Thursday, December 24, 2009

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.

Wednesday, December 23, 2009

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?

Tuesday, December 22, 2009

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?

Monday, December 21, 2009

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?

Thursday, December 17, 2009

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.

Wednesday, December 16, 2009

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?

Tuesday, December 15, 2009

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.

Monday, December 14, 2009

Not Out of the Woods

I was quite pleased with Obama's launching the Economic Advisory Board, especially by his appointment of Paul Volcker as chair. However, it seems that the board really has very little say in righting the ship, as indicated in this interview with Der Spiegel.

Unlike Bernanke, Volcker does not believe that we are out of the economic woods yet. Nor does he feel enough of the right things are being done to prevent another catastrophe.

Some quotes:
"Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter,
they don't come in a year. You can begin them but that is a process that takes
time. If we don't make that adjustment and if we again pump up consumption, we
will just walk into another crisis."

"...we have to get back in an area where there is confidence in the stability and the authority of the United States. I think we can do that but we have a challenge, we have gotten a wake-up call. There is concern in our recovery advisory group about how to rebuild the competitiveness of the United States, which inevitably means rebuilding, in part, the manufacturing sector of the economy."

"You are dedicated to exporting, we are dedicated to financial engineering and it hasn't worked out too well. I wish we had fewer financial engineers and more mechanical engineers."

"It's amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It's hard to deny that we need some forward looking financial reform."

"Banking will never be boring. Banking is a risky business. They are going to have plenty of activity. They can do underwriting. They can do securitization. They can do a lot of lending. They can do merger and acquisition advice. They can do investment management. These are all client activities. What I don't want them doing is piling on top of that risky capital market business. That also leads to conflicts of interest."

"As an American, I have to be an optimist. But we have got a big challenge and we have to face up to it. And as you know, there is a lot of concern about the dysfunction of the political system."

Tuesday, December 08, 2009

An Obscenity

That's almost a perfect word to describe our willingness to let a very small percentage of the population bear the major burden of our amazingly stupid and arrogant current folly - escalation in Afghanistan. Bob Herbert's article today is a cry for us to stop passing the burden of this war onto 1% of the population. We are asking not only soldiers but also their families to bear all of the costs.

Yes, WWII was fought in the last century and we live in a new world. But, it's not a better world. Back then we all fought for our country. We used ration cards to buy food. The headlines in every newspaper were about the war every day; they wasted very little time on the activities of the rich and famous. All of my male relatives were drafted or volunteered; some were wounded. Neighbors' kids died. College freshmen were drafted. We bought e-bonds. Women took over the jobs left by men drafted and this country became a massive production machine aimed at defeating the enemy.

How long can we continue to ask others to pay the price of our collective stupidity and arrogance? How can the president believe that troops will be pulled out in a couple of years? Is he delusional or cynical?

Monday, December 07, 2009

HAMPered Mortgages

Our estimable Treasury Department introduced the Home Affordable Modification Program with considerable fanfare earlier this year. However, things are not getting better for those who have trouble paying their mortgage. The Treasury says that banks are not doing enough. But, it may be that the program is not good enough.

Consider how the program calculates affordability. It considers only the payments on the mortgage plus insurance and taxes. However, most of us have more debt obligations than the mortgage - the credit card, the car payment and, in too many cases, the second mortgage. Shouldn't these other obligations be factored into the calculation of affordability?

Further, it appears that another aspect of second mortgages is not playing a role here. There is no interest in pressuring the banks - to whom we have given so much money - to write some of these mortgages off. These second mortgages appear as a $442 billion asset on the books of the banks. Writing these mortgages down to their true value would seriously impact each banks' balance sheet, perhaps to such a degree that bonuses will not be earned. That would be a major problem for Tim and his friends.

From Don Wright of the Palm Beach Post

Friday, December 04, 2009

This is a strategy?

R. J Adams at Sparrow Chat has a clearer example of the folly that dares to call itself a strategy.


Wednesday, December 02, 2009

Where did 1,000,000 jobs go?



Look at this chart from the Labor Department. It plots private sector jobs from January 1998 to January 2009. It is not as clear as I'd like, but, if you look closely, you'll see that the number is about the same in 2009 as it was in 1999.

The accompanying text looks at October 1999 and 2009. In 1999 there were 109,000,000 private sector jobs, in 2009 there were 108,000,000.

Isn't this a more severe problem than sending troops to Afghanistan?

Do these photos really differ?

They are both using America's young men and women to make the sale and, in both cases, it's not a product we should be buying as it will kill us.








Tuesday, December 01, 2009

A Voice of Experience

In the current NY Review Dr. Jerome Groopman has some interesting comments about today's medicine and the proposed changes. He believes that the emphasis on money is not good for doctors or patients. Yet, he feels that we need to adopt a different insurance scheme, one closer to that of Europe.

Groopman realizes the importance of scientific analysis but is not in favor of the strong emphasis on evidence-based medicine that seems to be part and parcel of the proposals for new insurance plans. He believes - and offers fairly strong supporting evidence - that 'evidence' does change over time and not everyone fits the model on which the evidence is based. He also feels that the placebo effect is very strong, which, to my mind, supports the thesis that the mind has a heck of a lot of control over the body.

A Boffo Issue

Over the past few months I've considered cancelling my subscription to the New York Review of Books. Their Holiday issue made me once more realize why I subscribe. As usual, I skipped over a number of articles in which I had zero interest. But then, I read Cathleen Schine's review of Gail Collins' "When Everything Changed". And then Ian Buruma introduced me to Helene Berr. I've always been fascinated with George Kennan and Paul Nitze; Brian Urquart's review of "The Hawk and the Dove" made me see Nitze in a new light. The capstone was Tony Judt's thoughts on social democracy. Yes, I had no interest in Francis Bacon. But, the articles I've mentioned will last me into 2010 and beyond.

Where's the Guts?

In today's NY Times Bob Herbert sums up my attitude - and I suspect (or hope) that of many Americans - about the escalation of the war. Will any president take the higher road and admit mistakes? I've highlighted some points I think especially important.

“I hate war,” said Dwight Eisenhower, “as only a soldier who has lived it can, as one who has seen its brutality, its futility, its stupidity.”

He also said, “Every gun that is made, every warship launched, every rocket fired, signifies in the final sense a theft from those who hunger and are not fed, those who are cold and not clothed.”

I suppose we’ll never learn. President Obama will go on TV Tuesday night to announce that he plans to send tens of thousands of additional American troops to Afghanistan to fight in a war that has lasted most of the decade and has long since failed.

After going through an extended period of highly ritualized consultations and deliberations, the president has arrived at a decision that never was much in doubt, and that will prove to be a tragic mistake. It was also, for the president, the easier option.

It would have been much more difficult for Mr. Obama to look this troubled nation in the eye and explain why it is in our best interest to begin winding down the permanent state of warfare left to us by the Bush and Cheney regime. It would have taken real courage for the commander in chief to stop feeding our young troops into the relentless meat grinder of Afghanistan, to face up to the terrible toll the war is taking — on the troops themselves and in very insidious ways on the nation as a whole.

More soldiers committed suicide this year than in any year for which we have complete records. But the military is now able to meet its recruitment goals because the young men and women who are signing up can’t find jobs in civilian life. The United States is broken — school systems are deteriorating, the economy is in shambles, homelessness and poverty rates are expanding — yet we’re nation-building in Afghanistan, sending economically distressed young people over there by the tens of thousands at an annual cost of a million dollars each.

I keep hearing that Americans are concerned about gargantuan budget deficits. Well, the idea that you can control mounting deficits while engaged in two wars that you refuse to raise taxes to pay for is a patent absurdity. Small children might believe something along those lines. Rational adults should not.

Politicians are seldom honest when they talk publicly about warfare. Lyndon Johnson knew in the spring of 1965, as he made plans for the first big expansion of U.S. forces in Vietnam, that there was no upside to the war.

A recent Bill Moyers program on PBS played audio tapes of Johnson on which he could be heard telling Defense Secretary Robert McNamara, “Not a damn human thinks that 50,000 or 100,000 or 150,000 [American troops] are going to end that war.”

McNamara replies, “That’s right.”

Nothing like those sentiments were conveyed to the public as Johnson and McNamara jacked up the draft and started feeding young American boys and men into the Vietnam meat grinder.

Afghanistan is not Vietnam. There was every reason for American forces to invade Afghanistan in the immediate aftermath of Sept. 11, 2001. But that war was botched and lost by the Bush crowd, and Barack Obama does not have a magic wand now to make it all better.

The word is that Mr. Obama will tell the public Tuesday that he is sending another 30,000 or so troops to Afghanistan. And while it is reported that he has some strategy in mind for eventually turning the fight over to the ragtag and less-than-energetic Afghan military, it’s clear that U.S. forces will be engaged for years to come, perhaps many years.

The tougher choice for the president would have been to tell the public that the U.S. is a nation faced with terrible troubles here at home and that it is time to begin winding down a war that veered wildly off track years ago. But that would have taken great political courage. It would have left Mr. Obama vulnerable to the charge of being weak, of cutting and running, of betraying the troops who have already served. The Republicans would have a field day with that scenario.

Lyndon Johnson is heard on the tapes telling Senator Richard Russell, chairman of the Armed Services Committee, about a comment made by a Texas rancher in the days leading up to the buildup in Vietnam. The rancher had told Johnson that the public would forgive the president “for everything except being weak.”

Russell said: “Well, there’s a lot in that. There’s a whole lot in that.”

We still haven’t learned to recognize real strength, which is why it so often seems that the easier choice for a president is to keep the troops marching off to war.

Another Surprise

So American Prospect is not Time or a very well-known publication, but it is fairly well-known in political circles. It has endorsed Alan Khazei for Senate in Massachusetts. The laudatory article pitches Khazei as a social entrepreneur. And, if there is such a field, he's actually done quite well.

He started City Year, which now operates in 16 cities in the U.S. and also in Johannesburg; it has a budget of $46,000,000 and employs 1,000. City Year, the article claims, was the inspiration for AmeriCorps, which Khazei has also helped surmount budget challenges.

I was quite impressed that Bloomberg ran a fundraiser for him.

Who knows? Stranger things have happened.