Archive for March, 2010|Monthly archive page


In Uncategorized on March 31, 2010 at 17:41


What can policymakers learn from happiness research?

by Elizabeth Kolbert

MARCH 22, 2010

People who are destitute are surprisingly likely to describe themselves as happy.

Happiness Research; Psychology; “The Politics of Happiness: What Governments Can Learn from the New Research on Well-Being” (Princeton; $24.95); Derek Bok; “Happiness Around the World: The Paradox of Happy Peasants and Miserable Millionaires” (Oxford; $24.95); Carol Graham; “Stumbling on Happiness” (2006)

n 1978, a trio of psychologists curious about happiness assembled two groups of subjects. In the first were winners of the Illinois state lottery. These men and women had received jackpots of between fifty thousand and a million dollars. In the second group were victims of devastating accidents. Some had been left paralyzed from the waist down. For the others, paralysis started at the neck.

The researchers asked the members of both groups a battery of questions about their lives. On a scale of “the best and worst things that could happen,” how did the members of the first group rank becoming rich and the second wheelchair-bound? How happy had they been before these events? How about now? How happy did they expect to be in a couple of years? How much pleasure did they take in daily experiences such as talking with a friend, hearing a joke, or reading a magazine? (The lottery winners were also asked how much they enjoyed buying clothes, a question that was omitted in the case of the quadriplegics.) For a control, the psychologists assembled a third group, made up of Illinois residents selected at random from the phone book.

When the psychologists tabulated the answers, they found that the lottery group rated winning as a highly positive experience and the accident group ranked victimhood as a negative one. Clearly, the winners realized that they’d been fortunate. But this only made the subsequent results more puzzling. The winners considered themselves no happier at the time of the interviews than the members of the control group did. In the future, the winners expected to become slightly happier, but, once again, no more so than the control-group members. (Even the accident victims expected to be happier than the lottery winners within a few years.) Meanwhile, the winners took significantly less pleasure in daily activities—including clothes-buying—than the members of the other two groups.

Perhaps, the psychologists hypothesized, people who buy lottery tickets tend to be melancholy to begin with, and this had skewed the results. They randomly selected another group of Illinoisans, some of whom had bought lottery tickets in the past and some of whom hadn’t. The buyers and the non-buyers exhibited no significant affective differences. The members of this new panel, too, rated themselves just as happy as the lottery winners, and reported getting more pleasure from their daily lives.

The researchers wrote up their findings on the lottery winners and the accident victims in the Journal of Personality and Social Psychology. The paper is now considered one of the founding texts of happiness studies, a field that has yielded some surprisingly morose results. It’s not just hitting the jackpot that fails to lift spirits; a whole range of activities that people tend to think will make them happy—getting a raise, moving to California, having kids—do not, it turns out, have that effect. (Studies have shown that women find caring for their children less pleasurable than napping or jogging and only slightly more satisfying than doing the dishes.) As the happiness researchers Tim Wilson and Daniel Gilbert have put it, “People routinely mispredict how much pleasure or displeasure future events will bring.”


hat should we do with information like this? On an individual level, it’s possible to stop buying lottery tickets, move back to Minnesota, and, provided the news reaches you in time, have your tubes tied. But there are more far-reaching societal implications to consider. Or so Derek Bok argues in his new book, “The Politics of Happiness: What Government Can Learn from the New Research on Well-Being” (Princeton; $24.95).

Bok, who served two stints as president of Harvard, begins with a discussion of prosperity and its discontents. Over the past three and a half decades, real per-capita income in the United States has risen from just over seventeen thousand dollars to almost twenty-seven thousand dollars. During that same period, the average new home in the U.S. grew in size by almost fifty per cent; the number of cars in the country increased by more than a hundred and twenty million; the proportion of families owning personal computers rose from zero to seventy per cent; and so on. Yet, since the early seventies, the percentage of Americans who describe themselves as either “very happy” or “pretty happy” has remained virtually unchanged. Indeed, the average level of self-reported happiness, or “subjective well-being,” appears to have been flat going all the way back to the nineteen-fifties, when real per-capita income was less than half what it is today.

Several theories have been offered to explain why the United States is, in effect, a nation of joyless lottery winners. One, the so-called “hedonic treadmill” hypothesis, holds that people rapidly adjust to improved situations; thus, as soon as they acquire some new delight—a second house, a third car, a fourth-generation iPhone—their expectations ramp upward, and they are left no happier than before. Another is that people are relativists; they are interested not so much in having more stuff as in having more than those around them. Hence, if Jack and Joe both blow their year-end bonuses on Maseratis, nothing has really changed and neither is any more satisfied.

America’s felicific stagnation shouldn’t be ignored, Bok argues, whatever the explanation. Growth, after all, has its costs, and often quite substantial ones. If “rising incomes have failed to make Americans happier over the last fifty years,” he writes, “what is the point of working such long hours and risking environmental disaster in order to keep on doubling and redoubling our Gross Domestic Product?”

To suggest that the U.S. abandon economic growth as a policy goal is a fairly far-reaching proposal. Bok concedes as much—“The implications of this critique are profound”—but he insists that all he’s doing is attending to the data. He takes a similarly provocative and, again, empirically driven position in a chapter titled “What to Do About Inequality.” His answer is, in a word, “Nothing.”

Read more:


‘GEELY BUYS VOLVO: GOLDMAN GETS THE UPSIDE, YOU GET THE DOWNSIDE,’ by Simon Johnson at baselinescenario .com

In Uncategorized on March 31, 2010 at 10:55

Geely Buys Volvo: Goldman Gets The Upside, You Get The Downside

Posted: 30 Mar 2010 03:01 AM PDT

By Simon Johnson

Geely Automotive has acquired Volvo from Ford.  This is a risky bet that may or may pay off for the Chinese auto maker – after first requiring a great deal of investment.

Goldman Sachs’ private equity owns a significant stake in Geely, with the explicit goal of helping that company expand internationally.  Remember what Goldman is – or rather what Goldman became when it was saved from collapse by being allowed to transform into a Bank Holding Company in September 2008 (which allowed access to the Federal Reserve’s discount window, among other advantages).  Goldman’s funding is cheaper on all dimensions because it is perceived to be Too Big To Fail, i.e., supported by the US taxpayer; this allows Goldman to provide more support to Geely (and others).

Our Too Big To Fail banks stand today at the heart of global capital flows.  People around the world – including from China – park their funds in the biggest US banks because everyone concerned believes these banks cannot fail; they were, after all, saved by the Bush administration and put completely – gently and unconditionally – back on their feet under President Obama.  These same banks now spearhead lending to risky projects around the world.

What is the likely outcome?

We know that risk-management at the megabanks breaks down in the face of a boom (remember Chuck Prince of Citigroup in July 2007: “as long as the music is playing, you’ve got to get up and dance. We’re still dancing”).  We know there is a growing boom in emerging markets – including through the overseas expansion of would-be multinationals from those countries.  This is most notably true of state-backed firms from China, but there is also a more general pattern (think India, Brazil, Russia, and more).

The big global banks, US and European, are charging hard into this space – Citigroup is expanding fast in China and India (areas where they claim great expertise); and the CEO of HSBC has moved to Hong Kong.  Many investment advisors are adamant that China will power global growth (never mind that it is less than 10 percent of the world economy), that renminbi appreciation is around the corner, and that the value of investments in or connected to that country can only go up.

There is a very good reason why, between the 1930s and the 1980s, large US commercial banks were severely constrained in their risk-taking activities.  By the 1930s US policymakers had learned the very hard way that we do not want the banks that run our payments system (with the implicit or explicit backing of the government, depending on how you look at it) to be engaged also in high risk equity-type investments – this is really asking for trouble.

The problem is not that all such banking-based risky investments go bad.  Far from it – we’ll first get an apparently great boom, which will suck in all kinds of financial institutions, our future Chuck Princes.  As long as the market goes up, the executives and traders involved will do very well – lauded as geniuses and paid accordingly.

And if some of them fail, so what – failure is essential to a market economy.  But here’s the key problem with having so much of our economy in the hands of financial firms that are Too Big To Fail.  When the next emerging market crash comes, we’ll have to make the 2008-2009 decision all over again: should we rescue our big troubled financial institutions, or should we let them fail – and cause great damage to the economy?

In our assessment (13 Bankers: The Wall Street Takeover and The Next Financial Meltdown, out today), based on the details of financial deregulation over the past 30 years, the prevailing belief system of top bankers, and the big banks’ incentives to take risk, we are all heading for trouble.  The “financial reform” legislation currently before Congress and still prevailing pro-banker attitudes at the top of the Obama administration are really not helpful.  The country’s course was set by a fateful meeting at the White House last March; a resurrected, unreformed, and still crazy system – symbolized by 13 bankers – is in the driving seat now.

At best, this will be another very nasty boom-bust-bailout cycle.  At worst, we are heading towards a situation in which our banks are so massive that when they fail, there is no way the government (or anyone else) can offset the damage that causes.

This time our government debt (held by the private sector) will roughly double – increasing by 40 percentage points of GDP – as a direct result of what the banks did.  We’ve lost more than 8 million jobs since December 2008 – for what good reason?  Next time could easily be worse.

You can disagree with our analysis – provide your own facts and figures, and we’ll have that debate here or elsewhere; the more public, the better from our perspective.  And you should certainly want to improve on our policy prescriptions.  We put forward some simple ideas that can be implemented and would help – our versions can also be communicated and argued widely: if banks are too big to fail, making them smaller is surely necessary (although likely not sufficient).

But don’t ignore the question.  Don’t assume that this time Goldman and its ilk will avoid getting carried away – they are just doing their jobs, after all, and their job description says “make money”; system stability is someone else’s job.

And also don’t presume that, just because the big banks and their friends seem to hold all the cards, they will necessarily prevail in the future.

In all previous confrontations between elected authority and concentrated financial power in the United States, the democratic element has prevailed (see chapter 1 in 13 Bankers; also Monday’s WSJ, behind the paywall).  This can happen again – but only if you stay engaged, argue this out with everyone you know (including your elected representatives), and help change the mainstream consensus on banking definitively and irrevocably.

‘PUNKS & PLUTOCRATS,’ by Paul Krugman in the N.Y. Times

In Uncategorized on March 29, 2010 at 13:13


Punks and Plutocrats


Published: March 28, 2010

Health reform is the law of the land. Next up: financial reform. But will it happen? The White House is optimistic, because it believes that Republicans won’t want to be cast as allies of Wall Street. I’m not so sure. The key question is how many senators believe that they can get away with claiming that war is peace, slavery is freedom, and regulating big banks is doing those big banks a favor.

Some background: we used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression. On the other side, banks were tightly regulated, so that they didn’t take advantage of government guarantees by running excessive risks.

From 1980 or so onward, however, that system gradually broke down, partly because of bank deregulation, but mainly because of the rise of “shadow banking”: institutions and practices — like financing long-term investments with overnight borrowing — that recreated the risks of old-fashioned banking but weren’t covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930. And the crisis came.

Now what? We have already, in effect, recreated New Deal-type guarantees: as the financial system plunged into crisis, the government stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And you should bear in mind that the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets. There’s every reason to believe that this will be the rule from now on: when push comes to shove, no matter who is in power, the financial sector will be bailed out. In effect, debts of shadow banks, like deposits at conventional banks, now have a government guarantee.

The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that?

Well, how about John Boehner, the House minority leader? Recently Mr. Boehner gave a talk to bankers in which he encouraged them to balk efforts by Congress to impose stricter regulation. “Don’t let those little punk staffers take advantage of you, and stand up for yourselves,” he urged — where by “taking advantage” he meant imposing some conditions on the industry in return for government backing.

Barney Frank, the chairman of the House Financial Services Committee, promptly had “Little Punk Staffer” buttons made up and distributed to Congressional aides.

But Mr. Boehner isn’t the problem: Mr. Frank has already shepherded fairly strong financial reform through the House. Instead, the question is what will happen in the Senate.

In the Senate, the legislation on the table was crafted by Senator Chris Dodd of Connecticut. It’s significantly weaker than the Frank bill, and needs to be made stronger, a topic I’ll discuss in future columns. But no bill will become law if Senate Republicans stand in the way of reform.

But won’t opponents of reform fear being cast as allies of the bad guys (which they are)? Maybe not. Back in January, Frank Luntz, the G.O.P. strategist, circulated a memo on how to oppose financial reform. His key idea was that Republicans should claim that up is down — that reform legislation is a “big bank bailout bill,” rather than a set of restrictions on the banks.

Sure enough, a few days ago Senator Richard Shelby of Alabama, in a letter attacking the Dodd bill, claimed that an essential part of reform — tougher oversight of large, systemically important financial companies — is actually a bailout, because “The market will view these firms as being ‘too big to fail’ and implicitly backed by the government.” Um, senator, the market already views those firms as having implicit government backing, because they do: whatever people like Mr. Shelby may say now, in any future crisis those firms will be rescued, whichever party is in power.

The only question is whether we’re going to regulate bankers so that they don’t abuse the privilege of government backing. And it’s that regulation — not future bailouts — that reform opponents are trying to block.

So it’s the punks versus the plutocrats — those who want to rein in runaway banks, and bankers who want the freedom to put the economy at risk, freedom enhanced by the knowledge that taxpayers will bail them out in a crisis. Whatever they say, the fact is that people like Mr. Shelby are on the side of the plutocrats; the American people should be on the side of the punks, who are trying to protect their interests.

‘WHAT DOES GREECE MEAN TO ME, DAD?,’ by John Maudlin at Outside the Box. Long read but worth it for most I think.

In Uncategorized on March 27, 2010 at 12:39

What Does Greece Mean to Me, Dad?

Tiffani had been talking with her friends. A lot of them read this letter, and they were asking, “Ok, I get that Greece is a problem. But what does that mean for me here?”

The same day, a friend told me about a conversation she had with her 17-year-old Cal Tech daughter and her daughter’s boyfriend, who is also headed to Cal Tech. These are really smart kids, and they were asking her about some of my recent letters. “We understand what’s he saying, but we just don’t see what it means.” (For what it’s worth, the boyfriend wants to grow up to be Mohammed El-Erian of PIMCO. Go figure; I just wanted to be Mickey Mantle.)

Twice in one day is a sign, I am sure, so I will try and see if I can explain. And since all my kids must be wondering the same thing, this is kind of letter from Dad to see if I can help them understand why things are not going as well as they would like.

(A little background. I have seven kids, five of whom are adopted. A fairly colorful family, so to speak. Pictures at the end of the letter. Ages almost 16 through 33. Daughter Tiffani runs my business and, except for the youngest boy, they are all out on their own. Four are married or attached. It is not easy to watch them struggle to make ends meet, but Dad is proud. But listening to their stories, and the stories of their friends, help keep me in the real world.)

Dear Kids,

I know what a struggle it has been for most of you, and now three of you have a kid of your own. Expensive little hobbies, aren’t they? I know that you read my letter (well, except for Trey) and wonder what it means to you trying to pay your bills. Let me see if I can make a connection from the world of economics to the world of paying your bills. Sadly, what I am going to say is not going to make you feel any better, but reality is what it is. We’ll get through it together.

While life looks pretty good for Dad now, when I graduated from seminary in December of 1974 unemployment was at 8%, on its way to 9% a few months later. We lived in a small mobile home, which seemed wonderful at the time. I was proud of it. We scrimped and got by. My first job was a dead end, so I left after a few months. I guess I was lucky that no one would hire me, because I had to figure out how to make it on my own. All I really knew was the printing business I had grown up in, so I started brokering printing. Pretty soon I was doing just direct mail, and then designing direct mail. But there was never enough money. We were still in that mobile home six years later.

And prices were going up like crazy. We had inflation. I remember going to a bank in the late ’70s and borrowing money for my business at 18%, so I could buy paper for a job I had sold. Forget about borrowing for a new home or car. All I knew was that I was struggling to make ends meet (with a new kid!). There were a lot of nights where I would wake up at two in the morning with panic attacks about whether I could make payroll or pay bills until someone paid me. I didn’t understand that what the Fed and the government were doing was causing high inflation and unemployment.

I had a bank line I used to buy paper with. One day the bank abruptly cancelled that line and demanded their money, which I didn’t have – all I had was a warehouse full of paper and a contract that said I had a year to pay for it. The bank didn’t care. I told them they would just have to wait. I swear, they actually called my mother and told her they would ruin me if she didn’t pay that $10,000 line. She was scared for me (after all, you had to be able to trust your banker) and paid it without asking me. Turned out the bank finally went bankrupt later in the year. They were just desperate and trying anything they could do to get money, so they wouldn’t lose everything. They did anyway.

In short, times were not all that good, but we got through it. And now, 35 years later, it seems like déjà vu all over again. Every time we talk it seems like someone we know has lost a job.

And so how do the problems in a small country like Greece make a difference to you? There is a connection, but it’s different than the old “hip bone is connected to the thigh bone to the knee bone” thing. It is a lot more complicated. Let’s go back to a letter I wrote four years ago, talking about fingers of instability. One of the best analogies your Dad has ever written, according to many of his 1 million friends. So read with me a few pages, and then we’ll get back to Greece.

Ubiquity, Complexity Theory, and Sandpiles

We are going to start our explorations with excerpts from a very important book by Mark Buchanan called Ubiquity, Why Catastrophes Happen. I HIGHLY recommend it to those of you who, like me, are trying to understand the complexity of the markets. Not directly about investing, although he touches on it, it is about chaos theory, complexity theory, and critical states. It is written in a manner any layman can understand. There are no equations, just easy-to-grasp, well-written stories and analogies.

We all had the fun as kids of going to the beach and playing in the sand. Remember taking your plastic buckets and making sandpiles? Slowly pouring the sand into ever-bigger piles, until one side of the pile started an avalanche?

Imagine, Buchanan says, dropping just one grain of sand after another onto a table. A pile soon develops. Eventually, just one grain starts an avalanche. Most of the time it is a small one, but sometimes it gains momentum and it seems like one whole side of the pile slides down to the bottom.

Well, in 1987 three physicists, named Per Bak, Chao Tang, and Kurt Weisenfeld, began to play the sandpile game in their lab at Brookhaven National Laboratory in New York. Now, actually piling up one grain of sand at a time is a slow process, so they wrote a computer program to do it. Not as much fun, but a whole lot faster. Not that they really cared about sandpiles. They were more interested in what are called nonequilibrium systems.

They learned some interesting things. What is the typical size of an avalanche? After a huge number of tests with millions of grains of sand, they found out that there is no typical number. “Some involved a single grain; others, ten, a hundred or a thousand. Still others were pile-wide cataclysms involving millions that brought nearly the whole mountain down. At any time, literally anything, it seemed, might be just about to occur.”

It was indeed completely chaotic in its unpredictability. Now, let’s read these next paragraphs slowly. They are important, as they create a mental image that helps me understand the organization of the financial markets and the world economy.

“To find out why [such unpredictability] should show up in their sandpile game, Bak and colleagues next played a trick with their computer. Imagine peering down on the pile from above, and coloring it in according to its steepness. Where it is relatively flat and stable, color it green; where steep and, in avalanche terms, ‘ready to go,’ color it red.

“What do you see? They found that at the outset the pile looked mostly green, but that, as the pile grew, the green became infiltrated with ever more red. With more grains, the scattering of red danger spots grew until a dense skeleton of instability ran through the pile. Here then was a clue to its peculiar behavior: a grain falling on a red spot can, by domino-like action, cause sliding at other nearby red spots. If the red network was sparse, and all trouble spots were well isolated one from the other, then a single grain could have only limited repercussions.

“But when the red spots come to riddle the pile, the consequences of the next grain become fiendishly unpredictable. It might trigger only a few tumblings, or it might instead set off a cataclysmic chain reaction involving millions. The sandpile seemed to have configured itself into a hypersensitive and peculiarly unstable condition in which the next falling grain could trigger a response of any size whatsoever.”

Something only a math nerd could love? Scientists refer to this as a critical state. The term critical state can mean the point at which water would go to ice or steam, or the moment that critical mass induces a nuclear reaction, etc. It is the point at which something triggers a change in the basic nature or character of the object or group. Thus, (and very casually for all you physicists) we refer to something being in a critical state (or use the term critical mass) when there is the opportunity for significant change.

“But to physicists, [the critical state] has always been seen as a kind of theoretical freak and sideshow, a devilishly unstable and unusual condition that arises only under the most exceptional circumstances [in highly controlled experiments]… In the sandpile game, however, a critical state seemed to arise naturally through the mindless sprinkling of grains.”

Then they asked themselves, could this phenomenon show up elsewhere? In the earth’s crust, triggering earthquakes; in wholesale changes in an ecosystem or a stock market crash? “Could the special organization of the critical state explain why the world at large seems so susceptible to unpredictable upheavals?” Could it help us understand not just earthquakes, but why cartoons in a third-rate paper in Denmark could cause worldwide riots?

Buchanan concludes in his opening chapter, “There are many subtleties and twists in the story … but the basic message, roughly speaking, is simple: The peculiar and exceptionally unstable organization of the critical state does indeed seem to be ubiquitous in our world. Researchers in the past few years have found its mathematical fingerprints in the workings of all the upheavals I’ve mentioned so far [earthquakes, eco-disasters, market crashes], as well as in the spreading of epidemics, the flaring of traffic jams, the patterns by which instructions trickle down from managers to workers in the office, and in many other things.

“At the heart of our story, then, lies the discovery that networks of things of all kinds – atoms, molecules, species, people, and even ideas – have a marked tendency to organize themselves along similar lines. On the basis of this insight, scientists are finally beginning to fathom what lies behind tumultuous events of all sorts, and to see patterns at work where they have never seen them before.”

Now, let’s think about this for a moment. Going back to the sandpile game, you find that as you double the number of grains of sand involved in an avalanche, the likelihood of an avalanche is 2.14 times as unlikely. We find something similar in earthquakes. In terms of energy, the data indicate that earthquakes simply become four times less likely each time you double the energy they release. Mathematicians refer to this as a “power law,” or a special mathematical pattern that stands out in contrast to the overall complexity of the earthquake process.

Fingers of Instability

So what happens in our game? “… after the pile evolves into a critical state, many grains rest just on the verge of tumbling, and these grains link up into ‘fingers of instability’ of all possible lengths. While many are short, others slice through the pile from one end to the other. So the chain reaction triggered by a single grain might lead to an avalanche of any size whatsoever, depending on whether that grain fell on a short, intermediate or long finger of instability.”

Now, we come to a critical point in our discussion of the critical state. Again, read this with the markets in mind:

“In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.”

Now let’s couple this idea with a few other concepts. First, one of the world’s greatest economists (who sadly was never honored with a Nobel), Hyman Minsky, points out that stability leads to instability. The longer a given condition or trend persists (and the more comfortable we get with it), the more dramatic the correction will be when the trend fails. The problem with long-term macroeconomic stability is that it tends to produce highly unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings for current consumption. Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.

Relating this to our sandpile, the longer that a critical state builds up in an economy or, in other words, the more fingers of instability that are allowed to develop connections to other fingers of instability, the greater the potential for a serious “avalanche.”

And that’s exactly what happened in the recent credit crisis. Consumers all through the world’s largest economies borrowed money for all sorts of things, because times were good. Home prices would always go up and the stock market was back to its old trick of making 15% a year. And borrowing money was relatively cheap. You could get 2% short-term loans on homes, which seemingly rose in value 15% a year, so why not buy now and sell a few years down the road?

Greed took over. Those risky loans were sold to investors by the tens and hundreds of billions all over the world. And as with all debt sandpiles, the fault lines started to show up. Maybe it was that one loan in Las Vegas that was the critical piece of sand; we don’t know, but the avalanche was triggered.

You probably don’t remember this, but Dad was writing about the problems with subprime debt way back in 2005 and 2006. But as the problem actually emerged, respected people like Ben Bernanke (the chairman of the Fed) said that the problem was not all that big, and that the fallout would be “contained.” (I bet he wishes he could have that statement back!)

But it wasn’t contained. It caused banks to realize that what they thought was AAA credit was actually a total loss. And as banks looked at what was on their books, they wondered about their fellow banks. How bad were they? Who knew? Since no one did, they stopped lending to each other. Credit simply froze. They stopped taking each other’s letters of credit, and that hurt world trade. Because banks were losing money, they stopped lending to smaller businesses. Commercial paper dried up. All those “safe” off-balance-sheet funds that banks created were now folding. Everyone sold what they could, not what they wanted to, to cover their debts. It was a true panic. Businesses started laying off people, who in turn stopped spending as much.

As you saw from my earlier story about my bank experience, banks may do what unreasonable things when they get into trouble. (Speaking of which, my smallish Texas bank, where I have been for almost 20 years, just cancelled my very modest, unused credit line last month, and told me that letters of credit will not be rewritten without 100% cash against them. Not to worry, Dad is actually in the best shape of his life, business-wise, knock on wood. I hadn’t talked personally to a banker in years. When I asked the young clerk on the phone, “What’s going on?” he said it was just an order from his director. I switched banks last week, as I can smell a bank in trouble. And I again have a credit line – which I hope not to use.)

But the fact is, we need banks. They are like the arteries in our bodies; they keep the blood (money) flowing. And when our arteries get hard, we can be in danger of heart attacks. And it’s going to get worse, as banks are going to lose more money on their commercial real estate loans. Commercial real estate is down some 40% around the country.

There are a lot of books that try to pinpoint the cause of our current crisis. And some make for fun reading, like a good mystery novel. You can blame it on the Fed or the bankers or hedge funds or the government or ratings agencies or any number of culprits.

Let me be a little controversial here. The blame game that is now going on is in many ways way too simplistic. The world system survived all sorts of crises over the recent decades and bounced back. Why is now so different?

Because we are coming to the end of a 60-year debt supercycle. We borrowed (and not just in the US) like there was no tomorrow. And because we were so convinced that all this debt was safe, we leveraged up, borrowing at first 3 and then 5 and then 10 and then as much as 30 times the actual money we had. And we convinced the regulators that it was a good thing. The longer things remained stable, the more convinced we became they would remain that way. The following chart shows how our sandpile ended up. It’s not pretty.

I know Dad always say it is never “different,” but in a sense this time is really different from all the other crises we have gone through since the Great Depression that your Less-Than-Sainted Granddad used to talk about. What the very important book by professors Reinhart and Rogoff shows is that every debt crisis always ends this way, with the debt having to be paid down or written off or defaulted upon. That part is never different. One way or another, we reduce the debt. And that is a painful process. It means that the economy grows much slower, if at all, during the process.

And while the government is trying to make up the difference for consumers who are trying to (or being forced to) reduce their debt, even governments have limits, as the Greeks are finding out.

If it were not for the fact that we are coming to the closing innings of the debt supercycle, we would already be in a robust recovery. But we are not. And sadly, we have a long way to go with this deleveraging process. It will take years.

You can’t borrow your way out of a debt crisis, whether you are a family or a nation. And as too many families are finding out today, if you lose your job you can lose your home. What were once very creditworthy people are now filing for bankruptcy and walking away from homes, as all those subprime loans going bad put homes back onto the market, which caused prices to fall, which caused an entire home-construction industry to collapse, which hurt all sorts of ancillary businesses, which caused more people to lose their jobs and give up their homes, and on and on.

It’s all connected. We built a very unstable sandpile and it came crashing down and now we have to dig out from the problem. And the problem was too much debt. It will take years, as banks write off home loans and commercial real estate and more, and we get down to a more reasonable level of debt as a country and as a world.

And here’s where I have to deliver the bad news. It seems we did not learn the lessons of this crisis very well. First, we have not fixed the problems that made the crisis so severe. We have not regulated credit default swaps, for instance. And European banks are still highly leveraged.

Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)

Except, now that Greek debt is risky. Today, it appears there will be some kind of bailout for Greece. But that is just a band-aid on a very serious wound. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes to a level that no one in the US could even contemplate. What is being demanded of them is really bad for them, but they did it to themselves.

But those European banks? When that debt goes bad, and it will, they will react to each other just like they did in 2008. Trust will evaporate. Will taxpayers shoulder the burden? Maybe, maybe not. It will be a huge crisis. There are other countries in Europe, like Spain and Portugal, that are almost as bad as Greece. Great Britain is not too far behind.

The European economy is as large as that of the US. We feel it when they go into recessions, for many of our largest companies make a lot of money in Europe. A crisis will also make the euro go down, which reduces corporate profits and makes it harder for us to sell our products into Europe, not to mention compete with European companies for global trade. And that means we all buy less from China, which means they will buy less of our bonds, and on and on go the connections. And it will all make it much harder to start new companies, which are the source of real growth in jobs.

And then in January of 2011 we are going to have the largest tax increase in US history. The research shows that tax increases have a negative 3-times effect on GDP, or the growth of the economy. As I will show in a letter in a few weeks, I think it is likely that the level of tax increases, when combined with the increase in state and local taxes (or the reductions in spending), will be enough to throw us back into recession, even without problems coming from Europe. (And no, Melissa, that is not some Republican research conspiracy. The research was done by Christina Romer, who is Obama’s chairperson of the Joint Council of Economic Advisors.)

And sadly, that means even higher unemployment. It means sales at the bar where you work, Melissa, will fall farther as more of your friends lose jobs. And commissions at the electronics store where you work, Chad, will be even lower than the miserable level they’re at now. And Henry, it means the hours you work at UPS will be even more difficult to come by. You are smart to be looking for more part-time work. Abbi and Amanda? People may eat out a little less, and your fellow workers will all want more hours. And Trey? Greece has little to do with the fact that you do not do your homework on time.

And this next time, we won’t be able to fight the recession with even greater debt and lower interest rates, as we did this last time. Rates are as low as they can go, and this week the bond market is showing that it does not like the massive borrowing the US is engaged in. It is worried about the possibility of “Greece R Us.”

Bond markets require confidence above all else. If Greece defaults, then how far away is Spain or Japan? What makes the US so different, if we do not control our debt? As Reinhart and Rogoff show, when confidence goes, the end is very near. And it always comes faster than anyone expects.

The good news? We will get through this. We pulled through some rough times as a nation in the ’70s. No one, in 2020, is going to want to go back to the good old days of 2010, as the amazing innovations in medicine and other technologies will have made life so much better. You guys are going to live a very long time (and I hope I get a few extra years to enjoy those grandkids as well!). In 1975 we did not know where the new jobs would come from. It was fairly bleak. But the jobs did come, as they will once again.

The even better news? You guys are young, still babies, really. Hell, I didn’t have a good year income-wise until I was in my mid-30s, and that was an accident (I literally won a cellular telephone lottery). And it has not always been smooth since then, as you know.  But we get through bad stuff. That is what we do as a family and as the larger family of our nation and world.

So, what’s the final message? Do what you are doing. Work hard, save, watch your spending, and think about whether your job is the right one if we have another recession. Pay attention to how profitable the company you work for is, and make yourself their most important worker. And know that things will get better. The 2020s are going to be one very cool time, as we shrug off the ending of the debt supercycle and hit the reset button. And remember, Dad is proud of you and loves you very much.


In Uncategorized on March 26, 2010 at 16:10

Legal-Marijuana Advocates Focus on a New Green


Published: March 25, 2010

SAN FRANCISCO — Perhaps only in California could a group of marijuana smokers call themselves fiscal realists.

Supporters of a ballot measure that would tax and regulate marijuana in California say it could raise $1.4 billion a year.

And yet, faced with a $20 billion deficit, strained state services and regular legislative paralysis, voters in California are now set to consider a single-word solution to help ease some of the state’s money troubles: legalize.

On Wednesday, the California secretary of state certified a November vote on a ballot measure that would legalize, tax and regulate marijuana, a plan that advocates say could raise $1.4 billion and save precious law enforcement and prison resources.

Indeed, unlike previous efforts at legalization — including a failed 1972 measure in California — the 2010 campaign will not dwell on assertions of marijuana’s harmlessness or its social acceptance, but rather on cold cash.

“We need the tax money,” said Richard Lee, founder of Oaksterdam University, a trade school for marijuana growers, in Oakland, who backed the ballot measure’s successful petition drive. “Second, we need the tax savings on police and law enforcement, and have that law enforcement directed towards real crime.”

Supporters are hoping to raise $10 million to $20 million for the campaign, primarily on the Internet, with national groups planning to urge marijuana fans to contribute $4.20 at a time, a nod to 420, a popular shorthand for the drug.

The law would permit licensed retailers to sell up to one ounce at a time. Those sales would be a new source of sales tax revenue for the state.

Opponents, however, scoff at the notion that legalizing marijuana could somehow help with the state’s woes. They tick off a list of social ills — including tardiness and absenteeism in the workplace — that such an act would contribute to.

“We just don’t think any good is going to come from this,” said John Standish, president of the California Peace Officers Association, whose 3,800 members include police chiefs and sheriffs. “It’s not going to better society. It’s going to denigrate it.”

The question of legalization, which a 2009 Field Poll showed 56 percent of Californians supporting, will undoubtedly color the state race for governor. The two major Republican candidates — the former eBay chief executive Meg Whitman and the insurance commissioner, Steve Poizner — have said they oppose the bill.

Jerry Brown, the Democratic attorney general who is also running for governor, opposes the idea as well, saying it violates federal law.

And while the Obama administration has signaled that it will tolerate medical marijuana users who abide the law in the 14 states where it is legal, a law authorizing personal use would conflict with federal law.

Supporters of the bill say the proposal’s language would allow cities or local governments to opt out, likely creating “dry counties” in some parts of the state. The proposed law would allow only those over 21 to buy, and would ban smoking marijuana in public or around minors.

Stephen Gutwillig, the California state director for the Drug Policy Alliance, a New York-based group that plans to raise money in favor of the measure, said he expected “a conservative implementation,” if passed.

“I think most local jurisdictions are not going to authorize sales,” Mr. Gutwillig said.

Local opt-out provisions are part of a strategy to allay people’s fears about adding another legal vice and to help capture a group considered key to passing the bill: non-pot-smoking swing voters.

“There’s going to be a large sector of the electorate that would never do this themselves that’s going to sort out what the harm would be versus what the supposed good would be,” said Frank Schubert, a longtime California political strategist who opposes the bill. “That’s where the election is going to be won.”

But Dan Newman, a San Francisco-based strategist for the ballot measure, said he expected broad, bipartisan support for the bill, especially among those Californians worried about the recession.

“Voters’ No. 1 concern right now is the budget and the economy,” Mr. Newman said, “which makes them look particularly favorable at something that will bring in more than $1 billion a year.” Opponents, however, question that figure — which is based on a 2009 report from the Board of Equalization, which oversees taxes in the state — and argue that whatever income is brought in will be spent dealing with more marijuana-related crimes.

Mr. Standish said: “We have a hard enough time now with drunk drivers on the road. This is just going to add to the problems.”

He added: “I cannot think of one crime scene I’ve been to where people said, ‘Thank God the person was just under the influence of marijuana.’ ”

Advocates of the measure plan to counter what is expected to be a strong law enforcement opposition with advertisements like one scheduled to be broadcast on radio in San Francisco and Los Angeles starting on Monday. The advertisements will feature a former deputy sheriff saying the war on marijuana has failed.

“It’s time to control it,” he concludes, “and tax it.”

Not everyone in the community is supportive. Don Duncan, a co-founder of Americans for Safe Access, which lobbies for medical marijuana, said he had reservations about the prospect of casual users joining the ranks of those with prescriptions.

“The taxation and regulation of cannabis at the local or state level may or may not improve conditions for medical cannabis patients,” Mr. Duncan said in an e-mail message. He added that issues like “police harassment and the price and quality of medicine might arise if legalization for recreational users occurs.”

Still, the idea of legal marijuana does not seem too far-fetched to people like Shelley Kutilek, a San Francisco resident, loyal church employee and registered California voter, who said she would vote “yes” in November.

“It’s no worse than alcohol,” said Ms. Kutilek, 30, an administrator at Metropolitan Community Church of San Francisco. “Drunk people get really belligerent. I don’t know anybody who gets belligerent on marijuana. They just get chill.”

‘THE CANADIAN BANKING FALLACY,’ by Peter Boone & Simon Johnson at baselinescenario .com.

In Uncategorized on March 26, 2010 at 13:33

The Canadian Banking Fallacy.

By Peter Boone and Simon Johnson

As a serious financial reform debate heats up in the Senate, defenders of the new banking status quo in the United States today – more highly concentrated than before 2008, with six megabanks implicitly deemed “too big to fail” – often lead with the argument, “Canada has only five big banks and there was no crisis.”  The implication is clear: We should embrace concentrated megabanks and even go further down the route; if the Canadians can do it safely, so can we.

It is true that during 2008 four of all Canada’s major banks managed to earn a profit, all five were profitable in 2009, and none required an explicit taxpayer bailout.  In fact, there were no bank collapses in Canada even during the Great Depression, and in recent years there have only been two small bank failures in the entire country.

Advocates for a Canadian-type banking system argue this success is the outcome of industry structure and strong regulation.  The CEOs of Canada’s five banks work literally within a few hundred meters of each other in downtown Toronto.  This makes it easy to monitor banks.  They also have smart-sounding requirements imposed by the government:  if you take out a loan over 80% of a home’s value, then you must take out mortgage insurance.  The banks were required to keep at least 7% tier one capital, and they had a leverage restriction so that total assets relative to equity (and capital) was limited.

But is it really true that such constraints necessarily make banks safer, even in Canada?

Despite supposedly tougher regulation and similar leverage limits on paper, Canadian banks were actually significantly more leveraged – and therefore more risky – than well-run American commercial banks.  For example JP Morgan was 13 times leveraged at the end of 2008, and Wells Fargo was 11 times leveraged.  Canada’s five largest banks averaged 19 times leveraged, with the largest bank, Royal Bank of Canada, 23 times leveraged.   It is a similar story for tier one capital (with a higher number being safer):  JP Morgan had 10.9% percent at end 2008 while Royal Bank of Canada had just 9% percent.  JP Morgan and other US banks also typically had more tangible common equity – another measure of the buffer against losses – than did Canadian Banks.

If Canadian banks were more leveraged and less capitalized, did something else make their assets safer?  The answer is yes – guarantees provided by the government of Canada.  Today over half of Canadian mortgages are effectively guaranteed by the government, with banks paying a low price to insure the mortgages.  Virtually all mortgages where the loan to value ratio is greater than 80% are guaranteed indirectly or directly by the Canadian Mortgage and Housing Corporation (i.e., the government takes the risk of the riskiest assets – nice deal if you can get it).  The system works well for banks; they originate mortgages, then pass on the risk to government agencies.  The US, of course, had Fannie Mae and Freddie Mac, but lending standards slipped and those agencies could not resist a plunge into assets more risky than prime mortgages.  Let’s see how long Canada resists that temptation.

The other systemic strength of the Canadian system is camaraderie between the regulators, the Bank of Canada, and the individual banks.  This oligopoly means banks can make profits in rough times – they can charge higher prices to customers and can raise funds more cheaply, in part due to the knowledge that no politician would dare bankrupt them.  During the height of the crisis in February 2009, the CEO of Toronto Dominion Bank brazenly pitched investors: “Maybe not explicitly, but what are the chances that TD Bank is not going to be bailed out if it did something stupid?”  In other words:  don’t bother looking at how dumb or smart we are, the Canadian government is there to make sure creditors never lose a cent. With such ready access to taxpayer bailouts, Canadian banks need little capital, they naturally make large profit margins, and they can raise money even if they act badly.

Proposing a Canadian-type model to create stability in the U.S. is, to be blunt, nonsense.  We would need to merge our banks into even fewer banking giants, and then re-inflate Fannie Mae and Freddie Mac to guarantee some of the riskiest parts of the bank’s portfolios.  With our handful of new “hyper megabanks”, we’d have to count on our political system to prevent our banks from going wild; Canada may be able to do this (in our view, the jury is still out), but what are the odds this would work in Washington?  This would require an enormous leap of faith in our regulatory system immediately after it managed to fail repeatedly and spectacularly over thirty years (see 13 Bankers, out next week, for the awful details).  Who can be confident our powerful corporate lobbies, hired politicians, and captured regulators can become so Canadian so soon?

The stakes would be even greater with these mega banks. When such large banks collapse they can take down the finances of entire nations.  We don’t need to look far to see how “Canadian-type systems” eventually fail.  Britain’s largest bank, the Royal Bank of Scotland, grew to control assets equal to around 1.7 times British GDP before it spectacularly fell apart and required near complete nationalization in 2008-09.  In Ireland the three largest banks’ assets combined reached roughly 2.5 times GDP before they collapsed.  Today all the major Canadian banks have ambitious international expansion plans – let’s see how long their historically safe system survives the new hubris of its managers.

There’s no doubt that during the coming months many people will advocate some form of a Canadian banking system in America.  Our largest banks and their lobbyists on Capitol Hill will love the idea.  For some desperate politicians it may become a miracle drug:  a new “safer” system that will lend to homeowners and provide financing to Washington, while permitting politicians and regulators to avoid tough steps.  Let’s hope this elixir doesn’t gain traction; smaller banks with a lot more capital – and able to fail when they act stupid – are what U.S. citizens and taxpayers really need.

An edited version of this post appeared on the NYT’s Economix this morning; it is used here with permission.  If you wish to reproduce the entire post, please contact the New York Times.

‘COVERING UP AMERICAN WAR CRIMES, FROM BAGHDAD TO NEW YORK,’ by Charles Glass at Information Clearing House. com.

In Uncategorized on March 26, 2010 at 13:22

Covering up American War Crimes, From Baghdad to New York

By Charles Glass

March 25, 2010 “Taki’s” — BBC correspondent John Simpson reported on March 4 that the number of defects in newborn babies in the Iraqi town of Fallujah had risen dramatically since the American assault there at the end of 2004. Some people in the town blame the abnormalities in their children on whatever chemicals the US Marines may have used in their conquest of the Sunni Muslim redoubt. Dr. Samira al-Ani, a paediatrician at Fallujah’s General Hospital, told Simpson that two or three children were born each day with serious cardiac problems. Before the first American attack on Fallujah in two years earlier, she noticed similar ailments in one baby every two months. “I have nothing documented,” she admitted, “but I can tell you that year by year the number [is] increasing.”

The Iraqi government, which supported the American attack with troops of its own, denies there has been any increase. “The US military authorities,” Simpson said, “are absolutely correct when they say they are not aware of any official reports indicating an increase in birth defects in Fallujah—no official reports exist.” Nor are any likely to. By any standard, though, this was a big story. John Simpson is a serious journalist and a friend, and I listened carefully to his report that morning on the BBC World Service. I waited in vain for the New York Times, Washington Post, and other serious American journals to take up the story. All I read was a brief item on the CBS News website quoting Simpson.

“The US government does not want it known that it was using chemicals on human beings in a country whose leader it overthrew ostensibly because he retained the capacity to do the same thing.”

The US denied it anyway, perhaps out of habit. Military spokesman Michael Fitzpatrick responded predictably, “No studies to date have indicated environmental issues resulting in specific health issues.” But, as Simpson said, there have not been any studies. American spokesmen were reluctantly forced to admit the use of White Phosphorous—or Willie Pete, as the troops call it—in Fallujah when someone noticed that Field Artillery Magazine, a U. S. Army publication, had already documented its deployment in its March/April 2005 edition. The magazine wrote, “We fired ‘shake and bake’ missions at the insurgents, using WP [White Phosphorous] to flush them out and HE [High Explosives] to take them out.” After Dahr Jamail, a brilliant freelance journalist, reported during the battle in 2004 that American forces were using WP on Iraqis, Project Censored gave him an award for the second most under-reported story of the year. It is still under-reported, but it is not difficult to understand why. The US government does not want it known that it was using chemicals on human beings in a country whose leader it overthrew ostensibly because he retained the capacity to do the same thing. And the US Treasury does not want to compensate foreigners for any harm its troops might have done. Let us turn now to New York and what has become the secular-sacred site of the former World Trade Center.

The government this month finally settled claims by 10,000 workers on the Ground Zero clean-up by agreeing to pay $657.5 million for the debilitating effects of the asbestos and other poisons they were exposed to. That’s an average of $65,750 a head, less the lawyers’ share. It doesn’t sound like much, but they’re doing better than anyone in Fallujah. There are precedents for government resistance to admitting responsibility. American Vietnam veterans crippled by the dioxin they dropped all over Vietnam waited many years for the government to acknowledge their plight. At first, the government resisted the connection between dioxin and the veterans’ cancer, Parkinson’s, and other fatal illnesses. By the time the government paid anything, the vets were observing that their children were being born with severe birth defects from dioxin in Agent Orange and other herbicides unleashed on the South Vietnamese countryside. Their children’s congenital deformities included spina bifida and other horrors that may go for generations to come. The Department of Veterans Affairs didn’t send them any money until 2003—thirty years after the last barrel of poison was dropped on Vietnam. Even that was restricted to 7,520 of the 99,226 veterans who claimed to have been affected.

While dioxin disabled thousands of American service personnel who merely handled it, as many as 4.8 million Vietnamese endured twenty-eight million gallons of toxic rain that drenched their skins, soaked their soil, and polluted their rivers and groundwater for ten years. As with the American war vets, then-unborn children were also affected. Vietnam has one of the world’s highest levels of birth defects, concentrated in the south where the American forced deployed most of the chemicals. Five children out of one hundred are born with serious abnormalities, including missing limbs, spina bifida, twisted or missing internal organs and grotesque malformations that have made their survival impossible. While reluctantly accepting a link between dioxin and birth defects in American service personnel’s children, the US denies any connection when it comes to Vietnamese. I guess it’s just one of those strange anomalies that nature throws up every so often, like Los Angeles police chief Daryl Gates’ observation that the disproportion in African-American deaths from the police choking was due to the fact that “blacks might be more likely to die from chokeholds because their arteries do not open as fast as they do on ‘normal people’.” Perhaps Vietnamese born after 1961, when Operation Ranch Hand to defoliate South Vietnam began, were just not normal anyway.

The abnormal people of Iraq remember that the US denied Saddam Hussein’s use of chemical weapons on its Kurdish citizens. In those days, Saddam was an American ally. When freelance journalist Gwynne Roberts brought back the soil samples from Hallabja that proved Saddam has gassed the Kurds, the US blamed the Iranians. That assessment became inoperative when condemning Saddam was politically useful. Now that the US has been caught using chemicals in the same country that the monster Saddam did, it admits using them on “insurgents” but not on civilians. It is hard in a city to blast chemicals at the people with guns and miss those who don’t have any. No matter. The US and Iraqi governments are blocking an investigation that would prove one way or another that White Phosphorous did any harm to Iraqi mothers and their children. It’s unlikely they’ll receive a cent for the next fifty years, if ever. But why the hell isn’t this a big story?

©2009 Taki’s Magazine. All rights reserved.

‘HAIL THE CONQUERING PROFESSOR,’ by Maureen Dowd in the N.Y.Times.

In Uncategorized on March 24, 2010 at 11:13

Hail the Conquering Professor



Published: March 23, 2010


The Democrats were walking around in a state of shock.

Holy cow, they were saying to themselves. We’re not total wimps! We don’t have to sit around and let ourselves be slapped silly by Republican bullies and Tea Party scaremongers. We can actually get something done if we suck it up and find a way to pull together.

One minute they were legislative losers, squabbling and scrambling for the off-ramps. The next they were history-makers, sharing chest bumps and goose bumps at the White House. How had the lofty president and the wily speaker suddenly steered them off Jimmy Carter Highway and onto F.D.R. Drive?

One gleeful and relieved White House aide called the bill-signing ceremony in the East Room, packed with Democratic lawmakers snapping pictures and acting like obstreperous children, “an Old Spice moment.”

“You could see it in their faces,” he said. “It was kind of like that Old Spice ad where the guy smacked himself on the cheeks and said, ‘Wow, that feels good!’ It was like they smacked themselves on the cheeks and said, ‘You are a member of Congress and now you can start doing things. Wow, that feels good!’ ”

David Axelrod agreed: “It was incredibly moving to be in that room today. This was such an emotional high that I actually saw congressmen hugging senators. People are so used to low expectations around here that the idea that you could do something big and meaningful is exhilarating.”

The Democrats held hands, held their breath and jumped over the cliff — not that it was a radical bill. And, mirabile dictu, nothing awful happened. The markets went up. The polls went up. Their confidence went up.

John McCain threatened Democrats, telling an Arizona radio affiliate that “there will be no cooperation for the rest of the year” from Republicans. So much for “Country First.” (He’s so clueless that he came on the Senate floor and said, “Let’s stop this legislation, and let’s start from the beginning.”)

But David Frum, the former W. speechwriter, conceded that in trying to turn health care into Obama’s Waterloo — a replay of the Clintons’ disaster in 1994 — Republicans may have made it their own Waterloo.

“We followed the most radical voices in the party and the movement, and they led us to abject and irreversible defeat,” Frum wrote on his blog, adding: “Conservative talkers on Fox and talk radio had whipped the Republican voting base into such a frenzy that deal-making was rendered impossible. How do you negotiate with somebody who wants to murder your grandmother?”

Some base members of the Republican base showed themselves as the racist Neanderthals they are.

Protesters outside the Capitol on Saturday called two black congressmen, the civil rights hero John Lewis of Georgia and Andre Carson of Indiana, a racial epithet as they walked by. Another, Representative Emanuel Cleaver of Missouri, was called that epithet and got spit on. Barney Frank of Massachusetts was called an anti-gay slur. The anti-abortion Democrat Bart Stupak was called a “baby killer” by Texas Republican Representative Randy Neugebauer, who says he’s had a “tremendous outpouring” of support for his outburst.

It was disgusting. And for the Democrats who had battled each other through every twist and turn of health care, it was unifying.

Senator Al Franken, who had blown up at Axelrod after Obama held a televised session with Senate Democrats in February, arguing that the president wasn’t fighting hard enough or strategizing well enough, sent Axelrod a congratulatory note after the bill passed.

“You’re welcome,” Franken wrote. He added an asterisk: “Joke. I used to be in comedy.”

Only a week ago, Fred Hiatt, The Washington Post’s editorial page editor, had written that Obama did not seem happy in his job, that he projected “weariness and duty” instead of the “jauntiness” of F.D.R. and J.F.K.

But Tuesday, the president was joyous, and that infectious smile so sparsely offered over the last two years lit up the East Room. Many Democratic lawmakers and Obama supporters were frustrated at the president’s failure to show more spine earlier. As Representative Louise Slaughter told The Times in February, “I wouldn’t mind seeing a little more toughness here or there.”

Until now, Obama has gotten irritated at those who cast Washington affairs in Manichean terms of strength or weakness and red or blue. He wanted to reason, to compromise, to float in his ivory tower.

But at long last, when push came to shove, he shoved (and let Nancy push). He treated politics not as an intellectual exercise, but a political one. He realized that sometimes you can’t rise above it. You have to sink down into it. You have to stop being cerebral and get your hands dirty. You can fight fear with power.

The Chicago pol in the Oval has had to learn one of the great American truths: You’ve got to slap the bully in the face. He’s a consensus-building “warrior,” Axelrod boasted to Charlie Rose.

The president, who has been reading Edmund Morris’s “The Rise of Theodore Roosevelt,” has always spoken with a soft voice. Now he’s wielded the big stick.

‘VOLCKER & BERNANKE: SO CLOSE & YET SO FAR, ‘ by Simon Johnson at baselinescenario .com.

In Uncategorized on March 23, 2010 at 11:33

Volcker And Bernanke: So Close And Yet So Far

By Simon Johnson

In case you were wondering, Paul Volcker is still pressing hard for the Senate (and Congress, at the end of the day) to adopt some version of both “Volcker Rules”.  It’s an uphill struggle – the proposed ban on proprietary trading (i.e., excessive risk-taking by government-backed banks) is holding on by its fingernails in the Dodd bill and the prospective cap on bank size is completely missing.  But Mr. Volcker does not give up so easily – expect a firm yet polite diplomatic offensive from his side (although the extent of White House support remains unclear), including some hallmark tough public statements.  It’s all or nothing now for both Volcker and the rest of us.

But at the same time as the legislative prospects look bleak (although not impossible), we should recognize that Paul Volcker has already won important adherents to his general philosophy on big banks, including – most amazingly of late – Ben Bernanke, at least in part.  In a speech Saturday, Bernanke was blunt,

“It is unconscionable that the fate of the world economy should be so closely tied to the fortunes of a relatively small number of giant financial firms. If we achieve nothing else in the wake of the crisis, we must ensure that we never again face such a situation [like fall 2008].”

You may dismiss this as empty rhetoric, but there is a definite shift in emphasis here for Bernanke – months of pressure from the outside, the clear drop in prestige of the Fed on Capitol Hill, and the pressure from Paul Volcker is definitely having an impact.

Bernanke finally understands the “doom loop” – in fact, he provides a nice succinct summary:

“The costs to all of us of having firms deemed too big to fail were stunningly evident during the days in which the financial system teetered near collapse. But the existence of too-big-to-fail firms also imposes heavy costs on our financial system even in more placid times. Perhaps most important, if a firm is publicly perceived as too big, or interconnected, or systemically critical for the authorities to permit its failure, its creditors and counterparties have less incentive to evaluate the quality of the firm’s business model, its management, and its risk-taking behavior. As a result, such firms face limited market discipline, allowing them to obtain funding on better terms than the quality or riskiness of their business would merit and giving them incentives to take on excessive risks.”

He also expands on an important, related point – that the presence of “too big to fail” is simply unfair and really should be opposed by all clear thinking businesspeople who don’t run massive banks (aside: someone kindly point this out to the Chamber of Commerce – they are undermining their people),

“Having institutions that are too big to fail also creates competitive inequities that may prevent our most productive and innovative firms from prospering. In an environment of fair competition, smaller firms should have a chance to outperform larger companies. By the same token, firms that do not make the grade should exit, freeing up resources for other uses…. In short, to have a competitive, vital, and innovative financial system in which market discipline encourages efficiency and controls risk, including risks to the system as a whole, we have to end the too-big-to-fail problem once and for all.”

Bernanke now endorses the first Volcker Rule, “Some proposals have been made to limit the scope and activities of financial institutions, and I think a number of those ideas are worth careful consideration. Certainly, supervisors should be empowered to limit the involvement of firms in inappropriately risky activities.”

But he is still hampered by the illusion that there is any evidence we need megabanks in their current form – let alone in their likely, much larger, future form.  Let me be blunt here, as the legislative agenda presses itself upon us.

I’ve discussed this issue – in public where possible and in private when there was no other option – with top finance experts, leading lawyers, preeminent bankers (including from TBTF institutions), and our country’s most prominent policymakers.  And I have testified on this question before Congress, including to the Joint Economic Committee, the House Financial Services Committee, and – most recently – the Senate Banking Committee, where leading spokesmen for big banks were also present.

Mr. Bernanke, with all due respect: there is simply no evidence to support the assertion that, “our technologically sophisticated and globalized economy will still need large, complex, and internationally active financial firms to meet the needs of multinational firms, to facilitate international flows of goods and capital, and to take advantage of economies of scale and scope,” at least if this implies – as it appeared to on Saturday – we need banks at or close to their current size.

We can settle this in a simple and professional manner.  Ask your staff to contact me with the evidence – or, if you prefer, simply have a Fed governor provide the compelling facts in a speech and/or have a staff member put out the technical details in a working paper.

There is no compelling case for today’s massive banks, yet the downside to having institutions with their current incentives and beliefs is clear and awful.  Think hard: what has so far changed for the better in the system that brought us to the brink of global collapse in September 2008?  In this context, Mr. Bernanke’s three part proposal for dealing with these huge banks should leave us all quite queasy:

He wants tighter regulation.  Fine, but what happens next time there is “let it all go free” president again – a Reagan or a Bush?  Regulation cannot be the answer; there must be legislation.

Improving the clearing and settlement of derivatives is also fine.  But why not also make the banks involved smaller – given that a bankruptcy of a future megabank could easily involve millions of open derivative positions?  This would also make complete sense as a complementary measure – unless you think society would lose greatly from the absence of megabanks.  Again, show us the evidence.

A resolution authority is not a bad idea.  But everyone involved in rescuing the big banks with unconditional guarantees in spring 2009 insists on one point – if they had run any kind of FDIC-type resolution process, this would have been prohibitively expensive to the taxpayer.  You simply cannot have this both ways – either resolution/bankruptcy was a real option in early 2009 (as we argued) or it was not (as Mr. Geithner argues), but in that case the resolution authority (and also living wills, by the way) would change precisely nothing.

Mr. Bernanke needs to face some unpleasant realities.  Because of the various actions – some unavoidable and some not – it took in saving Too Big To Fail financial institutions during 2008-09, the Federal Reserve is now looked up with grave suspicion by a growing number of people on Capitol Hill.

The cherished independence of the Fed is now called into question – and losing this could end up being a huge consequence of the irresponsible behavior and effective blackmail exercised by megabanks – who still say, implicitly, “bail us all out, personally and generously, or the world economy will suffer”.

Mr. Volcker sees all this and wants to move preemptively to cap the size of our largest banks.  Mr. Bernanke has one last window in which to follow suit (e.g., lobbying Barney Frank could still be effective).  In a month it could be too late – the legislative cards are now being dealt.

Mr. Bernanke is a brilliant academic and, at this stage, a most experienced policymaker.  What is holding him back?


In Uncategorized on March 22, 2010 at 13:17

Which sectors spring forward?


Saturday marks the first day of spring, and if history is any indication, the stock market is ready to bloom.

Winter’s Santa rallies and the January Effect may garner more attention, but spring is an unusually bullish season for stocks. Over the last 30 years, the S&P 500 index (.SPX) has climbed an average of 1.8% in April and 1.5% in May, making that stretch the best back-to-back months of the year — outperforming even the typical rallies of November and December.

Recently, those hefty returns have stretched into a third month. Over the past 10 years, the three-month period from March through May has yielded by far the strongest results for stocks and ETFs, says Ryan Detrick, chief technical strategist at Schaeffer’s Investment Research.

Of course, these effects are often dwarfed by larger economic trends and analysts warn against putting too much faith in the position of earth relative to the sun. For example, “last year’s rally helped strengthen the seasonal averages,” Detrick says.

Still, market watchers agree there are real cyclical patterns in seasonal trading. Investors who exited stocks after the holidays may spot more lower valuations in the spring – at least in some sectors. “You get a dip in January and February,” says Marc Pado, U.S. market strategist at Cantor Fitzgerald. “You come down, you hit a low, and then you see there’s an opportunity to jump in and then they move back into the sectors.”

SmartMoney wanted to find out which sectors perform best during the spring, so we gathered the monthly returns of 12 sectors for the past decade and crunched the numbers ourselves. Here’s what we found.

Business services and consumer services were the best-performing sectors for the most spring months (March, April and May) over the last 10 years. The industrials sector was a close second. And energy performed well, too.

Why are business services a springtime buy? Let’s take a closer look at the sector. It’s made up of employment services, services to buildings and dwellings and office administrative services. Analysts say those kinds of businesses benefit during the spring because they’re most likely to be undervalued in late winter.

“February is a tough month for those groups because you get IT spending in Q4, and all the good stuff is baked into the stock — then you come back down after earnings come out,” says Pado. Essentially, he adds, “February is a correction, so what you’re doing is you’re balancing off of a seasonal low – anything business, IT services-related will do something like that.” The effect is probably the strongest in years marked by good economic performance as well, says Pado.

Take Automatic Data Processing , for example. The payment processing firm rose 8.9% in March through May of 2008, 12% during the period in 2009, and is up 8% so far this March. ADP also declared a dividend on March 10 of this year, for 34 cents. Paychex  is up more than 8% already in the month of March.

Like business services, consumer services leans on the fourth quarter, says Pado. So there, too, a pullback in January and February leads to an eventual opportunity in the spring.

Industrials also show a spring boom, which some market watchers say is unexpected. The bump could be the result of companies assessing the need for inventory, choosing to deplete leftover holiday inventory into the first quarter, and then starting to rebuild in the second-quarter spring months, says Pado. “There are always seasonal tendencies — just like you buy retail in September.”

Not every sector appears to enjoy the spring effect. Among our 12 sectors, utilities were the worst monthly performer, posting the weakest results of any sector in seven out of the 30 months we tracked. They may be victims of portfolio adjustments, says Doug Roberts, chief investment strategist for “If you’re going into a riskier trade, then you dump the less risky — so utilities versus consumer, it’s the flip side of the coin,” he says. “Utilities are pretty viewed as less risky, and all the sudden they think they can go into something with more zip.”

The spring also brings sector rotations that follow distinct patterns, says Roberts. “In the old days they used to look at crop reports, and you’d see bumps. You also see that in January, because you’re rebalancing, you tend to have a little pop in small stocks that can continue for a while.”

Another explanation could be the tax trade, says Roberts. “They sell the losers tax-time, and then people rotate back into them.”

And then there’s the weather. Everybody always buys utilities going into winter, says Pado. “I always laugh when there’s a cold spell in the East Coast, then you get this pop in the energy stocks and crude just because you have that cold weather. It’s as if you didn’t know it was going to come – yes, you get exceptional stuff like the snow that we had this year — but even a mild cold spell, it still seems to come as a shock.” When winter is over, so is that trade.