Markets » Gress... Has Issues

Redistribution is Nonsense

Culture, First Principles, Government, Markets, Social Philosophy

Sep 022010

Economic Fishing Lessons Beat Dependency.... Everytime

It Works!
If our economic system doesn’t “distribute” wealth, how in the world can it be “redistributed?” Yet that’s what our happy fisher for tax dollars says he – with the complicity of a ‘Progressive’ Congress – wants to do. In fact, it’s well under way, with gobs more in the planning. Was there a “national conversation” about this?
The national conversation about race that Democrats, in particular, seem insistent that we should have…has been incessant for the last thirty years or so. It seems we never tire of talking about race, and the proliferation of communication technologies has exacerbated the exercise. But my concern is not about race, right now, but rather the priorities in our national conversation (whatever that is). We don’t have an honest discussion about the real causes of poverty, or the slow disintegration of our governing institutions. We have just elected an administration that is intent on the redistribution of wealth, but without a conversation about what that means, and to whom, for how long, and with what general consequence. The point of the adage about teaching a person to fish, rather than just giving them a fish, is that – once the fish is gone – the recipient of the fish-charity is right back where they started. The notion of resourcefulness starts with the assumption that you can create or find your own resources, rather than relying on someone else who then has to create resources for both of you. This is why the welfare system failed so badly. Public housing meant to house folks who were temporarily in distress became a multi-generational trap for it occupants. No skills, no incentives, no memory of having to work like their fellow Americans in order to share in the national work ethic; in order to give meaning and dignity to a life enhanced by personal accomplishment. And, following an insanely belated reform, numerous individuals interviewed by the press were elated that their lives had changed in a positive way. So how does redistribution differ from the old welfare trap? Ask any Russian how it feels to be dependent on the government for everything. Look at the Indian Reservations. Prior to the casino boondoggle, wall to wall poverty and hopelessness. After independence, India copied their former colonizers in adopting Socialism as their economic model. Nearly destroyed India; they finally changed to a free market economy and are swiftly developing, thanks to the education and enterprise of their professional class. The rest are slowly coming along, but at the mercy of an entrenched government bureaucracy who has to slowly leave their socialist corruption behind in order to properly serve the common man and facilitate free enterprise. Isn’t it evident that distributing limited resources in a race to the bottom is not a benefit to someone who has to live a long human life-span, often responsible for themselves and other family members? As a safety net for the temporarily disadvantaged and those unable to fend for themselves, sure, but for an able person who simply lacks skills, nothing could be more cruel. And the society that adopts such a policy is shortsightedly destructive. Unfortunately, these societies are often led by trained professionals with good hearts who simply won’t look at where such policies inevitably lead. So, money and other largesse doesn’t work. But there is, I think, a form of redistribution that does: Education. Education is, in fact, a redistribution of knowledge, of skills. That’s right: Teach people to fish. And how an economy works. And the history of their civilization. And how to run a business. And how to manage money. And the unique value of their heritage as a country; the genius and sacrifice they are heirs to.

The difference between “earned” and “distributed.” How to think; not what to think. Knowing which “national conversations” are important.

Redistribute that.

Gulf Oil Jobs Crisis – by Decree

Energy, Government, Labor, Markets, Oil, Transportation

Jun 042010

The Last Time, it Was OPEC; Now it's Washington

US Historical Oil & Gas Production Sites

If you’ve been following the oil spill, you know the president has declared a six-month moratorium on offshore oil drilling. This is in addition to the existing ban on drilling closer to shore, as well as exploration and drilling on most land-based applications. Jobs will be lost by the thousands, and gasoline prices will soar. As reported in the Inside Louisiana News.com blog, Governor Jindal of Louisiana wrote an alarmed letter regarding the job losses, here.

Proof that the economic damage has already begun is illustrated by the invoking of force majeur clauses to cancel existing drilling contracts and ceasing activity until the end of the moratorium, as reported here, on Tom Fowler’s Energy blog. I thought the following comment in the thread that followed was indicative of what we can anticipate:

I have to wonder if President Obama and his advisors have thought thru the ripple effects of halting 33 projects in the Gulf of Mexico and putting a 6-month stop on new drilling. Employees of oil and gas operators; employees of drilling rig contractors; employees of multiple oil and gas service companies; employees of crew boat companies; employees of helicopter service companies; vendors who supply fuel and groceries, etc. to rigs….and I’m sure there are more that just haven’t come to mind, who will lose work in a time when, on another hand, President Obama is promoting increased employment and healing the economy. His decision will wreak havoc on Texas and Louisiana economies with ripple effects beyond that.

Finally, a little food for thought regarding the importance of oil drilling to our livelihoods. Most of America needs a car to get to work. They also do not have public transportation as a substitute. Not everyone has the year-round weather, safe-paths, or age and health related ability to ride a bike to work. We can’t know how much oil we have domestically until we stop acting as if we can simply will our dependency away. The poor will suffer the most, and the middle-class our administration claims to love and protect – will become poor. Some will conclude that this is all for the good of the country, the planet, humanity. Draw your own conclusions in this short interview with the former President of Shell Oil. Maybe the thought of $6 to $8 gasoline could be your motivation.

(The video that originally accompanied the article made the interviewers look a bit foolish, so they killed it and substituted another part of the interview in which Hofmeister just talks about his book. He is just barely allowed to make his points in this tendentious piece on Yahoo Finance’s Tech Ticker.)

The above map at the US Geological Survey is a humongous, size-adjustable pdf map with color-coded explanation if you wish to visit, here.

Slander Goldman To Avoid Scrutiny

Government, Legislation, Markets

Apr 292010

Those are YOUR Junk Mortgages, Senator

J'accuse!

April 27, 2010 The Senate Permanent Subcommittee on Investigations

Comedy Gold as Senators (Levin, Collins, Kaufman,McCaskill,Coburn,McCain) pretended to be conducting a serious inquiry into the market practices of Goldman, Sachs. They obstinately refused to recognize that the mortgage CDO managers were not, in fact, financial advisers to their clients. Goldman’s job is to engage parties on both sides of future transactions in assembling a package on which they agree to…yes, bet. If Goldman subsequently decides to take a position on the CDO, it is not in regard to either supporting or betraying a client, but to managing their own risk regarding that deal, their current inventory of other instruments, and the market environment as it changes. Their function is to create an instrument that can be used by both buyers and sellers, without regard to the quality of the underlying assets or the intentions of the investors on each side of the market. (There is a price at which even the worst assets will be attractive to some professional investors – cheap enough for the longs and overpriced enough in the opinion of the shorts.)

Our elected heroes were not about engaging that idea, i.e. ‘reality.’ They had already assembled a narrative that must be supported: that Goldman and its operatives were betraying the trust of their “clients.” This clash between the fantasy political agenda – (aimed at bolstering a Democrat financial reform bill) and technicians calmly explaining how their roles were not supportive of those assumptions – would have been more amusing if it were not a cynical attempt by the Senators to divert responsibility for the financial collapse from themselves (government creating the housing bubble) to Wall Street.

It’s probably worth noting that most Senators are lawyers who operate in a different mental paradigm than business or financial people. In the lawyers’ world, transactions are about warrantying merchantability, the seller honestly representing the good or service sold, otherwise a fraud has occurred. It’s an adversarial world in which such matters don’t come to their attention until the fraud is at least suspected.

In the business world, fraud occurs occasionally, but most transactions are necessarily cooperative and mutually beneficial or the buyer would stop buying and the seller would go out of business. Some businesses, like finance, sometimes act only as intermediaries in a dynamic situation in which two or more parties will interact in the market, but need a predicate action performed by a third party before this can happen. The intermediary is not recommending or predicting the outcome of any market actions taken by the other parties. The intermediary could decide to take one side or another of any bet on the performance of the instrument they compiled from existing assets, and they – like their clients – could win or lose that bet. Disclosure is not an issue.

Note that the lawyers, and many voters encouraged by their elected representatives, speak scornfully of derivatives – esp. Synthetic CDO’s, as just “casino gambling,” which, because of the lack of an actual trading of assets, ought, in their opinion, to be outlawed. That’s crap. The whole stock market is a casino, individuals and institutions with individuals’ money, betting on the outcome of just about anything that can occur in a complicated, dynamic world marketplace. All of that – and the instruments used to make it happen – was just fine until everybody decided to bet that housing prices could rise indefinitely. A bad bet, that would have caused a problem eventually, but not as bad as dropping the underwriting standards on the loans that made those housing transactions possible.

Nothing wrong with bundling mortgages into securities and selling them to a world market in large quantities – even via exotic instruments – providing the mortgages were made to people who could repay them. So, our Senators and other congress-creatures can be smug about condemning Wall Street, and banks, for doing what they do well and in trillion dollar quantities, but let’s not forget that the government’s enthusiasm for cheap home ownership and government-guaranteed lending was the tinder that allowed this blaze to be set. And, not incidentally, that the officials righteously screaming J’accuse! at the Wall Streeters could have – along with the regulators they failed to oversee – nipped this whole thing in the bud years before the collapse. Have they no shame?

The More Things Change...Senator Joseph McCarthy

Rebuttal to “Spanish Green Jobs Failure”

Environment, Government, Markets, Wind

Mar 302010

Wind-Power NIMBY

I’m hoping this post will put to bed this contretemps between the DOE and its renewables detractors, at least for this blog. The American Wind Energy Association reports in the paragraphs below that the Universidad Rey San Carlos study that concludes that more than two private sector jobs are lost for every “green job” created is methodologically incorrect. Basically, it rather fatuously concludes that if the US governments’ assumptions and methods aren’t employed, there can simply be no correct conclusion.

The report’s writers twist themselves into knots justifying the official rationale for replacing our fossil-fuel economy with their “green obsession,” implying it just isn’t fair to look at the displacement of jobs in the private sector caused by the green substitute when it’s clear that it is only due to unfair and prolonged subsidies to fossil fuel that have made our current unsustainable and destructive energies possible.

They utterly ignore the green movement’s complicity in preventing both nuclear power and domestic fossil fuel development. There is no mention that, without the scientifically disproved green gas theory (read our blog on the topic on these pages) and the non sequitur global warming theory, the need to reduce Co2 would be non-existent. Without the theory, we are back to traditional conservation measures, for which there is broad consensus, and the ability to use the latest technology to achieve energy independence with our own abundant US resources.

When reading the piece that follows, from the American Wind Energy Association (a wind-power trade association), note that the National Renewable Energy Laboratory and its operator, the producer of this report, are all academic and business interests heavily invested, for years, in the idea of replacing our fossil-fuel economy with one of their own imagining. (And it’s good to remember that natural gas is a fossil fuel and that, because of the 200 million or so internal-combustion engine cars on American roads, we will be using petroleum products for many years to come. And that these folks want to artificially create a demand for their “solution” to their “problem” and don’t care how many poor people won’t be able to afford to get to work on $4/gal and up fuel.)

Don’t forget to click on the link in the AWEA notice that follows. It’s the NREL report “rebutting” the Spanish Rey San Carlos study. Enjoy.

NREL Rebuts Spanish Jobs Study


The Department of Energy’s National Renewable Energy Laboratory (NREL) has released a scathing critique of the so-called Spanish Jobs Study, which stated that renewable energy eliminates two jobs for every jobs it creates. The NREL analysis states that “The analysis by the authors from King Juan Carlos University represents a significant divergence from traditional methodologies used to estimate employment impacts from renewable energy. In fact, the methodology does not reflect an employment impact analysis. Accordingly, the primary conclusion made by the authors – policy support of renewable energy results in net jobs losses – is not supported by their work.” The Spanish jobs study was cited by columnist George Will, members of Congress and others as a reason to oppose the efforts by the Obama Administration and Congress to promote renewable energy as a means of increasing energy security, reducing carbon emissions and creating jobs. The Spanish study criticized actions by the Spanish government to promote renewables, saying it did so at the expense of job creation on other sectors of the economy. The NREL analysis says, “The study ignores the role of government in facilitating growth of valued new industries. Governments invest in renewable energy technologies to promote the growth of the industry as a whole. Emerging (renewable energy) technologies have not achieved levels of maturity and economies of scale that traditional technologies have; nor have they benefited from years of public and private investment. As a result, there may be a role for government to play in leveling the playing field between new and old technologies and in supporting emerging technologies. In the United States, all conventional energy technologies received government support in their early stages, and still benefit from government investment today.” N.B. There is a disclaimer by the Department of Energy at the foot of the report, saying govt not responsible for content.(It was written by the Alliance for Sustainable Energy, which operates the NREL. LOL.

Danish Windmill Blowback

Environment, Markets, Wind

Mar 292010

Looks Better on the North Sea

Wind-Power Danes strike back. It seems the stake-holders in the Danish wind power system took umbrage at the CPOS report. So they formed a consortium to launch a study of their own and write a rebuttal. The Project is named CEESA (Coherent Energy and Environmental System Analysis), and, as you will see in the 36 Page report, here, they assembled quite a diverse team. Our sincere thanks to Renee Nilson, a reader who brought this to our attention.

Abstract

In a normal wind year, Danish wind turbines generate the equivalent of approx. 20 percent of the Danish electricity demand. This paper argues that only approx. 1 percent of the wind power production is exported. The rest is used to meet domestic Danish electricity demands.

The cost of wind power is paid solely by the electricity consumers and the net influence on consumer prices was as low as 1-3 percent on average in the period 2004-2008. In 2008, the net influence even decreased the average consumer price, although only slightly.

In Denmark, 20 percent wind power is integrated by using both local resources and international market mechanisms. This is done in a way which makes it possible for our neighbouring countries to follow a similar path. Moreover, Denmark has a strategy to raise this share to 50 percent and the necessary measures are in the process of being implemented.

Recently, a study made by the Danish think tank CEPOS claimed the opposite, i.e. that most of the Danish wind power has been exported in recent years. However, this claim is based on an incorrect interpretation of statistics and a lack of understanding of how the international electricity markets operate. Consequently, the results of the CEPOS study are in general not correct. Moreover, the CEPOS study claims that using wind turbines in Denmark is a very expensive way of reducing CO2 emissions and that this is the reason for the high energy taxes for private consumers in Denmark. These claims are also misleading. The cost of CO2 reduction by use of wind power in the period 2004-2008 was only 20 EUR/ton. Furthermore, the Danish wind turbines are not paid for by energy taxes.

Danish wind turbines are given a subsidy via the electricity price which is paid by the electricity consumers. In the recent years of 2004-2008, such subsidy has increased consumer prices by 0.54 €¢/kWh on average. On the other hand, however, the same electricity consumers also benefitted from the wind turbines since the wind power decreased the electricity market price on Nord Pool. On average during 2004-2008, such effect decreased the consumer prices by 0.27 €¢/kWh and consequently the net influence during this period increased consumer prices by only 0.27 €¢/kWh equal to only 1-3 percent of the final consumer prices. In 2008, the net influence of wind power actually decreased the consumer price slightly by approx. 0.05 €¢/kWh. Consequently, the influence of Danish wind turbines on the consumer electricity price is negligible.

Spanish “Green Jobs” Failure

Environment, Government, Markets

Mar 282010

In my posting of March 13th, under the title “Obama Wind Power Deceit,” I promised to find the Spanish University study referred to in the Investor’s Business Daily editorial and publish it at a future date. Well, here it is. The editorial will be removed from this site on April 13th, but the link to will remain. Meanwhile, I’ve excerpted the Executive Summary from the report, here, detailing the 23-point conclusion from the 53 page report.

Despite its length, I’d recommend you peruse the report for the many charts and more detailed conclusions, especially the background history of the Renewables Movement pursued by the European Union.

Please note, also, the use of the word “bubble” here. The academics who authored the study are explicitly trying to warn us against a “Renewables Bubble.”

Enjoy.

EXECUTIVE SUMMARY: LESSONS FROM THE SPANISH RENEWABLES BUBBLE

Europe’s current policy and strategy for supporting the so-called “green jobs” or renewable energy dates back to 1997, and has become one of the principal justifications for U.S. “green jobs” proposals. Yet an examination of Europe’s experience reveals these policies to be terribly economically counter productive.This study is important for several reasons. First is that the Spanish experience is considered a leading example to be followed by many policy advocates and politicians.

This study marks the very first time a critical analysis of the actual performance and impact has been made. Most important, it demonstrates that the Spanish/EU-style“green jobs” agenda now being promoted in the U.S. in fact destroys jobs, detailing this in terms of jobs destroyed per job created and the net destruction per installed MW. The study’s results demonstrate how such “green jobs” policy clearly hinders Spain’s way out of the current economic crisis, even while U.S. politicians insist that rushing into such a scheme will ease their own emergence from the turmoil. The following are key points from the study:

1. As President Obama correctly remarked, Spain provides a reference for the establishment of government aid to renewable energy. No other country has given such broad support to the construction and production of electricitythrough renewable sources. The arguments for Spain’s and Europe’s “greenjobs” schemes are the same arguments now made in the U.S., principally that massive public support would produce large numbers of green jobs. The question that this paper answers is “at what price?”

2. Optimistically treating European Commission partially funded data1, we find that for every renewable energy job that the State manages to finance, Spain’sexperience cited by President Obama as a model reveals with high confidence,by two different methods, that the U.S. should expect a loss of at least 2.2 jobs on average, or about 9 jobs lost for every 4 created, to which we have to add those jobs that non-subsidized investments with the same resources would have created. 1 The MITRE project was partially funded by DG TREN (Energy & Transport) of the EuropeanCommission under the Altener programme.Study about the effects on employment of public aid to renewable energy sources-2-3.

Therefore, while it is not possible to directly translate Spain’s experience with exactitude to claim that the U.S. would lose at least 6.6 million to 11 millionjobs, as a direct consequence were it to actually create 3 to 5 million “greenjobs” as promised (in addition to the jobs lost due to the opportunity cost of private capital employed in renewable energy), the study clearly reveals the tendency that the U.S. should expect such an outcome.

4. At minimum, therefore, the study’s evaluation of the Spanish model cited as one for the U.S. to replicate in quick pursuit of “green jobs” serves a note of caution, that the reality is far from what has typically been presented, and that such schemes also offer considerable employment consequences and implications for emerging from the economic crisis.

5. Despite its hyper-aggressive (expensive and extensive) “green jobs” policies it appears that Spain likely has created a surprisingly low number of jobs, two thirds of which came in construction, fabrication and installation, one quarter in administrative positions, marketing and projects engineering, and just one out of ten jobs has been created at the more permanent level of actual operation and maintenance of the renewable sources of electricity.

6. This came at great financial cost as well as cost in terms of jobs destroyed elsewhere in the economy.

7. The study calculates that since 2000 Spain spent €571,138 to create each“green job”, including subsidies of more than €1 million per wind industry job.

8. The study calculates that the programs creating those jobs also resulted in the destruction of nearly 110,500 jobs elsewhere in the economy, or 2.2 jobs destroyed for every “green job” created.

9. Principally, the high cost of electricity affects costs of production and employment levels in metallurgy, non-metallic mining and food processing, beverage and tobacco industries.

10. Each “green” megawatt installed destroys 5.28 jobs on average elsewhere in theeconomy: 8.99 by photovoltaics, 4.27 by wind energy, 5.05 by mini-hydro.

11. These costs do not appear to be unique to Spain’s approach but instead are largely inherent in schemes to promote renewable energy sources.

12. The total over-cost – the amount paid over the cost that would result from buying the electricity generated by the renewable power plants at the marketprice – that has been incurred from 2000 to 2008 (adjusting by 4% and calculating its net present value [NPV] in 2008), amounts to 7,918.54 millionEuros (appx. $10 billion USD)

13. The total subsidy spent and committed (NPV adjusted by 4%) to these three renewable sources amounts to 28,671 million euros ($36 billion USD). Executive Summary: Lessons from the Spanish renewables bubble-3-

14. The price of a comprehensive electricity rate (paid by the end consumer) in Spain would have to be increased 31% to being able to repay the historic debt generated by this rate deficit mainly produced by the subsidies to renewables, according to Spain’s energy regulator.

15. Spanish citizens must therefore cope with either an increase of electricity rates or increased taxes (and public deficit), as will the U.S. if it follows Spain’s model.

16. The high cost of electricity due to the green job policy tends to drive the relatively most electricity-intensive companies and industries away, seeking areas where costs are lower. The example of Acerinox is just such a case.

17. The study offers a caution against a certain form of green energy mandate. Minimum guaranteed prices generate surpluses that are difficult to manage. InSpain’s case, the minimum electricity prices for renewable-generated electricity, far above market prices, wasted a vast amount of capital that could have been otherwise economically allocated in other sectors. Arbitrary, state-established price systems inherent in “green energy” schemes leave the subsidized renewable industry hanging by a very weak thread and, it appears, doomed to dramatic adjustments that will include massive unemployment, loss of capital, dismantlement of productive facilities and perpetuation of inefficient ones.

18. These schemes create serious “bubble” potential, as Spain is now discovering.The most paradigmatic bubble case can be found in the photovoltaic industry. Even with subsidy schemes leaving the mean sale price of electricity generated from solar photovoltaic power 7 times higher than the mean price of the pool, solar failed even to reach 1% of Spain’s total electricity production in 2008.

19. The energy future has been jeopardized by the current state of wind or photovoltaic technology (more expensive and less efficient than conventional energy sources). These policies will leave Spain saddled with and further artificially perpetuating obsolete fixed assets, far less productive than cutting edge technologies, the soaring rates for which soon-to-be obsolete assets the government has committed to maintain at high levels during their lifetime.

20. The regulator should consider whether citizens and companies need expensive and inefficient energy – a factor of production usable in virtually every humanproject- or affordable energy to help overcome the economic crisis instead.

21. The Spanish system also jeopardizes conventional electricity facilities, which are the first to deal with the electricity tariff deficit that the State owes them.

22. Renewable technologies remained the beneficiaries of new credit while others began to struggle, though this was solely due to subsidies, mandates and related programs. As soon as subsequent programmatic changes take effect which became necessary due to “unsustainable” solar growth its credit will also cease.

23. This proves that the only way for the “renewables” sector – which was never feasible by itself on the basis of consumer demand – to be “countercyclical” in crisis periods is also via government subsidies. These schemes create a bubble, Study about the effects on employment of public aid to renewable energy sources-4-which is boosted as soon as investors find in “renewables” one of the few profitable sectors when fleeing other investments. Yet it is axiomatic, as we are seeing now, that when crisis arises, the Government cannot afford this growing subsidy cost either, and finally must penalize the artificial renewable industries which then face collapse.

24. Renewables consume enormous taxpayer resources. In Spain, the average annuity payable to renewables is equivalent to 4.35% of all VAT collected, 3.45% of the household income tax, or 5.6% of the corporate income tax for 2007.

Busting Up the Big Banks

Government, History, Legislation, Markets

Mar 272010

SAVED OUR BANKS

That’s J.P. Morgan there, on the left. Before the Federal Reserve was founded, he had, on more than one occasion, rounded up the resources to save our financial system from collapse. No taxpayer funds.

The crux of the argument for breaking up the big banks and hedge funds is that they were to blame for the ’08 Recession, and doing something to prevent the next one depends on not allowing large, global financial institutions. (There are a few economists and a large slice of the population wed to this notion.) Nevertheless, it seems to me this is simply confusing cause and effect: If you don’t feed garbage into a global economic network, you won’t get garbage out. The whole thing was working just fine until we stuffed it with worthless mortgages. (I know…derivatives, short sales, low Fed rates, Mark-to-Market, stove-piping,collusive rating agencies,creative instruments,etc.)

Worthless mortgages don’t simply appear without cause. Someone has to relax the underwriting standards that have kept our mortgage lending stable for fifty years or more. Since everyone involved is government licensed and regulated, conducting their business in the shadow of city, state and federal regulations, who are we to assume was the initial and primary cause of the problem? Was it the hedge fund managers? The derivative designers and traders? The Federal Reserve? The insurance companies? The large depository-bank trading operations?

There were plenty of people in the financial markets who behaved badly, but they are the most highly regulated (on paper) on the planet. The regulators simply did not regulate, and their over-seers in Congress, although warned repeatedly, failed to act. It is only government regulators that had the power to start or stop this disaster, and they have only as much authority as Congress is willing to give them. (Ask yourself this: Does Congress really want regulators so independent they will call a halt to actions Congress supports? Are some laws written as congressional cover and not to be enforced? Where does that over-riding phone call come from when a regulator threatens to overstep his bounds? By actually regulating.) Everyone involved behaved as they were incentivized. Having a powerful government wanting everyone to own a home – regardless of their ability to pay – was the problem, and still is.

The Community Reinvestment Act, which was properly founded to prevent “redlining” of loans in minority neighborhoods, was stable and uneventful until the push in the late 90′s, by Congress and the Clinton administration (and ACORN,by the way), to hugely increase the quotas for lo-doc loans. (The Bush Administration supported the housing push, as well, but wanted much larger reserves for Fannie Mae and Freddie Mac – Congress refused.) Fannie and Freddie were Turbo-charged, and they in turn empowered Countrywide and the financial markets to create, package and distribute toxic assets into a worldwide market in which trillions of dollars travel daily.

The system did not fail because of the relaxation of the Glass-Steagall Act (preventing depository institutions and investment banks from combining). The only bank in the whole system that fit that description was Citi. And it’s useless to try and blame the thousands of neighborhood banks, most of whom made and kept their own loans.

In my not-so-humble opinion, our current administration and a sympathetic Congress are using this crisis to deflect blame away from themselves and onto the financial markets – and as an opportunity to satisfy an old, Leftist dream of bringing down Capitalism. And what better start than to slowly dismantle the large banks at the forefront of our international prosperity and influence? If you reflect on it, you realize these institutions cannot function adequately if they are not large and international – operating, as they do, in hundreds of countries.

So, when Democratic Senator Kaufman, of Delaware, in the clip that follows (25 mins), rants about ending “Too Big to Fail,” I think he really is announcing his party’s intention of ending American international banking. I urge you to spend a little time at the link, because it appears to be the definitive Democrat statement on the subject – and their sincere intentions.

Prohibition Stupid & Immoral

Culture, Gangs, Government, Health Care, Legislation, Markets, Rule of Law

Mar 172010

Funding Enemies; Subverting Civilization; Incentivizing Crime

We Just Never Learn

An Investor’s Business Daily editorial on Monday, March 15th regarding the previous Saturday’s massacre of American citizens in Ciudad Juarez, Mexico, just across the border from El Paso, Texas:

President Obama expressed outrage Sunday over the broad-daylight massacre in Juarez of a pregnant American U.S. consular employee and her husband, which left their 1-year-old baby wailing in the back of their car. Within 10 minutes, a second attack by machine-gun-toting thugs killed the husband of another U.S. consular employee and injured his two children, ages 4 and 7, traveling in a separate car. All were returning from the same child’s birthday party.

Killings like this in the border city near El Paso are so numerous the State Department cautions against assuming it was a targeted hit — “although we are not discounting anything,” said spokesman Charles Luoma-Overstreet.

The death toll in the Mexican drug war has hit 19,000 now, with Juarez the worst-hit. Over the weekend, 50 people were killed elsewhere in Mexico.

The editorial goes on to rail against the violence directed at Americans, and calls for a tougher approach, on both sides of the border, to back up our inadequate $1.6 billion in equipment and training funds to fight the cartels.

While I am normally in agreement with the IBD editorial board, on this issue we part company. It is outrageous, immoral and delusional that, given the obvious carnage caused by prohibition – American prohibition – anyone can write with sincerity that the solution to the problem is stronger prohibition. It doesn’t work. It hasn’t worked. It will never work. Passing laws against human nature in order to enforce a social preference couched as a moral crusade against addiction is – in light of the observable global consequences – immoral. We have the addiction anyway, because the prospect of illicit earnings propagates armies of drug salesmen looking to create new addicts. That’s the incentive system and unintended consequence of law that we knew was bad when we were forced to repeal the 18th amendment to the Constitution.

Further consequences, without even trying to be comprehensive, are: 1) Funding our enemies in the War on Terror, 2) Exacerbating a sense of racial isolation among American minorities, esp. Blacks and Latinos, by stuffing our prisons with drug offenders, 3) Propagating criminal cartels and gangs all over the world, many of which are better armed than the police or army – and have no regard for the lives of other citizens, 4) Undermines the rule of law and the viability of our institutions by the use of bribery and intimidation – as well as huge shadow-economy profits that distort the economic life and incentives in any communities affected.

There comes a point in any large system where – regardless of its desirability or outcomes – so many people have a stake in its maintenance that it cannot be voluntarily changed. At that point, only catastrophic collapse is possible. We’re getting close to that conclusion, but I would like for our editorial writers to at least acknowledge that – so that we at least have the possibility of saving ourselves from this monstrosity in some more rational way.

Even just since the Nixon years, when the latest chapter of this ongoing debacle was written, shelves of largely ignored books have been printed, warning of the wrongheadedness of the scheme and its horrible consequences to individuals and whole societies. The bad consequences of addiction under legalization and regulation don’t even come close. And I assume that the journalist who wrote the article sincerely believes that the effort formerly called “the drug war” is correct policy, probably because, as William Bennett – one of our former Drug Czars believed – we simply cannot have a society that tolerates widespread drug use. Moral decay followed by chaos and economic collapse. And, of course, there’s really no such thing as ‘recreational drugs.’ Really?

That would be a fitting end to this rant, were it not for your all-time favorite feature:

FREQUENTLY UNASKED QUESTIONS

As drug cartels become more common – in your community and mine, with violent intimidation and bribery the norm (plata o plomo) – who will you be able to trust?

Do we tolerate the midnight raids on the wrong addresses and the resultant harassment – and occasional deaths – of our fellow citizens because it’s always happening to someone else; maybe someone you would never personally be associated with?

If millions of people routinely used marijuana in the 70′s and are currently productive members of society, how is it a “Gateway Drug?”

Did you know that most of our burglaries are caused by junkies trying to get money to support their habit, and that England briefly had a successful program that allowed heroin addicts to get their drug by prescription – not to get high, but to maintain themselves in order to function in normal jobs (a program, I hear, that was stopped by pressure from the US government)?

How are our unemployment statistics skewed by the existence of such a massive Black Market?

How profoundly does this affect the family and societal dynamics within Black and Latino communities?

Other than the cartels and minor drug pushers, who is profiting from the status quo, and why should we tolerate it?

FUQ: 2 Big 2 Fail – 2 small 2 Succeed

Government, Legislation, Markets

Mar 082010

FREQUENTLY UNASKED QUESTIONS

I Tweeted on this earlier, although I’ve been made to understand that no one under thirty tweets anymore. So, hello adults! Just a couple of quick Q’s on 2 Big 2 Fail:

1) If a company cannot be allowed to get too big to fail (or too big for antitrust laws), does it need to be too small to succeed in the global marketplace?

2) Does a law that allows the orderly unwinding of a large, global enterprise solve the problem?

3) If 2, above, is yes: What is the threshold for action, and who is to decide?

4) If government-initiated and supervised unwinding is enacted, what is to prevent such a process from being abused by the political party in power?

5) Is this government authority not just one step from reasonably proposing laws that convert our largest financial institutions into regulated utilities?

6) Would it not then be logical, for the safety and stability of markets and the protection of the consumer to do the same with any large businesses considered ‘vital?’ (The reasons given for this necessity can vary from jobs to national security - the world has seen this movie before.)

Uh-oh, we’re once again edging toward that slippery Socialist slope that is toxic to capitalism and a free society. Maybe it would be good to remind ourselves that the Crash of ’08 was caused by feeding junk assets into a global financial behemoth, rather than by the size of either the system or its parts.

It would really be an improvement in our civilization if we could stop letting our elected officials mis-identify problems and respond with irrelevant or destructive solutions. But that would require a vigilant, informed polity, rather than the political cults that currently control our national political conversation.

Delusion Caused the Collapse

Culture, Government, Markets

Feb 232010

The Only Escape from this Trap is Failure

Market Delusions

It’s alright to stay: I’m not going to stir the ashes of the financial collapse. I have bigger fish to fry, so I’ll just do a quick resume of the situation from my viewpoint, then get to what’s on my mind; namely, what sort of trap did we all fall into in order to create such a calamity? More importantly, was the collapse actually a typical intractable situation that slowly becomes a crisis?

OK, the government did it. There, I’ve said it, so you don’t have to get feverish trying to anticipate who I’m going to blame. Just my opinion. I’m a simple man who likes to think of causation occuring in some sort of sequence. Cause and effect; one foot in front of the other. So I can’t blame organizational size, or derivatives, CDO’S, CDS’s, short sales, speculators, greedy bankers, cowboy traders, quants, or anything else appurtenant to the financial industry. The industry is as we found it in late 2007 – gigantic, dynamic, prosperous; powering a worldwide market with trillions of transactions each business day.

But a massive worldwide distribution system is only as good as what it distributes. Until the crisis, it was good credit paper that fueled millions of jobs, protected nest eggs, liquified businesses large and small. Feed garbage into this behemoth and that’s what you distribute. Republican and Democratic governments had a hand in pressuring banks and incentivizing mortgage brokers to drop prudent underwriting standards; both were allowed to bundle the mortgages and ship them off to the behemoth. They made lots of money, the government got money and votes, and the behemoth had a feeding frenzy at a time when it was important to have a product to sell to world investors hungry for a return.

The rest is a history that will be interpreted in many ways – already has – and we all agree we had a close call. So here’s what’s bothering me: How is it that virtually every cadre of our professional world failed to stop this before it went off the rails? It’s not that we didn’t have regulators; the various congressional committees are trying to eliminate the stovepiping of responsibility, the venue-shopping by financiers, and the many authority overlaps among agencies.

The rating agencies were there, churning out ratings at an accelerated pace, assuring investors they were buying good paper (it’s interesting to note that the subprime loans were rated AAA because that was the best rating for that type of loan. It wasn’t until 2008 that the agencies woke up and realized this sent entirely the wrong message to the markets, and they proceeded to change the ratings on all future mortgages). The banks, large and small, had regulators sitting next to them at work. The stockbrokers and bond traders and insurance investors were all tightly regulated as a prerequisite to being in those businesses. Fannie Mae and Freddie Mac were the massive guarantors of these packaged mortgages, answering both to the executive branch of the government and their public shareholders. The mortgage brokers were the least regulated, but dependent for their business on the good will of their communities and those who purchased their mortgages.

So, back to the top: What really caused all of these actors to avoid acting to save their own system? It looks like some kind of delusion trap wherein the momentum to profit caused a loss of restraint and reached a tipping point where no one within the system would have been powerful enough to stand up and say “stop” without being disregarded, disgraced or dismissed. Self-interest, at every level, in a consensus environment, forces everyone to keep the game going until it collapses of its own internal contradictions.

If that’s so – and I’m only speculating – what other delusion traps do we know about where all the actors are trapped in a paradigm that will eventually fail, but not before causing a lot of external damage? I nominate prohibition, campaign finance and the federal income tax. The immigration mess is a poster child for what happens when you refuse to deal with a daunting, controversial problem involving a lot of self-interested constituencies, here and abroad. I’m sure you can think of a lot on your own, so feel free to pile on with your suggestions. This is important, because it happens these are intractable problems with global significance.

There are now too many constituencies benefiting from the drug war to allow anyone, for any reason, to change it. No one thinks the income tax is anything but a disaster, and there are many good alternatives, but we are paralyzed into riding the current system right over a cliff. Congress is trapped into spending a significant part of their lives fund raising, rather than governing – a widely known fact – and they desperately need tax money to fund programs to curry favor with voters. This produces a lot of bad outcomes, but no one who can change it will, because the status quo is what they mastered in order to get their jobs. Do we need the entire government to fail before anything gets fixed? Is it necessary to just scrap our constitution and start over? I’m afraid we’re going to find out.

Which brings us to:

FREQUENTLY UNASKED QUESTIONS

Re Fannie, et al: How healthy is it to have a government entity with private shareholders who can lobby Congress and make campaign contributions?

What will prevent future regulatory defeasance if the regulators aren’t sure their decisions will be supported and insisted upon by their elected leaders?

How is it possible for voters to rescue officials from their own delusion trap if the trap makes the rescue impossible?

Is there a level of buy-in to certain human activities that only a calamitous collapse can resolve?

Why do we keep electing officials who wilfully profit off the delusions of others?

After all the hearings, will Fannie and Freddie get ‘fixed’ ?

Will mortgage-loan underwriting standards get restored?

Which regulators allowed those standards to be removed?

Which legislators approved of the regulators defeasance?

Is Wall Street ‘greed’ the same as, or worse than, politician’s ‘greed?’

How can we defend against recurrences if we allow blame/causation to be deliberately misdirected?