The New York Times has an article called “Equity Loans as Next Round in Credit Crisis.” Home equity loans represent second-lien holders. It basically means home equity loan creditors don’t get paid until first-lien holders (usually, the original mortgage) gets paid in full. Now with homes worth less, these second-lien holders are looking at potentially huge losses. Hence, they are using a bit of the legal standing that they do have to try to reduce some of their loss. In some cases, it is just denial. However, these creditors would rather go down fighting than concede defeat. In an age of corporatism, it will probably be the people in the middle who will suffer the most.
March 28, 2008
March 27, 2008
I recently finished up reading “Sure You’re Joking, Mr. Feynman!” It is a good book, although some of the details of some of later stories exceed mentioning in polite company. The interview ties many of the disparate aspects of the book together. I think the bit about the atomic bomb was particularly important. We are often embark on debatable tasks for good reasons. When we concentrate on doing the task, sometimes the reasons and the pretext changes. It is therefore essential to revisit our decisions. Feynman is, without a doubt, a brilliant man who loved life. However, he left behind a terrible gift that has the potential of putting human survival in jeopardy. This is the reevaluation that we, the inheritors of Feynman’s legacy, must consider: will we keep maintaining the machine of our potential destruction for the illusion of safety it provides, or will we step out from the shadow and dismantle it for a more hopeful future?
The real issue is probably not what the answer to the question is, but rather how many will have the imagination to even ask it in the first place.
March 26, 2008
Frontline ran an amazing two part program called “Bush’s War.” It can be viewed online here. It isn’t a complete picture of Iraq, however it gives insight into the behind-the-scenes political battles that took place surrounding the war.
I don’t want to belabor any of the points. However, a couple things are clear. First, Rumsfeld was hopelessly deluded about the war. The disastrous post-invasion looting was due directly to his incompetence. The torture of prisoners for information is something he directly authorized.
Second, Rice failed her way upwards. She was a central piece to the intelligence failure on September 11th. Although, in her defense, it is unclear how willing higher ups in the administration were willing to listen. She is the adamant stay-the-course adherent. Her advocacy of Clear-Hold-Build, while sound is way too little, way too late. We don’t have the troop levels. We spent the political capital we had in Iraq. There is not enough popular support here at home. Even if we had the strategy from the get go, and the resources, it is unclear how effectively it would work.
Finally, Bush is one of the worst executives in history. He is in love with his own myth: the down to brass tacks, no nonsense, straight-talking, brave commander-in-chief. He lies to himself. His largely unconfrontational personality coupled with the perfect storm of persuasive bureaucrats such as Cheney, Rumsfeld, Powell or Tenet created a culture of exclusion. The alienation of leaving people out of the loop created tensions and frayed his administration. There is one decisive reason for this: the president was exceptionally lazy. Not lazy physically, lazy intellectually. He didn’t want to be president. He wanted to play president. He wanted to make big decisions. He didn’t want to get bogged down in details. He wanted to look people in the eye, see their soul, and trust his gut. In the short term, it is Bush’s failure. However, in the long view, it is America’s failure. This legacy will be passed onto the next president and the repercussions will be laid at the feet of future generations of Americans. There is no way history will judge anyone kindly in this debacle, including the American people.
March 25, 2008
The New Yorker has a piece by James Surowiecki called “Too Dumb to Fail.” The moral hazard that the action sets up should be obvious to anyone. The underlying point is the same. Any numb-skull can “loan” people money that isn’t going to get returned. The reason the banks were justified in making there enormous profits was because they loaned people money who were going to pay back back huge premiums on the initial money lent. Now it turns out that these financial wizards are not the sober judges of character they claimed to be. Now they are rushing for the aid of the government to save them from all the borrowers who cheated them. Who could have predicted it? As it turns out, anyone who looked seriously at the problem.
Eliot Spitzer, yes that one, wrote an editorial in the Washington Post that directly links the Bush Administration to predatory lending practices. This takes some explanation so stay with me. As we have examined before, subprime is not the cause of the current credit woes. It was merely the first market to go because it was the sketchiest. It was just the canary in the coal mine. When the housing market took a dive, borrowers found that they have a negative equity in their home, that is they owe more on their home than it is worth. Every borrower faced with negative equity has a huge incentive to just walk away from their home. Why would any sensible borrower want to pay a significant amount over the price of their home in addition to the interest on that principle? The answer is that they won’t. In no recourse that is pretty much the end of it, banks foreclose, the people move out and it is a done deal.
In the meantime, the banks used exotic accounting practices, including the infamous mark-to-market accounting, to try to predict the value of their investments. Mark-to-market books a profit immediately. It looks great on quarter reports since the entire value of the deal comes in as one lump sum. For example, a loan for $100,000 at 6% that is paid over 30 years would immediately be booked as a $115,838.53 profit. However, the problem is that when the asset goes south, you need to revise and restate earnings. The Enron debacle mostly revolved around them trying to hide their massive liabilities using creative accounting practices through special purpose entities. It should be noted, Enron did this with the help and support of many investment banks. It was a house of cards waiting to fall just like this current debacle. Just imagine the result on a balance sheet when a $115,838.53 profit, booked quarters ago turns into a $20,000 loss. That is what is happening to the fundamentals of each one of these securities every time a house is foreclosed. Bears Sterns had tremendous leverage, that is for every dollar they kept in reserve they lent about $30. This basically means about a 3% loss wipes them out. Now imagine a housing correction of 10%, 20%, 30% and we can easily see why such a bank is in trouble.
Eliot Spitzer and other attorney generals wanted to enforce the predatory lending laws in their states. The Bush Administration used an obscure government agency known as the Office of the Comptroller of the Currency to prevent states from enacting their consumer protection laws. This is not “gee whiz” we didn’t know, it is the Bush Administration knew about the problem and actively sought to enable it. In many ways it is equivalent to the corruption we see in the Iraq war reconstruction. Corporations were finding these deals extraordinarily (and fictitiously) profitable and they used their influence at the federal level to protect it. The ultimate result is a disaster for everyone. The hardest immediate losses will be foreign governments who flooded our market with capital to help American consumers to continue to purchase their goods. Much of that debt will simply be bad, but this country’s economy is going to be hamstrung for a very long trying to meet our debt obligations. The debt is going to be particularly crippling when faced with the prospect of trying to rebuild our infrastructure while meeting our prior obligations to foreign lenders.
In short, there is no such thing as too big or too dumb to fail because this nation is proving both of those premises false on their face.
March 24, 2008
Norman Solomon goes through the presidential war rhetoric and the way the American media acts as a propaganda wing of the government. The key point is that when media just reiterates what the government is saying and acts in concert; the media isn’t acting as a check on the government, it is an enabler.
It should be said that there are independent news outlets, such as Democracy Now! or The Real News that do a much better job. However, these sources remain outside the mainstream. The most glaring difficulty I see is the news media has a tremendously tough time sorting through an official news source that lie to them. This difficultly has arisen mostly due to time constraints. There is literally less effort going into each news story today compared to the past. This is part of the Rupert Murdoch revolution in mass media.
The most serious aspect of propaganda is not what is included, but rather what is left out. If we are unable to cull those who are consistently and unapologetically wrong, we will forever be hamstrung dealing with unending mountains of false or misleading information.
March 22, 2008
So, it is that time of the year again. The NCAA Men’s Basketball tournament is upon us. Raymond Chen has his predictions up. In years past, he has used seating capacity of the arena or the length the President/Chancellor of the University has been in charge. When filling out my own predictions, I try to pick some of the more likely upsets based on record, whether or not I feel the conference the team is from is overrated, or the team is overrated, impression of how I feel the coach has done in the tournament in the past and whether I feel they can achieve that level of success again. It is very unscientific and subjective.
I also find myself somewhat flabbergasted that Chen managed to pick Sienna, Villanova, Kansas St. and San Diego (and a little bit jealous). So, maybe he is on to something.
In addition, I feel that I have to pick some upsets because I know there are going to be upsets. However, I never really sat down and determined if that was actually a rational thing to do.
First of all, let’s talk about what is definitely irrational: random picking based on weights. I noticed a bracket simulator that assigned picks basically by picking a random number after assigning each team a relative likelihood of winning. It gives you an interesting bracket, but the strategy is not in fact rational. If you were interested in maximizing your chances of winning you’d pick the team with the best chance of winning every time. Or would you?
Let’s assume the NCAA selection committee is totally unbiased and correctly assigning seeds. Knowing the majority of people follow the NCAA’s recommendation, does it make sense to make a suboptimal bracket that virtually guarantees an exclusive victory? I don’t know, let’s figure it out.
To determine a rational strategy, we have to start off with scoring. We’ll ignore the first game between the two 16 seeds because they aren’t included in most Pick ’ems. Generally, the scoring is based on correctly picking a winner multiplied by 2 raised what round the game was played (starting the count at 0 as is the want of computer scientists). Also, most Pick’ ems require a consistent bracket, that is a bracket where only the winners are allowed to play in the next round. I actually don’t know if would make sense to pick a team to lose in the first round, only to resurrect them later, but alas it is disallowed.
Definition of the NCAA Selection picker: Pick the team that is a lower seed. If two teams are the same seed from different regions, randomly pick one to be the winner with equal weighting.
Next time: how this selection algorithm actually performs against tournaments of the past.
March 21, 2008
This is why reality will always be stranger than fiction. PZ Myers, biologist and associate professor at the University of Minnesota, Morris, was not allowed to see an advance screening of the movie “Expelled: No Intelligence Allowed.” A movie he was interviewed for under false pretenses. Well, apparently the producers of the movie anticipated that PZ Myers might make such an attempt at their screening. However, what they didn’t seem realize was that Richard Dawkins was going to be in Minnesota for the 34th Annual Nation Conference of American Atheists. So while they kept Myers out, they let the Dawkins in. Apparently there was a Q and A session after the movie where Dawkins asked why PZ Myers had been, well, expelled from seeing the film. Here is an account from a Christian perspective. (h/t Chris)
I must say, Dawkins is a brave man. If it were me, I would watch the film, keep my mouth shut, and leave. However, it is exactly that type of tenacity which makes Dawkins such a strong advocate for reason, and entertaining to watch.
March 20, 2008
This is a little bit old, but wow. Massimo Calabresi, I think Greenwald just put you on notice.
March 19, 2008
History is a mighty dramos, enacted upon the theatre of times, with suns for lamps and eternity for a background. -Thomas Carlyle
March 18, 2008
The company he ran (into the insolvency) was bought out by JPMorgan using $30 billion of American citizen’s money. Remember folks, it doesn’t matter if they tax it, borrow it, or print it, at the end of the day it is all about the reducing your purchasing power.
Nobody expects an investment bank to be a charitable institution, but Bear has a particularly nasty reputation. As Gretchen Morgenson of The New York Times reminds us, Bear “has often operated in the gray areas of Wall Street and with an aggressive, brass-knuckles approach.”
Bear was a major promoter of the most questionable subprime lenders. It lured customers into two of its own hedge funds that were among the first to go bust in the current crisis. And it’s a bad financial citizen: the last time the Fed tried to contain a financial crisis, after the collapse of Long-Term Capital Management in 1998, Bear refused to participate in the rescue operation.
Bear, in other words, deserved to be allowed to fail — both on the merits and to teach Wall Street not to expect someone else to clean up its messes.
But the Fed is rescuing them anyway, with your purchasing power. And people like Cayne will still be on top, completely unaccountable. As Krugman explains, we have to save the system. Yeah, well this system is flawed and it is taking us all to destruction anyway. Maybe it is time to recognize that it has failed and move on to something better. A system that values the environment, social equality, human rights and dignity. One that isn’t based on asset ownership, but rather labor and contribution. This isn’t idealism talking, it is pragmatism. As FDR noted, “we have always known that heedless self-interest was bad morals; we know now that it is bad economics.” So, why did we build the whole system based on heedless self-interest again?