Esoteric Dissertations from a One-Track Mind

March 13, 2009

Cramer Becomes Inarticulate

Filed under: capitalism, economy, media — Tags: , , , — codesmithy @ 9:05 am

Crooks and Liars has Jim Cramer’s appearance on the Daily Show.  There was definitely a moment of who-are-going-to-believe as Cramer tries to ignore the fact that Stewart has just played a tape where Cramer admitted that he manipulated the market and following it up with example on how to start a rumor and short Apple’s stock.   

Cramer was all over the map, advocating criminal indictments, kangaroo courts, and positing his street-cred as an Obama voter.  To me, he never seemed to answer the fundamental question: what does he see as CNBC’s role as an institution?  Cramer, lamely, kept admitting that CNBC needed to do better without ever striking at the heart of the issue.  

The focal point of Stewart’s criticism was how CNBC pushes itself as a reliable get-rich-quick network.  When Santelli complains about bailing out loser’s mortgages, he fails to mention that no home owner is leveraged 30 to 1, unlike many investment banks that we are now pumping money into.  The unbelievable sense of entitlement that the executives of bailed out firms demonstrate when simultaneously asking the government for money while threatening dire consequences if their demands aren’t met shows the accountability free and disconnected nature of the Wall Street aristocracy.  Stewart likens it to Sherman’s march to the sea; it is more like Nero fiddling as Rome burns.

The problem is that CNBC could have been the early warning system to let the public know something was going wrong.  Instead, CNBC cheered on Wall Street, and why not?  Everyone was making money at least on paper.  In reality, executives walked away with the real cash for illusory short-term gains and people who entrusted their savings in the market are left holding the long-term losses.

Michael Parenti has an article called “Capitalism’s Self-inflicted Apocalypse.”  While, it might be a tad over-the-top.  The real economy is based on work, not gambling.  Until we get back to that foundation, and limit the tax that these middle-men can place on the productive economy by their arbitrary and obviously undeserved control of capital, disasters like the ones we are experiencing aren’t unexpected, they are inevitable.

February 25, 2009

Bank Re-privatization?

Filed under: capitalism, economy — Tags: , , , — codesmithy @ 9:50 am

The growing consensus seems to be that banks will be nationalized. The case for nationalizing banks is pretty much a done deal as far as economists are concerned.  Krugman lays out the case fairly well.  I hate the term “stockholders” in this context, because it isn’t really stockholders that are the problem, at least directly.  The problem is with the executives of the banking companies and the ridiculous moral hazard they are faced with.  Society has an incentive to keep these financial institutions afloat.  The executives have an incentive to run the businesses into the ground precisely because they know society will not allow these institutions to fail.  

Why not pay exorbitant bonuses to yourself as your company is losing money hand-over-fist?  Might as well do it now while you still can.  It is precisely this perverse incentive for those who actually run the company that necessitates a government intervention, especially if the institution is FDIC insured.

As such, it is an illusion to say stockholders control a company.  I’m a stockholder and in many cases the ownership is indirect through mutual funds.  It is a complete illusion to say I exercise any power in the corporations in which I own a stake.  Myself and stockholders like me theoretically have power but it is too dilute.  Locking me out from benefits of a bailout is nothing compared to the executives.  However, saying so requires an admission that there is a corporate master class, and such an admission is not considered polite when you are an academic talking to the proles in the New York Times.

Regardless, the nationalization that is proposed is always temporary.  Why?  I’m not saying that re-privatization is not a good idea, but I want someone to explain it to me.  And one key point I would like to see addressed is explaining how re-privatizing banks would ensure a crisis like this won’t happen again, because, to me, this current crisis seems to be a direct result of a private profit motive combined with successful lobbying.  

It is particularly galling because the alternative is so obvious.  Why not keep the banks nationalized and centralize them?  Why not lock out the for-profit motive of lending entirely?  The Federal Reserve system already effectively sets interest rates, why not just take it one step further and provide financial services directly to citizens and businesses in the form of a national bank. Citizens could deposit and obtain loans from this bank.  We could get rid of FDIC.  If people wanted to risk putting their money in private banks, fine.  But, if it goes under, the government is not going to come and bail you out.  I even imagine there are some economies of scale with such an approach, in that it may be more efficient than the current banking system.  It would also reduce the need for regulatory oversight of private banks.  At the very least, there wouldn’t be “stockholders” to screw things up.

January 13, 2009

The Enron Economy

Filed under: capitalism, economy, politics — Tags: , — codesmithy @ 8:49 am

Paul Krugman called our economy the Madoff economy back in December.  With all due respect to Mr. Krugman, I would tweak his description and call what we are experiencing the Enron economy.

60 Minutes ran an investigation into the price of oil.  It is not a coincidence that banks going south the same time the price of oil dropped.  

Oil has been the prime factor in the economy taking a turn for the worse.  Living in the suburbs, or exburbs became unaffordable because of transportation costs, rising food prices, and the rising prices of other basic necessities.  The root of all of these problems were oil prices.  Prices that were artificially inflated to feed speculative traders, and it was the productive economy that took the hit.  The direct parallel to this is what Enron was able to do to the California electricity market, not the Ponzi scheme Madoff set up.

The potential political ramifications were nearly as concerning.  Enron, whose former CEO and figurehead of the company had intimate ties with the Bush family, played a key part in getting Democratic governor Gray Davis recalled.  This resulted in the election of Republican governor Arnold Schwarzenegger.  The parallel between this and “drill, baby, drill” is left for the reader.

Enron was not just the story of one company, it was the canary in the coal-mine.  The first one to go.  Enron did not just implode on its own, it took the law firms, accounting firms, government regulators and investment banks to look the other way.  However, in reality, the facts are so much more damning than that.  It isn’t that these institutions merely looked the other way, they were actively complicit in the fraud.  No, they didn’t know everything, but that doesn’t mean they didn’t know anything.

When history looks back on the first decade of this new century, I think they will label it the age of fraud and negligence.    The defining characteristic will be incompetence, a contempt for the rule of law, and the failure of institutions to properly check and balance other centers of power.  It is all born out of a ideology that abhors rules, and the very notion of democratic governance.  Now, we are all experiencing its benefits.

September 17, 2008

The Credit Crisis: AIG Bailout

Filed under: economy — Tags: , — codesmithy @ 6:17 am

In yet another twist in the Credit Crisis, the Fed stepped in to give AIG a $85 billion loan.  AIG, and the other insurance companies like AIG that guaranteed the mortgage backed securities (through “credit default swaps”) are basically where the buck stops in the credit crisis.  Well, not exactly, if the insurance companies go bankrupt, then the mortgage backed securities would have to be reevaluated because they obviously aren’t going to be AAA any longer, which in turn would cause massive write-downs and losses.  It is a fear of the second scenario that made the Fed act.  Another reason the Fed had to act was because no one else would.  AIG’s obligations on these mortgage backed securities are so odious, only the government, an institution that can raise funds through coercion, could make such a poor investment.  Therefore, I find the following highly dubious.

Fed staffers said that they expected A.I.G. would repay the loan before it comes due in two years, either through the sales of assets or through operations.

The $85 billion is what is needed continue a delusion, i.e. that by chopping and slicing a bundle of bad debt, you wind up with something that just isn’t repackaged bad debt.  Well, it isn’t anymore, because now the American tax-payer is footing the bill, but AIG’s ability to repay the loan is predicated on re-couping some of that debt through selling the underlying asset, like the house (good luck with that), selling other assets and firing employees.

This isn’t to say the Fed didn’t do the right thing.  If this is the approach the Fed takes, guaranteeing AAA rated securities with taxpayer money, then it needs to be regulated.  The second issue is anti-trust.  There should be no entity on Wall Street that is “too big to fail.”  Third, people who perpetrated this fraud need to be sent to prison and some of their property confiscated in order to repay American tax-payers.  The end result of the credit crises cannot be a financial system that continues with “business-as-usual” after getting bailed out by American tax-payers.  It is morally indefensible to have a system that privatizes profits and socializes losses.  The effects of this crisis are going to linger for years to come, so we are faced with a choice: the people can either demand something better or let the moment pass.

September 9, 2008

Fannie Mae and Freddie Mac Takeover

Filed under: economy — Tags: — codesmithy @ 8:08 am

Fannie Mae and Freddie Mac were taken over by the government.

The government pledged to inject taxpayer dollars into the companies to prevent insolvency — up to $100 billion total for each company. It also will also start buying mortgage-backed securities from the companies.

The stocks of the respective companies have plunged over the past year, losing over 90% of their value.  Fannie Mae was trading at 62.76 on 9/10/2007 and Freddie Mac was trading at 58.75 on the same date.  Fannie Mae closed at 0.730 and Freddie Mac closed at 0.880.

Banks make terrible neighbors, and resulting suburban blight is likely to give positive feedback to already hurting home values.  In short, suburbia is dying.  Depending on energy prices and future technology, it could be a terminal case for millions of Americans.

July 18, 2008

Al Gore’s Challenge

Filed under: economy, environment, politics — Tags: , , — codesmithy @ 8:59 am

Al Gore challenged the nation to get to renewable, zero carbon electricity within 10 years.  What Al Gore proposes is the type of large-scale action that is necessary to combat the related crises we are facing.  If you watched it on CNN, you probably didn’t see the website you could visit for additional information.  It is http://www.wecansolveit.org.

Al Gore’s suggestions meet the scale of the challenge that lie before us, not just as a nation but as a species.  America needs to lead, not dig in our collective heels.  Gore demonstrated the type of rhetoric that demonstrates a good contrast between the ideas of the Republican party and his.  The Republican solutions to these crises are actually counter-productive as Gore explains in his speech.

In general, the Republicans don’t win because of the strength of their ideas.  They win based on image.  Glenn Greenwald examines this dynamic in his book Great American Hypocrites: Toppling the Big Myths of Republican Politics.  The corporate-owned, mainstream media plays a critical role.  The MSM doesn’t ask about climate change, they ask about lapel pins.

On the other hand, Democrats play along by trying to blur the distinctions between the two parties.  This is another reason why the FISA capitulation is so disappointing.  Democrats seem unable to convincingly stand by a principle.  The only “strength” they show is by a willingness to surrender even when their base tells them not to.

One thing that is so disappointing about the wecansolveit.org site is that the largest initiatives seem to be contingent on federal government action.  Sadly, the federal government is broken and there is no way it is getting fixed in time, even if the Democratic party is in control of both the legislative and executive branches.  Can we really afford to wait for this broken and corrupt institution before we take decisive action?  Is there any way to get a good head start without federal government help?  Not just researching it, but building it.  I can’t see how we will succeed otherwise.

July 15, 2008

Credit Crisis: Fannie Mae, Freddie Mac

Filed under: capitalism, economy, politics — Tags: , , , — codesmithy @ 9:11 am

Paul Krugman examines the coming bailout of Fannie Mae and Freddie Mac in his op-ed column “Fannie, Freddie and You.”  Basically, a bailout of Fannie Mae and Freddie Mac is coming.  Both are quasi-government institutions to encourage home ownership.  While, profits are privatived and losses are socialized, Fannie Mae and Freddie Mac are examples of regulation that worked, well, for the most part.

Krugman points out that both institutions were tightly regulated in terms of lending.  However, they weren’t required to put up enough capital, which left them vulernable to this type of problem when the assets declined.  The capital requirement is just insurance, and without a doubt both institutions should have had more.   Nevertheless, given the scope of the current crisis, taxpayers would be left holding the bag one way or another.  This is the very essence of a social safety net.

The question of whether they should have ever been privatized to begin with is another question entirely, and tellingly, one that Krugman doesn’t ask.  Privatizing these institutions gave rise to the perversity of incentives which led to the lack of capital backing.  However, it is unlikely that a corporation would do much better.  The same type of perversity exists, only it is the shareholders left footing the bill instead of taxpayers.  Sometimes, the financial leaders can spur an after the fact taxpayer bailout by pointing out that it is not them who will suffer, but rather shareholders who depend on some form of financial instruments for their retirement.

There are lots things to get very upset about surrounding this entire crisis.  The Fannie Mae and Freddie Mac bailout is small in the big scheme of things.  If the government starts buying up bad debt from private instutions that avoided regulation, that is the time to get really upset.

May 26, 2008

RE: Why People Don’t Trust Free Markets

Filed under: capitalism, economy, politics, science — Tags: — codesmithy @ 7:32 am

Michael Shermer wrote a post on his blog called “Why People Don’t Trust Free Markets.” Shermer is the founder of the The Skeptics Society and editor of its magazine Skeptic. Skeptic magazine is dedicated to investigating and debunking junk science and supernatural claims.

For me, Shermer is a little bit of a mixed bag. He gave a good talk at TED on “why people believe strange things.” I criticized one of his columns in Scientific American on “Rational Atheism.” So any criticism of Shermer should be tempered against the good work that he does. It is a phenomenon that people tend to hold greater disdain for those they disagree with slightly than completely. A young-Earth creationist can be dismissed as haplessly misinformed. Their employment of logical fallacies and poor evidence is not notable, it is expected. Shermer, as a person who advocates a more rational understand of the universe, employs similar canards; it feels like an outright betrayal. He should know better!

Shermer starts off by quoting Ludwig von Mises:

The truth is that capitalism has not only multiplied population figures but at the same time improved the people’s standard of living in an unprecedented way. Neither economic thinking nor historical experience suggest that any other social system could be as beneficial to the masses as capitalism. The results speak for themselves. The market economy needs no apologists and propagandists. It can apply to itself the words of Sir Christopher Wren’s epitaph in St. Paul’s: Si monumentum requires, circumspice.

Noam Chomsky breaks apart this argument when asked if capitalism is making life better?

As Chomsky correctly notes, one could say the same thing about slave societies. As a skeptic who knows the importance of tracking the failures as well as the successes, I am surprised he employs this line of argument.

Next Shermer goes on to state:

Market solutions to social problems are generally received with skepticism. Businessmen are distrusted, corporations looked at askance, and there is a well-known resentment against those who have most benefited from markets.

I’m surprised Shermer doesn’t offer any examples for this. What is an example of a market based solution to a social problem? Would school vouchers be a fair example? Or is “a market solution” turning over a municipality to a private entity.

Businessmen should be distrusted. Anytime some one is trying to sell you something, their claims should be looked at skeptically, especially because they have obvious incentive to cheat.  Corporations are distrusted because they are incredibly powerful and largely, publicly unaccountable institutions.  By their very nature, they are one-share, one-vote, not one-person, one-vote.  This has major ramifications for so-called “externalities.”  See ship breaking in Bangladesh for an example of externalities.

As for resentment towards the biggest winners in a free-market, I know of no way to meaningfully quantify it.  Even for Bill Gates, his book “Business @ the Speed of Thought” was a best seller near the time it was released.  Is that antipathy?  Is that resentment?  Buying a book that he wrote?  Yes, there are people that don’t like Bill Gates, but that seems indicative of any public figure.

Shermer then gives a sketch of historical development from hunter-gather tribes explain “evolutionary egalitarianism” or the collective reversion for “excessive greed and avarice.”  Then Shermer pulls a remarkable rhetorical trick:

Throughout most of the history of civilization as well, economic inequalities were not the result of natural differences in drive and talent between members of a society equally free to pursue their right to prosperity; instead, a handful of chiefs, kings, nobles, and priests exploited an unfair and rigged social system to achieve gains best described as ill gotten.

I would love to see this great break in history where society moved to a pure meritocracy based on a free market.  It is telling that whenever a country democratically decides to redistribute land to undue some of the “ill gotten” gains of the past, the United States has seen fit to intervene as was the case in Iran, Chile and Guatemala.

The most laughable part of the piece, and the most unconscionable is Shermer citing “well-documented liberal bias in the academy and the media against free markets.”  It absolutely must be screaming in the back of Shermer’s mind that the argument he employs in this section is exactly the same tactic intelligent-design advocates use to claim bias against their espoused ideas.  There are not two, equally valid sides to every issue.  Setting up a false dichotomy and adhering to the doctrine of “centerism” is incorrect on its face.   Arianna Huffington posits it as equal time for lies.  If Shermer wants to demonstrate some bias against free market ideology, he needs to improve his method.  He needs to look at individual stories and pick out irrefutable inaccuracies.  The “centerist” doctrine he tries to employ is worse than worthless.

Shermer then concludes:

This is, in fact, why WorldCom and Enron type disasters still make headlines. If they didn’t — if such corporate catastrophes caused by egregious ethical lapses were so common that they were not even worth covering on the nightly news — free market capitalism would implode. Instead it thrives, but just as eternal vigilance is the price of freedom, so too must it be for free markets, since both are inextricably bound together.

Capitalism and freedom are not inextricably bound together.  They are frequently diametrically opposed propositions.

Naomi Klein investigated the link in “China’s All-Seeing Eye.” Shermer sentiment is no more true than when Milton Friedman pitched it.

May 14, 2008

Never Listen to David Lereah

Filed under: books, culture, economy — Tags: — codesmithy @ 7:24 am

David Lereah is author of such books as “Why the Real Estate Boom Will Not Bust – And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market.”  He actually changed the title to that in February 2006.  The same book was published a year before under the title “Are You MIssing the Real Estate Boom?: The Boom Will Not Bust and Why Property Values Will Continue to Climb Through the End  of the Decade – And How to Profit From Them.”

Lereah learned how to lose money for people with his book “The Rules for Growing Rich: Making Money in the New Information Economy” published right around the time when the dot-com bubble burst.

The man has a midas touch for disaster.  OK, maybe it is alright to listen to Lereah’s advice, as long as you listen to what he says then do the opposite.

April 29, 2008

DNC’s Ad Attacking McCain

Filed under: economy, politics — Tags: , — codesmithy @ 8:15 am

The Democratic National Committee has a new ad attacking McCain’s stance on Iraq.

It is tough to say what grounds the RNC is crying foul on, maybe that staying in Iraq is only fine with him if only American causalities are acceptable.  However, historical evidence seems to indicate if things are going well, that means the strategy is working and we should stay the course.  If things get worse, then leaving will embolden the enemy.  It is a “heads I win, tails you lose” scenario.

The neo-conservative goal, which McCain has whole-hearted adopted, is to setup a pliable client-state in the heart of the Middle East.  There is no exit strategy.  The plan is to stay.  Iraq is indicative of imperial overreach that will end American prosperity.  Countless economists will be brought out to dissuade us commoners from believing that the state of the economy has anything to do with the war in Iraq.  There is no connection, or they can’t understand the connection.  They’ll argue, historically, wars have been good for the economy.

So where is the missing link?  The problem of course is that the “war analysis” is at best superficial.  War improve economies by improving the need for domestic goods, normally bombs and other munitions.  These facilities are then repurposed after the war ends for exportable goods.  This can lead to a great deal of prosperity, but the key to a good war economy is a concerted effort to invest in infrastructure.

The Iraq war is coming at the expense of infrastructure.  It is not an exaggeration to say that billions of dollars just literally disappear.  When you combine this with tax-cuts that feed a consumer class based on debt, what do you get?  That is right, inflation, lot’s of inflation.  Inflation is where we are at folks and it ain’t going away anytime soon.  We live in a borrowed prosperity.

So, when picking your next president, think of it terms of picking an interest rate that you’ll need to pay back.  The money is already borrowed, it just about how much we throw down the hole to chase it.  McCain’s interest rate is insanely high, Obama’s and Clinton’s are pretty low, although there is a one in ten chance that Hillary loses it and bombs Iran.  Although, to be fair with McCain it is virtually guaranteed America will attack Iran.  If you think the next president won’t make any difference, maybe that $4.00 you pay per gallon at the pump will make you reconsider your position.

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