Thursday, December 31, 2009

Amazon Confuses "Never Again" with Anti-Semitism

When I logged onto Amazon to search for a book, my page showed a recommendation to buy Protocols of the Elders of Zion. Amazon is proud of its search recommendations but maybe it has to finesse its engine. I am a Jew and don’t want to buy the unvarnished propaganda that helped justify hundreds of years of persecution and murder.

I presume the reason Amazon recommended the favorite screed of anti-semites is because I bought the genius Will Eisner’s commentary on The Protocols, The Plot: The Secret Story of The Protocols of the Elders of Zion. He created this graphic novel because he was deeply disturbed that The Protocols, which purports to be the actual blueprint by Jewish leaders to take over the world, continued to be published and disseminated throughout the world. It is taught and held as literal truth in the Arab and American White supremacist movement.

It’s kind of like confusing Art Spiegelman’s Maus with Mein Kampf. The algorithmic connection is so offensive it makes me wonder about Amazon.

Google's Youtube is also trying to create better discovery in order to keep its viewers from moving their eyeballs away from the site. "Discovery" in this case means suggesting recommendations by mastering data-mining techniques. And as we see in the case of Amazon's recommendation for me, the meeting of the computer and human mind is flawless. Not.

Christopher T. Volinsky, executive director of statistic research at AT&T Labs Research, who led the team that won that $1 million to improve Netflix's search recommendations, thinks it's complicated but solveable. He said :

"I don't think the YouTube problem is different from the Netflix problem or the Amazon problem."

That it took his team of top computer scientists three years to make a modest improvement to Netflix, which has some 700,000 titles, illustrates the complexity of the task, Mr. Volinsky said.

As a longtime subscriber to Netflix, I suggest it doesn't recommend Riefenstahl's Triumph of the Will because I picked Schindler's List even though they both took place during the thirties when the Nazis picked up steam.

Sometimes a computer is just a computer.

Friday, December 18, 2009

Thank God Citigroup Is In Charge of the Treasury

Whatever happened to pretending that government is in charge?

Kind of a messy situation the other day when Citigroup tried to exit TARP to get out of compensation restrictions. It had to raise $20 billion in a stock offering on Wednesday. To maintain its cover as a non-zombie bank, it convinced the Treasury to sell $5 billion of its 25% ownership of Citigroup at the same time. But guess what? No one wanted to pay what the Treasury originally paid, $3.25 a share. Either the investors know something we don't or all the players are gaming the system.

Thank God Citigroup Vice Chairman Ned Kelly was on the case Monday evening, two days before the offering. He was irate that the government allowed Wells Fargo to launch a stock sale at the same time. So he called a Treasury aide (who?) to complain about the timing.

Then finger pointing began. The Fed and the FDIC weren't too sure the TARP banks were strong enough to exit. There is no mark-to-market valuation, only fair value, if that. No one really knows how strong these banks are or if they'll need mass transfusions of more government aid in the very near future:

[The Fed and the FDIC] privately complained that Treasury officials pushed them to allow banks to quickly leave TARP.

On Thursday, after the government pulled back its stock offering, the Treasury came back at the Fed/FDIC with a quick retort:

[D]ecisions about bank repayments are up to bank regulators at the Fed and FDIC.

So the Treasury blames the Fed and the FDIC. If what the Treasury says is true, why is Ned Kelly calling Geithner? Shouldn't he be calling Bernarke or Bair? If I were cynical, I'd say Geithner is more loyal to Ned Kelly than Sheila Bair, FDIC Chairman.

I can rest easy knowing the taxpayers' money is being safeguarded by the Vice Chairman of Citigroup. Otherwise we might be in real trouble.

Bernarke: Moral Hazard Man of the Year

As a financial consultant and blogger who has been closely following the economic crisis since 2007, I nodded my head in agreement when I heard U.S. Chairman of the Federal Reserve was named Time Magazine’s 2009 Person of the Year

Ben Bernarke should be the Time Person of the Year. Not because he saved the United States from a second Great Depression, but because he created a new economic order and enshrined moral hazard for the most powerful financial institutions in the nation.

In the past, only commercial banks enjoyed the backing of the federal government (vis a vis the FDIC) because they were closely regulated and had to put aside capital reserves to cover potential losses.

Under his guidance as chairman, the Federal Reserve actively intervened to decide which industries and companies would live or die. Before the crisis, investment banks and industrial credit companies like GMAC were not backed by the government precisely because they didn’t submit to supervision.

As the credit bubble collapsed and money became harder to come by, the Fed decided to provide liquidity to every financial institution it deemed “too big to fail.” Bernarke directed the Fed to purchase toxic assets from banks. The Fed is now the largest holder of mortgage-backed securities in the nation. In other words, he shifted the burden of selling illiquid assets of unknown value to the taxpayer.

He helped create and enforce the notion that some financial institutions are “too big to fail”. Instead of breaking up the banks, as Paul Volcker suggested, he encouraged them to merge. JP Morgan Chase took over Bear Stearns. Bank of America swallowed Countrywide and Merrill Lynch. Wells Fargo absorbed Wachovia. Their bigness and hence their ability to cause systemic failure has increased exponentially.

The flip side of the coin is that many financial institutions are considered “too small to save.” These are community banks and credit unions that supply much of the lending to small businesses and individuals. They are also the most affected by high unemployment and mortgage foreclosures. As of November 2009, over 120 banks have failed a five-fold increase over 2008. Unlike the “too big to fail” banks, the smaller banks could not trade off the Fed’s explicit guarantee of losses in order to raise funds to replenish their capital.

By keeping interest rates near zero and providing unlimited liquidity rather than insisting on solvency, Ben Bernarke made it easier for companies such as Goldman Sachs to speculate overseas with cheap money. In the meanwhile, credit has tightened for small business and individuals.

But Ben Bernarke’s crowning achievement was that he enforced moral hazard. Moral hazard is when you encourage risky lending because those that take the risk know they will be insulated from their losses. After the Fed’s extensive interventions, there is no doubt that the United States will not allow these “too big to fail” institutions to fail. For them, there is no downside. They take the profits, the taxpayer takes the losses.

It may be conventional wisdom on Wall Street that Zero Ben saved the economy, but on Main Street, which is considered “too small to save”, things are not so upbeat. The economic crisis was not a natural part of a business cycle. It was man-made, the result of a credit bubble collapse stoked by esoteric financial engineering and leverage to the tune of 100 to 1.

The big banks were amply rewarded; first on the upside, and now come January 2010 bonus time, on the downside.

Yesterday in front of Congress Ben Bernarke said there was no evidence of inflation because “the United States economy was operating so far beneath its potential that inflation was unlikely to become a problem.” This is a statement that can only warm the hearts of stockholders. For everyone else, it implies overcapacity and more unemployment.

In any case, his assertion is belied by the Producer Price Index, which registered a surprising spike in prices (excluding food and energy) on Tuesday.

He also said that he saw no sign of a bubble in the stock market. But stock prices have gone up over 60% since February. The stock index in China is up more than 75% this year and the stock in Brazil are up even more. Oil prices have rebounded to over $70 a barrel from the low $40 range in February.

In his 1999 Princeton economics professor days, Ben Bernarke argued that the Fed should get out of the way of bubbles because 1) it wasn't possible to determine when they occurred and 2) if the Fed intervened it would cause more problems. Obviously keeping out of the housing bubble was a serious error. If he is confirmed on Thursday, perhaps the bubble he doesn’t see is the one that will blow up in our faces.

Thursday, December 10, 2009

Bankers Just Don't Get It

Bankers really think they deserve what's coming to them. They do. Of course, what I think is coming to them and what they think are two different things. Even the WSJ gently acknowledges that bankers may have a wee bit of a perception problem. They think their business was a victim of sudden volatility which righted all by itself. Everyone else knows they recovered because the government bailed (and still bails) them out with buckets of blood and sacrifice.

Monday, December 7, 2009

Today's Anniversary--Pearl Harbor Day

It was 68 years ago today that the Japanese military attacked Pearl Harbor. This launched America's entry into World War II, the "Good War".

The society mobilized. We shared the sacrifice of our men in uniform. We endured shortages of resources needed for the war, such as rubber and meat. We planted Victory Gardens to help feed ourselves. We bought war bonds to help finance the war. The government owed interest to us, not the Chinese. Women came into the factories and built munitions and aircraft. There was the draft.

That war, which was shorter than the concurrent wars in Iraq and Afghanistan, was not walled off from the majority of Americans like the ones now. We have volunteer armies and mercenaries (especially mercenaries) fighting the wars now. America keeps dipping into the till, printing money to go into the hands of privateers. We see no painful images of war's realities, blood and death and the killing of civilians. Instead, we are exhorted to do our part simply by consuming.

There is no shared sacrifice anymore. What glues our society together? Trivial images of fleeting, valueless celebrity scandals re: Tiger Woods and high level party crashers? We live in homogenous communities, segregated census districts where everyone shares the same ideas and never has to cross paths with people who have different ideas. Those different ideas become fuel for anger and violence, and are easily exploited. The population is increasing online. Corporations collect infinite mounds of data in order to pinpoint exactly what you desire as a consumer and sell it to you, one individual, atomized micro-niche at a time.

Will social networking sites hold us together? Can they substitute for deteriorating social institutions?

Sunday, December 6, 2009

America's""" God Is Money

Speech by Tony Judt, Director of the Remarque Institute at NYU, printed in The New York Review of Books, December 17, 2009 (sorry, I only have the print edition):

The "disposition to admire and almost to worship the rich and the powerful and to despise or at least to neglect persons of poor and mean the great and most universal cause of the corruption of our moral sentiments."

Those are not my words. They were written by Adam Smith, who regarded the likelihood we would come to admire wealth and despise poverty, admire success and scorn failure, as the greatest risk facing us in the commercial society whose advent he predicted. It is now upon us.

Wednesday, December 2, 2009

Blowing Bubbles and Economic Amnesia

The institutional memory of financial institutions is appalling. And now that there is no downside to risk, we can look forward to perpetual creative destruction.

Investors plowed money into Dubai even though it had no oil. In essence, it had no collateral except the implicit backing of Abu Dhabi, the capital of United Arab Emirates. Abu Dhabi has been deafening in its silence.

Dubai is a hot desert state that built an indoor ski run and islands within its borders. Investors included Citigroup AFTER it received TARP bailout money:

[I]t lent $8 billion to Dubai last year: Oh, and here's an interesting fact: Citigroup made the loan to Dubai on December 14, 2008. Take a look at the calendar--that's after it received tens of bilions in TARP funds.

But Dubai is not the only overextended government. Every country pumping liquidity into its institutions is on the hook. Which includes the United States :

In the United States, for example, Treasury debt maturing within one year has risen from around 33 percent of total debt two years ago to around 44 percent this summer, while falling slightly since then, according to Wrightson ICAP. The United States will soon have debt problems of its own.

Now we turn to bubbles. Or rather, return to bubbles. What happens when money doesn't cost anything? Investors borrow cheap money (dollars) to buy more profitable assets. When everyone piles into the same assets (mortgage-backed securities, for instance) the assets become way overvalued (homes). Right now the Fed is keeping interest rates at near zero. So what's happening?

Gold prices are up more than 50% in a year's time. China's Shanghai Composite stock index is up more than 75% this year. Stocks in Brazil are up even more. Oil prices have rebounded. They remain far below last year's peaks but a return to those highs could fuel inflation in goods and services more directly than tech stocks or housing did.

Ben Bernarke in his 1999 Princeton professor days argued that the Fed should get out of the way of bubbles because 1) it wasn't possible to determine when they occurred and 2) if the Fed intervened it would cause more problems. Obviously keeping out of the housing bubble was a serious error. Some think incremental interest rate increases would have dampened the credit ardor. As for the bubble's enigmatic invisibility, William Dudley, who is now president of the New York Fed, says that's nonsense:

"I can identify at least five bubbles that one could reasonably have identified in real time," including the tech boom, Mr. Dudley said in a 2006 speech. He knew, he said, because he had speculated against three of them himself when he was chief economist at Goldman Sachs.

Of course, some hold to the view that raising rates is like using a sledgehammer to drive a tack. Says Donald Kohn, the Fed's vice chairman:

"You raise interest rates [to fight a bubble] and you damp all kinds of capital spending and consumer durable spending."

The Fed has been buying Treasury bills and mortgage-backed securities and every other type of depreciated or worthless asset for over a year now. Bernarke is at zero. But no one or no company can get cheap credit except for those deemed too big to fail. There AIN'T no capital spending. How can you dampen nothing?

We can see the bubble. It's here. So what to do?