Archive for January, 2010|Monthly archive page

‘STUCK IN NEUTRAL? RESET THE MOOD.,’ by Prof. Robert Shiller in the N.Y. Times.

In Uncategorized on January 31, 2010 at 15:00


Stuck in Neutral? Reset the Mood


Published: January 30, 2010

THE United States and other advanced economies may be facing a long, slow period of disappointing growth.

That is a widespread concern, as recent polls demonstrate. A USA Today/Gallup poll, for example, found this month that about two-thirds of Americans say they think that economic recovery won’t start for two more years, while 28 percent say it won’t begin for at least five years.

Among students of history, there are fears that we will suffer the type of chronic economic malaise that afflicted the world after the 1929 stock market crash, or that weakened Japan after the puncturing of twin stock and housing market bubbles around 1990. The post-1929 depression did not end for about a decade, and Japan has still not emerged from its post-1990 slowdown.

The fears themselves are an integral part of the problem. Economists have a tendency to assume that everyone’s behavior is rational. But post-boom pessimism is a factor driving the economy, and it is likely to be associated with attitudes that may be enduring.

In reality, business recessions are caused by a curious mix of rational and irrational behavior. Negative feedback cycles, in which pessimism inhibits economic activity, are hard to stop and can stretch the financial system past its breaking point.

Today, banks are not making an abundance of new loans, and this is clearly linked to the decline in confidence. In an October survey, the Federal Reserve asked banks why they weren’t lending. Respondents said the reasons were a reduced tolerance for risk, followed by a less favorable or more uncertain economic outlook and a worsening of industry-specific problems.

If banks do not have the confidence to make loans, business cannot proceed, and the lack of confidence becomes a self-fulfilling prophecy. This was recognized as a major problem during the Great Depression. Reflecting a common view of the time, a 1933 article by John Pell in the North American Review described this cycle as “self-evident.”

Mr. Pell gave the example of a start-up company that had a new idea for manufacturing a windshield wiper. The economy needed such ventures multiplied “a few thousandfold,” he said, to get rolling again. But if you tried to start such a venture, “bankers would tell you that investors, on whom you must depend for your capital, were in no mood to tie up their funds, in an unliquid security, and were only interested in buying liquid, marketable, securities.”

Were the investors described by Mr. Pell rational? That is an unanswerable, for no one can prove what the rational expectation should have been. But we do know that there was a negative “mood,” as he called it, that must have influenced their thinking.

Today, after the speculative bubbles in the housing market, we are leaving a time of irrational exuberance when many people and financial institutions bet their future on speculative trading, not on genuine economic contribution. Speculation is a healthy capitalist activity, but there is a problem if it becomes a national obsession, as it did in the boom before this crisis. President Obama’s proposed “Volcker Rule,” which seeks to limit bank risk-taking, may be seen as a response to widespread disillusionment with excessive speculation.

The present mood, though, needs to be put into a longer historical context. After World War II, there was rapid growth in labor productivity until sometime around the early 1970s. But then there was a major break, roughly coinciding with three events of 1973-74: the oil crisis, a huge stock market tumble and the first significant depression scare since the Great Depression itself.

According to the Bureau of Labor Statistics, annual growth of business output per labor hour averaged 3.2 percent from 1948 to 1973, but only 1.9 percent from 1973 to 2008.

Ever since the long-term productivity slowdown became visible, the economist Samuel Bowles, now at the Santa Fe Institute, has said that its causes are to be found as much in the loss of “hearts and minds” of workers and investors as in technology.

This month at Yale, in lectures titled “Machiavelli’s Mistake,” he spoke of the error of thinking that a high-performance economy could be based on self-interest alone. And he warned of the overuse of incentives that appeal to individual gain.

The speculative boom periods that ended a few years ago carried us into such overuse, and today’s malaise is partly a result of our disorientation from that period.

IN their coming book, “Identity Economics,” the economists George Akerlof of the University of California, Berkeley, and Rachel Kranton of the University of Maryland argue that an economy works well when people personally identify with it, so that their self-esteem is tied up with its activities.

The authors emphasize this example from the military: Well-functioning fighting units have never been built on pay-for-service alone. People will sacrifice their lives if they believe in the cause and in one another.

In most civilian fields, job satisfaction may not be a life-or-death matter, but a relatively uninterested, insecure work force is unlikely to bring about a vigorous recovery.

Solutions for the economy must address not only the structural instability of our financial institutions, but also these problems in the hearts and minds of workers and investors — problems that may otherwise persist for many years.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.


‘WHAT’S AHEAD IN THE NEXT DECADE?, ‘ from Fortune Magazine at

In Uncategorized on January 31, 2010 at 00:50

If you were a typical American investor on Dec. 31, 1999, chances are your portfolio was loaded up with stocks — U.S. stocks, for the most part. And scorching tech stocks most of all. Why not? The S&P 500 index  had swaggered its way to a 432% total return during the ’90s. Sure, there were a few zealots on the fringe proclaiming the virtues of commodities and emerging markets, but who was listening?

We all know how that turned out. Even as the S&P sagged by 11% through the ’00s, gold quadrupled, oil took off, and you had to listen in agony as a work colleague bragged about the killing he’d made in a Peruvian mining stock.

Is the paradigm about to shift again? We asked four of the market’s best minds to preview the next 10 years. Their answers mostly point to another sobering decade in the U.S.

Opportunities still exist — you just may need to look a little further to find them.

Robert Arnott

Research Affiliates chief; plots strategies used to manage $43 billion

There are three challenges that will shape the landscape in the decade ahead. Fiscal discipline has been largely lacking at all levels, creating a debt burden far beyond historical precedent. If you factor in Social Security, Medicare, state and local debt, and what Fannie Mae  and Freddie Mac  owe, our total public debt is now at 141% of GDP. Add in household and corporate debt, and the unfunded portion of entitlement programs, and it’s 840% of GDP. Yikes.

The second headwind is the fact that markets are expensive by historical standards.

The third is demographics: In 2002 the U.S. was adding 10 new working-age people for every new senior citizen. By 2023 that flips to 10 new retiree wannabes for each new working-age person. Retirees will be selling assets to a shrinking pool of buyers. So save aggressively and play defense.

While the developed world has huge debt and demographic problems, many emerging markets have younger populations and foreign reserves. After the rally in 2009, this is not a “buy now” recommendation. Still, a case can be made to invest significantly more in emerging markets, especially during one of their periodic plunges. U.S. inflation and a declining dollar will add to their relative attractiveness.

Inflation protection will be priced at a premium. Give inflation-linked bonds and commodities more than token allocations. There are always interesting investment opportunities. Choose wisely.

Jeremy Grantham

Founder of GMO, which manages $102 billion for institutions

We expect that the S&P 500 in 10 years will only trade a little higher because of inflation. This is because the index starts out today about 30% overpriced. Within the S&P, though, the 25% highest-quality companies — those with high, stable return and low debt — should have an above-average 6.75%-a-year return plus inflation, with the rest facing a negative return.

Going out a few years, China is potentially a severe disappointment. A group of people who were communists in every aspect a few years ago is trying to drive the largest country in the world at the fastest rates in economic history. They are making unprecedentedly large and perhaps badly reviewed loans. They’ve been incredibly lucky. They are probably not as good as they seem to be. I think there is a nascent bubble in emerging markets. Over the next three to five years, emerging markets are likely to sell at a handsome premium P/E because of the respect for their higher GDP growth.

Metals will have scarcity crises every few years. We just don’t have enough cheap, high-grade ores of almost any kind. Lithium is a scarce metal in heavy demand.

As a general principle, I think in the future value will matter. There will be things going wrong pretty well all the time. Not necessarily gigantic things. Not necessarily enough to stop the forward progress. But enough to keep growth and profits below average and the market looking for any excuse to be cheap.

Bill Gross

Founder of bond giant Pimco

The world has changed since early ’08 or even ’09. The next 10 years will involve deleveraging, re-regulation, and deglobalization. Countries will become more protective in terms of mild tariffs or currency devaluation. The result is a “new normal” of slower growth in the U.S. and global economies.

If an economy grew at 3% to 4% annually over the last 10 years, then it’ll grow at 1.5% to 2% over the next 10. We expect returns will be half of what they were in the past decade.

If you lump stocks, bonds, and real estate into one pot, we’re looking at 5% to 6%, not including inflation, as opposed to 10% to 12% returns. We think over the next 10 years the U.S. will experience 2% to 3% inflation, so real returns will probably be 2% to 3%.

Instead of a speculative Nasdaq  stock at a 50 P/E, investors in the next 10 years should consider, say, an NYSE utilities stock that yields 5%. Focus on dividend income in terms of stocks, as opposed to growth and investment-grade income from bonds. You can generate a portfolio that yields 4% to 5% and that is in some fashion protected against inflation.

If you’re looking for growth, you should venture outside the U.S. Brazil and China and other Asia equities are the cherry on top of the melting sundae. It’s not only their internal economies; they’re in better shape from the standpoint of reserves and balances. Ten years ago Brazil was a basket case and beggar. Now it has hundreds of billions of dollar reserves.

Jeremy Siegel

Author and professor at the Wharton School of Business

Your impulse to follow what has done well the past decade is actually the wrong strategy. At the end of the 1990s, stocks had had their best decade ever — and then went on to have their worst since the 1930s. Find assets that are out of favor. Those are apt to do well in the long run. So with stocks coming off their worst decade, I believe the next 10 years will bring returns in equities at or above their long-term normal of 6% to 7%, after inflation.

Returns on a diversified global portfolio of equities will be at least that much. I do mean global. Over half the world’s equity capital is now outside the U.S., and that fraction is growing. For the S&P 500, 40% to 50% of profits and revenues come from foreign sales, and that fraction will be rising.

You have to be internationally diversified — in both emerging and developed markets. There’s no question emerging markets will grow faster than the developed. That doesn’t mean go after the firms that are there. Some are overpriced. Go for the firms that recognize where the growth is going to be but are still reasonably priced. They could be in the U.S., Germany, or anywhere.

I reject Bill Gross’s thesis of the “new normal.” I don’t believe we’ll see slow growth. You have to talk about productivity growth, and that depends on innovation and research. We may be entering a golden age of such innovation because of the explosion of the Internet and international communication. That’s what produces breakthroughs.

‘A RADICAL TREASURE, ‘ Bob Herbert remembers Howard Zinn in the N.Y. Times.

In Uncategorized on January 30, 2010 at 23:27


A Radical Treasure


Published: January 29, 2010

I had lunch with Howard Zinn just a few weeks ago, and I’ve seldom had more fun while talking about so many matters that were unreservedly unpleasant: the sorry state of government and politics in the U.S., the tragic futility of our escalation in Afghanistan, the plight of working people in an economy rigged to benefit the rich and powerful.

Howard Zinn, Historian, Is Dead at 87 (January 29, 2010)

Mr. Zinn could talk about all of that and more without losing his sense of humor. He was a historian with a big, engaging smile that seemed ever-present. His death this week at the age of 87 was a loss that should have drawn much more attention from a press corps that spends an inordinate amount of its time obsessing idiotically over the likes of Tiger Woods and John Edwards.

Mr. Zinn was chagrined by the present state of affairs, but undaunted. “If there is going to be change, real change,” he said, “it will have to work its way from the bottom up, from the people themselves. That’s how change happens.”

We were in a restaurant at the Warwick Hotel in Manhattan. Also there was Anthony Arnove, who had worked closely with Mr. Zinn in recent years and had collaborated on his last major project, “The People Speak.” It’s a film in which well-known performers bring to life the inspirational words of everyday citizens whose struggles led to some of the most profound changes in the nation’s history. Think of those who joined in — and in many cases became leaders of — the abolitionist movement, the labor movement, the civil rights movement, the feminist revolution, the gay rights movement, and so on.

Think of what this country would have been like if those ordinary people had never bothered to fight and sometimes die for what they believed in. Mr. Zinn refers to them as “the people who have given this country whatever liberty and democracy we have.”

Our tendency is to give these true American heroes short shrift, just as we gave Howard Zinn short shrift. In the nitwit era that we’re living through now, it’s fashionable, for example, to bad-mouth labor unions and feminists even as workers throughout the land are treated like so much trash and the culture is so riddled with sexism that most people don’t even notice it. (There’s a restaurant chain called “Hooters,” for crying out loud.)

I always wondered why Howard Zinn was considered a radical. (He called himself a radical.) He was an unbelievably decent man who felt obliged to challenge injustice and unfairness wherever he found it. What was so radical about believing that workers should get a fair shake on the job, that corporations have too much power over our lives and much too much influence with the government, that wars are so murderously destructive that alternatives to warfare should be found, that blacks and other racial and ethnic minorities should have the same rights as whites, that the interests of powerful political leaders and corporate elites are not the same as those of ordinary people who are struggling from week to week to make ends meet?

Mr. Zinn was often taken to task for peeling back the rosy veneer of much of American history to reveal sordid realities that had remained hidden for too long. When writing about Andrew Jackson in his most famous book, “A People’s History of the United States,” published in 1980, Mr. Zinn said:

“If you look through high school textbooks and elementary school textbooks in American history, you will find Jackson the frontiersman, soldier, democrat, man of the people — not Jackson the slaveholder, land speculator, executioner of dissident soldiers, exterminator of Indians.”

Radical? Hardly.

Mr. Zinn would protest peacefully for important issues he believed in — against racial segregation, for example, or against the war in Vietnam — and at times he was beaten and arrested for doing so. He was a man of exceptionally strong character who worked hard as a boy growing up in Brooklyn during the Depression. He was a bomber pilot in World War II, and his experience of the unmitigated horror of warfare served as the foundation for his lifelong quest for peaceful solutions to conflict.

He had a wonderful family, and he cherished it. He and his wife, Roslyn, known to all as Roz, were married in 1944 and were inseparable for more than six decades until her death in 2008. She was an activist, too, and Howard’s editor. “I never showed my work to anyone except her,” he said.

They had two children and five grandchildren.

Mr. Zinn was in Santa Monica this week, resting up after a grueling year of work and travel, when he suffered a heart attack and died on Wednesday. He was a treasure and an inspiration. That he was considered radical says way more about this society than it does about him.

‘THE STATISTICAL RECOVERY HAS ARRIVED ,’ by John Mauldin at FrontLineThoughts .com.

In Uncategorized on January 30, 2010 at 21:14

The Statistical Recovery Has Arrived

Before we get into the main discussion point, let me briefly comment on today’s GDP numbers, which came in at an amazingly strong 5.7% growth rate. While that is stronger than I thought it would be (I said 4-5%), there are reasons to be cautious before we sound the “all clear” bell.

First, over 60% (3.7%) of the growth came from inventory rebuilding, as opposed to just 0.7% in the third quarter. If you examine the numbers, you find that inventories had dropped below sales, so a buildup was needed. Increasing inventories add to GDP, while, counterintuitively, sales from inventory decrease GDP. Businesses are just adjusting to the New Normal level of sales. I expect further inventory build-up in the next two quarters, although not at this level, and then we level off the latter half of the year.

While rebuilding inventories is a very good thing, that growth will only continue if sales grow. Otherwise inventories will find the level of the New Normal and stop growing. And if you look at consumer spending in the data, you find that it actually declined in the 4th quarter, both annually and from the previous quarter. “Domestic demand” declined from 2.3% in the third quarter to only 1.7% in the fourth quarter. Part of that is clearly the absence of “Cash for Clunkers,” but even so that is not a sign of economic strength.

Second, as my friend David Rosenberg pointed out, imports fell over the 4th quarter. Usually in a heavy inventory-rebuilding cycle, imports rise because a portion of the materials businesses need to build their own products comes from foreign sources. Thus the drop in imports is most unusual. Falling imports, which is a sign of economic retrenching, also increases the statistical GDP number.

Third, I have seen no analysis (yet) on the impact of the stimulus spending, but it was 90% of the growth in the third quarter, or a little less than 2%.

Fourth (and quoting David): “… if you believe the GDP data – remember, there are more revisions to come – then you de facto must be of the view that productivity growth is soaring at over a 6% annual rate. No doubt productivity is rising – just look at the never-ending slate of layoff announcements. But we came off a cycle with no technological advance and no capital deepening, so it is hard to believe that productivity at this time is growing at a pace that is four times the historical norm. Sorry, but we’re not buyers of that view. In the fourth quarter, aggregate private hours worked contracted at a 0.5% annual rate and what we can tell you is that such a decline in labor input has never before, scanning over 50 years of data, coincided with a GDP headline this good.

“Normally, GDP growth is 1.7% when hours worked is this weak, and that is exactly the trend that was depicted this week in the release of the Chicago Fed’s National Activity Index, which was widely ignored. On the flip side, when we have in the past seen GDP growth come in at or near a 5.7% annual rate, what is typical is that hours worked grows at a 3.7% rate. No matter how you slice it, the GDP number today represented not just a rare but an unprecedented event, and as such, we are willing to treat the report with an entire saltshaker – a few grains won’t do.”

Finally, remember that third-quarter GDP was revised downward by over 30%, from 3.5% to just 2.2% only 60 days later. (There is the first release, to be followed by revisions over the next two months.) The first release is based on a lot of estimates, otherwise known as guesswork. The fourth-quarter number is likely to be revised down as well.

Unemployment rose by several hundred thousand jobs in the fourth quarter, and if you look at some surveys, it approached 500,000. That is hardly consistent with a 5.7% growth rate. Further, sales taxes and income-tax receipts are still falling. As I said last year that it would be, this is a Statistical Recovery. When unemployment is rising, it is hard to talk of real recovery. Without the stimulus in the latter half of the year, growth would be much slower.

So should we, as Paul Krugman suggests, spend another trillion in stimulus if it helps growth? No, because, as I have written for a very long time, and will focus on in future weeks, increased deficits and rising debt-to-GDP is a long-term losing proposition. It simply puts off what will be a reckoning that will be even worse, with yet higher debt levels. You cannot borrow your way out of a debt crisis.

This Time Is Different

While I was in Europe, and flying back, I had the great pleasure of reading This Time is Different, by Carmen M. Reinhart and Kenneth Rogoff, on my new Kindle, courtesy of Fred Fern.

I am going to be writing about and quoting from this book for several weeks. It is a very important work, as it gives us the first really comprehensive analysis of financial crises. I highlighted more pages than in any book in recent memory (easy to do on the Kindle, and even easier to find the highlights). Rather than offering up theories on how to deal with the current financial crisis, the authors show us what happened in over 250 historical crises in 66 countries. And they offer some very clear ideas on how this current crisis might play out. Sadly, the lesson is not a happy one. There are no good endings once you start down a deleveraging path. As I have been writing for several years, we now are faced with choosing from among several bad choices, some being worse than others. This Time is Different offers up some ideas as to which are the worst choices.

If you are a serious student of economics, you should read this book. If you want to get a sense of the problems we face, the authors conveniently summarize the situation in chapters 13-16, purposefully allowing people to get the main points without drilling into the mountain of details they provide. Get the book at a 45% discount at

Buy it with the excellent book I am now reading, Wall Street Revalued, and get free shipping.

A Crisis of Confidence

Let’s lead off with a few quotes from This Time is Different, and then I’ll add some comments. Today I’ll focus on the theme of confidence, which runs throughout the entire book.

“But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked.”

“If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is. Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government’s policies, a financial institution’s ability to make outsized profits, or a country’s standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget.”

And this is key. Read it twice (at least!):

“Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence-especially in cases in which large short-term debts need to be rolled over continuously-is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang!-confidence collapses, lenders disappear, and a crisis hits.

“Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public’s expectation of future events, that makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to “multiple equilibria” in which the debt level might be sustained – or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does. When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.”

How confident was the world in October of 2006? I was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. I was on Larry Kudlow’s show with Nouriel Roubini, and Larry and John Rutledge were giving us a hard time about our so-called “doom and gloom.” If there is going to be a recession you should get out of the stock market, was my call. I was a tad early, as the market proceeded to go up another 20% over the next 8 months.

As Reinhart and Rogoff wrote: “Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when bang! – confidence collapses, lenders disappear, and a crisis hits.”

Bang is the right word. It is the nature of human beings to assume that the current trend will work out, that things can’t really be that bad. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone “knew” that cooler heads would prevail.

We can look back now and see where we made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.

Now, there are bullish voices telling us that things are headed back to normal. Mainstream forecasts for GDP growth this year are quite robust, north of 4% for the year, based on evidence from past recoveries. However, the underlying fundamentals of a banking crisis are far different from those of a typical business-cycle recession, as Reinhart and Rogoff’s work so clearly reveals. It typically takes years to work off excess leverage in a banking crisis, with unemployment often rising for 4 years running. We will look at the evidence in coming weeks.

The point is that complacency almost always ends suddenly. You just don’t slide gradually into a crisis, over years. It happens! All of a sudden there is a trigger event, and it is August of 2008. And the evidence in the book is that things go along fine until there is that crisis of confidence. There is no way to know when it will happen. There is no magic debt level, no magic drop in currencies, no percentage level of fiscal deficits, no single point where we can say “This is it.” It is different in different crises.

One point I found fascinating, and we’ll explore it in later weeks. First, when it comes to the various types of crises with the authors identify, there is very little difference between developed and emerging-market countries, especially as to the fallout. It seems that the developed world has no corner on special wisdom that would allow crises to be avoided, or allow them to be recovered from more quickly. In fact, because of their overconfidence – because they actually feel they have superior systems – developed countries can dig deeper holes for themselves than emerging markets.

Oh, and the Fed should have seen this crisis coming. The authors point to some very clear precursors to debt crises. This bears further review, and we will do so in coming weeks.

Greeks Bearing Gifts

On Monday, the government of Greece offered a “gift” to the markets of 8 billion euros worth of bonds at a rather high 6.25%. The demand was for 25 billion euros, so this offering was rather robust. Today, those same Greek bonds closed on 6.5%, more than offsetting the first year’s coupon. Greek bond yields are up more than 150 basis points in the last month!

Why such a one-week turnaround? Ambrose Evans Pritchard offers up this thought: “Marc Ostwald, from Monument Securities, said the botched bond issue of €8bn (£6.9bn) of Greek debt earlier this week has made matters worse. Many of the investors were ‘hot money’ funds that bought on rumors that China was emerging as a buyer, offering them a chance for quick profit. When the China story was denied by Beijing and Athens, these funds rushed for the exit.”

Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries.

When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That’s a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.

Greece benefitted from being in the Eurozone by getting very low interest rates, up until recently. Being in the Eurozone made investors confident. Now that confidence is eroding daily. And this week’s market action says rates will go higher, without some fiscal discipline. To help my US readers put this in perspective, let’s assume that Greece was the size of the US. To get back to Maastricht Treaty levels, they would need to cut the deficit by 4% of GDP for the next few years. If the US did that, it would mean an equivalent budget cut of $500 billion dollars. Per year. For three years running.

That would guarantee a very deep recession. Just a 10% suggested pay cut has Greek government unions already planning strikes. Nevertheless, the government of Greece recognizes that it simply cannot continue to run such huge deficits. They have developed a plan that aims to narrow the shortfall from 12.7% of output, more than four times the EU limit, to 8.7% this year. That reduction will be achieved even though the economy will contract 0.3%, the plan says. The deficit will shrink to 5.6% next year and 2.8% in 2012.

The market is saying they don’t believe that will happen. For one thing, if the Greek economy goes into recession, the amount collected in taxes will fall, meaning the shortfall will increase. Second, it is not clear that Greek voters will approve such a plan at their next elections. Riots and demonstrations are a popular pastime.

Both French and German ministers made it clear that there would be no bailout of Greece. But here’s the problem. If they ignore the noncompliance, there is no meaning to the treaty. The euro will be called into question. And the other countries with serious fiscal problems will ask why they should cut back if Greece does not. If Greece does not choose deep cutbacks and recession, the markets will keep demanding hikes in interest rates, and eventually Greece will have problems meeting just its interest payments.

Can this go on for some time? The analysis of debt crises in history says yes, but there comes a time when confidence breaks. My friends from GaveKal had this thought:

“What is the next step? Having lived through the Mexican, Thai, Korean and Argentine crises, it is hard not to distinguish a common pattern. In our view, this means that investors need to confront the fact that we are at an important crossroads for Greece, best symbolized by a simple question: ‘If you were a Greek saver with all of your income in a Greek bank, given what is happening to the debt of your sovereign, would you feel comfortable keeping all of your life savings in your savings institution? Or would you start thinking about opening an account in a foreign bank and/or redeeming your currency in cash?’ The answer to this question will likely direct the next phase of the crisis. If we start to see bank runs in Greece, then investors will have to accept that the crisis has run out of control and that we are facing a far more bearish investment environment. However, if the Greek population does not panic and does not liquefy/transfer its savings, then European policy-makers may still have a chance to find a political solution to this growing problem.

“What could a political solution be? The answer here is simple: there is none. So if Europe wants to save Greece from hitting the wall towards which it is now heading, the European commission, the ECB and/or other institutions (IMF?) will have to bend the rules massively. In turn, this will likely lead to a further collapse in the euro. But for us, an important question is whether it could also lead to a serious political backlash. Indeed, at this stage, elected politicians are likely pondering how much appetite there is amongst their electorate for yet another bailout, and for further expansions in government debt levels. The fact that the intervention would occur on behalf of a foreign country probably makes it all the more unpalatable (it’s one thing to save your domestic banking system … but why save Greece?).”

If Greece is bailed out, Portugal and Ireland will ask “Why not us?” And Spain? Italy? If Greece is allowed to flaunt the rules, what does that say about the future of the euro? Will Germany and France insist on compliance or be willing to kick Greece out?

A few months ago, the markets assumed that not only Greece but Portugal, Italy, Spain, and Ireland would have a few years to get their houses in order. This week, the markets shortened their time horizon for Greece.

Even so, we get this quote, which may end up ranking alongside Fisher’s quote in 1929, that the stock market was at a permanently high plateau, or Bernanke’s quote that “The subprime debt problem will be contained.”

“There is no bailout problem,” Monetary Affairs Commissioner Joaquin Almunia said today at the World Economic Forum’s annual meeting in Davos, Switzerland. “Greece will not default. In the euro area, default does not exist.”

The evidence in This Time is Different is that default risk does in fact exist. You cannot keep borrowing past your income, whether as a family or a government, and not eventually go bankrupt.

Are we at an inflection point? Too early to say. It all depends on the willingness of the Greek people to endure what will not be a fun next few years, for the privilege of staying in the Eurozone. And on whether the bond market believes that this time is different and the Greeks will actually get their fiscal house in order.

Oh by the way, did I mention that the history of Greece is not exactly pristine in terms of default? In fact, they have been in default in one way or another for 105 out of the past 200 years. Aristotle, can you spare a dime?

And one last thought. The US is running massive deficits. If we do not get them under control, we will one day, and perhaps quite soon, face our own “Greek moment.” Look at the graph below, and weep.

Obama offering to freeze spending by 17% in US discretionary-spending programs, after he ran them up over 20% in just one year, is laughable. Greece is an object lesson for the world, as Japan soon will be. You cannot cure too much debt with more debt.

Biotech, Conversations, and More

Two quick commercial notes. I mentioned a few weeks ago that I was going to start a stock-buying program for the first time in 15 years (I normally invest in managers and funds rather than specific stocks). I published an Outside the Box last week that talked about why I think biotech stocks could be at the beginning of a decade-long run, and why I wanted to participate directly. You can read that Outside the Box by clicking on this link.

Second, I offer a subscription service called Conversations with John Mauldin, where I hold conversations with people who I think have something important for us to understand. It has been very well received. We provide both audio and a transcript. I just posted my latest Conversations, in which I interviewed two gentlemen who are CEOs of companies that I think are at the very bleeding edge of the biotech revolution. Subscribers have already gotten that posting. Over the year, in addition to the usual economic Conversations we have, I will be interviewing other industry leaders who will be changing the world of medicine in the coming decade. You can subscribe at

In addition, George Friedman and Niall Ferguson and I are exchanging emails on a time to get together for another of the series where George and I talk about geopolitics. I guarantee a lively and fascinating Conversation.

It is good to be back from Europe. While it was fun, it was mostly long days and a lot of planes, trains, and automobiles. I arrived home to find baby bottles and other baby paraphenalia around the house. Tiffani and Ryan are starting to come back to work at the house with me, and of course my granddaughter Lively will be here most days with them, along with a nanny so Mom can actually work. It has been a long time since I had a baby around. As I went to bed, I realized that I was going to get to watch this grandchild grow up on an almost daily basis. It was with a sigh of contentment that I went to sleep.

And then today, they came and brought her. She has grown so much in just the week I was gone! Once again, I get to experience the miracle of kids growing up. Only this time I don’t have to change the diapers. Life is good.

Your believing my grandkids will have a better future analyst,

John Mauldin

Copyright 2010 John Mauldin. All Rights Reserved


In Uncategorized on January 29, 2010 at 17:59

The long-awaited stock market correction may be at hand.

One of the fundamental conundrums of investing is that we may be absolutely correct about something and yet unable to profit. Making money on an insight requires two conditions: The information cannot already be priced into the market, and other investors who do not already share that information must come around to our point of view.

There are times when the conventional wisdom about something may well be correct. If the conventional wisdom is already reflected in market prices, then profit opportunities are slim to nonexistent. I’ve been saying for some time that stocks appear overdue for a correction, simply because they’ve advanced so far without one since last March. Stocks do not go up in a straight line. There will be a correction. The only question is when.

So let’s check for our two conditions. First, is this cautious outlook already priced into the market? In recent weeks I’ve wondered, with so many commentators and money managers talking about how stocks have gotten ahead of themselves. Still, someone was buying. I’ve learned investors may say one thing, but do another, especially when the market doesn’t immediately confirm their stated conviction. My hunch was that people were expressing caution, but not actually selling — and in many cases continuing to buy.

As for the second condition, my belief that there would be a correction has seemingly lacked the concrete evidence to shift investors’ views. Economists believe the recession ended sometime last summer. Holiday sales were better than expected. Consumer confidence is up. Corporate profits have been surging. The outlook has been looking rosy, at least for anyone who has a job.

Then, suddenly, the outlook shifted abruptly. A Republican victory last week in Massachusetts exposed a seething electorate and threw Washington into disarray. President Obama responded to the furor over Wall Street bonuses with much tougher banking proposals, including a tax and a ban on proprietary trading. Fairly or not, populist fury zeroed in on the Federal Reserve and its chairman, Ben Bernanke, whose confirmation suddenly seemed in doubt.

Until then, few had seemed to take seriously the possibility of partisan meddling with the independence of the Fed. But last week it seemed all too real. Meanwhile, unemployment continued at high levels, and the likelihood of a robust recovery seemed much diminished.

In short, all the elements of a correction had materialized.

I suspect I was as surprised at these developments as most people. I didn’t know what would cause a correction — only that something would. Anyone following the Common Sense system should be prepared, having raised cash and, perhaps, invested in some short ETFs.

Despite some complaints that short ETFs don’t always perform as advertised, these have done their part during the recent sell-off. I used them to hedge my positions in two stock index funds, and they’ve done exactly that. When the market reaches the next Common Sense buying threshold — that’s 10% below the Nasdaq’s  recent high point, or roughly 2090 — these will be the first positions I’ll sell.

Last week’s three-day decline in the major averages — just over 5% — doesn’t yet constitute a correction (a 10% drop is the standard definition). There’s no certainty we’ll get there any time soon. But last week’s sudden drop is a reminder that we will eventually — probably when we least expect it.

Report card: Last week the put options I sold on various bank stocks expired. All were out-of-the money — trading at higher than the strike prices — so I kept the proceeds and have no further obligation to buy the shares. With bank shares dropping and option spreads rising during the recent selloff, a similar opportunity to sell put options in bank stocks may be taking shape.


In Uncategorized on January 29, 2010 at 14:21


Published: January 29, 2010

PARIS — A new political battle loomed on Friday between President Nicolas Sarkozy and the former prime minister, Dominique de Villepin after a Paris court acquitted Mr. de Villepin on charges that he was part of a 2004 conspiracy to tarnish Mr. Sarkozy’s reputation.

Immediately after the verdict on Thursday, the president said that he would not appeal against it. But on Friday, the Paris prosecutor announced that he would seek a new trial. “I have decided to file an appeal against this decision,” Jean-Claude Marin said on Europe 1 radio. “Whatever happens, there will be a second trial.”

In a television interview, Mr. de Villepin said the prosecutor’s decision showed the president was pursuing a political vendetta. “What this decision shows is that one man, Nicolas Sarkozy, wants to persevere in his determination, in his hate,” he told BFM television.

Mr. Sarkozy, who won the presidency in 2007, was a plaintiff in the deeply political trial, known as “Clearstream,” which both confused and captivated France. The case had raised issues of class, culture and power, and Mr. Sarkozy made no secret of his hostility toward Mr. de Villepin.

The verdict found no wrongdoing by Mr. de Villepin, even though prosecutors had asked the court to convict him of complicity in slander, forgery, use of stolen property and breach of trust. The case turned on the use of forged documents to try to defame Mr. Sarkozy and others by linking them to secret accounts supposedly containing kickbacks from arms sales to Taiwan.

Three other men were found guilty of various charges, but the prosecution’s case — that Mr. de Villepin failed to stop the conspiracy to defame Mr. Sarkozy — found little favor with the court, which declined to even admonish Mr. de Villepin, who is now free to resume his political career and challenge Mr. Sarkozy for the presidency in 2012.

Mr. de Villepin, who has already started a political club and social network, may well divide the right, weaken Mr. Sarkozy and erode the sense of inevitability around his re-election.

“The verdict is very important because for three years, Sarkozy argued that he was fighting a political plot against him, and the court said there was no plot,” said Christophe Barbier, editor of the weekly L’Express. “Sarkozy wants to be the only candidate of the right in 2012, but if de Villepin now becomes a candidate, he has no chance to win, but he can weaken Sarkozy and make victory difficult.”

After the verdict, which was delivered in the courtroom in which Marie Antoinette was sentenced to the guillotine, Mr. de Villepin, 56, said: “I have no rancor, no resentment. I want to turn the page.” He called the verdict “a victory of justice and the law over politics.

There were about 40 plaintiffs, but Mr. de Villepin has said he believes that Mr. Sarkozy was behind the case, trying to use the power of the presidency for political ends. At the beginning of the trial last year, Mr. de Villepin said he was in the dock “because of the relentlessness of one man, Nicolas Sarkozy,” whom he has previously referred to as “that dwarf.”

In 2004, Mr. de Villepin, who has written books of declamatory poetry, told Le Point that “Nicolas doesn’t have the makings of a man of state, because he has no interior labyrinth” and lacks “the mystery that is the strength of great men.”

The two men were ministers under President Jacques Chirac, who favored Mr. de Villepin, but Mr. Sarkozy proved the better politician.

Mr. Sarkozy not only was a plaintiff, but during the trial, he also branded the defendants guilty, which his opponents called a further violation of his responsibility as president to be above the law.

He vowed revenge in 2005, saying he would hang those responsible “on a butcher’s hook.” But as Mr. Barbier said, “If the case was the revenge of Sarkozy, it may also be the beginning of the revenge of de Villepin.”

In a statement, Mr. Sarkozy, who turned 55 on Thursday, said he had taken note of the verdict, which recognized “a serious conspiracy,” and would not appeal.

The verdict was a surprise, but the court accepted Mr. de Villepin’s insistence that he did not know the list of accounts in a Luxembourg-based institution called Clearstream was fraudulent, rejecting the prosecution’s allegation that Mr. de Villepin knew of the forgery but did nothing to stop the plot. The prosecution had asked for an 18-month suspended sentence and a fine of about $65,000.

Socialist leaders reacted with some glee. A Socialist legislator, Arnaud Montebourg, said that Mr. Sarkozy “instrumentalized justice to settle scores” and that the verdict “is proof that Sarkozy used justice to try to eliminate a political rival.”

The court convicted three other defendants. A former aerospace executive, Jean-Louis Gergorin, was sentenced to three years in prison, with 21 months suspended, and fined about $56,000. Mr. Gergorin passed on the accounts to judicial authorities on the orders, he said, of Mr. de Villepin and Mr. Chirac. Imad Lahoud, accused of falsifying the list of accounts on the orders of Mr. Gergorin, was also sentenced to three years, with 18 months suspended and a fine of $56,000. Florian Bourges, an accountant, was given a four-month suspended sentence, while the journalist Denis Robert, accused of passing on the list, was acquitted.

Those convicted are expected to appeal.

Last October, Mr. de Villepin said he wanted to embody “a republican alternative” for 2012. Last week, he held a political event in Bondy, a Paris suburb, a flashpoint of the 2005 riots and an area where Mr. Sarkozy is deeply unpopular.

According to a poll conducted last November by IFOP, a French polling organization, on voting intentions for the 2012 presidential elections, 8 percent of French voters said they would favor Mr. de Villepin in the first round. Even against a divided Socialist Party, that would be enough to deny Mr. Sarkozy victory in the first round, especially if a candidate runs from the far-right National Front.

Maïa de La Baume contributed reporting.

‘MARCH OF THE PEACOCKS,’ by Paul Krugman in the N.Y. Times. ‘THE STATE OF THE UNION IS NOT GOOD.’~~~Is that ever an understatement!

In Uncategorized on January 29, 2010 at 13:55


March of the Peacocks


Published: January 28, 2010

Last week, the Center for American Progress, a think tank with close ties to the Obama administration, published an acerbic essay about the difference between true deficit hawks and showy “deficit peacocks.” You can identify deficit peacocks, readers were told, by the way they pretend that our budget problems can be solved with gimmicks like a temporary freeze in nondefense discretionary spending.

One week later, in the State of the Union address, President Obama proposed a temporary freeze in nondefense discretionary spending.

Wait, it gets worse. To justify the freeze, Mr. Obama used language that was almost identical to widely ridiculed remarks early last year by John Boehner, the House minority leader. Boehner then: “American families are tightening their belt, but they don’t see government tightening its belt.” Obama now: “Families across the country are tightening their belts and making tough decisions. The federal government should do the same.”

What’s going on here? The answer, presumably, is that Mr. Obama’s advisers believed he could score some political points by doing the deficit-peacock strut. I think they were wrong, that he did himself more harm than good. Either way, however, the fact that anyone thought such a dumb policy idea was politically smart is bad news because it’s an indication of the extent to which we’re failing to come to grips with our economic and fiscal problems.

The nature of America’s troubles is easy to state. We’re in the aftermath of a severe financial crisis, which has led to mass job destruction. The only thing that’s keeping us from sliding into a second Great Depression is deficit spending. And right now we need more of that deficit spending because millions of American lives are being blighted by high unemployment, and the government should be doing everything it can to bring unemployment down.

In the long run, however, even the U.S. government has to pay its way. And the long-run budget outlook was dire even before the recent surge in the deficit, mainly because of inexorably rising health care costs. Looking ahead, we’re going to have to find a way to run smaller, not larger, deficits.

How can this apparent conflict between short-run needs and long-run responsibilities be resolved? Intellectually, it’s not hard at all. We should combine actions that create jobs now with other actions that will reduce deficits later. And economic officials in the Obama administration understand that logic: for the past year they have been very clear that their vision involves combining fiscal stimulus to help the economy now with health care reform to help the budget later.

The sad truth, however, is that our political system doesn’t seem capable of doing what’s necessary.

On jobs, it’s now clear that the Obama stimulus wasn’t nearly big enough. No need now to resolve the question of whether the administration should or could have sought a bigger package early last year. Either way, the point is that the boost from the stimulus will start to fade out in around six months, yet we’re still facing years of mass unemployment. The latest projections from the Congressional Budget Office say that the average unemployment rate next year will be only slightly lower than the current, disastrous, 10 percent.

Yet there is little sentiment in Congress for any major new job-creation efforts.

Meanwhile, health care reform faces a troubled outlook. Congressional Democrats may yet manage to pass a bill; they’ll be committing political suicide if they don’t. But there’s no question that Republicans were very successful at demonizing the plan. And, crucially, what they demonized most effectively were the cost-control efforts: modest, totally reasonable measures to ensure that Medicare dollars are spent wisely became evil “death panels.”

So if health reform fails, you can forget about any serious effort to rein in rising Medicare costs. And even if it succeeds, many politicians will have learned a hard lesson: you don’t get any credit for doing the fiscally responsible thing. It’s better, for the sake of your career, to just pretend that you’re fiscally responsible — that is, to be a deficit peacock.

So we’re paralyzed in the face of mass unemployment and out-of-control health care costs. Don’t blame Mr. Obama. There’s only so much one man can do, even if he sits in the White House. Blame our political culture instead, a culture that rewards hypocrisy and irresponsibility rather than serious efforts to solve America’s problems. And blame the filibuster, under which 41 senators can make the country ungovernable, if they choose — and they have so chosen.

I’m sorry to say this, but the state of the union — not the speech, but the thing itself — isn’t looking very good.


In Uncategorized on January 29, 2010 at 04:50

A Colossal Failure Of Governance: The Reappointment of Ben Bernanke

Posted: 28 Jan 2010 03:38 PM PST

When representatives of American power encounter officials in less rich countries, they are prone to suggest that any failure to reach the highest standards of living is due in part to weak political governance in general and the failure of effective oversight in particular.   Current and former US Treasury officials frequently remark this or that government “lacks the political will” to exercise responsible economic policy or even replace a powerful official who has clearly become a problem.

There is much to be said for this view.  When a minister or even the head of a strong government agency is no longer acting in the best interests of any country – but is still backed by powerful special interests — who has the authority, the opportunity, and the fortitude to stand up and be counted?

Fortunately, our constitution grants the Senate the power to approve or disapprove key government appointments, and over the past 200 plus years this has served many times as an effective check on both executive authority and overly strong lobbies – who usually want their own, unsuitable, person to be kept on the job.

Unfortunately, two massive failures of governance at the level of the Senate also spring to mind: first, the strange case of Alan Greenspan, which stretched over nearly two decades; second, Ben Bernanke, reappointed today (Thursday).

Greenspan, as you recall, was worshiped as some sort of economic magician.  Even his most asinine comments were seized upon by a legion of acolytes.  Instead of providing meaningful periodic oversight, every Senate hearing was essentially a recoronation.

And now we can look back over 20 years and be honest with ourselves: Alan Greenspan contends for the title of most disastrous economic policy maker in the recent history of the world.

Some on Wall Street, of course, would disagree – arguing that the financial sector growth he fostered is not completely illusory, that we have indeed reached a new economic paradigm due to the Greenspan tonic of deregulation, neglect, and refusal to enforce the law.  Prove the ill-effects, they cry.

What part of 8 million net jobs lost since December 2007 do you still not understand?

And now the same Greenspanians and their fellow travelers rally to the support of Ben Bernanke’s troubled renomination.  Certainly, they concede that Bernanke was complicit in and continued many of Greenspan’s mistakes through September 2008.  But, they argue, he ran a helluva bailout strategy after that point.  And, in any case, if the Senate had refused to reconfirm him – financial sector representatives insist – there would have been chaos in the markets.

Take that last statement at face value and think about it.  Have we really reached the situation where the Senate as a body and individual Senators – accomplished men and women, who stand on the shoulders of giants – must bow down before financial markets and high-ranking executives who are really just talking their book?

Here’s what markets really care about: credible fiscal policy, sufficiently tough monetary policy, and the extent to which big banks will be allowed to run amok – and then get bailed out again.

Reappointing Ben Bernanke solves none of our problems.  In fact, given his stated intensions, a Bernanke reappointment implies larger bailouts in the future – thus compromising our budget further with contingent liabilities, i.e., huge payments that we’ll have to make next time there is a crisis.  What kind of fiscal responsibility strategy is this?

Rather than messing about with a meaningless (or damaging) freeze for part of discretionary spending, the White House should fix the financial system that – with too big to fail at its heart – has directly resulted in doubling our net government debt to GDP ratio from 40 percent (a moderate level) towards 80 percent (a high level) in a desperate attempt to ward off a Second Great Depression.

If you think we can sort out finance with Ben Bernanke at the helm, it was sensible to reappoint him.  But when the time comes for members of the Senate themselves to be held accountable, do not be surprised if people point out that pushing Bernanke through – come what may – was the beginning of the end for any serious attempt at reform.

Ultimately, sensible democratic governance prevails in the United States. Sometimes it takes a while.

By Simon Johnson

‘ADULTS ONLY, PLEASE, ‘ Thomas Friedman in the N.Y. Times.

In Uncategorized on January 28, 2010 at 15:48


Adults Only, Please


Published: January 26, 2010

Maybe it’s just me, but I’ve found the last few weeks in American politics particularly unnerving. Our economy is still very fragile, yet you would never know that by the way the political class is acting. We’re like a patient that just got out of intensive care and is sitting up in bed for the first time when, suddenly, all the doctors and nurses at bedside start bickering. One of them throws a stethoscope across the room; someone else threatens to unplug all the monitors unless the hospital bills are paid by noon; and all the while the patient is thinking: “Are you people crazy? I am just starting to recover. Do you realize how easily I could relapse? Aren’t there any adults here?”

Fred R. Conrad/The New York Times

Thomas L. Friedman

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Sometimes you wonder: Are we home alone? Obviously, the political and financial elites to whom we give authority often act on the basis of personal interests. But we still have a long way to go to get out of the mess we are in, and if our elites do not behave with a greater sense of the common good we could find our economy doing a double dip with a back flip.

Dov Seidman, the C.E.O. of LRN, which helps companies build ethical cultures, likes to talk about two kinds of values: “situational values” and “sustainable values.” Leaders, companies or individuals guided by situational values do whatever the situation will allow, no matter the wider interests of their communities. A banker who writes a mortgage for someone he knows can’t make the payments over time is acting on situational values, saying: “I’ll be gone when the bill comes due.”

People inspired by sustainable values act just the opposite, saying: “I will never be gone. I will always be here. Therefore, I must behave in ways that sustain — my employees, my customers, my suppliers, my environment, my country and my future generations.”

Lately, we’ve seen an explosion of situational thinking. I support the broad proposals President Obama put forth last week to prevent banks from becoming too big to fail and to protect taxpayers from banks that get in trouble by speculating and then expect us to bail them out. But the way the president unveiled his proposals — “if those folks want a fight, it’s a fight I’m ready to have” — left me feeling as though he was looking for a way to bash the banks right after the Democrats’ loss in Massachusetts, in order to score a few cheap political points more than to initiate a serious national discussion about an incredibly complex issue.

President Obama is so much better when he takes a heated, knotty issue, like civil rights or banking reform, and talks to the country like adults. He is so much better at making us smarter than angrier. Going to war with the banks for a quick political sugar high after an electoral loss will just work against him and us. It will spook the banks into lending even less and slow the recovery even more.

That said, part of me can’t blame the president. The behavior of some leading Wall Street banks, particularly Goldman Sachs, has been utterly selfish. U.S. taxpayers saved Goldman by saving one of its big counterparties, A.I.G. By any fair calculation, the U.S. Treasury should own a slice of Goldman today. Goldman has been the poster boy for banks behaving by “situational values” — exploiting whatever the situation, or rules that it helped to write, allowed.

Also, President Obama tried to create a bipartisan commission to come up with a plan to reduce the national debt — a plan that would inflict pain on both parties by cutting some programs and raising some taxes. But the Republican leader, Senator Mitch McConnell, said the G.O.P. would not cooperate with any commission that proposes raising taxes. And some liberal Democrats rejected cutting their favorite programs. Way to take one for the country, guys.

Then let’s look at the unions — hardly paragons of sustainable thinking for the country. We all know they got more than their fair share in the General Motors settlement and in the Obama health care proposals because they could shake down the Democrats in return for votes.

And, finally, don’t forget both the Democratic and Republican senators who have decided to get a quick populist boost by turning one of the few adults we have left — Federal Reserve Chairman Ben Bernanke — into a piñata. No, Mr. Bernanke is not blameless for the 2008 crisis. But since then he has helped steer the country back from the brink and kept us out of a depression. He absolutely deserves reappointment.

No doubt, this is a lousy season to be the leader of any institution. We are in the midst of a long period of austerity, where all that most leaders will be able to do is cut, fire and trim. It is so easy to play populism and run against them. But this time is different. When our government is this deeply involved in propping up our economy, and the economy is this fragile, politics as usual will kill us. We badly need leaders inspired by sustainable values, not situational ones. Without that, we’ll just be digging our hole deeper and making the reckoning, when it comes, that much more ferocious.

‘HOWARD ZINN, HISTORIAN, DIES AT 87,’ in the N. Y. Times by The Associated Press.

In Uncategorized on January 28, 2010 at 05:36

Howard Zinn, Historian, Dies at 87


Published: January 27, 2010

Howard Zinn, an author, teacher and political activist whose book “A People’s History of the United States” became a million-selling leftist alternative to mainstream texts, died Wednesday in Santa Monica, Calif. He was 87 and lived in Auburndale, Mass.

Associated Press

Howard Zinn

The cause was a heart attack, his daughter Myla Kabat-Zinn said.

Published in 1980 with little promotion and a first printing of 5,000, “A People’s History” was, fittingly, a people’s best-seller, attracting a wide audience through word of mouth and reaching 1 million sales in 2003. Although Professor Zinn was writing for a general readership, his book was taught in high schools and colleges throughout the country, and numerous companion editions were published, including “Voices of a People’s History,” a volume for young people and a graphic novel.

“A People’s History” told an openly left-wing story. Professor Zinn accused Christopher Columbus and other explorers of committing genocide, picked apart presidents from Andrew Jackson to Franklin D. Roosevelt and celebrated workers, feminists and war resisters.

Even liberal historians were uneasy with Professor Zinn, who taught for many years at Boston University. Arthur M. Schlesinger Jr. once said: “I know he regards me as a dangerous reactionary. And I don’t take him very seriously. He’s a polemicist, not a historian.”

In a 1998 interview with The Associated Press, Professor Zinn acknowledged that he was not trying to write an objective history, or a complete one. He called his book a response to traditional works, the first chapter, not the last, of a new kind of history.

“There’s no such thing as a whole story; every story is incomplete,” Professor Zinn said. “My idea was the orthodox viewpoint has already been done a thousand times.”

“A People’s History” had some famous admirers, including the actors Matt Damon and Ben Affleck. The two grew up near Professor Zinn, were family friends and gave the book a plug in their Academy Award-winning screenplay for “Good Will Hunting.”

Oliver Stone was a fan, as was Bruce Springsteen, whose bleak “Nebraska” album was inspired in part by “A People’s History.” The book was the basis of a 2007 documentary, “Profit Motive and the Whispering Wind,” and even showed up on “The Sopranos,” in the hand of Tony’s son, A.J.

Professor Zinn himself was an impressive-looking man, tall and rugged with wavy hair. An experienced public speaker, he was modest and engaging in person, more interested in persuasion than in confrontation.

Born in New York in 1922, Professor Zinn was the son of Jewish immigrants who as a child lived in a rundown area in Brooklyn and responded strongly to the novels of Charles Dickens. At age 17, urged on by some young Communists in his neighborhood, he attended a political rally in Times Square.

“Suddenly, I heard the sirens sound, and I looked around and saw the policemen on horses galloping into the crowd and beating people,” he told The A.P. “I couldn’t believe that.”

“And then I was hit. I turned around and I was knocked unconscious. I woke up sometime later in a doorway, with Times Square quiet again, eerie, dreamlike, as if nothing had transpired. I was ferociously indignant.”

War continued his education. Eager to help wipe out the Nazis, he joined the Army Air Corps in 1943 and even persuaded the local draft board to let him mail his own induction notice. He flew missions throughout Europe, receiving an Air Medal, but he found himself questioning what it all meant. Back home, he gathered his medals and papers, put them in a folder and wrote on top: “Never again.”

He attended New York University and Columbia University, where he received a doctorate in history. In 1956, he was offered the chairmanship of the history and social sciences department at Spelman College, an all-black women’s school in segregated Atlanta.

During the civil rights movement, Professor Zinn encouraged his students to request books from the segregated public libraries and helped coordinate sit-ins at downtown cafeterias. He also published several articles, including a rare attack on the Kennedy administration, accusing it of being too slow to protect blacks.

He was loved by students — among them a young Alice Walker, who later wrote “The Color Purple” — but not by administrators. In 1963, Spelman fired him for “insubordination.” (Professor Zinn was a critic of the school’s non-participation in the civil rights movement.) His years at Boston University were marked by opposition to the Vietnam War and by feuds with the school’s president, John Silber.

Professor Zinn retired in 1988, spending his last day of class on the picket line with students in support of an on-campus nurses’ strike. Over the years, he continued to lecture at schools and to appear at rallies and on picket lines.

Besides “A People’s History,” he wrote several books, including “The Southern Mystique,” “LaGuardia in Congress” and the memoir “You Can’t Be Neutral on a Moving Train,” the title of a 2004 documentary about Professor Zinn that Mr. Damon narrated. He also wrote three plays.

His wife and longtime collaborator, Roslyn, died in 2008. They had two children, Myla and Jeff.

One of Professor Zinn’s last public writings was a brief essay, published last week in The Nation, about the first year of the Obama administration.

“I’ve been searching hard for a highlight,” he wrote, adding that he wasn’t disappointed because he never expected a lot from President Obama.

“I think people are dazzled by Obama’s rhetoric, and that people ought to begin to understand that Obama is going to be a mediocre president — which means, in our time, a dangerous president — unless there is some national movement to push him in a better direction.”