Heads I Win, Tails You Lose

Over the past two years I've written about the C.D.O., collateralized debt obligation, in not exactly favorable terms. Now Gretchen Morgenson etal writes about those who saw the weakness in the C.D.O. and bet against it. It so happens it was the same people who were selling the C.D.O. as a new paragon of investing smarts.

The article has a few telling quotations. From "an expert in structured finance", “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.” From a Goldman Sachs salesman, “Here we are selling this, but we think the market is going the other way.” And Morgenson writes about the myriad ways the banks modified the rules of the game to increase their profits when the C.D.O. tanked.

But, we need not worry that such a nasty process will weave its way into our financial system again. After all, Geithner has hired Lewis Sachs as a special counselor. His firm was quite active in this process.

Whatever GE Wants, GE Gets

and GE wants to build the backup engine for the F-35, whether we need it or not. We've already poured $2 billion and ten years into this project but have yet to produce an engine. Now we're throwing in another $600,000,000 for this year alone.

The Pentagon says we don't need it. Obama says we don't need it. Congressional Research Services says we don't need it. Taxpayers for Common Sense says we don't need it.

But the esteemed federal leaders of Massachusetts, Ohio and Indiana say we need it, otherwise GE would have to cut jobs in those states and in the 21st century capitalism under which we live that is a bad thing, 'that' being cutting jobs at a behemoth like GE. Cutting job's at Max's Manufacturing is, of course, not a bad thing as that is how capitalism is supposed to function.

How can we ever control our spending if we continually violate basic precepts of capitalism when it comes to the big guys?

Another Wasserman Cartoon That Is On The Money

Sometimes an 'eye for an eye' may be justified

You see the headline - Pakistan court orders ears and noses to be cut off - and you shudder and wonder how a court in the 21st century could order such a punishment. Then you read the story and understand. The defendants cut off the ears and nose of their cousin when her parents refused to approve the marriage to one of the defendants.

Not doing too well

OneUnited Bank, a recipient of TARP funds, is having trouble paying dividends on this money. It has missed 3 of 4 opportunities, despite reporting $3,100,000 in profit for the first nine months of the year. Of the 600 banks that received TARP money, only 38 have failed to make a dividend payment. How likely is it that OneUnited will be here a year from now?

Doing the nation's business

Deeply concerned about our nation, Senators Ben Nelson and Harry Reid agreed that the nation would be much better off if the proposed health care bill

• freed Blue Cross of Nebraska from paying the proposed annual fee for insurers
• exempted Medigap policies sold by Mutual of Omaha from the annual fee
• allowed referrals by Nebraska doctors to hospitals owned by these doctors.

Having placated Senator Nelson, Senator Reid assured Senator Dodd that the bill would include $100,000,000 to allow UConn to build another hospital. Senator Bill Nelson was the next recipient of largesse from Reid; 800,000 Florida seniors can retain extra benefits based on the Medicare Advantage boondoggle.

Reid thinks big. He realized that drug makers needed help. Thus, he is wiling to allow some companies to restrict generics from entering their market for at least 12 years. And, of course, Reid refuses to allow the government to negotiate drug prices for Medicare recipients.

Don't you feel so much better knowing how much our leaders are doing for you?

I find this hard to believe.

The Pentagon pays a retired general $1,600 a day as an 'adviser' to its Joint Forces Command and this general works for seven defense contractors as either a consultant or board member. Doesn't this sound bizarre to you?

Apparently, this general is a fairly good marketing guy as he was able to sell the Marines on a video surveillance system that did not work. And, this is not a unique situation. 130 generals and admirals collect their pension from the military, are paid as advisers to the military and also work for defense contractors.

Isn't there something wrong here?

My lazy American students

That's the title of an op-ed by Kara Miller, who teaches rhetoric and history at Babson College, a business college in Wellesley, MA. She complains that the bulk of her U.S. students do not put in anywhere near the effort of her foreign students. If she is right and I think she may be, then our return to greatness is highly unlikely.

How stupid are we?

This whole brouhaha about filibustering really amazes me. One would think that the Senate actually gets things done so that the idea of some idiot or group of idiots holding up their sober and intelligent deliberations is something that we have to zealously guard against. It may very well be a good idea to let the filibuster proceed so that our nation can really see how ridiculous our leaders are. Let's show the filibuster on all the tv channels. Run it in place of Law and Order. Here we are sinking into the marshes and these people believe it more important to express their disagreement than to try to solve our problems. Why has this country sunk so low as to tolerate this bullshit by the lower orders?

Would an intelligent electorate see that a filibuster where a Senator talks about nothing for days on end is an abdication of responsibility by the Senate and by us? Should we not start a campaign to recall the entire Senate? The quality of these people is really sub-par. Would you hire Reid to run your operation? Would you trust Dodd to actually say what he really believes? Why should anyone pay any real attention to Nelson or Lieberman? Why do we tolerate suuch assholes?

Is Volcker Speaking Up More?

Here are some excerpts from his appearance at something called the Future of Finance Initiative. Emphasis mine. Will our leaders listen?

You concluded with financial-services executives showing cultural sensitivity and responsible leadership. Well, I have been around the financial markets for 60 years, and how many responsible financial leaders have we heard speaking against the huge compensation practices?

Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God's work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint?

I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two—credit-default swaps and collateralized debt obligations—which took us right to the brink of disaster. Were they wonderful innovations that we want to create more of?

I mean: Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information. I am getting a bit wound up here.

In Britain, I was just talking to a high-tech company about the immense attraction to go into finance when both Britain and the United States are suffering from a basic inability to produce things competitively, to keep up with the new economy. Is this a result of financial innovation that we should be really worried about?

I made a wiseacre remark that the most important financial innovation that I have seen the past 20 years is the automatic teller machine. That really helps people and prevents visits to the bank and is a real convenience.

How many other innovations can you tell me that have been as important to the individual as the automatic teller machine, which is in fact more of a mechanical innovation than a financial one?

I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs.

I do not know if something happened that suddenly made these innovations essential for growth. In fact, we had greater speed of growth and particularly did not put the whole economy at risk of collapse. That is the main concern that I think we all need to have.

If it is really true that the world economy was on the brink of a great depression that was greatly complicated by financial problems, then we have a rather basic problem that calls for our best thinking, and structural innovation if necessary. I do not want to stop you all from innovating, but do it within a structure that will not put the entire world economy at risk.

First, let us agree that we have a problem with moral hazard. I do not think that there is any perfect answer in dealing with it, but I would suggest that we can approach an answer by recognizing that elements of finance have always been risky and that's certainly true of the commercial-banking system.

I think we need the commercial banking system for more than automatic teller machines. Commercial banks are still at the heart of the system.

In a crisis, everybody runs back to the commercial banks. They, after all, run the payment system. We cannot have this global economy without commercial banks operating an efficient payment system globally as well as nationally. They provide a depository outlet for individuals and businesses, and they are still big credit providers for small and medium-size businesses, but they backstop most of the big borrowers as well. The commercial-paper market is totally dependent on the commercial banking market. They are an essential financial institution that has historically been protected. It has been protected on one side and regulated on the other side.

I think that fundamental is going to remain. People are going to think it is important, it is important, it needs regulation and in extremis it needs protection—deposit insurance, lender of last resort and so forth.

I think that it is extraneous to that function that they do hedge funds, equity funds and that they trade in commodities and securities, and a lot of other stuff, which is secondary in terms of direct responsibilities for lenders, borrowers, depositors and all the rest.

There is nothing wrong with any of those activities, but let you nonbank people do it and you can provide fluidity in markets and flexibility. If you fail, you're going to fail, and I am not going to help you, and your stockholders are going to be gone, and your creditors will be at risk, and that is the way that it should be.

How can I be so blithe about making that statement? We need a new institutional arrangement which I believe has a lot of support. We need a resolution facility. What can that resolution facility do? If one of you fails and has systemic risk, then it steps in, takes you over and either liquidates or merges you, but it does not save you. That ought to be a kind of iron cross.

A Medicare Surplus?

It certainly sounds strange but an article in the Proceedings of the National Academy of Sciences makes the claim. The argument is based on improvements in medical care so that older people are able to continue to be productive members of the work force. The authors believe that studies predicting deficits ignore the fact that people are living longer, healthier lives and a certain proportion of these people will continue to work into their 70s and 80s and, thus, our productivity will continue to increase at an annual growth in GDP of 3.2%.

Much of their work is based on a 1994 study by the Bureau of Labor Statistics (BLS) which projected that Medicare expenditures in 2004 would be $361 billion. The actual number was $268 billion, the difference being due, in the authors' opinions, to the failure by the BLS to fully consider all of the benefits of a longer, healthier life.

The authors made their own projection of the 2004 Medicare costs and came up with $268 billion, a lot closer to the actual number. Of course, I can't figure out when they made this projection. Furthermore I ask myself some basic questions:

Will enough oldsters want to continue to work?
What kinds of jobs will they hold?
How much will they be paid?
How productive will they really be?

They raise an interesting point. How likely is their conclusion?

Lunch on Boston Common

By Ted Gartland of the Boston Globe

CALMing the TV

We've all had the experience of being shocked out of our seat when a commercial comes on. Sometimes the noise is deafening. Surprisingly, our leaders are trying to do something about it. The Commercial Advertisement Loudness Mitigation Act (CALM) has been approved by the House. The bill attempts to prevent broadcasters from ramping up the volume when airing commercials.

A Surprise

The woman above was six months pregnant and did not know it as she trained for a weightlifting contest. She gave birth during the training session.