subtracting the first tax, though, to avoid double-taxing); when the goods move from the wholesaler to the retailer, another tax is imposed (subtracting the previous step, of course); and when the goods are finally sold, they are taxed once again. Hence, for instance, a 20% VAT tax is imposed at every stage of production: when raw materials worth $10 are transformed into semi-finished, they are sold for $12 and $2 is sent to the government; when they are input into a product that is sold to a wholesaler for $100, $20 is added, but the $2 is discounted, so that the government gets $18 from the factory; the wholesaler sells for $200, adding $40 but discounting $20; the retailer sells it for $400 ($80 VAT) but discounts $20. Hence $2+($20-$2)+($40-$20)+($80-$40) = $80 for the government on the final sales price of $400.

Of course, this is a marvelous way to raise revenues: it takes consumption, most of which is fairly involuntary, as we consume to live (and it does tax those who prefer to live to consume...) and turns it into a revenue generator of significant proportions.

Of course, there are downsides: it is highly regressive, tax those who can afford it the least proportionally the most (and for this reason alone should be rejected by all politicians who claim to represent the little people...), and while you can free certain necessities (or impose a lowered VAT) such as food, housing and clothing, the tax burden remains on those who consume.

There is, however, another component that people have completely forgotten to include, and one with sever and unintended consequences: the VAT must also be imposed upon imported goods when they arrive, in the form of an import tax that is the same level as the VAT. Hence when you, coming from a country without VAT, export to a country with VAT, your goods have a import tax placed on them at the port of entry that is equivalent to the VAT, with the importer paying for this.

The unintended consequence of a US move to a VAT would be this import tax, which will be viewed by many as a major change in the US policy of freedom of trade: the imposition of a VAT in the US could be interpreted as an act of protectionism, leading to a significant worsening of international trade relations.

Just something to think about when y'all are contemplating how we are going to pay for Obama's Follies.

The Best Proof...

One of the best proofs of the worth and efficacy of a political system is what others, not inclined to be sympathetic to the system, think of it.

This is interesting.

Key quote:

Liu's backing of democracy is purely practical, and really has nothing to do with political beliefs. He describes American democracy as a system designed by a genius for effective use by stupid people. As Liu puts it, ''a bad system makes a good person behave badly while a good system makes a bad person behave well. Democracy is the most important reform for China, for without it there can be no sustainable growth.''

That's Chinese Lieutenant General Yazhou Liu, by the way, a political officer in the Chinese military.

Can't get a better endorsement for the wisdom of the founding fathers than this.


Of course, even a system designed by a genius for effective use by stupid people can be destroyed by those who think they can do it better. No system can be designed to be fool-proof, especially when those who meddle with the system in the name of "progress" are the biggest fools.


This also points to ... interesting changes going on in China.

Liu points out that communists can compete in a democratic environment, especially since Chinese communists have abandoned the most destructive aspects of traditional communist doctrine (state control of the economy). But growing corruption, especially among communist officials, is crippling China and threatens the economy, as well as continued communist control of the country. Better to compete in a democratic environment, and risk losing national power, than to proceed with the current system and risk everything. Liu is being listened to by a lot of senior officials, both military and government, who back clean government. But the "dirty communists" are opposed, and that is a formidable opponent for someone like Liu.

Liu is a special kind of officer. He's a political officer, a job invented by the Russians during the Soviet period. The political officer is assigned to units from company size on up, and is second in command of the unit. The political officer is responsible for the political loyalty of all the officers and troops in the unit. He also acts as a (non-religious) chaplain, morale officer and publicist for the unit. These days, political officers rarely say much about communist doctrine, as few Chinese care for it. Political officers do serve as a source of grassroots information on what's going on with the troops, and the word is that corruption is a big issue with military personnel as well. Change is in the air, whether communist officials want it or not. Liu offers a way out, but there's no guarantee that enough of these officials will take it.

If the events that Liu hopes for come to be, this would be, for the Chinese, the best of all worlds. Clean, non-corrupted government could be that which saves China from collapse and chaos. The US system of checks and balances has been proven time and time again to be the best system to prevent corruption of the entire government: while parts go bad now and then (and more now right now than then...) it is virtually impossible, despite the best efforts of the Chicago machine, to corrupt all parts of the government within a single legislative period.

Whether they continue to try during the rest of the President's term is yet to be seen.