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.

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?

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 condition...is 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.

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?

Omni Palin

It's one thing that the vertical ad next to my Facebook profile is Going Rogue FREE OFFER!

It's another that her image is being used for the iconic Flat Belly ad on my IE home page. Bespectacled bikinied beauty queen hockey mom caricature. If she can run a household, she can run the U.S. I trust her. She's got common sense. I'd like to have a beer with her.

Glen Beck is doing a political tour and the right wants its candidates to sign loyalty oaths.

Onward to 2012!

Detroit is the Future

I'd say it’s a disgrace, but that’s too soft a word. It’s a horror. Detroit is dying. Motor City. Motown. A once great city, the hub of American manufacturing, lies in tatters, a victim of the short-sighted decision to favor capital over labor.

The Detroit Silverdome, where the Detroit Lions, Detroit Pistons and Michigan Panthers played, just sold for $583,000. It cost $55 million to build in 1975.

In today’s column by Bob Herbert, who seems to be one of the few who is putting a human face on the economic devastation in the United States, Detroit is:

[E]ndless acres of urban ruin, block after block and mile after mile of empty and rotting office buildings, storefronts, hotels, apartment buildings and private homes. It’s a scene of devastation and disintegration that stuns the mind, a major American city that still is home to 900,0000 people but which looks at times like a cross between postwar Berlin and the ruin of an ancient civilization.

A.I.G. & Fed Transparency: What's Behind the Curtain?

Neil M. Barofsky, the special inspector general of TARP (which technically stands for Troubled Asset Relief Program, aka The Act to Reward Plutocrats), reported this week that the Treasury (at the time headed by Henry Paulson, secretly advised by Lloyd Blankfein, the CEO of Goldman Sachs) and the head of the New York Fed, Timothy Geithner (now Obama’s Treasury Secretary) didn’t use their considerable leverage to force any concessions from the counterparties of the troubled insurer A.I.G.

Who gave the federal government the power to give any money to any financial institution other than commercial banks? The reason commercial banks could be given money was because they were (supposedly) tightly regulated. During those panicked times of Sept/Oct 2008 the Fed and the Treasury gave away a lot of money under dubious authority. Pretty f**king ad hoc. AIG was saved a week after Lehman collapsed by an initial $85 billion government infusion according to the following
authority:

The Fed took the highly unusual step using legal authority granted in the Federal Reserve Act, which allows it to lend to nonbanks under "unusual and exigent" circumstances, something it invoked when Bear Stearns Cos. was rescued in March.

A.I.G.'s trading partners, which included Goldman Sachs Group, Merrill Lynch and the large French banks Societe Generale and Calyon, refused to take less than 100 cents on the dollar on assets that were worth far less because they were derived from rapidly defaulting mortgages.

Their legal stance was that the Fed was a creditor and had no standing to put A.I.G. through bankruptcy. They knew by virtue of the $85 billion loan that the U.S. wouldn't let it fail. So they held all the cards. The Treasury and the Fed capitulated.

This was in stark contrast to the way the government dealt with the automakers:

First, the Fed considered itself a creditor of A.I.G., rather than a regulator that could impose its will on banks. It approached A.I.G.'s trading partners with a request for "voluntary" concessions. Mr. Barofsky said this differed from the government's role in the auto industry, where it lent the car makers money but also negotiated aggressively and won substantial concessions from other creditors.

It's self-serving that the counterparties invoked the letter of the law to assure themselves full payment from the Fed.

And it's obvious to any sentient being that class (as in class warfare) is alive and sickening.