A Stone's Throw

Deregulation

2010-05-11T18:01:00.001-07:00

Much of our regulation of banking was created during FDR's terms as President, during the Great Depression. A leading figure in that Administration was Marriner Eccles, who instituted much of the banking regulation and became Chairman of the Federal Reserve. Eccles was the founder of First Security Bank of Utah and a descendant of Mormon Pioneers.

Among one of the major accomplishments of the regulation was dividing commercial banking from investment banking. Broadly, commercial banking was limited to taking deposits and providing a certain rate of return, in turn lending that money out locally, usually to its same customers, at a slightly higher rate of return, thus turning a profit. It was relatively risk-free. Stocks, bonds and other securities, which carried greater risks, but also greater returns on investment was the purview of investment banking. The investment banks finaced larger capital projects, dealt with larger nation-wide corporations and not only bought and sold securities, but provided financial advice on topics such as mergers and acquisitions.

The creation of the Federal Depositor Insurance Corporation, although largely financed by the banks themselves, guaranteed deposits in the advent of a bank failure, thus providing "moral hazard" in that the U.S. government stood behind the deposits...if self-funding was exceeded, the full faith and credit of the United States stood behind the deposits (up to a certain limit on each account).

In general, the Federal Reserve regulated commercial banking, and the subsequent Securities and Exchange Commission (SEC) was created to regulated the investment banks (Wall Street).

Other financial instituions (such as Savings and Loans, Credit Unions, etc.) sprang up over time and were intially regulated through state law. Following the Savings and Loan crash in the eighties and nineties, which occured largely by deregulating them and allowing them larger markets (such as real estate and development lending, the Office of Thift Supervision was created at the federal level to oversee the Savings and Loans sector - or what was left of it.

Beyond banking and financial institutions, local, state and federal government regulation followed the expansion and increasing complexity of the broader society. Indeed, the rise in government regulatory and oversight functions became known as the "Progressive Era," running from the late eighteen hundreds to the nineteen twenties, particularly the Administrations of Theodore Roosevelt (the "Trust Buster") and Woodrow Wilson. During this era, the country experienced hugeindustrial and population growth and became a world power. Perhaps, government desired a sense of sharing that power, as critics of the era today profess, but much of this was due simply to the normal constraint of democracy upon the economic system of capitalism.

Waves of immigrants arrived to staff the country's growing industrial power. Citizenship conveyed voting power and voting power brought about the concept of "social justice" wherein government intervened to prevent the worst forms of exploitation. In some respects, the "worker" of the new largely industrial North was little better off than the pre-Civil War slave of the agrarian South...and as government stepped in to bring an end to slavery, it subsequently stepped in to regulate the use of labor in the North. It is difficult to defend Child Labor laws as "socialism," although the immigrants of industrialization brought many of those ideas as well.

I would suggest that the "Progressive Era" did have a profound change on American society in a sense similar to the expansion of Rome or any historical Empire. As the population grew in both numbers and diversity of ethnic cultures, the need for greater administrative control and "law" grew with it.

There is a second important factor in this growth of government power, democracy. Throughout human history, the wealthy and powerful have seldom had a problem accessing government...whether a monarch or a president; a Roman senator or a U.S Congressman. Democracy didn't overturn this, but it did shift the emphasis from the rule of a minority to the rule of the majority, consequently giving a "voice" to all within the society via their "vote."

Time is up for today...will continue for another post or two on this topic.

The Community Reinvestment Act (CRA)

2010-05-04T17:17:00.000-07:00

The first CRA bill was passed in 1977, under the Carter Aministration, and was pretty much an outgrowth of the earlier Great Society of LBJ and Civil Rights. IT's immediate justification was anti-discrimination regarding bank lending in low income, minority neighborhoods and intended to eliminate a common banking practice of "redlining." Redlining consisted of avoiding lending in these neighborhoods, according to the banks, because of poor credit performance, high rates of crime and the general higher risk found there.

The "counter-argument" was not to deny the statistical evidence regarding these factors, but to insist that "credit worthiness" needed to be based on individual performance, rather than neighborhood performance and to do otherwise was to continue a system of segregation that perpetuated the very factors the banks pointed to as reasons for non-lending.

Over the years, particularly as African Americans gained seniority in Congress, as a result of re-election, and rose in the Congressional leadership (particularly in the House of Representatives and the Democratic Party), the original CRA legislation was from time to time stregthened. Pressure was bought to bear on the Federal Reserve to, in turn, pressure the banks under their jurisdiction into paying greater attention and they responded by establishing offices in the various Federal Reserve regional banks to perform studies, coordinate banks and civic groups (such as ACORN)to encourage more communication, and to publish guidelines for the banks to use, which used "alternative measures of creditworthiness" for low-income, minority loan applications (e.g. combining household income although everyone in the household might not be part of a "traditional family," etc.).

As I understand it, it was not however, until the Clinton Administration and the growing merger mania and push for deregulation and expansion of national banks, that CRA compliance went from something approaching "voluntary," to meaningful penalities for non-compliance. Much of what had heretofore been informal became formal. Reports were required to measure compliance via 12 "assessment critieria," and banks were "scored" on the degree of compliance. At least one major bank expansion (The Continental Bank of Illinois request to purchase a smaller Arizona bank) by a Federal Reserve ruling that held Continental Bank to be CRA non-compliant.

This simultaneous expansion, but consolidation through mergers and acquisitions, in the wake of the failure of numerous Savings and Loan banks earlier created new opportunities for financial services. The intense competition created through the expansion and consolidation was a factor in the drive for increasingly "innovative products" (perhaps an equal contribution in this drive was the advancement of information technology which allowed the real-time sharing of information, the gathering of large data bases, etc.).

Personally, I would contend that much of this was also driven by the now middle-class hunger for credit and a growing awareness within the financial services industry that a great deal more money could be made by pressuring the more numermous "customers" living on the margins, than the "fat cat on the hill" who had the resources and education to avoid what become essentially a variation of "pay-day lending."

In a 1990's Michael Moore documentary, Moore interviews economist and real estate Professor Elizabeth Warren (now Chairwoman of the Financial Crisis Inquiry Commission). Warren relates the story of her conducting a seminar for banking executives at Citigroup on how they may avoid consumer risk through a more careful screening of credit applicants. As she wound up the several hour presentation, the senior executive in the room spoke up, telling her: "That's very interesting Professor Warren, but it is from those people living on the edge of bankruptcy that we make most of our money."

Thus, far more than the CRA Program and "banks being forced to lend to low-income minorities who were poor risks," I'd suggest that banks found they could not lend fast enough.

Studies since the economic crisis in the Fall of 2008 conducted by the Federal Reserve, the FDIC, several Universities and numerous other independent sources tend to uphold this conclusion.

In a December 4, 2008 speech to the Consumer Federation of America, Shelia Bair, Chairwoman of the FDIC (and a Bush appointee), stated: "I think we can agree that a complex interplay of risky behaviors by lenders, borrowers, and investors led to the current financial storm. To be sure, there's plenty of blame to go around. However, I want to give you my verdict on CRA: Not Guilty."

Bair points out that during the "bubble" of subprime mortgages from 2004-2006 (I'd suggest 2003-2006), only about 25% of the subprime loans (termed "higher-priced loans," since increased risk increased the loan fees and interest rates) were made by CRA-covered banks. Three-fourths of the subprime loans made during this period were made by private independent mortgage companies and large-bank affliates not covered by CRA rules.

The other studies back up Bair's conclusion. A Fed study showed that there was no significant difference in the foreclosure rate in low-income, minority neighborhoods, covered by the CRA, than in low-income, NON-minority neighborhoods.

Another study showed that mortgages made last...just before the crash...failed first, as lending standards decreaded, decreases unrelated to the CRA. And, as Bair concluded in her speech: "And the fact is, the lending practices that are causing problems today were driven by a desire for market share and revenue growth...pure and simple.

In the next post...we'll explore banking deregulation.

The Economic Crisis

2010-05-03T09:33:00.000-07:00

For the past few months, I've been engaged in internet discussion and research concerning the economic crisis, the bailout of American banks and its origins.

What motivated this interest was a question in my mind regarding right wing, conservative claims, primarily on public internet forums, that the origin of the crisis could be traced to the Carter Administration's sponsered legislation termed the Community Reinvestment Act (CRA). The "theory" put forward is that, through this legislation, and subsequent amending legislation during the Clinton Administration, U.S. banks were "forced" by the Federal Government into making bad loans to low-income, minority neighborhoods and that this federal government intervention led directly to the collapse of the subprime mortgage market.

Additionally, the more recent Democratic guilty parties are Christopher Dodd, currently head of the Senate Banking Committee and Barney Frank, Chairman of the House Financial Services Committee (the House of Representatives equivalent of the Senate Banking Committee).

Supposed "proof" of these charges are that Dodd received special treatment regarding his own home loan from a Countrywide mortgage program called "Friends of Angelo," Angelo being the founder and CEO of Countrywide. The "proof" regarding Frank is that Frank (with an openly gay sexual orientation) had a boy friend at one of the Government Sponsered Enterprises (Freedie Mac or Fannie Mae) and repeatedly defended the GSEs, referring to them as "financial sound," when in fact they were on the brink of bankruptcy due to their portfolio of bad mortgages. Associated with these charges are the repeated attempts by the Bush Administration and the Republican Congress to "reign in" the GSE's and prevent undue risk.

In sum, the conclusions arrived at from this interpretation of the cause of the economic crisis are: 1) government intervention into the banking system - via the CRA - orginated the bad mortgage problem leading to excessive forecluses leading, in turn, to the economic crisis. 2) Democrats were basically behind the CRA and the subsequent protection of the GSEs, which led to the crisis, since the GSEs are the single largest underwriters in the U.S. mortgage industry.

There are a few "side-lights" to this general theory. One is that ACORN, supported by Democrats, particularly Barack Obama (during his work as a Chicago Community Organizer)was a major, basically African-American, organization that pressured Democratic politicians into support for the CRA and banks (through the organization of demonstrations, disruption of banking business and discrimination law suits), and thus played a major role in causing the economic breakdown.

After checking into the above, I found that there was indeed "some truth" in the facts, but that the facts in themselves did not lead to a cause and effect conclusion regarding the charges and the economic meltdown. Further, I had two doubts regarding that cause and effect: 1) if the CRA "caused" the meltdown, why didn't it occur earlier, at a time closer to the inception of the CRA? 2) if Democrats were primarily to blame for subprime loans, why did the growth in the number and value of subprime loans virtually double under a Republican President, George Bush, and a Republican Congress?

Thus, I began my own research into the economic crisis of 2008-2009.

What follows in a series of posts are my own conclusions...beginning in the next post with a debunking of the above theory and then exploring what I now consider to be largely an accidential convergence of errors into the "Perfect Storm."

Those "errors" consist broadly of four events: 1) massive deregulation of the financial services industry; 2) The events of 9/11/2001 and its impact on national economic policy; 3) the failure of risk management models; and 4) global competition in a global economy, wherein the United States, ridden with debt, and guided by obsolete economic policy, has tried to maintain its post WW II status as the "model" for that global economy.

More in the next Post.

Health Care

2009-08-23T18:32:00.000-07:00

Hmmm? What a curious situation. September should be interesting.

The system is such that it was to be expected that the most liberal bill would come out of the House. Founding fathers designed it that way. Most populist views, left or right, come from the House, "The People's Chamber." The Senate, on the other hand, was to represent the status quo...the establishment. Basically, the Senate represents the sovereignty of the States; the House, the sovereignty of the People.

That coupled to gerrymandering House districts to ensure "safe seats" and the seniority system, almost assures that the more radical base of each party controls their party's leadership in the House.

Nevertheless...President Obama's handling of the situation was less than "excellent." "Excellent?"...Downgrade that to "less than good." If he cannot get a health care reform bill through, I would expect heads to roll in the White House...perhaps starting with his Chief of Staff.

And, two trillion off on the deficit projection? More heads...perhaps his chief of the Domestic Economic Council.

Granted, he has one of the most difficult tasks in recent memory...but running afoul of politics doesn't help. They missed the Town Hallers and Democratic Blue Dogs and were over focused on the Clinton single payer "left" in the House leadership positions.

If you look at each piece of the Obama platform separately,you miss the message. Each is a tactical piece of an overall strategy...namely the rebuilding of the American Economy to restore a strong and prosperous middle class, that saves and pays taxes, rather than spends and acquires debt. That goal, puts him squarely against most of the status quo who have profited off an over-emphasis on the global economy over a generation.

Investors do not invest to create American jobs. They invest for a return on the investment - i.e. to make more money. If the economy is geared toward riding over-valued assets (bubbles) or toward company's yielding the best returns by the utilization of cheap foreign labor...trickle down economics may continue to work...but only for the countries with whom we run large trade deficits.

A Democratic society cannot exist as a nation of a few rich and very many poor. The poor will use their vote to acquire social programs that substitute for what the private sector is not providing them...and the wealthy will be stuck with higher and higher taxes to pay for it. On the other hand, if wealth is spread over the more numerous middle class, then the vote aligns with economic policy...and the middle class shares the tax burden.

Obama's pieces are aimed at an economic restructuring, both to rebuild the American infrastructure and to compete better globally: health care, education and energy independence.

But if loses on Round 1...the rest will be far more difficult.

Obama and the Health Plan

2009-07-23T18:31:00.001-07:00

Ah...a frustrating day on the Internet trying to explain how government works.

Background: The founding fathers feared primarily two things - too powerful a government and mob rule. To take care of the first, they gave us checks and balances; to take care of the second, they fore go direct democracy and gave us representative government.

They intended that the two chambers of Congress to off-set one another...sort of a check and balance within Congress, as well as the others between branches. Te House was elected from numerous districts and directly by the people. Roughly, this the House equates to Britain's House of Commons, as it used to be. The House was intended to be "the people's chamber." It was designed to be larger than the Senate on purpose...to make it more difficult to get consensus. To off-set this, they gave them the "right" to propose appropriations (and more difficult to get them).

The upper chamber, the Senate, was elected via the Sate legislatures...not directly by the people. This was the equivalent of Britain's House of Lords, as it used to be. Although there was no inherited aristocracy, the F/F's recognized American elites, in the form of successful businessmen, planters, and a professional class (doctors, lawyers, etc.). By electing the Senate through the State legislatures, they created a barrier for the popular election of a demagogue and expected the Senate to represent these elites. Being a smaller chamber, it also was intended to be more collegial and more conservative than the lower chamber.

Although we abandoned, through Constitutional amendment, state legislature election of the Senate and went to direct popular elections, many of the basic intentions of the F/F's remain today in regard to the "nature" of the separate chambers.

In other words, the F/F's foresaw that legislation coming out of the House would be more representative of the "people" and perhaps transitory in nature. The brake on momentary popular fads was the requirement that legislation pass both chambers and be signed by the President before coming law.

Subsequent evolution enhanced rather than reduced these peculiar chamber orientations. The seniority system coupled to the gerrymandering of "safe districts" for both parties, virtually ensured that bills coming out of the House would represent the extremes of the Parties' positions. In other words, Committee Chairmen tend to be those who have been elected and reelected from safe districts and as such represent the views of either the most Republican of Republican districts or the most Democratic of Democratic districts.

All of which brings me to Obama and health care...but keep in mind the above.

One reason Obama is appearing to "rush" the House toward a vote is that he understands the legislative process and the above. He knows that whatever comes out of the House will not be the same bill that is eventually sent to him for signature.

The Senate will review the House bill and propose, in their own bill, less radical and more conservative alternatives. Both bills will then go to a Conference Committee, composed of representatives fom the House and Senate, for resolution of the differences. If Obama is reluctant to read every word of the thousand page House bill, it is with the understanding that there are two additional thousand word bills that lie ahead and that he will only have to put his name to the last one out of Congress. So, his impatience is in the vein of "let's get on with the process."

The second factor lies in how he reached the Presidency in particular. Remember that the real election in 2008 was fought out in the primaries for the Democratic nomination. The party was split very closely between himself and Clinton and one of their most pronounced differences was in the health plans each presented. So, he recognizes that there is a wide difference within the Democratic Party as to just what is meant by universal health care...and he must tread carefully to arrive at a Party consensus.

The third factor lies in his position within the Party itself. Clinton was, for the most part, the choice of the Party establishment, taken over from Bill (and with notable exceptions in the left wing who never forgave Bill for blowing his opportunities over...well, we all know that story...moving toward the center after his election and losing Congress in the 1994 elections). Indeed, many in the left of the Democratic Party had the same reaction to Bill as many on the right in the Republican Party had to George Bush and John McCain...i.e. they were not successful because of their lack of faithfulness to he cause.

I've digressed. In sum, Obama knows he must unify the Party and "prove" himself to Party pros. Many of these "pros" are old timey Democratic politicians, who now head up Committees and want to make sure Obama shows them proper respect, understands the limits of his authority, etc. I suspect, this is the major reason he has been vague with Congress on exactly what he wants, instead of sending them a detailed draft bill. He is "deferring" to them and the legislative process.

However, some form of universal health care has been on the Democratic agenda since Harry Truman. Additionally, he is right about the need for reform and future costs (more on that tomorrow). He'll wait it out to year end and expect something to reach his desk before then. In this way, no one gets mad on the Democratic side (and since they have the votes, it doesn't matter if Republicans get mad or not). And, he comes out the winner. When history forgets who held what committee chairmanship, he will be remembered as the Democratic President that enacted Health Care Reform...and if he handles all of this well, he'll gain respect among those same Chairman, who will be so quickly forgotten.

Grading Obama

2009-07-13T12:26:00.000-07:00

Dear Friends and Family:

We're experiencing a rainy day in the midst of a month of sunshine here in Seattle. Seems like an appropriate time to return to this blog.

I've also spent more than a few evenings arguing Obama's case on internet forums. I consider this my "community service." Although I completely understand some of you are NOT Obama fans, I am looking forward to somewhat more positive responses.

OK...grading Obama.

As of the closing days of July 2009, I think I give him something between a B- and a B. Considering that he is probably facing the most difficult times of any President since FDR, that isn't all that bad. Without judging the policies themselves, I grade him down a bit in his post-election movement toward the center. While this was envitable for practical political reasons, the movement IS a departure from the campaign rheotric that stirred the liberal wing of the Party (e.g. ending the wars, prosecuting torture, White House transparency, etc.).

I keep reminding myself, however, of the three major platform planks: energy self-sufficiency, health care and education (more on the economy in a moment). Pleasantly, he does not appear, IMO, to have moved his focus much from these issues. I suspect giving ground elsewhere may, in part, be due to the necessity of lining up conservative and moderate Democratic Congressional votes to push these substantive issues through in the first two years.

Aside from some R&D money and what may be up and coming tax code changes, the mainstay of energy self-sufficiency seems to lie in the cap and trade proposals. The recent G-8 meeting, wherein he appartently received less than overwhelming support from developing nations for similar global cap and trade programs was, unfortunately a set-back for his domestic proposals. I even heard a "clean coal" advocate using the old AFL-CIO slogan regarding "free trade," in effect saying "what the American Energy Industry needs is a Level Playing Field."

Hmmm? Where were these guys when the issue was labor?

The developing countries reluctance on top of our carbon intensive domestic energy producers may put the issue on the Congressional back burner (even though the House has passed its own version already). When we do finally get something, I am beginning to suspect it will include all sorts of waivers and be generally watered down. On the positive side, I think Obama understands what he is taking on and will take what first steps he can politically, with the intent of slowly whittling away at the problem during an economic recovery. So far, he has been the most pragmatic President in my memory.

I think he'll be somewhat firmer on health care (even trading some of his immediate cap and trade desires for some health care gains). His proposal is already somewhat to the right of the Clinton primary proposals and consequently he does not have much "room" to move further right and still hold Democratic support. Further, health care costs are hitting American pocketbooks on a daily basis, whereas cap and trade, although needed, is pretty much assured to raise energy costs over the short term. Aside from the broader economic problems, I would bet (at the moment) health care will be the major accomplishment of 2009-2010.

A few things have already been done in education (Pell Grants, teacher retention via the Stimulus Package, etc.). My own feeling is that any substantive push on education improvement will ultimately involve meeting the teacher's union head-on (standardized testing for BOTH students and teachers). This will require some very fancy footwork and I believe he'll delay big changes in this sector until he has a better track record on other major issues (i.e. basically more power within his own Party).

On the economy front, despite the whinning about earmarks and pork, I am impressed with the way he has linked his core platform issues with use of Stimulus money...i.e. more bang for the buck. On the banks, he side-stepped the trap of "nationalization," and refused to nationalize, even when people as far on the right as Libertarian Alan Greenspan were calling for nationalization. And, adding compensation limits to loan terms was smart and a virtual 100% guarantee that the loans would be repaid as quickly as possible.

Overall, on the economy, I see Obama as using government to encourage the re-direction of private investment. "Change" comes hardest to those who have profited most from the status quo...and it will be an uphill battle, but if he can, through tax policies, grants, R & D funding, etc., make it actually more profitable to private investors to invest in his policies, that will lay the groundwork for a meaningful economic recovery. Tough job...more on this point and foreign policy next time.

So much to comment on; so little time

2009-07-13T11:59:00.000-07:00

Seems I haven't written anything for a few months...will begin using this again shortly...please stay tuned.

Recent Developments in the Economic Crisis

2009-02-18T21:50:00.000-08:00

In addition to Obama's Mesa, Arizona speech unveiling his plan to mediate housing foreclosures, Fed Chairman Bernanke today addressed the National Press Club (a rare event for a Fed Chairman) and took questions from reporters following his speech (an apparently even more rare event for a Fed Chairman).

I noted one disturbing, in-passing answer to a question relating to Geithner's "stress tests" for the major banks. While he largely dodged the question, by correctly pointing out that Geithner should answer the question, he did give his own interpretation. He said he thought it was part of an effort to understand all of the assets and liabilities of the banks and then "test" their financial positions against a variety of worst case scenarios.

Uh...was that an indirect admission by the Chairman of the Federal Reserve that we have given these same institutions some $310B in emergency taxpayer funding WITHOUT understanding their exact financial situation? If so, this seems to support my idea that the reason Paulsen turned away from the original intention of using the TARP funding to acquire bank bad assets and sell them (much like the Resolution Trust Company, established for bankrupt Savings and Loans) is due to one of three things or a combination of the three: 1) in a generally declining economy and falling house prices, banks don't know how to value either assets or liabilities, 2) they know, but don't want to tell the government, or - worst case - 3) they aren't sure what they have.

Other item on the front page of tomorrow's NYT regarding UBS's decision to cooperate with the U.S. and turn over the names of U.S. citizen's who were evading U.S. taxes in UBS accounts. UBS stands for United Bank of Switzerland. UBS has already admitted to the accounts and their intent, but have to date refused to release the names, which presumably include numerous U.S. VIP's. This has the potential to become a huge scandel. UBS has said they made $200M/yr just on the fees charged to manage the accounts, which may run into billions. The IRS is said to be looking at 19,000 names.

Look for Phil Gramm's name. He's the former Chairman of he Senate Banking Committee and largely responsible for eliminating most of the safeguard's put into the regulatory system over banks following the Great Depression. [Most recently notable as John McCain's senior economic advisor until his famous "Americans are a nation of whinners" remark.

Following his Senate success at deregulating the banks, Gramm joined the board of UBS and became a VP within its U.S. operations, at roughly the same time the bank now admits it's special U.S. accounts were started. His first assignment with UBS was to oversee their acquisition of Paine Webber, for which he received an estimated $750,000.

Gramm's wife, Wendy, was head of the Commodity and Futures Trading Commission. One of her last acts there (they both left Washington about the same time) was to "deregulate" commodity futures trading, for among other things, natural gas. Within a year of her departure, she was named to the board of a Houston, Texas company that was at the time the largest distributor of natural gas in the country - ENRON.

Ah well..we're all innocent until proven guilty, but it would not surprise me if both of them found themselves in a federal prison by 2010.

The Catch 22's of the Economic Crisis

2009-02-12T09:00:00.000-08:00

A generation of Americans grew up with "Catch 22," but for those older and younger, a brief explanation is due. "Catch 22," was a popular book, written by Joseph Heller, on the contradictions and absurdities of human behavior. Specifically, Heller's book was about a group of the U.S. Army Air force, stationed on an island off the Italian coast during WWII. The overall absurdity is the life they lead on the island and the violent death and destruction they are exposed to on their bombing runs over Nazi occupied Europe. Among the other absurdities are the supply Sergeant who corners the world market in some commodity and becomes a multimillionaire; the squadron commander, whose name is Major Major Major and will grant squadron members interviews in his office only when he's not in his office, etc., etc. The book was written in 1955, but didn't reach the peak of its popularity until the sixties.

So, the term "Catch 22," generally refers to a seemingly reasonable situation wherein it is impossible to get from Point A to Point B, but no one wants to admit it.

There are several very large Catch 22's in today's economic crisis, which I believe have to be resolved before we'll see improvement; this post explains a few of them.

1) Regulation and oversight. Virtually every sane person involved in the crisis, from former Secretary of the Treasury Paulson, to current Federal Reserve Chairman Bernake, agrees that the lack of efficient regulation and oversight has been a major contributing factor to today's crisis. I use the term "efficient regulation and oversight," because a few believe that statutes on the books are adequate and the problem is simply that they weren't enforced. Most, however, believe that there must be a substantial overhaul of the entire regulatory structure. The new Secretary of the Treasury Geithner has explicitly called for a "reshaping of the financial industry." Given the Congressional tendency to "over correct" on problems they've ignored for too long, I believe there is anticipation within the industry and among investors that there will be fundamental changes composed of new regulation, increased transparency, and a re-structuring of oversight functions (eliminating some of the existing ones and replacement by a more centralized, uniform government organization).

Unfortunately, this is a huge task, involving large numbers of special interests and very careful thought. As such, it will require considerable time to accomplish and that "time" is not available due to the urgency of the economic situation.

The Catch 22 here is that until investors understand the new "rules," they will be hesitant to re-enter the markets, and neither tax cuts or stimulus packages can eliminate this reluctance. In other words, any tax cut or government spending plan is likely to fail to jump start markets until the new rules are promulgated. But, the urgency of the situation does not allow for such promulgation prior to government intervention, so tax cuts and government spending will be effected under the old rules, which everyone acknowledges were largely responsible for the crisis in the first place. Catch 22. We can't get from Point A to Point B.

2) Valuation and Mark to Market. Discussion of the current crisis is centered around the valuation of assets. Mark to market is simply the present accounting requirement for all financial institutions to "value" their holdings on daily market prices. This valuation is, in turn, used to establish sound capital-to-debt ratios, which are requirements of the bank industry (or, if you are an individual investor, how much you can borrow "on margin"). Yesterday's testimony of banking CEOs before the House Financial Services Committee may illustrate the problem. Bank of America CEO, Ken Lewis, complained when asked about his bank's ratio of capital-to-debt, because he had already stated that the Bank of America had been a profitable bank for numerous years. He gave the answer (a conservative 10.3%), but implied that as long as he ran a profitable operation, his capital-to-debt ratio was no body's business.

These ratios are established to protect investors (individuals or banks) in exactly the type of situation in which we find ourselves today, falling values. Just as the lack of effective regulation and oversight is generally acknowledged as a major cause of today's crisis, it is also generally acknowledged that "over leveraging" was also a major factor in the crisis. Over leveraging is just another way of saying that the capital-to-debt ratios were far, far overextended. Thus, given today's environment, the question to Lewis was germane.

Here, perhaps, a word or two on "banker mentality" is in order. With rare exception (such as the crisis of the moment), bankers have spent their entire careers in generally favorable investment climates and are, consequently, usually optimistic about the global economic future and assets, which in such a climate, are "bound to rise." From time to time, there may be a temporary retrenchment, but over the long haul - say 10 to 20 years - it is inevitable that global wealth will increase and, as a result, current assets are also "bound to increase in value." [There are limits, of course. Certain things wear out or become obsolete and are replaced, but ultimately that simply generates new assets, with increased value.]

In such an up-market environment, mark-to-market accounting valuation is seen as "conservative," because it is believed that overall assets will only increase in value. It may be that "off balance sheet" investments and commitments, which have become so prevalent today are in many instances used to "correct" what was believed to be "under valued" assets in the mark-to-market valuation requirement. It would be interesting to know if Bank of America's 10.3% ratio includes off-balance sheet items.

The point is that mark-to-market valuation works generally to every one's satisfaction in an "up market," based on the psychological premise that it is better to underestimate your worth than overestimate it and that if you are sure that you are becoming wealthier, it really doesn't matter as much about how much wealthier you are becoming, than it does in a "falling market," when you are becoming poorer.

To some extent, ENRON played this game by carrying "bad assets" off balance sheet, but simultaneously convincing Wall Street that these were, in reality, "good assets" and everybody would make a killing once they were brought back on balance (it worked for awhile).

In a falling market none of the above works and it's much the reverse. To maximize wealth today in a falling market, you would need to substitute mark-to-market valuation with an alternative that "price's in" past valuations, which of course, were higher than present valuations.

In sum, on this point, to get a "real time" picture of a company's true financial status, we would insist that all assets and liabilities be brought on balance sheet and price them mark-to-market.
There is one problem with this; if we did it, I suspect a dozen or so of the world's largest banks, including several of our own, would be evaluated as "insolvent" and the global financial system would collapse. Catch 22. Returning to economic reality = economic disaster.

The second element to this, but within the same above principle, is the difficulty in establishing ANY valuation in today's market. The economic system is so complex, with so many significant unregulated financial instruments, intertwined with one another, no one is quite sure what any of them are really worth, but also aware of the general proposition that whatever they are worth, they're probably worth a lot less than they were yesterday. This is why Paulson found that he really couldn't use the first phase of the TARP money to buy up bad assets and simply had to pour money into the banks and hope for the best. This is also why banks saw their immediate task as not to make bad assets good, but rather to pay dividends, acquire other financial institutions, and retain employees, who understood the transactions better than the Board, through bonuses. In more vulgar terms, the first and foremost step in creating financial stability was, from the banks perspective, CYA.

In other words, to go back to Catch 22, you may only see the banker when he isn't in.

3) Globalization, the New Economy and Post-Industrial Society. I have written so much on this topic in prior posts, that it is probably unnecessary to go into depth here. Much of the promise of these concepts have failed the average American. Over the last thirty years or so, wealth in the country has been increasingly concentrated in the top few percentiles. Reason? For all of these new "concepts," the global economy still runs pretty much on the production and transfer of goods and, to a far lesser extent, services. For all of their gains in productivity, American workers cannot off-set the differences in labor costs in Mexico, China, India, Indonesia, et al. except in agriculture (via Big Agra Business) and that isn't enough to offset the other.

The annual trade imbalance (now falling due to a lack of consumer spending) approached $1.0 trillion/year. The only way we could sustain this mounting debt was to, basically over value our national assets and sell-off the country. Outside of that giant Ponzi scheme, we hold no particular advantage over our global economic competition in other sectors of the post-industrial global economy.

The Catch 22 is that it is ironic that a country, that for most of its trading history built its industry and positive balance of payments on reasonable tariffs, is now throwing it all away for the theory of "free trade." Federal Reserve Chairman Bernake, hardly a "socialist," recently testified before Congress, that in his opinion, the prime "cause" of the current crisis was not the housing market itself, but rather consistent negative balances in international account balances, which led to a surge of overseas capital flowing back into the United States. The housing bubble was largely an outgrowth of U.S. financial institutions trying to accommodate that flow, through the creation of new and untested financial instruments.

I would add to this the perception of Republican and Democratic politicians who looked at this as a "win-win proposition."

Neither Party has yet suggested a reevaluation of these concepts might be beneficial in resolving the present crisis. In fact, it seems likely that a simple "Buy American" provision in the current stimulus package may be withdrawn before passage due of fear by both parties that such might bring "retaliation."

On the other hand, it seems clear to me that a first step toward resolving the current crisis is to bring national goals in line with national resources and to stop trying to be Masters of the Universe. Immediately, this will require more government spending to assist in the redirection of private investment. It will also require new incentives in policy, including the tax code, to encourage the reconstruction of a sound and self-sustaining national economy.

A few final words on the Stimulus and Geithner Plans. First, the latter. I suspect that when Geithner talks about a fundamental restructuring of the financial industry, he ultimately has in mind specific changes that will not be seen by those still living in a fantasy world as "good" for the economy. Announcing those plans in the present crisis environment would only worsen the present situation and that's the reason for "lack of detail" (aside from the time necessary to work out those plans, noted above).

The stimulus plan is "the least worst temporary solution." It passes on massive debt to future generations. It will create new government bureaucracies, etc., etc. But, I again suspect the alternative is a high risk to social stability. California is virtually in bankruptcy. Other states will follow. This is the major reason Republican Governors are backing the plan. Given the differences that have occurred since 1929 in our overall culture, I do not think we can afford another Great Depression. The social instability, which may today result from 20-25% unemployment rates, will make the Bonus March on Washington look like a walk in the park.

[The bonus march occurred during the Great Depression (1932), when thousands of WWI vets descended on Washington, D.C. insisting the government pay them vet bonuses promised earlier by Congress and not delivered. They were broken up by a call out of the U.S. Army. The March probably helped FDR become elected in the fall of 1932 and led to the creation of FDR's Corps of Conservation Camps. Ultimately, Congress agreed to the bonuses in 1936 and to a subsequent GI Bill, in 1945, for returning WWII vets.]

Additional tax cuts, on the other hand, may be of minimal stimulus value. The poor and middle class are so far in debt that small and relatively insignificant tax cuts will not appreciably change their situation. Nor do these economic classes "create jobs." Further tax cuts to the wealthy will go the same way as the Bush cuts, either into another "bubble" or be withheld entirely pending the fundamental changes to overall financial structure of the country. Worse case is that the debt to Gross Domestic Product will approach or slightly exceed the immediate WWII ration of approximately 120%. I believe that the current ratio is approximately 77% (about 10 trillion in debt, with 13 trillion in annual GDP. The difference is that in the post WWII era, when we ran tremendous balance of payment surpluses and had the world's strongest manufacturing industry, we quickly recovered. If, as a result of an increased indebtedness combined with a falling GDP, we hit 120% again, the imbalance will have a greater impact and require a far longer period of recovery. I do not expect the United States to regain its prior economic significance for at least a generation, if ever, but this does not mean we cannot have a sound, but smaller economy beneficial to all of us.

California Almonds and Free Trade

2009-02-07T16:31:00.000-08:00

Totally "free trade" exists only in economic theory. We have a long list of tariffs we currently impose on a variety of imports ranging from shoes to agricultural products, as well as tariffs imposed on American exports by various other countries. So, in large measure, "free trade" is a relative term - relative to where we've been, where we are and where we're going. [I would suggest most ideological constructs are similar; not absolutes in themselves, but relative to particular points in history. "Truth" has always been more the purview of faith than science.]

The United States was initially a net importer at the beginning of our history and as we built our manufacturing base we generally utilized tariffs to protect our start-up industries. WWI changed that and between WWI and the late 1960s we were net exporters. For the following thirty years (1960s - 1990s), we more or less stabilized the trade deficit at around $100B/year. In the late nineties, we began a sharp decline to our present status, which is approaching $1.0 T/year. A lot of things were occuring in the late nineties while we were focused on "I did not have sex with that woman" and the Clinton impeachment. Another notable change was the deregulation of banks and the end of the safeguards imposed after the Great Depression.

Today, there are specific sectors of trade where we still run actual surpluses: aircraft (thanks to Boeing, Cessna, et al), agriculture, chemicals and machine tools. In all other areas of manufacturing we import more than we export (I would assume the entertainment industry is also a net exporter, but not of significance). Since most of the annual imbalances are based on the inflow of consumer goods, historically, our trade balance gets better in recessions - i.e. we buy less.

Supply-side economists (the free trade/free market people) tell us that a negative trade imbalance is not necessarily a bad thing in a global economy. Many of our traditional American manufacturers are still here in name, but from the perspective of an American manufacturing worker, have become no more than distributors of products made in American owned plants abroad (owned wholly or partially). The products these "American" plants produce are counted against us in the balance of goods and services, but strengthen the U.S. economy through taxes and dividends paid in the U.S. Ah...the House of Cards. American investors get rich off Indonesian workers in American plants, who sell their products to U.S. workers who live on credit, granted to them by U.S. investors....hmmm? Nice, but what happens when the credit runs out? Investors are now finding out. [Note: From one perspective, the subprime mortgage disaster was simply the "tipping point" facet of the broader credit problem.]

I would point out that this is very similar thinking to a reliance on foreign energy imports (oil). I believe the political party line went something like: "We need energy independence because we now depend on those who may not have our best interests in mind." Perhaps we need to ask why this same logic does not apply to manufacturing?

The Smoot-Hawley Tariff of 1932 is probably the most frequently quoted event of supply-siders as "proof" that tariffs don't work. They're right; but for the wrong reason. Ravi Batra (an economist from, of all places, Southern Methodist University, home of the Bush library and not particularly known as a "liberal institution," pointed out in a 1993 book, "The Myth of Free Trade," that the Smoot-Hawley tariffs were reversed in two years and unemployment continued to rise. Further, he points out that the key reason they didn't work was that we had become a "creditor nation," exporting more than we imported and by resorting to tariffs, which encouraged retaliation, we were cutting our own throats. This seems to me, a reasonable explanation: the best time to be a free trader is when you are exporting more than you are importing to protect your exports from tariffs in your export market and not the reverse.

Today, among Democrats as well as Republicans, the most common retort to the suggestion that a tariff or two might not hurt is: "No, because any tariff we imposed on others would be met with retaliation." That thought took me to a little research on just what that retaliation might be, which took me to our leading export of agricultural products and a revisit to the Batra book. And, from there, we get to California almonds.

As I was passing by the TV, from my library shelf, there was someone talking about California almonds and his new book. California almonds are apparently the most intensive "bee pollination" fruit on earth. Each year, a healthy percentage of the nation's bee keepers descend on the almond growing valley in California for several weeks. It's a like a giant bee rock concert or, as he put it, the first days of kindergarten, where bees from all over the country are "rented" to the almond growers for pollination services. And, the bees mix and mingle, they catch and carry their various "bee diseases" home with them.

In other words, by bringing the bees to the almonds, instead of the almonds to the bees we may have inadvertently endangered the bee communities, which are in fact dying off in the jillions. Without bees, much of our agricultural surpluses (and exports) disappear.

So, California almonds may be another reason to begin thinking about tariffs and bringing home some of that manufacturing capability we so easily and carelessly gave away.

OK, Boeing and the aircraft sector might be hurt, but anymore than they are being hurt today? And, agriculture? If we can solve the bee problem (probably one of those stupid government research grants the Republicans tossed out of the stimulus package), what's basically more important, consumer goods or food?

Let's think this through. We decide that we're going to reestablish the TV industry in the United States (I believe, today, we manufacture exactly zero TVs). To help that industry start-up, we place a high tariff on TVs from Japan (who probably get most of their subcomponents from China). The Japanese cry "foul" and retaliate by shifting some of their U.S. grain purchases to Russia and Chinese rice and telling us they won't buy as much of our debt as they have in the past.

Although this is not the way we'd all like the global economy to work, it is doubtful that such a move would instigate an all-out trade war. The Japanese sell a lot more here than TVs. Plus, with or without tariffs, U.S. unemployment and a failing economy will probably have more negative impact on total Japanese imports than a TV tariff. Positively, we begin to build back our own manufacturing capability, reestablishing our middle class, take more in in taxation and spread the tax burden more equitably.

Here's why we might think about running the risk of a tariff or two: just like individuals in this economy, the country can stand only so many trillion dollar bailouts before our credit runs out. The primary reason the rest of the world was willing to buy U.S. debt was because of our consumer market and their ability to import more product to us (in oil and Wal-Mart goods) than we sold to them. If that market goes away with a return to sane credit standards, their willingness to purchase our debt will go with it.

In short, as the post WWII era developed and the global economy recovered, and with the end of communism, the only way we could remain at the center of the global economic stage was through the lie of cheap money and over-valued assets.

The longer we postpone this return to a sound economy and a strong middle class, via bringing some of the old jobs home, creating new ones and enforcing New Economy value through cross-border intellectual property rights, the worse the shock to the "global economy."

This is a new economic approach begging for an author, not yet to be found in either political party.

Finally, for this post, there is another non-economic reason for the U.S. to remain a "Superpower," which is our military. Bush did neither us or the rest of the world a favor in largely squandering that power in Iraq. Obama must beware that he does not do the same in Afghanistan. Without our "superpower" status, will the Chinese stay out of Taiwan...or Japan? Will Russia forsake a return to imperial ambitions? To a degree, our influence through military force has been replaced by the influence of a debtor. The last thing the people who hold that debt want is to have to foreclose. Although largely exposed militarily and economically as a Paper Tiger by the ill-advised policies of over-reachers within the Bush administration, I do believe that because of our diversity, our rule of law (which has been a bit tarnished as of late) and our relative stability, we serve as an important factor in global stability. In this sense, a modest retrenchment of our manufacturing capability for the sake of our economy, and a general "cleaning up of our act," (politically, economically and socially) coupled with a restoration of our military capability would be welcomed abroad, as well as at home. And, of course, as we lose "debtor status" the international environment may change. It pays to be nice to people who owe you money as well as vice a versa.

Globalization is for the most part already here, but we have reached it practically, without much of the structure that may be necessary to sustain it. Stepping back from it for the national good is, in my opinion, in the long run better for the end product of globalization, which is some form of world government. If we are more successful as a nation now in rebuilding a sound economy and curing some the inequities of our own society, then when (and if) the time for world government comes, it will more closely mirror our own. In other words, "recalling" some of manufacturing base is more a matter of emphasis than new direction or isolationism; we stay in the U.N.; we stay in the WTO and IMF, etc. We don't re neg on present international commitments, but temporarily postpone making new ones. I believe we are genuinely at a critical point in our history in that much of the world is beginning to feel they've been scammed by the United States in the current economic crisis. True, many of the "scammed" willingly went along with us for profits they didn't think they could make elsewhere, but it started here. We were the financial geniuses, the people whose system was so flawless we didn't need regulation or oversight, etc., etc.

Given this environment, systemic reform must be, this time, more than whitewash...more than prosecuting a company or two or showing we're "serious" by putting a Martha Stewart in jail for a while. More on this in my next post.

[Note: I see no conflict between being a patriotic American and the understanding that global social, material and technological progress will probably eventually lead to some form of world government focused, hopefully, on human rights and ecological survival. Initially, I would see this something along the lines of "states rights" at an earlier point in our own history. Eventually, that too would pass into a sort of Star Trek environment, a culture based on science, knowledge and exploration, wherein individual beliefs are respected (religious or otherwise), but do not conflict with the overall goal of preservation of the species. I believe that to a large degree that latter stage may also involve further human evolution, so we might be looking at thousands of years from the present, assuming we can survive without it until then, and that human evolution is for the most part positive. In the meantime, I believe the U.S. should at least strive to be the "model" and see no Constitutional issues that would prevent it. Admittedly, current trends are not encouraging to this outcome. If all of that seems a bit far fetched, imagine Thomas Jefferson anticipating laptops and a global Internet and the fact that once I click the "publish" button on the screen, the above becomes virtually accessible to some 2 billion people.]

Miscellaneous Thoughts

2009-02-07T11:00:00.000-08:00

Before continuing with my broader review of the economy and where it needs to go, a post on current events.

The economic crisis must be even worse than I thought. When I turned on TV this Saturday morning, I found the U.S. Senate debating the stimulus package. Wow! When Senators work on the weekend something is very seriously wrong.

My prior posts have pointed to some of my own dissatisfaction with the House package. In general, I believed it was spending heavy and job creation light, and there was some truth to the Republican complaints that Democrats had included a "shopping list" built up over the eight years of the Bush Administration and the twelve years of a Republican Congress (1992-2006).

That said, Republicans haven't offered much alternative, other than corporate tax cuts and the necessity to restrict spending and consequently "debt."

Of course, any one who isn't brain dead understands that's like the kettle calling the pot black. What ever Congress does with this package, it will be relatively small compared to the debt created by Bush and the Republican Congresses noted above.

I am particularly irked by two points Republicans seem to want to forget: 1) the stupidity of passing tax breaks in time of war and 2) the stupidity in pursuing free trade policies without regard to the fact that the country is running huge trade deficits.

OK, OK, debate is the way the system works. Presumably, the Republicans have all of a sudden found Jesus and want to get back to fiscal conservatism, now that they no longer have the votes to pass their own earmarks. For six years, Bush never saw an appropriations bill he didn't like. But, I don't object to them having their day in court. In fact, I believe if I were Reid, I believe I'd give them the weekend to continue to complain and then take it to a vote.

The Democratic effort to get 60+ votes for the package is based on two things: Obama's desire to make it appear a bi-partisan effort and avoid a Republican filibuster (which is actually what we have going on this weekend; it takes 60 votes in the Senate to "close debate," but only a bare majority to pass legislation).

[Actually, the Senate procedure is more complicated than the above. Filibusters may be prevented through "reconciliation" on budget issues. The "Byrd Rule" further defines exactly when reconciliation may or may not be used. The Byrd Rule may be overturned, but it requires (you guessed it) 60 votes. When all of this is said and done, I believe, Reid could invoke reconciliation and take the package to the floor for a vote, and pass it with a simple majority. Presumably, the only reason he does NOT do this - Republicans invoked reconciliation in each of the three Bush tax cuts - is the broader Obama play-nice and appeal for bi-partisanship approach, which of course wears thinner with each passing day.

My "guess," is that Obama will not ask Reid to use reconciliation to pass the package, until following next week's announcement of his plan for the second tranche of the Wall Street bail-out and will then refuse to bring that legislation forward until the stimulus package gains more Republican support (i.e. the 60 votes).

There are trade-offs in the approach. Obviously, there are items in the stimulus package that can be cut and Obama could have strongly suggested to House Democrats cuts that would have made the whole thing more palatable to Republicans. My opinion is that he has two goals, exclusive of the economic crisis itself, which he feels comfortable with tagging Bush and Republicans. 1) He doesn't want to alienate the House, which he undoubtedly recognizes as further to the left collectively than the public mainstream. He will need these people (Plosi, Wrangel, Conyers, Waxman, Frank, et al) later for other programs. 2) He's perfectly willing to give the Republicans enough rope to hang themselves as "obstructionists." To date, Republicans seem sort of lost in ideology...without any real alternative stimulus package and without focused leadership. If the economy gets worse without a stimulus package, it will be easily blamed on Republicans; if it doesn't and gets better, Republicans will get credit for saving money. The key, however, is that the economy has only a very remote chance of improvement for at least 6-12 months, according to the most optimistic economists (I've given my arguments in prior posts for a time frame of more like a generation, if then) at which time the public will have long forgotten about the current debate. In other words, the Republicans may be talking themselves into a grave.

What to Do?

2009-02-04T21:43:00.000-08:00

I see very little hope for avoiding a major restructuring of the American economy. While Republicans don't seem to be capable of getting off the "tax cuts solve all" band wagon, Democrats seem unable to depart from their reputation among conservatives as "tax and spend liberals." To a large degree, there is much true in the criticisms of each party of the other, without either party having any reasonable solution.

Since Democrats appear to have the votes, whatever "stimulus package" that emerges will probably be "more Democratic than Republican."

I suspect, however, that the Democratic package, slightly modified, to pull in a few moderate Republican votes to reach the magic number of 60 in the Senate, will ultimately simply disappear into the Federal Government much as the first $350B of the $750B stimulus package of last October, simply "disappeared" into the banks.

The Democratic package does, however, have the advantage of creating jobs faster than tax cuts.
While these jobs are not the "ideal jobs" and undoubtedly contain a lot of inefficiencies, which contribute only vaguely to the "sound economy" we should be building, they will add as a stop gap solution to keep people off the unemployment rolls, maintain some degree of social stability, etc.

The sad thing, in my mind, is that neither the Democratic congressional stimulus package, not the Republican tax cut solutions do much, over the long run, to bring about the paradigm shift necessary. Neither Republicans or Democrats seem capable of rejecting the illusions, which for the most part, brought us to the present crisis, namely mindless free markets and free trade, all under the umbrella guise of globalization.

Capitalism has a well known (and positive) destructive element. As new technology replaces the old, those who deny it suffer at their own peril. As capital shifts to the latest and greatest means of production, outmoded techniques and the companies who insist on retaining them are "destroyed." Hence, Dickens's famous opening line written in an era similar in many ways to own own: "It was the best of times; it was the worst of times." For some, "change" is beneficial; for others (a textile worker in North Carolina or a UAW assembly line worker in Detroit) it may be a disaster. It is the duty of government, in my own opinion, to intervene to mitigate the pain for whom it is the worst of times.

For the certainly the last sixteen years (and probably going back to Reagan), the government has largely ignored this role. Both parties have largely put economic efficiencies, globalization, free trade and free markets ahead of national interest. This is not to say these concepts are not good goals; I believe they are. But, the trick is to arrive at them with minimal disruption to our own people, most of whom were/are middle class blue collar or first line white collar supervision, who for the most part were sacrificed on the alter of globalization.

We can continue, rightfully, to continue to pursue these goals, albeit at a slower pace and without the sacrifices...or, at a minimum, with far fewer sacrifices. We needn't abandon the goals of free trade, and global free markets; we need only to control (or regulate) the pace of the changes such brings.

A strong argument may be made to the rest of the world, which holds a great deal of our debt, that, in the long run, it will be better for the goals of free trade and global free markets, if the United States calls a temporary "time out" and puts its own house in order. That task isn't going to be easy and involves, in part, the following, with the understanding that volumes could be written on each topic.

1) Cleaning up our political system. Campaign financing, ethics, competitive re-districting, etc. Unless these things are reformed, we'll only continue on our slide to Third World status.

2) Immigration. Other than felons, those presently in prison or living on welfare, I have no desire to send people home, disrupt families, etc. We need border enforcement and some form of amnesty for those who are illegal, but have otherwise tried to behave as good citizens. That may sound incredibly naive if you are the U.S. Chamber of Commerce, or a University sociologist, but I think it may be that simple. We may continue to grant work visas in various categories (from fruit pickers to Microsoft programmers), but with revised procedures ensuring that the work visa programs are not being used to hold down wages.

3) Wall Street. Following the Great Depression, the Glass-Steagel Act separated investment banking from commercial banking. One essential reason was that investment banking is what it says it is, namely it facilitates deal making. By eliminating the distinction, investment banks moved first into insurance and then into the underwriting of the deals themselves, continuing to take enormous commissions for a) the initial advice regarding a merger or acquisition and b) the financing of the merger or acquisition. This is like expecting a vacuum salesperson to recommend that maybe what you really need is just a broom.

The recent economic crisis has really not separated the two. Now we have very few investment banks and the few big names (Morgan Stanley, Goldman Sachs) have just become commercial banks, which I suppose means that they will now take extraordinary risks with deposits and that whatever risks they take will be backed by government bailouts? I can't think of a surer path to more serious economic dislocations in the future. We need to go back to a clear division between commercial and investment banking, limiting and overseeing what each does.

Note: I've mentioned it in earlier blogs, but in some ways banks today are to a globalized economy, what John D. Rockefeller was to American industry in his day. Although Rockefeller received a lot of negative popular press, much of this was inspired by regional competitors he had effectively put out of business. Rockefeller used new "tools," largely distribution tools to take the oil industry from one dominated by smaller regional/state interests to a national and international level. Rockefeller was the positive "destructive force of capitalism" of his day. And, eventually, became so successful in eliminating any and all competition that government had to step in and break up Standard Oil. Similarly, with this economic crisis, banks may have shown that they have become too large and powerful for the ultimate good of the whole. I do not completely discount their argument that they have to be big to compete globally, but when they become "too big to fail," then they've invited substantial more government intervention, even if that intervention does not result in "trust busting."

4) Education - It begins and ends here. Whatever the reason (unions or too much decentralization via school districts), education in America is not keeping up with the rest of the world (or at least much of it). Unless we figure out a way to substantially fix the system, it won't matter how many jobs are created, if our "graduates" or drop-outs are too dumb to fill them. This is an issue of enormous cultural and economic ramifications. For every value-positive reinforcement provided by our entertainment industry, there must be at least 10 or 20 negative reinforcements, because "that's what sells." This is not just a "black issue"; it extends equally to the entire community. Although I completely support public education, I have sympathy for the pro-voucher and home-schooling adherents.

There is another area of education, seldom, if ever, discussed: the tendency to equate social science progress with scientific progress and expect the same results. Paul Volcker, along with others, have pointed out that a prime cause of the present economic crisis was the faith responsible people (from CEOs to Alan Greenspan - my words, not Volcker's) put in "economic engineering" in regard to risk management. It may sound "elitist," but I suspect than as education becomes more universal, it in fact, losses some of its "quality." This is a topic worthy of a volume to itself.

5. Redirection - This involves the "pause" in free market, free trade and globalization processes noted above. And, both politically and economically, this may be the most difficult to really achieve. I think one begins by re-defining capitalism and economics as a sub-set of society as a whole. If you are somewhere near the top of the economic strata, it may be very difficult to disassociate the two...democracy and capitalism. But, if you are closer to the bottom than the top, it really doesn't matter much where or how your income is coming to you, as long as you have enough for subsistence. An individual, out of a job and facing foreclosure on their home, doesn't care too much about "the big picture" and how all of the pursuit of these principles (free trade, free markets, globalization, etc.) will "eventually" be better for him or her self. The perspective of that individual is that for him or her there may be no "eventually." In this, rigid adherence to some theoretical economic principle, which is not working for most people endangers capitalism itself and ultimately democracy.

Big Government...and by that I mean really Big Government, where say 75% of the work force is employed by government, may be unwise economically over the long haul, but if that is the only choice people have between eating and starvation, between employment and unemployment, that's where they'll turn and economic theory be damned.

In sum, without middle class jobs, and as a result of those jobs, less concentration of wealth, and a more equitable across the board tax burden, I don't see how tax cuts per se help create a sound economy. Where would the additional investment capital go? I would suggest that the answer to that is that without substantial redirection of the economy as a whole, into another category of overvalued assets (this time probably commodities). That, coupled to the end of the great Ponzi scheme called "loose credit" and we are in store for substantial long-term unemployment, less tax revenue, failing entitlement programs and a great deal of social unrest, perhaps as long as a generation. And, that's the "good news." Worse, it is more likely that the American electorate would turn to someone with "quick fixes." Scrap our international commitments, cancel our foreign debt, and throw out Congress - in other words, the quick and easy short term solution of a dictatorship.

The point is that I really see no reasonable alternative toward embarking on a new economic direction aimed at restoring a substantial American middle class and that any alternative to doing so places both democracy and capitalism at high risk.

I am not suggesting we do this overnight. It took 20-30 years to get rid of most of our manufacturing industry and it will take as long or longer to bring it back. And, during that period, one would hope for improvements in basic infrastructure, health care, and education whereby it would not be necessary to bring all of it back. What is required is not necessarily "manufacturing" per se, but an economy based on well paying middle class jobs and one not dependent upon increasing debt via credit. It is possible that with vast improvements in education, a genuinely self-sustaining post-industrial economy would work. However, post-industrial "service" economies tend to be heavily reliant on intellectual property rights, which are acknowledged internationally. I don't think we have this yet. The nature of the New Economy or post-industrial economy is essentially "non-physical." It is a lot harder to be "cheated" if your wealth, say 50% of it, is based on big, heavy, expensive "stuff" (e.g. factories and machine tools) than on a single computer disk, the contents of which can be shifted anywhere in the world in milli-seconds.

Note: Of course, that was the beauty of over-valued American real estate. It couldn't be transplanted. But, that scam seems unlikely to return. I see no alternative to the international acceptance and policing of intellectual property rights as the foundation of a genuine post-industrial economy. We were stupid to have given away our manufacturing capability prior to securing those rights.

In closing, I think it possible to pursue multiple economic goals simultaneously. Step #1 is maintaining employment, even if it is through direct government employment or government contracted employment. Step #2 is an overhaul of oversight and regulatory functions, both domestically and internationally. A re-emphasis on creating a self-sustaining domestic economy does not preclude further progress at arriving at international standards for accounting, the intellectual property rights noted above, etc. Step #3 and Step #4 are simultaneous, overhauling our educational system and the creation of well-paying, immovable domestic jobs, such as in alternative energy, health care, etc.

Next Time: Evaluating the Service Economy: When is a service job genuinely value added and when is it just make work?

P.S. Before I forget it. Re. CEO Compensation. The United States has the highest executive compensation in the world. Comparing the lowest company salary to the top, Japan is something like 20X, Western Europe something like 40X, the U.S. is somewhere around 300X and rising. Why has no one asked our CEO's to take pay cuts "in the interest of making us more globally competitive?"

Stimulus Package Principles

2009-02-02T17:05:00.000-08:00

The size and details of the stimulus package are, at this point, up in the air. The House version comes in at around $816B; the initial Senate version (yet to be passed by the Senate) at roughly $890B. Based on a few news stories I've heard, apparently the word "compromise" in Congress almost always means combining every one's pet projects, so the pundits are predicting that it will probably require approximately $1T to actually get a bill through Congress.

Based on the House Bill, here's the rough breakdown in percentages of the total:

35% - Tax Cuts. These are roughly divided in half...about 50% for reductions in payroll taxes and earned income expansion and about 50% for business in the form of accelerated depreciation and changes to the recovery of past taxes paid for current losses.

30% - Unemployment extension in time and small increase in payments. Increase in food stamp program and assorted other Health and Welfare sort-of programs. Expansion of COBRA benefits and government participation in COBRA payments; expansion of Medicaid.

12% - Infrastructure. School renovation, federal buildings renovation, improvement of national electrical grid, alternative energy research, highway construction, expansion of Internet services to rural areas, water projects.

10% - Education related expenditures, including expansion of Pell Grant Program (student loans).

10% - Aid to State and Local governments, but 61% of aid must be education related.
1% - Miscellaneous. Information technology for State Department, Census money, Park Service, Homeland Security, etc.

My conclusion is that this House Bill essentially reflects Democratic goals and in some cases (Pell Grants), puts money back in that they lost in prior battles, as well as sort of a back-door entry to universal health care. In other words, a lot of the Republican criticisms are correct. While I might support some of the Democratic proposals elsewhere in the budget process, not sure they belong in a supposedly "bi-partisan emergency economic stimulus package." This doesn't mean I agree with the Republican proposals (e.g. corporate tax cuts to make us more globally competitive...how many times have we heard that line?).

I do not understand the logic or methodology regarding how the above translates to jobs. Some is obvious, such as $30B in new highway construction; other expenditures, such as $20B defined only as "Programs for Health and Human Services" are not so obvious and there is probably some validity to the Republican fear that there is much here to permanently expand the U.S. Government.

Here, a word or two regarding my own background and philosophy may be in order. Over the past 40 years or so, my "careers" may be sorted into four categories. I spent roughly 10 years in education, 10 years in industry almost totally dependent on government contracting, 10 years in private, commercial industry and 10 years in civil service. As a result, I like to think that I have a broad understanding of what works best within which type of environment. In general, bureaucrats are paid (and rewarded) by following the rules. That may be dull and, in many instances, not as efficient, but it does provide stability and continuity necessary for sound government. Risk assumes a greater role in private enterprise and as a result that sector is more innovative and dynamic, but not as stable. But, there is no blanket rule regarding privatization vs. civil service and it largely depends on the task involved. For instance, I do not want a privatized tax collection system or a privatized police department, military or homeland security, but would want private contracting in most of our aerospace industry, highway construction, etc.

Perhaps a very flexible guideline would be that when dealing directly with the public (or citizen) or critical national security issues, you probably want to keep that within government. When you are dealing with a product to be delivered to the government, private contracting probably works better.

To return to the stimulus package, I am somewhat disappointed by the House Bill. While I agree with many of the Democratic policies, they may have been saved for a subsequent debate on the needs and priorities of the country. However, as the saying goes: "What goes around, comes around." The package is only slightly larger than the $750B dollar stimulus package for financial institutions, half of which seems to have evaporated into thin air, following the distributions, or the $750B Bush tax cuts, which expire in 2010.

On one hand, I am not overly concerned with the addition to the debt (we're still not to our post WWII level of gross debt-to-annual GDP ratio, which was over 100% while we paid off the cost of the war. On the other hand, I expect the mounting debt, coupled to a substantial reduction in annual GDP could take us to those prior highs. And, today, there is a lot more global competition than in the post WWII era, so "recovery" is apt to take longer.

In this sense, I would have liked to have seen a more dramatic shift to a "New Old Economy" in the package. The House Bill just sort of begins to catch us up socially where we left off with Bush and is not I am afraid substantial enough to genuinely "change" economic direction toward a renewed industrial base. I have little doubt that, within the Beltway and Washington, D.C., Obama will score a "success" and emerge with a "more or less" acceptable bi-partisan stimulus package. But within the context of the greater change for the country his candidacy promised, it unfortunately falls short.

As a sort of Postscript, conceivably the package will fail to create the necessary "stimulus," regardless of size. I believe the magnitude of the economic crisis is such that a distinct paradigm shift is needed. The absolute best the package may accomplish (without quadrupling its cost) will be to temporarily ensure continuing social stability. I think the house of cards is falling; going forward, we must be willing to accept, for a long time at least, a reduced presence in the rest of the world. It is time to step back from globalization, without necessarily abandoning it, and put our own house in order. Economically, in my opinion, this requires an overhaul of our financial industry regulation and oversight and at least the beginning of reorganizing the national economy. Whether this can be accomplished within the given political and social milieu (the influence of lobbyists, campaign financing, gerrymandered districts and an ideologically polarized country) is, frankly, doubtful.

In sum, as I look at the battle over the economic stimulus package, an old French proverb comes to mind: "The more things change, the more they remain the same."

Next: Back to Economic Basics and Fixing the National Economy in the Broader Global Setting.

More on the Stimulus Package

2009-02-01T12:36:00.000-08:00

In the last post, my major point was that relying on tax cuts as economic stimulus will not necessarily work as fast or as efficiently has temporary direct government spending. Supply side economics does work, but it works within the parameters of the economic system available to investors. Investors, for the most part, do not select investments based on patriotic motivation or a conscious desire to create jobs; they select investments based on the rate of return the investments promises to yield.

During the Bush Years, job creation was largely in four principal areas: housing construction, financial services, government, and self-employment (the oft touted "small businessperson").
The increase in government jobs was driven largely by 9/11 and the War on Terror. I'll skip self-employment for the moment, which deserves more time and thought, although I suspect that a more in-depth look would show much of "self-employment" simply masks unemployment figures and the loss of manufacturing jobs.

Investment stimulus did have an impact on the housing construction and financial services industries, as well as collateral investment opportunities (e.g. the growth in municipal bonds may have well been stimulated indirectly through the housing boom in that communities needed expanded municipal services for new housing development). Further, it is doubtful that the housing industry itself would have attracted significant investment capital without the high rates of return, which were in turn based on highly risky loan practices (NINJA loans, adjustable rate mortgages, loose credit, etc.). Much of the housing boom was both a financial and political scam.

For additional tax cuts to contribute to a meaningful rebuilding of the American economy (not the global economy), I believe, there are prerequisites to be accomplished first. We must ensure ourselves that the additional disposal income will result in the creation of productive American jobs - i.e. identify sound national investment opportunities (e.g. new energy technology; infrastructure improvement; etc.). We must also overhaul the financial system and return to a sane regulatory and oversight environment. This may not be as difficult as it may sound. I suspect the U.S. economy "as is" is far too heavily dependent on foreign investment and that these investors, if not our elected representatives in Washington, will insist on the these or similar steps.

In sum, supply siders who still insist that tax cuts are the only way out of our present economic dilemma are something like the Catholic Church still insisting the Earth was the center of the Universe after Copernicus.

That said, the House Democratic stimulus package is not encouraging and holds only slightly better prospects for success than a Republic package based on tax cuts.

This "may" be corrected in the Senate (but don't count on it). The polarization of American politics is more evident in the House than the Senate. Gerrymandering has largely placed individual House members beyond bi-partisanship and doing what is good for the "national interest." The Senate is also polarized, but their polarization is driven more by ideology.
More on this and where the House package, in my opinion, fails in the next post.

On the Economic Stimulus Package

2009-01-31T14:06:00.000-08:00

Reaction to Obama's economic stimulus package seems to be falling into two camps: Those who now believe that what is needed is a healthy dose of Keynesian economics (i.e. government spending) and those who continue to adhere to "supply-side" economics. The basic difference between the two is who decides how to spend the economic resources of society: the government or wealthy individuals acting collectively through free markets.

Supply siders will criticize the last sentence's qualification of "wealthy" individuals and talk about the average person, the small businessperson, etc., etc. In general, that's playing with words. Middle class 401K accounts were largely smashed by the bursting of the dot.com bubble, turning the "average person" to real estate equity, which in turn has been smashed by the real estate bubble. If you are one of the lucky ones and still making $250,000 and up, "tax cuts" may have some relevance, but as unemployment grows and foreclosures increase, tax cuts will be chump change to the magnitude of economic problems most of us will be facing.

Far, far more important than tax cuts will be "jobs" - both in re-employment and saving existing jobs, particularly those jobs that we all rely upon for the safety and stability of society (police, firemen, health care workers, etc.). I have nothing against free market solutions or tax cuts...if they work. And, I have a lot of doubt regarding their effectiveness as a stimulus at this point.

Basically, as noted a jillion or so times in these blogs, supply side economics argues that minimizing government expenditures and maximizing the wealth in the hands of individuals allows the individual to "reinvest" in the economy, whether it's through an investment portfolio or by purchasing a flat screen TV. That, in turn, ups demand and creates jobs.

In theory, and historically on several occasions in the past, this does work. Problem today is that it isn't the past. Things have changed. The investment portfolio has tended to have been dominated by over-valued assets and largely unregulated new "financial instruments." What was a great investment two years ago may not be worth much more than a lottery ticket today. All the additional tax cuts thinkable won't change the situation until we overhaul the financial system, re-establish some fundamental regulation and oversight and, the kicker, create new investment opportunities in new industries employing people in real jobs, making real products, for which there is a demand. As a twenty-something writer for Fortune Magazine noted yesterday on a CNN program devoted to the crisis, "the United States had a strong economy when we made things and sold them and will not be strong again until we make things and sell them."

Regarding the lower category of demand, those flat screen TV's, well most of them were bought on credit weren't they?

So, let's face it. Without the ability of the U.S. government to step in and borrow enormous sums of money (thus simply transferring every one's "credit problem" to the next generation via government deficits), the U.S. financial system and virtually the entire economy would have gone into bankruptcy last Fall. Get it? It is not very far from the truth to say that without tossing much of this supply side economics and free markets stuff out the window, capitalism would have pretty much completely failed at some point in the October - December 2008 period.

Ideologues die hard. So, when someone suggests that the answer to the current crisis lies through more tax cuts, let me suggest some of the illusions and delusions they are possessed by to justify the statement.

Supply side economics works, but only under certain conditions. In our case, it assumes several things, which in today's economy simply are no longer true. Basically it says that tax cuts = more disposable income = more investment = more demand = more jobs = labor scarcity = rising wages = a better world for everyone. It's the ultimate "win-win" situation...within the context of the economic system in which it is practiced. Problem is that for the last 20 years or so, that system has been global, not national. Income HAS trickled down; it has trickled down to the customer service worker in India (the person you talk to when you call to ask about your phone bill); to the factory worker in China (who builds the components of your flat screen TV, which is assembled in Indonesia and sold through a Japanese company to an American distributor, such as Wal Mart, or Target); etc.

Basic point: We may cut taxes all we want, but it until the investment flows and purchasing demands resulting from those cuts generate well paying U.S. jobs, they will not help members of the American Middle Class.

Within a global economy, the benefits of U.S. tax cuts will flow primarily to a) Americans lucky enough to be "investors" and b) workers outside our own borders.

Economic statistics support this. At the time the real estate bubble burst, wealth distribution was skewed toward the upper 5-10% more than at any time in our history since 1929 (nothing wrong with being rich, but if wealth becomes so concentrated that no one but the few at the top can purchase things, their numbers do not in themselves create sufficient demand for product; that demand, is generated not by actual widespread income or wealth increases, but by loose credit). Credit was at an all time high and American savings at an all time low (actually a negative figure).

A recent study by Moody Investors concluded that in terms of direct stimulus, food stamps comes in first, with each dollar spent generating approximately $1.73 in return. Corporate tax cuts came in last, actually costing the overall economy some $0.25 in each dollar cut.

In short, unless specific tax cuts can be restricted or conditioned by other tax incentives to hold savings within the U.S. economy and create U.S. jobs forget them; direct U.S. government spending is more efficient in that it may at least be more directed and controlled.

This is not to argue that many of the Democratic proposed government stimulus items are not equally stupid.

In the next post, I'll get into those.

P.S. Another word on wealth distribution. I have a theory that basically says there is a certain "optimum rate of capital absorption" for any given economic identity at any given moment. This holds true for individuals (e.g. the typical lottery winner) as well as for institutions (banks) or national or even the global economy. And, that there is a relationship (or correlation) between the amount of money in the system and overall investment risk. As available capital exceeds the optimum level, risk increases correspondingly. Liquidity that exceeds rational investment will still be invested...irrationally. Like eating too much chocolate. This, in some ways, relates back to income or wealth distribution - i.e. there may be some economically "optimum distribution," which allows for a wealthy investor class to "grow" the economy, and some sort of basic subsistence level for the poor, but distributes the majority of income across the majority of the population. Not suggesting that government do this; actually it already does, through fiscal and monetary policy, taxation, tariffs, etc.

Obama's Stimulus Package, Paul Krugman and the CBO

2009-01-09T08:52:00.000-08:00

Today's NYT carries a column by recent economic Nobel Prize winner, Paul Krugman (Krugman writes a regular column for the NYT, as well as teaching at Princeton). Krugman's column criticizes the Obama economic plan as basically being too small to close the growing gap, brought on by the recession, between potential supply and real demand. Krugman's observation is largely based on yesterday's report and testimony by the CBO, or Congressional Budget Office.

Having watched the CBO hearing, I understand Krugman's concern, on its face. About the only positive aspect of the testimony was the name of the witness, the Acting CBO Director, Mr. Sunshine (I kid you not).

A smiling Mr. Sunshine, exhibiting rare wry humor and the appropriate power point presentation delivered little more than doom and gloom in substance. It was an apt follow-on to the Three Stooges press conference of yesterday and illustrates a facet of modern America that I've been complaining about for years...process over substance, or in these instances, presentation over message. It's sort of like the world's foremost scientists gathering before a Congressional Committee and testifying that the world will end in a week and the committee members walking away afterwards saying to one another: "damn fine presentation."

Hello...the sky is falling.

Aside from that however is my own observation that may offset Mr. Sunshine and Professor Krugman's concerns, i.e. the validity of the supply side potential and its significance to the overall U.S. economy relative to overall consumer demand. What this boils down to is the suggestion that an economy based on overextended credit and foreign imports isn't exactly a great goal to set for the post recession world. Rather than getting back to achieving our "full potential," as defined by the old rules (i.e. creating consumer demand) it may be more important to spend some time discussing exactly what that potential really is and to offer an explanation for the "demand side" in terms other than Wal Mart's quarterly sales figures.

In other words, two major points: 1) When we get through this and strip the economy of its over leveraging, largely phony financial instruments based on overvalued assets, and begin paying more attention to fundamental trade balances, manufacturing jobs and neglected infrastructure we may find we have a sounder, but smaller economy. 2) Given 1), the actual size of the stimulus package necessary to return us to the Land of Oz is largely irrelevant and that instead of searching for a way to the Emerald City, we should be looking for a way to get back to Kansas. Temporarily, this may not be good for the U.S. economy within the context of our position within the overall global economy, but may be better for the average American and consequently, in the long run, good for our economy.

In sum, the future of the American economy can't really be compared to its status/position over the last several decades while we were incrementally moving toward an unsustainable situation. The Obama stimulus package and the Bush Administration moves since the "emminient collapse" and initial bailouts are indications of a slow, but growing awareness that we cannot simply go back to a situation that repeats the errors of the past, which have been similar to building a foundation with half the bricks that are prudent and necessary to sustain the structure.

Supply and demand require measurements that go beyond retail sales and consumer consumption. Given Krugman's basic Keynesian philosophy, his concern regarding these outmoded measures is curious.

And So It Goes...

2009-01-08T13:52:00.000-08:00

Obama gave a major speech today on his economic stimulus package. While details are still sparse, Congressional Democrats didn't let that stop their criticism. [Note: I was afraid of this...the most notable names among Congressional Democrats have been in the minority for so long, they are having problems understanding that they won the Presidency and control of both houses. It may take a special type of politician to survive in the minority and that that type is unsuited to represent the majority.

Anyhow, while Obama's speech indicated that he is well aware of the seriousness of the current economic crisis and its relationship to the "climate in Washington," Party congressional leaders virtually simultaneously offered additional proof that they do not. Messers. Durban, Schumer, and Dodd gathered to announce a major "breakthrough" in their "negotiations" with Citigroup to change the current bankruptcy laws (changes they all voted FOR a few years ago) allowing bankruptcy judges to restructure mortgage debt on primary residences (including forgiveness of a certain amount of principal). Curiously, the judges have held this power for second homes, vacation homes, yachts, private jets etc., but it was not granted for primary residences. [Note: I suppose the New Economy logic is that a primary home would be located near one's workplace and if you were in bankruptcy, your retirement home (or yacht) would be of more value to you.]

The three Stooges announced that after hard and difficult fighting with the financial industry, they had arrived at an important compromise. Citigroup has "agreed" to include primary home mortgages as subject to restructuring, including principal reduction, IF such mortgages are limited only to those in effect prior to the new law. In other words, they have agreed to support the change solely on a retroactive basis and not for future mortgages.

Ah...this is all becoming soooooo confusing. I use to think the American legal system - ex post facto law as in Article I, Section 10 of the Constitution - prohibited the passage of law retroactively. If so, the Three Stooges' announcement is simply window dressing. By modifying the Three Stooges' bill to apply solely to mortgages made prior to the bill becoming law and negating the modification for mortgages after the bill becomes law, Citigroup has its cake and eats it as well.

Further, why are the Three Stooges "negotiating" with Citigroup at all? The U.S. Government (and consequently, the U.S. taxpayer) is, following the Citigroup bailout of $20B+, the single largest Citigroup shareholder. [Note: Second largest is Dubai with $7.5B.]

Why is it that Congressional leaders continue to play the Emperor's New Clothes game?

Negotiating with Citigroup about the bankruptcy laws is like asking Nazis what they REALLY think about Jews.

It's like finding "good Germans" in 1945 or truly non-sectarian Iraqis in 2009. What the guy in Des Monies, Iowa or Peoria, Illinois understands is that the malfeasance and corruption of the American financial industry ran so broadly and deeply for so long, there are no good guys left.

And, what the Three Stooges need to understand is that this is a situation that is rapidly becoming one of you are either part of the problem or part of the solution and "negotiating" with idiots and/or criminals puts you in the camp of the former.

First Take on Obama's Largest Obstacle...the Democrats

2009-01-06T10:05:00.000-08:00

Although the Obama transition has run into a few glitches - such as the Richardson appointment - it has thus far gone smoothly. However, the recent fiasco regarding Obama's replacement for his Senate seat perhaps points to what, I believe, will be the greatest obstacle to his message of "change," namely established "pols" within his own party.

Skipping for the moment the coming headaches concerning Schumer, Dodd, et al over how to effectively regulate Wall Street and the Rockefeller, Feinstein lukewarm response to Leon Panetta's probable appointment as head of the CIA, the event that illustrates this most clearly is Harry Reid's stance on the Blagojevich appointment of Burris to Obama's Senate seat. Reid's approach to representation is one of "party power politics" versus the rule of law and Democrats would be wise to remove him as their majority leader, seat Burris and leave Blagojevich to his fate within the Judicial system and probable impeachment by the Illinois State Legislature.

Reid's action to block Burris from the Illinois Senate seat portends the setting of an extraordinary precedent - i.e. the assumption that the Senate decides its own composition.

In doing so, Reid has singlehandedly elevated an albeit messy scandal to a matter of Constitutional principle.

Generally, States fill Congressional seats that become vacant between elections either through special elections or Governor appointment. In Illinois, under current law, it is the latter. Despite Blagojevich's impending indictment and probable impeachment, no one has argued that potential future removal from office eliminates his current powers. Indeed, one might make an argument that since removal from office may be accomplished only by either election or impeachment, he might well continue his Governorship from a jail cell. Thus, the combination of the Illinois Legislature's failure to act promptly in either impeachment or changing the appointment process prior to Burris' appointment and Reid's action have effectively overturned Illinois law and the democratic process.

Obama is probably recalling the old clique, "with friends like this, I don't need enemies."

Obama Picks

2008-11-22T11:20:00.000-08:00

The Obama Cabinet is shaping up fast and, similar to Clinton's experience in 1992, the left wing of the Democratic Party is screaming "betrayal."

It was largely this element of the Party that gave Obama his initial break. In 1992, they backed Clinton, only to find him moving toward the center following his election. Not wanting a repeat of 1992, they led the initial Obama surge to "Stop Hillary," on her way to her coronation as the Party standard bearer.

To some degree, our political party system guarantees this type of result for both Democrats and Republicans. McCain experienced a similar falling out of the Republican Party base, prior to his pick of Sara Palin.

Both Democratic and Republican Party activists tend toward the extremes of the political spectrum. Party work is, for the most part, built around volunteers who work for free (excluding the leadership) and it is difficult to motivate them with realistic political policies that have the support of the majority middle. A President that attempts to "govern" from the base is usually doomed to failure - i.e. George W. Bush.

The Left should not be terribly surprised; Obama emphasized during the latter part of the campaign that he intended to govern from the center and, thus far, his appointments seem to reinforce his campaign message. This, despite the likes of Fox's Hannity, Newt Gingrich, Dick Morris, et. al. who see a five percent increase in upper bracket taxes and a potential 10-15 percent increase in the capital gains tax as "socialism" or worse.

A word or two on the appointments to date.

Geithner as Secretary of Treasury. As President of the New York Federal Reserve Bank, he has been close to Wall Street, without being part of Wall Street. And, presumably, he had a voice in allowing Lehman Brothers to fail. I suspect the Obama economic policies, aside from tax specifics, will be oriented toward increased regulation and oversight and a backing away from the march to globalization, without completely abandoning that goal. The Obama job goals and stress on "rebuilding the economy from the bottom up" and the resuscitation of the middle class, indicate to me that he will be moving away from an economy based on fees to one based on actual products. Although I haven't researched Geithner, it seems a good pick.

Daschle as Health and Human Services. I was initially skeptical about this one. I never considered Daschle as strong as he might have been in the Senate, as Minority Leader. Also, he has ties to the private health industry. But, after some thought, he makes sense. Obama's health plan builds on the distribution of health services through private industry, with essentially a mandate for universal coverage and assistance for those who cannot afford the premiums. Daschle's ties to the industry may actually be helpful.

Richardson as Commerce Secretary. At first glance this looks like a "downgrade" for Richardson, who is qualified for a more important cabinet position (such as Secretary of State or Energy). I was an early Richardson for President supporter before turning to Obama. The fact that he accepted the position may indicate one of two things (or both): he desperately wants to get back to Washington and/or Obama plans to elevate the importance of the Commerce Secretary position - particularly in trade negotiations, potential tariffs and new at home energy jobs - as he rebuilds a solid U.S. economy.

Clinton as Secretary of State - I wanted Richardson for this position, but it may be a smart Obama political move. Constitutionally, this position is the number three position in the cabinet, behind the President and Vice President. Prior to the constitutional amendment regarding presidential succession, the Secretary of State was second in line for the Presidency, should something happen to both the President and Vice President (today, that line runs directly to Congress, with the Speaker of the House in 3rd place). It also keeps Hillary (and presumably Bill) out of the country for much of the time and relatively removed from a domestic political base of their own; in the Senate, without much seniority, she would have ample time to build her 2012 or 2016 presidential campaign. Although she was most known for her own efforts in health care, Secretary of HHR is better suited for Daschle and the importance of Secretary of State befitting for someone who today is Democrat #2. I also presume that Obama intends to be his own Secretary of State, in regard to policy, which is his prerogative.

Gates at Defense - This one is rumored, but not called. It would not be a bad pick. Gates is a pragmatist and not an ideologue. One of Obama's goals is to return U.S. foreign and defense policy to one with bi-partisan support, which the country enjoyed for most of the Cold War. Another two years with Gates wouldn't be a bad choice.

Napolitano as Secretary of Homeland Security - Don't know much about her, other than she has apparently had a lot of success in controlling illegal immigration in Arizona, through both a border shutdown and employer responsibility approach. Homeland Security begins with border control and goes inward in terms of tracking legal immigrants, etc.

Eric Holder as Attorney General - Holder was Clinton's #2 at Justice when Janet Reno was Attorney General. Presume that major areas of concern for the new AG will be prosecution of terrorists, both the ones at Gitmo and the ones on Wall Street. If he works well with Clinton at State, Gates at Defense, and Geithner at Treasury he should be OK. And, where better to put another African-American than in the position of the nation's Top Cop.

More later.

Summary of a Theory

2008-11-13T12:56:00.000-08:00

The President (George Bush Jr...remember him?) spoke today on the economy prior to the opening of a global meeting on the global economic crisis, which he is hosting.

On this one, he's a reluctant host. Sort of like the 9/11 Commission; first he was against such a meeting, now he's for it. What changed his mind? French President Zarcozy and the European Union President's visit of approximately one month ago. As word got around that Bush basically didn't want to do anything and wanted to let the next Administration handle the crisis (beyond what has already been done in terms of bailouts for U.S. financial institutions), the Europeans hopped on a plane for a 3 hour dinner meeting with Bush in Washington. In arrival remarks, Zarcozy publicly pointed out that a global meeting should be called by the U.S. in November. Shortly thereafter, Bush "changed" his mind (or whatever it is he calls a mind).

Today's Bush remarks, however, were an indication that he remains unconvinced of the magnitude of the changes the global community is likely to bring with them this weekend. He is still - true to the bitter end - a reluctant economic leader, preferring to wait for the invisible hand of long dead Adam Smith, to act via free markets with minimal, if any, oversight. And, Wall Street, which has largely grown to ignore him, responded accordingly (up 400+ points on the DOW), proofing that the markets follow the fundamentals when it suits them and are equally capable of ignoring them when they do not.

They may be temporarily clinging to faint hope. I believe that the type of capitalism that has ruled since Reagan is dead, which leads to the theory.

My theory is based on Eccles view on the causes of the Great Depression, wherein he noted that democratic capitalism depends in large measure on a more or less wide dispersion of wealth. If wealth becomes overly concentrated among a few, basically no one else has the money (or credit) to purchase things and the economy tanks.

I believe this is basically what is occurring today. The sub prime mortgage mess was merely "the trip wire" that began the unraveling of the "phony economy." If Eccles' observation is correct, falling or stagnate wages among the majority, with increasing concentration of wealth, was masked by easy credit and over-valued assets. Higher than normal foreclosures (virtually guaranteed by mortgage providers) led to falling real estate, which in turn has led to real estate investors to walk away from property worth less than their investment, leading to more foreclosures, etc., etc. [Note: the head of Bank America's mortgage loan division testified before Congress this week that the great bulk of those "walking away" from properties were not residents of the properties, but investors.]

All of this was further aggravated by an unregulated market, lousy risk management models, with a touch of greed, corruption and incompetence.

Considering that we are all in one segment of the "labor market" or another...be in on a GM assembly line or as manger of a trillion dollar hedge fund, I believe rebuilding the economy has to begin at the bottom. Pouring money into the financial institutions without substantial changes in those institutions will at best simply perpetuate the house of cards and add another layer; at worst it will do nothing more than add to the national debt, further undermining the house of cards.

Continuing with the theory expressed in earlier posts, I am coming to believe that between Reagan economics (or the Milton Friedman ideas upon which it was based -meaning totally free markets, minimal government interference, trickle down theories, etc.) and Keynesian economics, meaning government intervention, pump-priming via government spending and higher taxation, the economic "truth" lies somewhere in between, depending upon the times.

If times are stable the economic situation of the middle class sound (meaning a general increase in wages consistent with productivity and GDP growth), and sufficient oversight and regulation to ensure a minimal amount of fraud and thievery, then Reaganomics may be the best path.

However, it is largely a balancing act. If wages do not rise, through open borders or the exportation of good paying jobs, and the middle class begins to disappear, then government must step in and do for its citizens what the free markets could not accomplish...create jobs. Better paying jobs reduce welfare and put more people on the tax roles, thus spreading the tax burden.

At the moment, my impression is that no one really knows what to do. A government policy that forces a return to loose credit markets does not really resolve the problem; it merely continues it. Financial institutions are largely caught in the middle (not that they do not bear the burden of responsibility for the present mess). They are condemned for loss credit on one hand, but encouraged to provide it on the other.

I am not sure there is any "fix" without substantial more pain. It will take time to create meaningful jobs that cannot be easily moved overseas at lower labor costs. A tax increase for the wealthy of a few percentage points (say five on capital gains and upper income brackets) does not seem to be too harsh a "penalty" to impose on those basically responsible for the present mess (how many investors complained about ridiculous NINJA loans, but invested in them at the same time...it was as if the left hand didn't know what the right hand was doing). If used intelligently, nominal tax increases won't drive many into bankruptcy and may help to restore neglected infrastructure and create energy independence. The Republican clamor against tax increases strikes me as largely impractical for the times and largely ideologically based, to the degree of cutting off one's nose to spite their face.

In the recent Presidential campaign, Biden was chided for saying "paying taxes is patriotic." It is unbelievable that at a time of global economic crisis, record deficits and fighting two wars abroad that Republican pundits made fun of his statement, by arguing the exact opposite...i.e. along the lines of "we believe paying less taxes is patriotic!" Are these people crazy? Do they really understand what is going on? Did they think the country could pursue wars abroad and free markets without regulation and oversight, while lowering taxes, without a serious economic crisis?

Biden was right. Paying taxes in time of war is patriotic. Bush lowered taxes and skimped on our military.

While the Democrats are certainly not without blame (Fannie May; Freddie Mac; Wall Street connections; Bob Rubin, etc.), Republicans have been largely deluding themselves since 9/11 in abandoning fiscal discipline, ensuring genuinely free markets, and standing behind a foreign policy that suggested doubling or tripling military and homeland security outlays, rather than cutting taxes. If Democrats made the "Guns and Butter" mistake with LBJ and Vietnam, Republicans have now done the same.

Bluntly, cutting taxes in time of war is unpatriotic and very, very un-American.

[There is a book to be written on this subject and one might compare what we have tried to do in the middle east to the imperial wars of Great Britain, counting on a relatively small professional army, with superior weapons to "control" foreign colonies. One could argue that they, in fact, tried this on us, leading to our own revolution. Ironically, Mad King George was the British monarch at the time.]

Were it not for the McCain campaign, we could blame this on the abberation of George Bush. Yet McCain offered no substantial changes in either the Bush foreign or domestic policies. I do not recall him ever mentioning bringing war or foreign policy goals in line with financial resources. He seemed to think that if he could ban earmarks all would be well ($18B in annual earmarks versus some $150B in annual Iraqi and Afghan war costs).

Perhaps the major problem with the Republican hierarchy is that they drank the Kool Aid - i.e. began believing the sales pitch. And, as no less a conservative than David Frum has recently pointed out, until the party turns its attention to the middle class of America, they are doomed to failure. [Frum also noted that Joe the Plumber is probably not the answer...Republicans lost substantial vote among white, well educated males.]

The problems facing us today are often compared to the challenges Roosevelt faced in 1933. Obama's challenges may actually be greater. Roosevelt had an economic advantage in bringing the United States out of an economic crisis by mobilizing for war. Obama has to do the same economically, while extracting us from war. To accomplish both will not be easy for either a Democrat or Republican.

More next time on where I think Obama will take us and the need for a new Republican economic philosophy.

The Election

2008-11-01T22:13:00.000-07:00

Prior to continuing with specific steps that may be taken to rebuild the American economy, a post on Tuesday's election and why I have decided to vote for Obama.

Throwing out the charges of both the extreme left and right and after following the campaigns of both Obama and McCain for almost two years, I am reasonably confident that both men, from different philosophies and perspectives, have the best interests of the country at heart. I do not question the patriotism or dedication of either. The question in my mind is one of policies and qualifications, the latter in terms of both experience and intelligence.

The pace of change in American society is today so swift, that it is doubtful that either man knows what crises lie ahead. In this sense, intelligence in the ability to adjust to new situations and demands outweighs, in my mind, experience, although the latter is not an insignificant factor. Equally important is the ability to understand the world as it is and project a strategic vision for the future, which should coincide, of course, with my personal perspective regarding the best interests of the country.

Regarding these matters, I find Obama the better choice. I also find the charge that McCain is simply "more of Bush" to possess a great deal of truth, excluding small differences in tactics. To me, Obama appears to be the strategic thinker, while McCain is the tactician.

Obama has laid out both a strategic vision and plan for the achievement of goals compatible with my own perspective, while McCain continues, in my opinion, to wrestle with the tactical changes needed to implement Bush's basic strategic goals.

McCain had the opportunity to address both foreign policy and domestic policy goals and provide redirection. He did neither, and instead allowed his campaign to degenerate into a negative approach that spent more time attacking his opponent, than in laying out his own vision and strategy for the future. This may have been a dilberate campaign tactic anticipating a bad year for Republicans, but I believe it was a disservice to the voter. Foremost, I look to the candidates to explain what they are for more than what they are against.

In the realm of foreign policy, McCain has never questioned the President's decision to invade Iraq, which I view as an unnecessary war of choice. Obama, on the other hand, took tremendous political risk in condemning the invasion as "the wrong war, in the wrong place, at the wrong time," before public opinion turned against the invasion. [A political risk at least as great as McCain's risk on his surge position.] It is not enough for McCain to hide behind the Bush excuses of "we were all fooled" or to adopt the post invasion multiple causation reasons. The Bush Administration has never renounced its own Doctrine regarding the right to pre-emptive war and McCain has never questioned it. McCain has merely stated that he will correct Bush's errors. This sounds as if he views the "errors" as solely military tactics. There is no broader view. While Obama may also be charged with failing to lay out a comprehensive picture of changes to the Bush Doctrine, he still edges out McCain on this point.

Obama's statements on his willingness to talk to perceived enemies without pre-conditions is strategic and intelligent diplomacy, regardless of what he may actually do as President. McCain's insistence on pre-conditions, similar to Bush's, strikes me as a school boy attempt to gain a tactical negotiating advantage. If we must always leave military force as an opition on the table, it is also wise never to shut the door on diplomacy.

Domestically, although neither candidate appears to have much of an economic background, McCain appeared ready to leap before looking (suspending his campaign, threatening to cancel the first debate and rushing to Washington to "take charge" of the economic crisis). Nor does he seem to have any appreciation for the failure of Reagonomics that I've discussed in previous posts. As argued earlier, I believe that we are now in a position wherein a dose of Keynesian economics is essential for economic recovery. I have seen nothing that indicates McCain understands this, or the depth of the economic problems the country now faces and its implications for our future global position.

In fact, in both foreign and domestic policies, the McCain proposals do not, to me, seem to signify an awareness of just how bad the problems are that the country faces. In foreign policy it seems McCain is all about "winning" and knowing how to be militarily tough, without defining what winning means and what is actually necessary to rebuild our armed forces. Again, he seems stuck in past, with tactical changes to problems requiring strategic changes. He seems not only to admire Ronald Reagan, but also fails to understand the real changes in the world, since Reagan, that have led to our present situation: two unresolved wars abroad and a domestic economy on the verge of collapse.

On the other hand, Obama's position on rebuilding the military lacks force. Barney Frank's comment about cutting defense spending by 25% worries me, although he may be referring simply to eliminating the costs of the wars in Iraq and Afghanistan. I would agree with those cuts, provided that overall defense spending increase, excluding the savings from Iraq and Afghanistan. This point is also tied to my forthcoming "how to fix it" post and using increased defense spending to improve the U.S. economy. But, overall, I give Obama the edge on foreign policy, while considering defense spending a part of that policy.

I do not see pursuit of some undefined victory abroad and the extension of the Bush tax cuts at home as "keys" to improving our foreign policy or our economy. In a phrase, McCain appears concentrated on the past, equating the War on Terror and the threat of Islamic Fundementalism to the Cold War and communism. Obama's position looks more to the future and decouples that future from the Cold War, communism and the Vietnam experience.

As of last month, and the $700 billion + bailout package, it would appear that through mismanagement, corruption, the lack of oversight and an antiquated economic philosophy, we have blown the $700 billion Bush tax cuts and are repeating the mistake. Someone once wrote that insanity is doing the same thing over and over again and expecting different results. Or, as they say in Texas, you don't pour money down a dry well. The present economic crises is probably due to one of three things and most likely a combination of all three: incompetence, corruption, and the pursuit of the wrong economic philosophy. Bush blamed it on incompetence ("Wall Street got drunk."; McCain seems to think it was all due to corruption "I'll clean-up Wall Street" and Republicans, in general, seem to refuse to acknowledge that it might just be, at least in part, the economic philosophy itself.

Obama seems to acknowledge all three possibilities with a tax plan to "spread the money around" (OK...not ideal, until one realizes that the alternative is more loose credit) and redirecting capital, via tax increases toward jobs, new infrastructure and new technology. While McCain agrees with similar "goals," his approach is apparently almost entirely through reliance on the "free market" with additional tax cuts. Having just experienced a failure of the free market, it's a "sale" he can't make with me. My own view is that the best way to cure the free market's excesses is to temporarily take away some of their Monoply Money and scare the hell out of them. Tax increases may cause them to beg for a return to regulation. Let's face it; in good times, no one asks: How will this investment help the country? They look solely at their rate of return. Tougher investor questions may have prevented the current mess, which is a different way of supporting additional regulation. I don't exclude myself from investor blindness. As long as things were going great, I had minimal interest in economic theory.

On health care, there were three practical choices: Clinton's, Obama's and McCain's (which came late). Obama's plan is the least disruptive of the three, basically filling in the gaps of the present system and extending coverage by mandating coverage. McCain's plan would seem to me to lead to an increasing number of companies doing away with employee health plans and employees turning to McCain's $5000 tax credit to "fund" all of their health care needs; a plan virtually assuring that the result will be less universal coverage. Although I would prefer a genuine universal health care plan (which I assume would relieve American companies of the burden), I favor Obama's plan over McCain's.

McCain's ideas on freezing government spending and balancing the budget in four years have been discussed in earlier posts...in the vein of "if you believe that, I have a bridge to sell you." Banning earmarks sounds noble and good, but is only approximately $18 billion out of a $2.7 trillion budget. Worse, one could argue that doing away with earmarks encroaches on Congressional prerogatives and almost ensures a Democratic Congress and Republican Executive Branch confrontation. While it is certainly true that earmarks are most often not in the country's best interests as a whole, appropriation bills originate in the House (the people's branch of direct representation, and short-two year terms). If the people of Alaska really want to build a bridge to nowhere and their representatives are able to finagle an earmark to do it, well, that's part of the price of democracy...making sure that one person does not have entire control over how money is spent. Rather than "banning" earmarks, my preferred approach is through transparency, requiring more public exposure. Given the magnitude of the budget and deficit, in addition to massive bailouts, earmarks fall in the category of "chump change."

It also bothers me that McCain has not supported veteran programs and hasn't really bothered to answer the charge, saying only, "that's nonsense; veteran's know me." But, then, there are a lot of answers of that sort from McCain. There is a lot of "trust me," in his campaign. A curious message for a Republican in this election year. It is not that I believe McCain's "trust me" approach hides deceit, but rather than it covers inadequate preparation. Sort of: "I know what's right and will do the right think when we get around to it." Conversely, I believe, in general Obama has been more detailed and informed.

Finally, good, old trustworthy John has flip-flopped on enough issues to make John Kerry look remarkably consistent. I understand that this was the only way a moderate, "maverick" Republican could obtain the nomination in a radical right dominated Party, but one occasionally wishes he'd been more consistent on issues other than the Iraqi surge.

Obama has also made "running changes," but they seem to be less significant than McCain's 180 degree shifts (e.g. the Bush tax cuts).

In sum, I believe it is going to require a lot more than shoot-from-the-hip, knee jerk reactions to get us out of our present problems; it is going to require a lot of thought and reflection to decide where we want to be in that future and to strategize on how best to get there. In this, I believe Obama to be the better choice as evidenced by his own past history and the organization of his campaign. Obama impresses me as the strategic thinker, who could listen to the ideas of the Reverand Wright and William Ayers and take the good and leave the bad; who could and would sit down and talk reasonably to unreasonable people without feeling he was giving them some sort of recognition or endangering his own position; a person that is not afraid of alternative ideas, whether or not he accepts them. My own opinion is that this attitude must be our approach in coping with our future in everything from Islamic Fundamentalism (less actual terrorists) to social security and the regulation of Wall Street. What I do not want is a President who will exclude potential solutions because of an ideological filter.

Vote Obama!

The Perfect Storm

2008-11-01T13:59:00.001-07:00

The movie, by the same name, concerned an actual once in a hundred years weather event in the North Atlantic, wherein three different storms, from three different directions suddenly and unexpectedly converged. The movie is the story of the fishing boat that failed to make port and went down with all hands in the "Perfect Storm."

Economically, I see three converging forces occurring in the last year or so to produce the present economic crisis: unregulated financial instruments; rapidly rising energy costs; and the sub-prime mortgage failures.

Greed and incompetence plays a large part, but it should be remembered that "demand" was genuine with all three elements. If there were any factors that set the environment that allowed the three storms to develop it was a failed Bush foreign policy (creating enormous distrust in the United States; particularly in Russia and the Middle East) and the rapid transfer of wealth back into the U.S. from abroad.

It is difficult to determine which of the storms was the first to arrive. I suspect the first to arrive was the rising price of oil, which may have been partially in retaliation for U.S. foreign policies and partially due to growing awareness of declining Saudi reserves. Rising oil prices, in turn, may have accelerated the growth in foreign demand for new U.S. financial instruments, based largely on sub-prime mortgages, which in theory would have been more liquid than the actual purchase of real estate. This, in turn, accelerated the demand for additional sub-prime mortgages, which eventually began scrapping the bottom of the barrel with no-doc loans, packaged and repackaged according to risk management software that was little understood and tended to neglect down-side data (i.e. models that did not properly weight the possibility of above average foreclosures and falling real estate values).

As this first storm began gathering strength, the second arrived - this was the beginning of the foreclosures, further fueled through over-valuing real estate leading to overbuilding and the situation of more supply than demand, i.e. there were far more buyers of "packaged" instruments than actual buyers of real estate. Once real estate market tipped, investment shifted rapidly out of that sector and fled to commodities, further aggravating speculation in rising oil prices.

All three then converged. Unregulated financial instruments composed of unregulated (or ignored) sub-prime mortgages, with an unregulated commodity market. Since it is today still difficult to obtain reliable information concerning any of these markets, it is almost impossible to determine how each fed on the other and influenced the other. What is known is that it was apparently a toxic mix...a Perfect Storm, which has exposed the house-of-cards U.S. financial system, the pitfalls of deregulation, the incompetent or corrupt use of untested risk management models, our foreign oil dependency, etc.

It will be a long time before global confidence in the U.S. economy is restored. One means of that restoration is to move toward a more European/socialistic financial system (notwithstanding McCain's fear of redistributing the wealth and equating a progressive tax system with socialism).

In other words, restoration of global confidence in our economic system may demand abandoning Reaganomics, which anyhow has not improved the lot of the American middle class.

The extent of foreign investment in basically sub-prime mortgage packages shows that whereas much of the world is accustomed to working within their own more regulated and conservative banking systems, they weren't above making an extra Pound, Mark, Franc or Euro or two by investing in the high-risk, Cowboy Capitalism of George Bush's United States. But once burned, shame on you; twice burned shame on me. I suspect the U.S. has taken a very serious hit on its ability to guide future global financial rules and that global GDP growth will slow significantly until we return to square one, with new rules, going forward.

Notwithstanding Chris Dodd's Countrywide VIP mortgage, or Barney Frank's pre-crisis support of Fannie Mae and Freddie Mac, the Obama economic team, composed of people such as Paul Volker and Warren Buffet will probably appear abroad as considerably stronger than the McCain team of Jack Kemp and a handful of lobbyists and conservative think tank people (assuming that Phil Gram and Carly Fiorina are actually gone and not just hiding in the wings).

Two hundred and thirty two years ago, on July 4th, 1776 our founding fathers gathered in Philadelphia and declared our independence from Great Britain. While "taxation without representation" was a prime cause in that declaration, I believe the broader cause was an understanding that as long as they remained under colonial rule, the country could not reach its full potential. Failure to achieve independence would constrict growth both in population, geography and industry and subject the American colonies to the intra-European concerns and squabbles of Great Britain. Today, the phenomena, not of colonialism, but of globalization, may be having the same effect.

As long as we pursue economic policies that place a globalized economy ahead of the interests of our own people, we risk returning to basically colonial status. It is time Republicans abandoned the destructive economics of an outmoded theory and recalled the closing words of the men in Philadelphia: ""And for the support of this Declaration, with a firm reliance on the Protection of Divine Providence, we mutually pledge to each other our lives, our Fortunes and our sacred Honor."

Unless we are ready to accept a continued decline toward the status of a Third World Country, we must begin rebuilding an economy based on meaningful and well paying employment for all; an economy not only strong for the 10% at the top, now paying their disproportional share of taxes, but for all. In my next post, a few ideas on beginning this process.

The Economy - Part VI

2008-11-01T12:52:00.000-07:00

Given a progressive tax system and an economy losing its middle class, with stagnant or falling wages, it is not surprising that the upper two brackets pay more taxes than the rest. The "rest" don't make enough money to pay taxes. The means for rectifying this situation is not to cut the taxes of the wealthy, but to increase their taxes and use the money to do what the wealthy have largely failed to do over the past 20-30 years: invest in better paying U.S. jobs and thereby spread the tax burden more equitably over time (hopefully returning to a situation wherein all taxes may safely be reduced, on the basis of a sound economy).

The reason this isn't understood, is that Republicans (and, to a lessor degree, Democrats) fail to acknowledge that whereas Reganomics may now work globally, it has failed to work nationally. The reason for this failure is simple and has been stated time and time again herein: investors don't invest to create jobs; they invest to make money. If a company is able to produce a better return on investment than its competitors, by shifting production off-shore to take advantage of low labor costs, then that's where investment capital will flow. Forget free trade theory and trickle down economics. Labor (including costs associated with labor) is THE reason we've lost most of our manufacturing base over the last 30 years.

Again, I'll repeat my earlier comments about George Eccles' observations regarding the Great Depression. Eccles pointed out that a democratic-capitalist country, based on exports and mass consumption, functions best for everybody with a reasonably equal distribution of wealth, because then more people have sufficient money to buy more product.

Easy credit and cheap imports today obscure Eccles observation. But high-end products are (or have been until recently) surging. More expensive cars; more expensive yachts; more expensive homes; all meeting a demand that reflects the greatest concentration of wealth since 1929. What ultimately seems to have brought an end to this is the failure of credit at the bottom of the economic system, rapidly transmitted up the economy to include our major banks.

A housing foreclosure is essentially a failure of credit. Obama is correct. Additional tax cuts (or continuing with the temporary Bush cuts) for the wealthy will do nothing to improve an economy without a solid basis. The only way to do that is to rebuild the economy from the bottom up, by creating new infrastructure-related jobs (that can't be moved overseas) and restructuring the tax code to provide for incentive for investment capital to be kept inside the country.

This will be an enormous task that requires the suspension, if not completely scrapping, Reagonomics, which today seems to work primarily for the developing world. Clinton essentially continued Reaganomics via NAFTA, coupled to overvalued dot.coms and 401K accounts. Bush hid economic realities with phony growth based on the financial services, real estate and construction industries, stimulated through easy credit and cheap money.

I believe, the magnitude of the current economic crisis requires a strategic movement, via government, back to Keynesian economics and that the policies of Obama better reflect this movement. On the other hand, the McCain economic plan appears to me to be little more than a series of tactical moves designed to prop-up failed Reaganomics.

Before determining where we go from here, it is important to look at how we came to this point with more specificity, which I'll try and do in the next post, entitled "The Perfect Storm."

THe Economy - Part V

2008-10-31T08:05:00.000-07:00

Prior to getting into who pays what in taxes, it may be interesting to look at just where the money goes. In discussions on the economy, I still run into people who believe most of our tax dollars go to welfare and foreign aid. The following looks at federal tax dollars. Many welfare programs were either eliminated or pushed down to state responsibility during the welfare reform programs of the Clinton years. The information is taken from a no-partisan group: the Center on Budget and Policy Priorities, which may be found at http://www.cbpp.org/. Figures are for the 2007 budget.

Defense and Homeland Security related expenditures compose 22% of the $2.7 trillion dollar budget; that's $590 billion, with $125 billion of that total going toward the wars in Iraq and Afghanistan. Recently, Barney Frank suggested the defense budget could be cut by 25%. While I disagree with this, he probably is referring to ending the Iraq/Afghanistan expenses. I believe both wars have seriously deteriorated our armed forces and that we have probably not spent sufficiently on homeland defense (port, nuclear and chemical plant protection, etc.). Without a detailed study, I would guess defense spending could be held to roughly 20-25% of the total budget or about 5% of GDP.

Social Security takes 21% of the budget or $590 billion. This provides 34 million retirees with an average payment of roughly $1000/month. I don't foresee any immediate change in this, although due to shifting demographics, it is not a sustainable program over the long run. We may be forced to "means testing" down the road.

Medicare, Medicaid and SCHIP (State Children's Health Insurance Program - partially funded by the federal government, but administered through the states) claims another 21% of the federal budget, or $572 billion. With the political tide for some sort of universal health care program, I would not foresee any substantial reduction in this category, although increased efficiencies, elimination of corruption, etc. might improve costs by 10-20% (say $150 billion).

Safety Net Programs, such as the earned income and child tax rebates, school lunch programs, low-income housing assistance, food stamps and the various programs one would think of as "welfare," compose 9% of the budget or $254 billion. In a serious economic crisis, it will be difficult to hold spending to this level, without eliminating programs. Obama's tax plan increases the earned income credit, but for the sake of argument, let's assume this category could be cut in half, for a fifty percent savings (say $127 billion).

Interest on the national debt takes roughly the same amount of the budget, 9% or $237 billion. No much can be done here and as borrowing increases at a rate aster than income growth, this percentage will only rise.

Everything else comprises the remaining 18% of the federal budget. The 18% is divided roughly as follows: 6% for federal retirees and veterans benefits; 3% for for scientific and medical research; 2% for transportation and infrastructure; 2% for education; 1% for non-security related foreign aid; other miscellaneous 3%.

In terms of restoring the nation's basic infrastructure and encouraging new industries with new jobs, scientific and medical research, transportation and infrastructure and education probably all need increases in funding and a larger percentage of the total budget.

The point in reviewing these figures is, however, to show that if we hold defense spending and continue to fund entitlement programs, there is not a whole lot of discretionary spending available to reduce. If the above is even approximately correct, the best we could hope for is roughly $300 billion out of a $2.7 trillion dollar budget (approx. 10%). It is more likely that that savings would be shifted toward research, infrastructure and education.

According to the Center on Budget and Policy Priorities, in 2001, budget experts were projecting a $710 billion surplus in 2009; today we are instead expecting a $546 billion dollar deficit (and I believe these figures were prior to the recent bail-out of financial institutions). This means that during the Bush Administration the federal budget picture worsened by $1.3 trillion, not including the recent additional increases. The Center also studied where this money went: 42% in the Bush tax cuts; 40% in defense and security increases; 12% in entitlement increases; and 6% in discretionary spending increases.

My argument is that we do not resolve the overall budget problem with "tactical changes" such as getting rid of earmarks ($18 billion/year) or freezing discretionary spending to present levels and extending the Bush tax cuts and providing additional tax incentives to American corporations to enable them to better compete globally. In fact, policies designed to help us better compete globally have largely led to the destruction of the middle class and failed financial system.

Next: Who Pays the Taxes and How to Create Meaningful Employment

The Economy - Part IV

2008-10-27T12:31:00.000-07:00

Following 9/11 and the identification of Al Qaeda as the perpetrators, I assumed that George Bush had to do two things to have a chance at re-election in 2004. He had to destroy Al Qaeda and bring Bin Laden to justice and he had to scrap his tax cuts, which were, by all objective measures, aimed toward business and the wealthy. He did neither and managed to squeak by a second time to win in 2004. So much for my political astuteness.

Bush's legacy, however, is another matter. During his first term, he effectively destroyed American foreign policy and the post WWII western coalition that had essentially brought down communism. During his second term, he effectively destroyed the United States' leading role in the global economy and, although the jury is still out, much of that economy itself. Whatever international participation there was in the fiasco called the American economy and however deluded western intelligence may have been regarding the threat posed by Iraq, we began the Bush Presidency as the global military and economic leader and leave the Bush Presidency with our leadership in both in shambles. From the present perspective, Bush may go down in history as the worst President we have endured.

Bush managed to win the Presidency based on two factors; in 2000, a conservative, pro-Bush Supreme Court overruled the Florida Supreme Court and handed him the election. While I remain one of the few Democrats who believes that Bush "probably" actually won Florida, had events taken their usual political course and the Supreme Court decided against interference in the Florida State electoral system, Gore would have probably become President.

In 2008, Bush pulled out another "squeaker," with the deciding state switching from the electoral votes of Florida to the electoral votes of Ohio, although he did escape from becoming a "minority President," by carrying the overall popular vote by 500,000. Kerry's defeat was based on both the "fear" campaign waged by Republicans, coupled with intra-Party friction among Democrats. [I would contend that the Clintons preferred a Bush victory in order to clear the way for a Hillary nomination in 2008.]

Both of these elections will, hopefully, someday be seen as "aberrations" within our democratic system. But in 2008, the choices are incredibly clear. Whatever one thinks of the Obama policies (foreign policy, the use of military force, taxation, universal health care, etc.), McCain has offered no substantive change from Bush foreign and domestic policy.

"Winning" in Iraq and bringing home the troops with "honor" might be termed the "feel good strategy." McCain had the opportunity to reformulate the Bush Doctrine of pre-emptive war and offer a substantial new approach to foreign policy and the use of military force. He did neither. Outside of his claim of being correct on the tactics of the "surge" in Iraq and the need for a similar surge in Afghanistan, McCain's foreign and military policy is based virtually entirely on: "I have more experience; trust me." In the absence of offering alternatives to the Bush policies, one must assume that he concurs - i.e.silence is affirmation. The McCain goals of "victory" and "honor," lack definition and do not constitute in themselves a "strategy." Lacking such a strategy, McCain fails as Commander-in-Chief.

As the campaign shifted away from Iraq and Afghanistan toward the economy and what voters apparently believe is of a more urgent priority, McCain's arguments have been similar and offer little more than the standard Republican matra of supply side and trickle down economics. If Bush, in 2004, managed to get re-elected with the message of: "I've made mistakes, but Kerry will make more," based on foreign and military policies, McCain seems to be trying the same tactics in 2008 regarding the economy.

As with the wars in Iraq and Afghanistan, McCain's arguments with Bush on the economy are not strategic differences, but tactical. On the former, McCain never questions the policies of Bush or the decision for pre-emptive war (he doesn't discuss it); on the latter, the economy, it's simply more of the same. Indeed, McCain apparently believes he can right the economy by vetoing Congressional earmarks, freezing government expenditures (except for defense and entitlements...which compose 75% of the total budget) and providing additional tax breaks for corporations and the wealthy.

In other words, by pursuing strategies basically identical to Bush, he will somehow achieve better results, through small tactical changes. This fails to address the magnitude of our current economic problems.

Reaganomics, which has steered the Republican Party since Reagan, died with the recent Greenspan testimony before Congress, in which he noted that he did not foresee the errors of the banks and had assumed they would have been more protective of their stockholder interests - in other words, the free, unregulated market failed.

Ironically, the recent $700B+ bail-out of what-to-date has been a bailout of failed banks and financial institutions, approximates in dollars the Bush 2001 tax cuts. Looked at another way, the 2001 tax-cuts designed to stimulate real economic growth, instead were "blown" via the bubble of an over-valued real estate market, kept alive by ignoring basic lending rules, easy credit, and shady - if any - accounting practices.

Worse, the objective position of the United States-in-the-world has not changed and has probably gotten worse. Two of the three "axis of evil" are still in place. Al Qaeda is growing. Bin Laden is still at large. Domestically, incomes haven't risen, credit is virtually gone, home foreclosures increasing, unemployment growing, energy prices rising over the long term, infrastructure ignored, etc., etc. So what's the answer? More of the same?

We have, I believe, reaching "the tipping point." Four more years of essentially Bush policies will put this country into economic Depression.

This is not an indictment of the theories of free enterprise; supply side economics may work (and, in the past, has worked). But, in a global economy, it will not work for the middle class or the poor, unless accompanied by real growth in GDP and wages, instead of the phony growth in overvalued assets and easy credit.

At this juncture, it is important to shift economic policy back to a national focus. The fastest way to recovery is to temporarily step back from free markets, until they can be reformed, and to utilize taxation as a means for redirecting capital back to neglected national infrastructure and the creation of meaningful employment. The reason is simple. We cannot afford to continue to pursue national goals which demand expeditures far in excess of income. The best means of increasing that income, over the long run, is through the economic restoration of the middle class, so that they once again assume an important role in the overall tax burden.

Next: Why 40% of Americans pay no taxes.

The Economy - Part III

2008-10-23T14:53:00.000-07:00

In the late eighties and early nineties several enormous changes in the global economic picture began occuring which would have tremondous impact on American society. Among those were: the recovery of much of the world from the damaging effects of WWII, as evidenced in the growing economic and political strength of the European Union and the developing countries of southeast Asia, including the growth of market capitalism in South America; the mass utilization personal computing and its impact on global capital flows, transportation and logistics, as well as manufacturing; the end of communism and the sudden approximate doubling of the global labor force, which driven by free trade, essentially "devalued" much of the American work force.

The combined influence of these differing factors equated to "a perfect storm" for the American worker. To illustrate this, I would turn to the "piece of the pie" analogy frequently used. At any given moment, the global economy may be seen as a large pie, with each country possessing a slice of the pie, determined by the size and strength of its national economy [Note: This is an "old economy" analogy. Today, it might be difficult to determine exactly where one slice differs from the next.] Following WWII, the U.S. had more than fifty percent of the entire pie. We wisely understood, that such dominance was not to our long term benefit and would undoubtedly lead to additional wars and global instability if we did not help in dividing the pie more equally.

The trick in doing this while simultaneously allowing your share of the pie to either remain the same or grow slightly larger is to increase the size of the total pie - or the global economy - over time, and this is largely what has occured. Developing countries such as China, India, Russia have tended to grow at a faster rate than the Developed countries of Western Europe and the United States. While good Chinese growth in Gross Domestic Product is roughly 10%, reasonable U.S. growth is around 5%.

This does mean that all else being equal, the global economy will become roughly the same over time. This doesn't mean everyone will be equal, but that the extremes of wealth and poverty will be reduced and tend toward a more or less stable "middle."

With all of our dissatisfaction about our own system, the corruption that has crept in, etc., it is extremely important to understand that "sharing the wealth" of the planet has been a deliberate and intentional bi-partisan goal from Harry Truman to George Bush. And, that this "sharing" and promotion of global economic growth is seen as an alternative to World Wars.

In my opinion, this policy is unique in human history and represents a major step forward in human development and away from the laws of the jungle and the survival of the fittest. It is, in essence, an extension of the idea of social contract. And, although I do not agree with many aspects of the Bush Doctrine, its basis...i.e. stable and peaceful democratic societies adhereing to a democratic-capitalistic economic system, in which everyone gains. [George just uses the laws of the jungle to get there.]

Our present dilemma - i.e. the threat of global economic collapse - lies in trying to take "short-cuts" to the end goal. Short-cuts in the form of everything from pre-emptive war to economic policies that negatively impact the American economy.

In the great scheme of global economics, historically, economies are initially built on exports. In other words, initially, workers do not have the money to purchase the very goods they produce. They achieve this through exports, accumulating savings, financing their own development, creating economic strength and a middle class, eventually evolving into a mature economy.

Participating in this global system, the United States shipped so-called "obsolete jobs" overseas, anticipating that those jobs would be replaced by new jobs in the New Economy. The new economy jobs were to be found in three major areas: services and high tech products. Services had two basic components: low wage retail service workers, ranging from store clerks, to restaurant workers, to yard mowers and higher paid financial services workers. Segments of the financial services and high tech categories (as well as the entertainment industry) were to provide the "export" segment of the American economy. We called it the New Economy or the Post Industrial Economy.

In this, however, three critical mistakes were made: a failure to comprehend the extent of failure in the American education system; a failure to control borders and virtually unlimited illegal immigration; and a failure to understand how easily the "new technology" transferred across borders. Failure to adjust free trade policies and the flight of American manufacturing jobs abroad to these realities coupled with a failure to obtain intellectual property rights to protect our high tech innovations suddenly left a situation wherein instead of remaining the same or slighly increasing, the average American's "slice of the pie" began getting smaller.

Much of this began during the Clinton Administration. Falling real exports, due to these factors, led to the alternative of attracting foreign investment. If we couldn't compete in the global import-export market effectively, we'd make it up by "selling a piece of America itself." This, in turn, meant that the U.S. consumer market had to remain strong, in the face of falling or stagnate wages. The means for achieving this was through cheap money and easy credit.

In this manner, the total U.S. economy continued to look good to voters and foreign investors, while in reality we began to build the house of cards. Rather than being based on the production of actual goods and services, GDP growth now became dependent on "over-valued assets." It hit first with the dot.com bubble under Clinton and the housing bubble under Bush.

Next comes: If cutting taxes in time of economic decline is stupid, cutting taxes in time of war is self-destructive.

The Economy - Part II

2008-10-23T13:32:00.001-07:00

Supply side economics presumably originated in the University of Chicago School of Economics and largely with Milton Friedman. [Note: Interestingly, the University of Chicago was founded by John D. Rockfeller].

Until this event, American economics (and, more generally, western democracy economics) had been largely dominated by followers of John Maynard Keynes since the Administrations of FDR.

Without going into details (about which I admittedily have little in depth knowledge), and to contrast Keynes with Friedman; Keynes argued for more intervention in the economy by government, particularly in times of crisis. One of the reasons behind this was that government, theoritically, is able to act faster and more precisely direct expeditures than a free market. Keynes was certainly in favor of free markets and capitalist of high order; it was said that he became personally wealthy by playing the London Stock Market while having breakfast in bed.

To finance government expeditures, Keynes called for high taxes and the government re-direction of the economy...while this was not "socialism" per se, it was much closer to socialism than the philosophies advocated by Friedman. Friedman argued the opposite; that the strongest economies are built on as free markets as possible, because such markets were based - in democratic societies - on the free choices of its citizens. This called for low taxation, small government, and as little government regulation as possible. In a phrase: the market is King and all wise.

Practically, Friedman's theories evolved into Reaganeconmics; the theory that by keeping taxation low, people would have more disposable income to reinvest in the economy, whether in their own bsinesses or through the financial makets. These investments would create new capital for new industries and general economic growth. As the economy grew, so would the demand for additional labor. The competition for the additional labor would, in turn, drive up the cost of labor, increasing wages and enriching the total economy.

John Kennedy expressed the theory with: "In a rising tide, all boats are lifted." And, Kennedy cut taxes resulting in economic growth. Reagan did the same - although it should also be noted that the overall federal deficit increased under each of them; modestly under JFK and historically, under Reagan.

Despite fundamental changes in the national economy and the evolution of that economy into a global economy, Republicans (and a few Democrats) have held onto the Friedman theories.

Neither Keynes or Friedman are "right" or "wrong" and each has to be judged within the context of times in which their theories have been in vogue. Each represents a particular philosophical view; each may be "true" for specific conditions. I would contend that various historic changes in global economics has, in recent years, created national conditions within the global context that obsolete much of Friedman's thinking and, as a result, are now driving us back to Keynesian economics. The best recent example of this is the recent $700B+ government bailout of the financial services industry. In other words, there are times when it is advantageous to follow Friedman's theories and times in which we must follow Keynesian theories, in order to return to the stability needed for Friedman.

Underlying the various factors which are undermining supply side economics is what I would define as three fundamental economic truths: The first is that no one invests capital in a project/product of any sort wherein the value of that project/product is less than its cost. This would be "irrational" and all of our economic edifices rest on the proposition of rationality.

The second "truth" is a collary of the first: Capital investment - whether by government or individuals - is made in order to obtain a gain of somesort. In the case of an indivdual, this may be simply money. In the case of a small businessman it may mean additional means of production (people or machines) in order to increase the size of the business to, ultimately make more money. At the government level, it may social programs such as social security or medicare, which fullfill a recognized societal need. It may be unemployment insurance, which promotes stability. It may be better education, better health care, subsidies for new industries, better roads, national defense, etc., etc.

The point is that, in my opinion, no reasonable, "rational," person would disagree with the proposition that some type of division of wealth must be made between the realms of the individual and government for the future prosperity of both the individual and the society as a whole.

The third "truth" is the real kicker and one largely ignored in recent years, particularily under the Bush Administration (and in certain areas, under the Clinton Administration as well), namely: commitments must equal resources and resources must equal commitments.

In the next post, I will try and show how the violation of these three "rules" has led us both individually and collectively to the verge of economic collapse.

The Economy

2008-10-23T11:17:00.000-07:00

I have just finished watching four hours of Congressional testimony on the subprime motgage mess by Greenspan, Cox and Snow. The following is my take on their testimony and my own understanding (or lack thereof) of the overall mess.

Greenspan - Greenspan, based on his testimony, is now re-evaluating his basic economic philosophy. He half-heartedly admited to errors during his term as Federal Reserve Chairman and offered, in some cases, what I believe to be a legitimate defense - such as his attitude in regard to derivatives and hedge funds. He correctly pointed our that both continue to do well in their original areas of origin - essentially a hedge on equity prices and foreign exchange. He admitted that the area he failed to see was in mortgage securitization and its rapid growth due to demand.

When questioned about neglecting the Federal Reserve's oversight responsibilities (given by Congress in a 1994 law, which he generally ignored), his answer was that he believed that area needed more study internally by the Federal Reserve and they had basically "tabled" implementation of the law to explore its intent and means of implementation. A weak answer.

Greenspan is a self-described "libertarian." Basically, within economics,that means a believer in minimum government interference and deregulation to allow the free markets to operate on their own. The philosophy has always impressed me as one of failing to consider the imprefections of human nature...in this particular case, greed and corruption of the political/financial institutions. That subject is worthy of a separate and lengthy essay, but in a phrase: Greenspan was too involved in econometrics, with an overall niave economic philosophy.

But, and this is a very important "but," Greenspan's lack of action was in large measure due to his political masters, both Democratic (Clinton) and Republican (Bush). They both used him. Perhaps the best lesson to take away from his reign is that he stayed too long. We should consider a law that limits the amount of time a Fed Chairman may serve. Greenspan was around long enough for both parties to learn how to play him (18 years).

If Greenspan was the niave idealist in the trio, Chris Cox was the political realist. Cox is a man who all of a sudden has found religion, namely that of additional oversight and regulation. This new religion is appropriate for the moment and I don't doubt his sincerity. Yet, during his tenure as head of the SEC he pretty much followed the Administration's economic policies of deregulation, unrestricted markets, etc. Cox impresses me as one smart enough to have had serious doubts about the Administration's direction, but just went along. Cox is to the Administration's economic policies as Powell was to its foreign and defense policies. Although he will undoubtedly be gone shortly as SEC Chairman, he may have a promising future in helping to rebuild the Republican Party.

Former Secretary of the Treasury Snow was the "organization man" of the trio. The answer to past failures and future successes lies in "reorganization," eliminating duplicative and "stove pipe" regulatory organization, etc. Snow, who came out of corporate America, has much of its current philosophy - anything can be accomplished with the right organization. Much of what he testified to, I believe to be true, but much was neglected and he, like Greenspan and Cox, "bought in" to the Administration's misguided philosophies and policies.

What they all agreed upon, to one degree or another, was a need for both reorganization and expansion of government oversight and regulatory authority.

Another major observation of the testimony and questions was the intensity of the some Republicans to escape blame for the economic disaster. The exceptiopn to this was Republican Tom Davis of Virginia, who seemed to steer away from party politics and asked serious questions (another candidate for rebuilding the Republican Party). Aside from Davis, the very clear Republican position on the financial melt down is that it's all the fault of Democratics and their treatment of Freddie Max and Fanny May.

There is certainly SOME truth to this argument. However, none of the witnesses (Greenspan, Cox or Snow) felt it was the primary cause and Henry Waxman, the Democratic Chairman pointed out that at it's peak, both organizations held less than 15% of the total subprime market.
Nevertheless, Democrats such as Barney Frank, Chuck Schmur, Chris Dodd and a collection of others, primarily from the New York region have serious questions to answer in regard for their support of an untenable financial system. Obama, has the 2nd largest receipant in the Senate of Banking interest contributions probably falls into this category as well, although because of his relative newness, was probably being "cultivated" for the future. However, all of these contributions pall in comparison to the amounts raised in his Presidential campaign and it is a question mark as to the influence of these past industry contributions on his future behavior as President.

Basically, I see the issue as not one of Party per se, but rather one of "Pro-Wall Street vs. Anti-Wall Street," with the former primarily responsible for deregulation. Within that category, and very broadly, Republicans seem to have acted in regard to economic philosophy, while Democrats acted in regard to campaign contributions. Yet, regardless of motivation, the extent to which deregulation and lack of oversight occured has, in my opinion, seriously endangered the global financial system.

Next Post will be a reasonably lengthy overview of how we got into trouble and why Reganeconomics has failed.

Character(s) and Economics

2008-10-09T14:06:00.000-07:00

First of all, I note that this is a first post after a two month absence. Facing what is perhaps the most significant Presidential Election of our times and an economics debacle not matched since the Great Depression, I decided some months ago to move from my former Rocky Mountain National Redoubt to the Cascade National Redoubt and have spent the last two months doing just that.

Now to the topics. The Presidential campaign is now entering its last pre-election phase. Has we get into the "down and dirty" segment, one issue seems to be: Whose past associations are worse? Is it the Obama-Ayers connection, or the McCain-Keating connection?

Both have been thoroughly gone over in the past. Based on memory, here is my own take.

The Obama-Ayers association apparently began a number of years ago, when Obama decided to try his hand in Illinois State politics. He ran for the seat of a retiring Democratic, with her endorsement and support. One of his early fund raising events, which was set-up by the retiring Democrat, was held at the home of Ayers. At that time Ayers, while not renouncing his radical past, had become a more-or-less mainstream Democrat liberal in the Chicago political milieu. In all probability, Obama was grateful for his early political support and sort of "inherited" the connection from his predecessor.

Ayers' radicalism stemmed from is participation (and leadership) within the anti-war, anti-capitalism organization termed the "Weathermen," after Bob Dylan's famous song line: "You don't need to be a weatherman to know which way the wind is blowing."

The group was a coalition of various "anti" individualists falling somewhere between socialism and nihilism and everything in between. Ayers and his wife were early group founders. The Weathermen advocated "direct action," namely in violent protests, including bombings of symbolic military-industrial targets. Initially, these bombings were aimed solely at property destruction and a great deal of planning went into making sure that no one was actually hurt.

Subsequently, however, the group split into two factions: those who continued to insist on non-violent violence and those who became more historically traditional terrorists.

Naturally, and correctly, the government (primarily the FBI) did not see a great deal of distinction between the two factions and pursued both. Most were either caught or disappeared into obscurity with the end of the Vietnam War, but not before destroying a few targets and killing a number of people, including armored car guards in a hold-up to finance Weathermen operations. Their single most violent event, however, was the destruction of a Greenwich Village townhouse, in which six of their own were killed during the course of their bomb-building activities.

I believe Ayers was in the violent, non-violence faction and both he and his wife went to "ground" and disappeared. Years later, seeking to return to society and tired of running, they turned themselves in. They were arrested, but the government eventually decided not to prosecute, apparently for lack of evidence connecting them with killings.

Ayers eventually joined the Chicago campus of the University of Illinois faculty and both became active in ultra liberal Democratic circles. Ayers joined the board of a trust philanthropy set up by the conservative Republican Walter Annenberg. Obama also served on this board.

Subsequently, Ayers gave an interview, prior to 9/11, in which he stated that roughly: "we should have done more bombing," thus confirming his "non-repentant," attitude. Coincidentally, the interview was publish around the time of 9/11, but the statement was not his response to 9/11.

The Obama campaign pretty much went over the above when the Ayers issue arose during the primaries. To the best of my knowledge no additional sinister information has been added since, even by the McCain campaign, although they insinuate there is more to be learned.

The McCain-Keating association is tied to the Lincoln Savings and Loan failure during the broader Saving and Loan crisis. As head of Lincoln Savings and Loan, Keating violated a rule (amid other illegalities) regarding limitations on Saving and Loan Banks direct ownership investment into real estate projects, as opposed to simply loaning developers the money for such projects. Keating was prosecuted, convicted as a felon and spent time in a Federal prison.

Keating had been one of McCain's early supporters, campaign contributor and personal friend. The two families apparently vacationed together in the Bahamas, with Lincoln Savings and Loan picking up most of the tab. As the Savings and Loan crisis deepened and federal regulators moved in on Lincoln Savings and Loan, Keating turned to five of his friends in the U.S. Senate to attempt to pressure the regulators to delay prosecution until he could "fix things." The regulators declined and proceeded. McCain was one of the five Senators attending the meeting wherein pressure was exercised against the regulators. Subsequently, the five Senators were brought before an Ethics Committee investigation. McCain escaped with a mild reprimand. He has called this event a turning point in his life and has since been Mr. Ethics in Congress.

In retrospect, both Obama and McCain probably regret their associations. But, Ayers was never convicted of a crime, while Keating was. And, at worse, Ayers was deluded into believing that symbolic non human harmful bombings furthered some misguided idealism of benefit to the total society, while Keating robbed thousands of people of their life savings with a purely self-enrichment motivation. Hmmm? On balance, I believe I'd call that one at best "a draw."

I'll turn to economics in my next post.

This and That

2008-08-05T18:16:00.000-07:00

Ron Suskind

Ron Suskind (author of "The One Percent Solution," which won a Pulitzer Prize) began publicizing a new book today and managed to garner the headlines. In his new book (can't remember its title), Suskind claims that he has inside testimony that the Bush Administration instructed the CIA to forge a letter, drafted by someone in the White House, purporting to be from the head of Iraqi Intelligence to Saddam Hussein. The subject of the letter was the completion of terrorist training by Mohammad Ali (chief 9/11 terrorist who died in the crash into the World Trade Center) in Iraqi. Such a letter would "prove" the Al Qaeda - Iraq 9/11 link.

Suskind's accusation is quite a claim and should be investigated by the FBI, if for no other reason than to expose Suskind himself. At the moment, George Tenant (head of CIA at the time), the White House and the two CIA insiders, whom Suskind claims told him the story, have all denied it.

I am skeptical of Suskind's story and find it difficult (but not impossible) to believe senior White House people (i.e. Bush or Cheney) would have been involved. It may be that the story "grew with the telling." Tenant, while denying the main story, admits the head of Iraqi Intelligence was talking to the British on WMD and telling them Iraq had none. However, the CIA finally concluded he was an untrustworthy source and discounted the intelligence the British passed on to us from him.

According to Suskind's book, when told of the "no WMD in Iraq," Bush apparently became frustrated and said something to the effect, "let's get him to put it in writing." While that apparently never came about, it may have motivated someone else to come up with the forgery idea on the Iraq-Al Qaeda 9/11 connection - i.e. if the President wants written proof on all of this, we'll provide it.

But, having voiced my skepticism on Bush's personal involvement, forgeries seem to have a way of coming up in the Bush Administration. The story of Iraqis trying to purchase Niger yellow cake uranium apparently began with forgeries, which some have tentatively traced back, through Italian Intelligence, to a former Republican operative in the USA. The International Atomic Energy Agency identified the Niger-Iraqi official letter exchanges as forgeries. Joe Wilson (The Valarie Pflame Affair) was sent to investigate and confirmed the forgeries.

Also, I've long been suspicious of the Dan Rather forgeries concerning Bush's military service. Based on totally different and more credible sources, the substance of the forgeries were apparently based on accurate information. [The Air Force officer who supposedly wrote them is dead, but his secretary has been quoted as saying that while what is in the forged letters is pretty much what her boss thought of Bush, she didn't think he would have been dumb enough to put it in writing.] Yet once the letters were shown to be forgeries, the issue turned from Bush's military service to Dan Rather's credibility. No one paid attention to the substance of the forged letter's charges, which in all likelihood were very close to the truth. [Basically stating that Bush was less than the ideal soldier.]

If an investigation shows Suskind's charges to be false, he should be appropriately censured by his colleagues and the American public by assigning his "journalism" to the realm of fiction, assuming he broke no laws. If his charges turn out to be true, someone at the White House needs to go to jail, although there is a good chance that particular person has already been pardoned once - i.e. Scooter Libby, apparent hitman for the VP. Hmmm? Sort of a common fault among ideologically driven personalities wherein the "end" is the only thing that really matters and the "means" are...well, whatever it takes.

More on Oil

O'Bama has shifted a bit on off-shore drilling, in face of public opinion polls, which are strongly in favor of such. But rather than pay attention to the details of his new plan, the media emphasis is on "flip-flopping," once known in democratic politics as "compromise."

I'm convinced that the current push for off-shore drilling and ANWR drilling has much more to do with politics than energy. No one (either Republican or Democrat) has adequately explained the sudden surge in oil prices. During the last year that price doubled. While some of the surge is due to increased demand, demand has NOT doubled over the same period. Or, if it has, we can throw out the economic forecasters, as well as the economists. I suspect this is a complex issue, with many causes. Current prices seem driven by futures. Futures may be driven by: more forecast demand than previously thought; less global reserves than previously thought; higher than forecast recovery costs; hedge fund money flowing into oil futures seeking to recover from sub-prime mortgage losses; OPEC dissatisfaction with U.S. foreign policy; oil companies "last hurrah," etc., etc.

Whether this is through a coincidental confluence of motivations, or by design, the timing for repealing the ban on off-shore and ANWR drilling is running out. The Bush Presidency has but 5 months to run. Odds are that both a Democratic Congress and President will follow. If successful, it is a situation that could last easily for four years or as long as a generation; time during which it would be unlikely to obtain a repeal of the drilling ban. And, as alternative fuels are brought on stream motivated by an acknowledged decline in limited oil reserves, oil prices will rise and alternative energy will become more price competitive (although the "natural" market price should rise somewhat more slowly than it has during the last year).

"Politically," now is the time to push for the ban on drilling. All else being equal (price, convenience, etc.) Americans, in light of global warming and CO2 pollution, will choose non-fossil fuels (solar, wind, natural gas) over oil. [Nuclear energy and clean-coal may be included if associated safety and environmental problems are overcome.]

The arguments for and against the drilling ban require more fact and transparency. Part of this transparency involves in determining who is driving the surge in oil prices? Is it OPEC itself? Is it the global oil companies? Is it speculation? Is it demand? Probably a bit of each, but it is important to understand how much each contributes to the surge in prices in order to formulate a new energy policy.

In understanding this, it is important to look at a history of oil purchases (both spot and futures) over the past year. What factor began the price surge? It would certainly NOT be in the interests of end-users (national purchases such as China and India or in corporate purchases, such as airlines, trucking companies, etc.) to drive up oil prices, although they would have to follow and add to rising prices. OPEC might want higher prices, but unless they were trying to manipulate pricing by purchasing each other's oil, they would have a negligible impact. OPEC countries may control production within their countries, but they can't determine prices in a free market, which is how the price is presumably set. Further, I know of no significant reduction in global production of a magnitude that would double prices in a year.

[Caveat: Saudi reserves have declined somewhat and there is mounting evidence that the Saudis have exaggerated their reserves since the nineteen eighties. Political instability, in Nigeria, Venezuela, Iraq and Iran, due in no small measure to a failed Bush foreign policy, would also be a factor driving future oil pricing. Bush is not alone in having done little to address a comprehensive energy policy; neither Congress or prior Presidents have done much over the last 30 years. However, it IS, politically advantageous for Bush to seek to blame the current situation on Democrats and environmentalists today and "suggest" that drilling "now and here" is the solution. And, now that the legacy thing has been basically trashed, it wouldn't hurt to give a little something to all those guys contributing to the Bush Presidential Library.]

I have no personal preference for or against expanding drilling, other than that noted above - i.e. all else being equal, it's probably best for all of us to shift, as rapidly as possible, away from fossil fuels toward non-fossil fuels and/or non-polluting fossil fuels, such as clean-coal. However, due to future global energy demands and increasing production costs associated with future energy sources, both fossil and non-fossil, I have serious doubts that "drilling" solves anything in regard to "price." I suspect that increased energy efficiencies at both the manufacturing and consumer level will ultimately reduce consumption and prices will gradually fall. This is a game of technologies and lead-times and I suggest looking long and hard at the "promises" of those who argue for drilling. If we can transition in ten-twenty years to inexpensive energy sources (as measured by a percentage of household income), which gives us roughly equivalent performance and have the added value of reducing carbon emissions, I see no reason why we shouldn't leave a little oil in the ground - including that which is off-shore or in ANWR. Remember...whatever happens, whereever we drill...those last jillion barrels are going to be real expensive, unless we tell the people currently driving the price up, "keep your oil, we don' t really need it."

Note to the two people who regularly read this (well...I hope two...maybe one): Due to relocation, I'll be busy for the next month or so...but stay tuned.

Is There a Democratic Mole In the McCain Campaign?

2008-07-24T11:27:00.000-07:00

The contrast between Obama and McCain campaigns hasn't been so strikingly evident until today's coverage.

McCain is interviewed outside of a German restaurant in Ohio and spends most of the interview complaining (dare I use the word "whinning") about Obama on essentially inane points.

Switch to Obama coverage: Obama is addressing over 200,000 Germans in the heart of Berlin and calling for a new era of western politics.

Even worse (or better depending upon your candidate), all through the McCain interview there is this omnimous bell ringing in the background, bringing to mind the John Donne quote, made famous by Hemingway's "For Whom the Bell Tolls": "...any man's death diminishes me, because I am involved in mankind; and therefore never send to know for whom the bell tolls; it tolls for thee."

Being one who is periodically "involved in mankind," the only thought that occured was that the bell was tolling for John McCain.

Remember, that the McCain campaign asked for this...the thus far triumphant Obama overseas tour. In fact, had it not been for the McCain campaign's attacks regarding Obama's lack of experience and absence from the world stage, it is likely the Obama campaign would have never left American shores.

Now McCain is faced with the photo-ops of Obama sitting with U.S. Generals in Afghanistan and agreeing with them on the need for additional U.S. and NATO forces; conferring with Prime Minister Maliki, in Iraq, and emerging with an Iraqi plan for the withdrawal of U.S. forces very similar to his own; laying a wreath at the Holacaust Memorial in Israel; and speaking to the largest audiance thus far in the presidential campaign.

The McCain campaign is one of the most inept I have ever witnessed in American politics. Faced with an American electorate angry over a war in Iraq, housing foreclosures at home and $4.00/gallon gasoline driving inflation, McCain - 0n the key issues of the election - has been unable to provide any alternatives to the still titular leader of the Republican Party...the guy still in the White House, President Bush. At this point, he'd be lucky to carry Arizona, Utah and Idaho.

McCain's policies on the War on Terror are somewhat tactically different from the President, but offer zero change in strategic direction. His economic policies were aptly summed up by his ex-campaign co-chairman, ex-Senator Phil Graham, when Graham called us "a nation of whinners."
If this is what 30 years of experience in Congress yields, the American voter must be thinking: "Experience be damned; that is precisely what we are trying to get rid of."

Indeed, McCain's campaign is so bad I feel there must be Democratic plants inside his staff to ensure his defeat. Or, maybe it's just McCain himself...and all of that experience.

A Few More Words on Oil

2008-06-21T08:15:00.001-07:00

Perhaps, it's not too surprising that while the Bush Administration has had seven-plus years to come up with a "comprehensive energy plan," it has not done so. Bush and Cheney are "oil people." In 2009, Cheney may go back to Halliburton and Bush will retire to Crawford (and probably purchase a home in Dallas where his presidential library will be built).

What this suggests to me is that basically any "comprehensive solution" to the energy problem, coming from this administration has to have "oil" at its center. In turn, this means open drilling in places such as ANWAR and off-shore along our coasts, as well as a major reduction in environmental regulation concerning refineries. In other words, the plan had to first and foremost take care of the oil industry and then, secondarily include some window dressing for alternative fuel advocates, global warming and environmentalists.

When this approach ran up against the latter and failed to get even a Republican Congress' approval, the "comprehensive solution" became dead in the water. Bush has "talked" about ridding ourselves of foreign dependency on oil and the promotion of alternative fuels (ethanol). But, as with so many other issues within this administration, the idea of "policy formulation," seems to be to call in industry lobbyists, listen to what they want and then find a "political way" of achieving it.

I suppose buggy whip manufacturers also "died hard," with the advent of the automobile and, in their day, lobbied to prevent the horseless carriage. And, today, I see the oil industry and the Bush Administration in a similar light. Here's the deal: Peak Oil (or, at least Peak Easy Oil) has or is about to occur. There may still be ways to fore go completely running out of oil for another 100-200 years via shale oil, drilling off-shore, etc., but the cost of the remaining oil (once the present known reserves are gone) will be high, maybe high enough to sustain $100-200 a barrel. At those prices, the cost of a gallon of gasoline isn't going to decline much and will probably rise higher over the long run. Speculation regarding a non-renewable resource will continue.

Plus, even if the search/drilling for additional oil is successful, we still end up with a comparatively "dirty energy." Let's forget, for the moment, global waming and disturbing Alaska, Floridia and California eco-systems and wildlife. Putting large amounts of carbon emissions into the air we breath for the sake of economic growth is just not a very smart idea if there are alternative energy solutions. Government subsidies, tax incentives, etc., should be shifting from fossil fuel conversion toward these alternative forms (bio-mass, solar, nuclear, hydro, wind - and the least emphasized, simple conservation).

A couple of more points. All of the oil in ANWAR doesn't substantially change our reliance on foreign oil at current rates of usage. Shale oil technology has a way to go before the result can be refined into vehicle useable gasoline. Similarly, coal conversion to useable oil is still a long way off. And, of course, even at higher prices we are left with essentially a "dirty fuel." Off-shore drilling? While oil covered Florida or California beaches doesn't particularly bother me personally, I doubt the tourist industry or environmentalists in those states will want to run the risk. [Prediction: Charlie Crist, Republican Governor of Florida, recently flip-flopped on his stand against off-shore drilling along Florida coasts, apparently to bring his position in-line with John McCain, in anticipation of becoming a VP candidate. I would predict that a) Crist will NOT get the VP slot and b) he'll be voted out of office in the next election. The Arnold, in California, also a Republican Governor, has announced he'll continue to fight against off-shore drilling in California.]

As for refineries: would you want one next door to you? Plus, why invest money in a refinery that may be useless in twenty years?

In sum, the Bush Administration is using the "scare pressure" of high oil prices to force Congress to return to an essentially outmoded form of energy.

In my opinion, given the long term and short term demand for energy (not just here, but around the world), oil prices will continue to rise whether we drill off-shore or in ANWAR and Americans would be kidding themselves if they think American oil companies are going to sell that oil at lower than the global market price, based on some patriotic motivation.

It's time to hold firm against drilling in ANWAR and off-shore, end fossil fuel subsidies and create a "comprehensive" energy program based on alternative energy forms. This will be a battle against one of the most powerful lobbying groups in our history and will probably require a global effort, led by the "post-industrial" West, which has achieved much of its material wealth and success based on fossil fuels.

The American people need to understand the "scare tactics" and stand-up to them. At an absolute minimum, environmentally sound ANWAR and off-shore drilling should be "traded" for a genuine long-term alternative fuel program, with a rough, overall phase out for fossil fuels and a phase-in for substitutions.

Stumbling to the Finish and a Clarification

2008-06-13T09:37:00.001-07:00

Clarification

First, the clarification. Going over my last post on oil, I noticed that I concluded with a statement that in retrospect seems a bit harsh toward "average Americans." The statement branded them as having become "lazy and complacent" and "coddled" by easy credit.

It was an "unqualified" conclusion, which obviously requires qualification and probably refers far more to our political system and the majority of the politicians that system produces, than to our general population.

Apoligies to all of those falsely blamed. And, more explanation in a subsequent post.

Stumbling to the Finish

Bad week for Bush. Supreme Court upholds habeas corpus, in a close 5-4 decision (deserves separate post on its own). Prime Minister of Iraq Maliki announces that joint Iraqi-U.S. negotiations over a new occupation agreement for U.S. forces have broken down (the existing agreement ends at the end of the year). Seems the major sticking point is over Iraqi sovereignity; they want U.S. forces to be subject to Iraqi law and Iraqi coordination on U.S. operations in-country. Our presence in Iraq may end with a whimper rather than a bang, by simply being asked, by the Iraqi government, to leave.

Fair enough. The principal reason justifying pre-emptive war (i.e. the invasion) was weapons of mass destruction - get them before they get us. The 9/11 ties between Al Qaeda and Iraq were ALWAYS weak and implied, not stated. The reason of Iraqi failure to adhere to prior U.N. resolutions broke down when we failed to go back to the U.N., due to lack of votes, for a final resolution authorizing implementation of the prior resolutions by force. Invading Iraq to eliminate weapons of mass destruction, which we believed would be used against us, was a very tenuous, but more or less "legitimate" reason for war. Of course, once we failed to find these weapons, that reason evaporated. Point is that until we determined there were no weapons of mass destruction, Iraq was OUR problem. Once that reason disappeared, Iraq became primarily an Iraqi problem and we became part of the Iraqi problem.

I am in the camp that believes the invasion was one of the worst U.S. foreign policy blunders in our history, but for a moment let's give the Administration the benefit of the doubt. Assuming some sanity, the present "goal" of the United States in Iraq must be to simply ensure sufficient stability to allow the Iraqi people to carry on with their lives without the secretarian violence the invasion brought on and, hopefully, better than they had lived under Saddam Hussein and the Baathist Party. Any goal beyond that (e.g. a democratic state in the mid-east, access to Iraqi oil, an anti-Iranian regime, etc.) is basically U.S. interference in the internal affairs of a sovereign state, through armed intervention and occupation.

In other words, if we want to leave Iraq now that is certainly our decision, with a parting gesture ranging from "sorry bout that," to x number of dollars in aid for reconstruction, or whatever. But, contrary to the Bush/McCain position, the conditions for staying in Iraq are the prerogative of the duly elected Iraqi government and Parliament, not ours.

Technically, we are in Iraq today under a U.N. mandate recognizing us as an "occupying power," with specific duties and responsibilities. That "authority," which does NOT take a stand on whether or not we had the right to invade in the first place, runs out at the end of the year and is to be replaced with one of three courses of action: 1) a U.S.-Iraqi agreement on status of forces (preferred by all and the subject of Maliki's comments), 2) an extension of the U.N. mandate on the U.S. as an "occupying force," or 3) nothing (least preferable). In other words, although it is hard to understand given the Presidential campaign and the "stay" Republican position versus the "go" Democratic position, "staying" in terms of legality within the context of international law, isn't OUR decision to make. As a sovereign state, the Iraqis make that decision, not the United States.

This is an important point in distinquishing between the McCain position and the Obama positions on Iraq. If McCain defines "winning" as the establishment of a pro-U.S., anti-radical fundamentalist Islamic state, then this is merely an extension of the Bush Doctrine, that led us in in the first place and pretty much a continuance of the neo-conservative arguments. This definition of "winning" may indeed be a legitimate "goal" of U.S. foreign policy, but it is not a legitimate reason to continue as an occupying force.

In sum, "going" is our decision. "Staying" is an Iraqi decision. Staying to win, for duty, honor, country is misleading, deceiving and simply "disengaged" from the reality of our situation.

Hmmm? That point might be worth making in another Guest Commentary piece in the local paper.

Meanwhile, Congressional oversight hearings, re-started by a Democratic Congress that has enough votes for exposure, but lacks the votes for change, continue. I've listened to literally days of Administration testimony, from the Federal Aviation Administration, to the Food and Drug Administration, to the Consumer Product Safety Commission, to the Department of Energy, to the Department of Veterans Affairs, to the Department of Housing and Urban Development, to the Department of Homeland Security, etc., etc. There is a theme running through the testimony, namely "no money." Yes, we'd like to make air traffic safer. Yes, we'd like to be able to make our food and drugs safe. Yes, we'd like to ensure safe toys from China. Yes, we'd like to have a comprehensive energy policy. Yes, we wish we could do more for our Veterans. And, on and on. No one seems to tie Bush tax cuts and the expense of the Iraq war to agency failures at home.

And, of course, this was the week the Senate Intelligence Committee, six years late and roughly a trillion dollars or so short, issued its findings into the Bush ad campaign for the war in Iraq. This was promptly followed by Dennis Kisinich's introduction of a resolution for impeachment in the House of Representatives. The closest we'll come to that was the reading (once by Kisinich and once by the House clerks) of the 35 page resolution on the floor of the House. The resolution now goes to the Judiciary Committee, where it will stay until Bush is out of office.

Oil: The Next Bubble Has Arrived

2008-06-12T10:25:00.000-07:00

I suspect that virtually ALL of the reasons given for the oil pricing crisis are to some degree true.
The question is: How are they related? This post, while far, far from being comprehensive, suggests a broad outline of the relationships and problem.

1) Oil speculation. This refers primarily to the investments of financial institutions (i.e. banks) and financial instruments (i.e. investment vehicles such as hedge funds). The sub prime mortgage collapse created huge losses for both, via essentially overvalued real estate, whether based upon actual housing value or the value of the mortgage packages put together for investors. These losses are being written off and banks are now, across the board, raising new capital to replace the losses. However, the new capital must promise a healthy return and consequently must be invested in something, somewhere - e.g. commodities, of which oil is the leading example. Of course, there must also be some "rationale" for such investment - e.g. like the high tech stock bubble in which investors were "sold" based on arguments of the "New Economy," globalization, an almost certain future DJ average of 20,000, etc. A sort of "the market will always go up" mentality that sucked in investors who had missed the initial rise and were hesitant to enter the market too late. The same thing happened in the sub prime mortgage market with the argument that real estate will never fall. Any substantial "bubble" has to have some rationale that the investment of choice will ALWAYS get better and the risk of a turn around is minimal, if not impossible. This is where the other factors enter.

2) Supply and Demand and Peak Oil. The simple argument for speculation is that the world is running out of oil. In other words, if supply and demand is not an immediate problem, it most certainly will be within the next 5-10 years, as demand rises and with the failure of the world's single largest consumer to produce any meaningful long-term energy plan (i.e. the United States). The anticipation of a supply and demand problem drives up the price of oil futures, which in turn drives up current market prices. This aspect of the problem has recently worsened due to the growing acceptance of Peak Oil, which is the point wherein regardless of demand (which is anticipated only to increase) oil production will begin to decline due to a lack of sufficient reserves. Recently, increasing evidence that Saudi reserves are far less than the Saudis claim has hit the market and oil industry. This also fuels speculation.

3) Global warming, ANWAR, Off-Shore drilling, etc. Here, I would contend that one factor driving oil futures up is the gradual acceptance in the west that global warming is for real and that it is not a good thing to continue to put a lot of CO2 emissions into our atmosphere. Investors are basically betting that western environmentalists have won or will win, particularly with a Democratic President and Congress in 2009. This means that additional oil (or any fossil fuel) is NOT the answer, because it only delays the inevitable and continues to poison the planet while doing so. [Note: Global Warming, as a phenomena, is close to being considered "a fact," as is the conclusion that adding CO2 to the atmosphere hastens the process. What is debatable is the degree to which man-made CO2 emissions contribute to global warming.] Oil companies, who make their living on carbon-based, fossil fuel energy, naturally want to frame the argument in terms of more oil to meet certain rising energy demands. In sum, it is an argument between those who believe additional oil will solve the short-term economic problem versus those who believe that additional oil will only serve to worsen the long-term environmental problem of CO2 emissions. Shale oil and coal-conversion to liquid energy forms are other arguments, but to date lack the technology to "cleanse" the fuels of CO2 emissions and in some cases require more energy to process than they yield. This logic, however, does not apply to the rising economies in China, India, Russia, et al. Investors are "betting" that while oil demand will decrease in the west, it will continue to rise in the east; that market-oriented economies in the west will be able to adjust faster to alternative energy forms than state oriented economies in the east, whose on-going demand will hold the high oil prices.

4) Miscellaneous Causes. These range from failed foreign and domestic economic policies to a lack of refining capacity. Trying to bring democratic-capitalism to the middle east is perhaps the largest of the foreign policy failures. The Saudis and the Persian Gulf states are basically tribal-based dictatorships. Iran is a religious dictatorship. Indeed, one is hard pressed to find a democratic-capitalist system in any of the OPEC countries or among their future big customers (India may be a somewhat confusing exception to the latter). In other words the New World Economy, dominated by the USA, as the single surviving super-power has failed, largely through inattention to our own problems at home and failures abroad. We have precious little of value left to sell and what there is, is over-valued. Foreign investors can help drive up the price of overvalued stock or real estate, but they have little control over falling prices, other than to stand by and watch their investments drop in value. The impact of all of this is that the world has lost a great deal of confidence in the United States, both in terms of our military incursion in Iraq and our failure to look after their U.S. investments at home. The outcome of this may well be a global shift in the status of the dollar as the world's reserve currency. Ironically, the present shift of investment from speculation in real estate to speculation in oil may forestall this event temporarily, as long as oil is priced in dollars, but substantial improvement in our position will come only through restoring our economy at home and an improvement of our image abroad.

Refining capacity would seem to be a relatively minor blip in contributing to rising oil prices and may be little more than an excuse to avoid environmental regulation and/or an excuse not to invest in long-term and massive capital expenditures in face of a society that has become convinced that it needs less reliance on oil than more. If ways can be found to "clean oil," there may still be a future for Big Oil, but at the moment Big Oil is spending more of its profits in buying back their stock, than in R&D. Long term, there seems to be the attitude within Big Oil itself that they will either make the transition to non-fossil fuel based energy companies or liquidate over the next fifty years.

In sum, the future of the United States as the dominating power in a post-Cold War world does not look bright, over the short-term. However, because of our size, innovation, and one would like to think, democratic system, we may yet return to our former status based on a rebuilding of our own society upon more solid economic ground than we have had over the last twenty years.

Note: The rising price of oil may actually be seen as a "tax" eventually beneficial to the American economy (if it doesn't destroy that economy). Rival world economies, such as India and China, must also pay the higher prices, usually with U.S. dollar reserves. If the shift of western investment into oil pays off, those dollars recirculate largely to our own economy, bringing more tax revenue to the government, with which to rebuild our own society (assuming a future Democratic Presidency and Congress, which will raise taxes on the wealthy). In a sense, the present spike in oil prices may be the last chance of western capitalism as we know it today. If prices break and fall, the investment community will take another round of huge losses and the "oil bubble" may become the last great bubble of our times. Sort of "double or nothing" as the last Big Casino bet.

Either way, short-term, things do not bode well for the "average American." Having been lulled into complacency and laziness over twenty years of both government and financial institution coddling through cheap money and easy credit, the country is going to need more jobs, producing more income, and perhaps most of all, more savings. With inflation to be certainly around the corner, it will be difficult to achieve this, with rising prices. While the wealthy are undoubtedly going to get hurt by increases in taxation and more regulation of our financial markets, this in itself will not eliminate the disparities in wealth and may, in fact, accentuate them - e.g. the wealthy will be paying more taxes, while the rest are losing their homes, paying $5.00/gallon for gas, etc. This will certainly test social stability. Being or appearing to be poor may become "politically correct."

"How long our troops stay in Iraq isn't important"

2008-06-11T20:22:00.000-07:00

The title quote is McCain's latest manifestation of the raging "foot-in-mouth" disease from which he seems to be suffering.

He went on to say that what IS important are the casualties we're taking...more proof perhaps that he REALLY doesn't know about economics.

McCain has always supported the war, although he had serious reservations about the way the Rumsfeld/Cheney/Bush Team was conducting it. This presumably means that he supports the other aspects of the Bush Doctrine (e.g. democratizing the world, pre-emptive war if necessary to get the job done, war with Iran if necessary to stop their nuclear development, etc., etc.).

He has made it clear that the War on Terror, in his mind, refers to radical Islamic fundamentalists and that the struggle is similar to fighting fascism or communism. Along these same lines, he points to our troop presence in Germany since WWII, our presence in Korea, Japan, etc.

One suspects that McCain sees Iraq as some twisted way to undo the mistakes of Vietnam. He needs to be called on this by the media, with a few pointed questions:

1) Do you feel we should have remained in Vietnam and continued to fight?

2) What would you do, as President, if the Iraqi government demanded we leave, although such a departure would be against our own military and intelligence estimates?

3) What terrorist organizations, other than Al Qaeda, pose a direct and imminent threat to the United States?

4) Do you believe that your 5 years as a POW and service as a naval aviation squadron commander, prior to entering politics, qualify you, above all others, to make national security policy for the United States?

5) Do you believe that honesty and decisiveness puts your policies above reproach? Can't you be both and be wrong?

6) What are the limits of Presidential power in the role of Commander-in-Chief?

McCain Economic Advisors

2008-06-11T19:57:00.000-07:00

A brief post on the McCain economic advisory team:

1) Phil Gramm - ex U.S. Senator from Texas. Author of Gramm-Leach-Bliley Act (1999), which essentially cancelled most of the post depression era legislation designed to prevent another depression by establishing "firewalls" between commercial banking, investment banking and the insurance industry [Glass-Steagall Act]. Co-Sponsor of Commodity Futures Modernization Act of 2000, heavily lobbied for by Enron, which essentially eliminated government oversight of "credit default swaps." [A CDS is essentially an insurance policy bought against the failure of a Collateralized Debt Obligation (CDO), which in turn is a bundled package of investments, primarily mortgages, in the subprime mess.]

Gramm's spouse, had previously served as Chairperson of the Commodity Futures Trading Commission (the government oversight agency), where she successfully passed a Commission rule exempting energy trading from oversight. Following her service on the Commission, she joined the ENRON board of directors, where she served on the audit committee. Gramm received between $1.0M and $2.0M in campaign contributions from the financial services industry, over his last ten years in office. He resigned his seat around the same time as ENRON failed and a few months prior to end of his term to allow appointment of another Republican Senator, who then was able to retain Gramm's seniority and avoid an election. Gramm now serves as a Vice Chairman of the United Bank of Switzerland, which has - thus far - declared subprime mortgage losses approaching $40B. In 1996, McCain served as campaign chairman for Gramm's unsuccessful Presidential bid. McCain, who has admitted he knows little about economics, told the Wall Street Journal, in a 2005 interview, he considers Gramm his "economic guru."

2) Carly Fiorina - ex-Chairperson and CEO of Hewlett Packard. Fired by a revolt of the HP board for poor performance. Currently serves on the board of the Taiwan Semiconductor Manufacturing Company. Supporter of globalization and serves on a committee of the World Economic Forum. Supports outsourcing and more H1b visas, for foreign high tech employees.

3) Jack Kemp - former football player, ex-Congressperson, ex-Cabinet member, ex-VP candidate on Dole-Kemp ticket. Big proponent of supply side economics. Currently runs a lobby firm.

In the wake of the subprime mortgage mess, even the Bush Administration has conceded that one cause of the losses was a lack of government oversight of both lending practices and the new financial instruments created to package, insure and resell the resulting subprime mortgages. As on Iraq, McCain seems to be running somewhere to the "right" of the Bush Administration.

The Comprehensive Dodge

2008-05-23T10:50:00.000-07:00

I've been traveling, so time to catch up a bit. The following was submitted for possible publication in the local paper.

"I've noticed that over the past year or so a new word has crept into the Bush Administration's lexicon; it's the word "comprehensive."

On various occasions, Administration officials (including the President himself) have called for: a comprehensive immigration policy; a comprehensive solution to the sub-prime mortgage mess; a comprehensive energy policy; and a comprehensive mid-east solution.

Given their acknowledged ability to stay on message and approved talking points, I've decided that this must be more than the casual selection of words. And, also given their track record on these issues, I've concluded that "comprehensive" is a code word for "do nothing." It's sort of a late game substitution for "stay the course," which faded from use when no one could actually define the course, but it became obvious that a change was needed. Defining a problem in terms of needing a "comprehensive solution" has become a way of admitting that they no longer have the power to solve problems their way and that it is preferable not to attempt to solve them rather than compromise.

Immigration policy became comprehensive, when the Administration found that their pro-business/cheap labor open border policy ran up against an American majority, who reasonably observed that in the wake of 9/11 and the War on Terror it might be a good idea to control our borders and register some 15-20 million undocumented/illegal residents.

Comprehensive became the code word for the sub prime mortgage mess when the Administration accepted moral hazard (i.e. instituting a bad precedence) by bailing out the investment banking industry, but denying a similar responsibility for home owners undergoing foreclosure (other than a few ineffectual, feel-good programs).

Recently, and in the wake of $135/barrel oil and $4.00/gallon gas at the pump, the Secretary of Energy has, in Congressional testimony, referred to the need for a comprehensive energy policy, side-stepping the failure to anticipate rising world demand, the ramifications of a weak dollar, and a free market philosophy that considers "government" a dirty word.

And, the latest manifestation of "comprehensive" came last week with Condi Rice's remark in reference to a "comprehensive" mid-east solution. This followed the President's mid-east trip, wherein he followed-up his "foot-in-mouth" to the Israeli parliament (but it played well in Jerusalem), with a visit to Saudi Arabia.

There, he literally held hands with the Saudi absolute monarch (apparently an old Saudi custom, as was slavery until the nineteen seventies) and promised U.S. help in furthering the Saudis ambition toward "peaceful" nuclear power, by supplying them with light water reactor technology. [I'll bet the Israelis would be happy to swap the parliament speech for that promise.] Unfortunately, this smooth talking devil's (that's complimentary Texas slang, along the same lines as Slick Willy), who once looked into Putin's eyes and saw his soul, foreplay was rejected by the Saudis, who refused his request for additional oil production to ease our price at the pump. In the wake of these events, the solution for the mid-east acquired the "comprehensive" adjective.

Despite holding hands with kings, this Administration has never been known for its subtle diplomacy or ability to reach political compromise. But, in its waning days, and in face of a Democratic Congress and failed policies in immigration, the economy, energy and the mid-east, has chosen to merely substitute the term "comprehensive solution" in lieu of its prior "it's my way or the highway" approach.

Maybe, in the great scheme of things that's progress of a sort, but it's too little, too late...comprehensively, so to speak."

Other notes:

Strikes me as a bit strange that McCain, who received his entire college education courtesy of the U.S. government, objects to same for G.I.'s serving in Iraq? And, attacking Obama on the grounds that he can't know what sound military policy should be because he was never in uniform is...well...sort of like criticizing Dick Cheney for sitting out the Vietnam War on student deferments. It's a dangerous assumption for democracy that a "civilian" President, who has never served in the armed forces can't know what sound national security policy is. And, if McCain personally figured all of this out while a prisoner of the Vietnamese, why didn't he make Admiral? Or, for that matter, been more insistent on a stronger military during his years of senatorial wisdom? Prediction: By the end of this campaign, we will come to understand McCain as a very scary fellow.

However, that said, he made the right move in denouncing the reverends over their comments on Hitler and the Jews and the founding of America based on ridding the world of Islam. Now the question becomes: Can he really win the Presidency without the crazies?

On an Obama VP. Some talking head on CNN observed that if he picks Hillary, he'll need to hire a food taster. Still feel Richardson would be the best choice. As much as the talking heads would like to make it an issue of race or gender, in the last analysis it's about policy and experience (although not the kind of experience Hillary talks about). Richardson brings administrative and foreign policy experience to the ticket, not to mention the added "racial bonus" of being half-Hispanic.

On oil exec's testimony before Congress. The good news is that they contradicted one another as to causes for the oil price increases. Some said it was a supply/demand problem; others said they were meeting demand and it was a speculation problem, etc. The bad news is that they contradicted one another as to causes for the oil price increases. If they don't know, who does? Maybe it's "all of the above." Hmmm? Commies gave "planning" a bad name...seems as if private enterprise can't do much better. Does anyone find it curious that the price of oil has risen from $1.70/gallon to $4.00/gallon over the lifetime of an Administration led by an ex-Texas oil man and a former CEO of an oil field supply company? Naw....

On FLDS polygamy situation in Texas and handling thereof...now we know why the FLDS picked Texas.

I believe that Texas may be the only state in the union that preserved the right to succession, if they so choose to do so. This might be an appropriate time to encourage them to exercise that right...and, yes, I was born in Dallas.

On the Clinton candidacy. OK. I am content to have her play it out through the remaining primaries (Montana, South Dakota and Puerto Rico) and resolution of the Florida/Michigan primary vote. Following that, it appears to me that Obama will still have the majority of total votes, including "super delegates," and that her only arguments become: the states I won are more meaningful than the states he won and/or the super delegate vote is more important than the regular delegate vote. If she decides to pursue either of those courses, the Democratic Party has to threaten to withdraw its support from her future career as a Democratic candidate for any and every office - i.e. enough is enough. Many think that Bill ruined the chances for Democratic policy advances during his Presidency over the stupid issue of Monica (while simultaneously blaming the overreaction of Republicans).

Assumptions on remaining vote: 1) straight proportional vote on the remaining primaries; 2) "Super-Delegates" cast votes by mid-June. 3) Penalize Florida by reducing their delegates to three-fourths of nominal representations (logic is that it was a Republican Florida legislature that set the primary date and the Florida Democratic Party didn't have total control over the primary date; both names were on the ballot, although neither campaigned there). Then, apportion the remaining 75% of the Florida delegation to be seated by the primary vote. 4) Penalize Michigan by reducing their delegation by 50%, since apparently the state party DID have control of the primary date (if not...the same 25% reduction as Florida). In Michigan, however, Clinton was on ballot, while Obama was not. That's an unfair advantage for Clinton, off-set by the fact that she seems to have out-performed Obama among white, blue collar workers, off-set again, in Obama's favor by a predominately Detroit black vote. Split the reduced Michigan delegation evenly.

If, as a result of all of this, Obama goes into Denver as the Party's choice, Clinton should be content with either remaining in the Senate or a cabinet level position, in return for campaigning hard for Obama. If not...let her join Lieberman as an Independent.

Another Prediction: the Libertarians, with Bob Barr as its candidate, will out poll Ralph Nader nationally and give Obama an additional state or two in the general election...probably in the South.

A Stone's Throw Sunday Funnies

2008-04-27T16:39:00.000-07:00

Election coverage goes on and on and on...it reminds me of the old Mad Magazine Spy cartoons of spies spying on spies who are spying on spies, etc., etc. Now, we have analysts analyzing analysts who are analyzing analysts, etc., etc.

Yet the story doesn't change much.

Obama improved in Pennsylvania over the past few weeks, thanks to focus and money. He came from being down some 20+% to lose by 9.4 %. Clinton won.

At this point, it's probably important to play out the remaining primaries to the bitter end, then add up the numbers, with "super delegates" declaring sometime in June, repairing the damages in July, and going into the Convention in late August with a united Democratic Party. But, thanks largely to the Republican candidate, John McCain, I wouldn't be too worried if the Democratic nominee was picked on the Convention floor.

Highlight of the day, however, came from Fox News. First they did an interview with Obama, the first in about two years. Chris Wallace (Mike Wallace's son) did the interview for Fox. Obama presumably agreed to the interview as part of a campaign push to win more support among white male blue collar workers.

The interview went far better than I expected. Questions were fair; answers good. Wallace touched upon, but did not dwell on, the three major flaps of the Obama campaign: Reverend Wright, the "bitter" comment, and the ex-Weatherman, Ayers.[See Note below on Ayers]. The interview was followed by 15 minutes of "analysis" by the "Usual Suspects": Brent Hume, Bill Kristol, Juan Williams and a woman commentator from NPR, whose name escapes me at the moment. All but Kristol were reasonably impressed by the interview. If Fox News is slowly and incrementally coming around to accept Obama, he's virtually got it all wrapped up.

Fox followed this interview, several hours later, with a live broadcast of the Reverend Wright's keynote address to a meeting of the Detroit Chapter of the NAACP.

The Reverend took the occasion to show his "nice side." The theme was: different doesn't mean deficient and differences between African American "learning" (right brain) and White/European learning (left brain). It was entertaining and there were ample subtleties in his remarks, but few of the fireworks for which Fox probably hoped.

OK...I'll make an attempt to explain Reverend Wright and why he doesn't bother me as much as may bother others...particularly all those guys in Pennsylvania who voted against Obama, who Obama himself referred to as "bitter."

I am not an expert on African-American history or culture, so most of what follows is simply guess-work and conjecture.

The Reverend likes to distinguish himself as a pastor and definitely not a politician. IMO, this shades the truth a bit. My own observation is that successful Black preachers are, in fact, excellent politicians and, generally, the first group of African Americans to be solicited by White politicians seeking votes in the Black community.

I trace this to the role of the African American Church (in its various denominations) in American history. I suspect that during slavery, while Blacks were not treated as "humans," but property, few slave owners, nominally themselves Christians, could not logically deny Christian Black Churches, even for their slaves, and allowed separate Black Church services.

As such, the Black Church became a central focus of slave culture and consequently became an organizing force for the Black slave community, providing ethnic leadership, preserving African heritage, etc., with a mix of entertainment, religion, cultural heritage, and politics. Perhaps, most of all, it was a place to "vent."

During the civil rights days (the fifties and sixties), it was primarily a coalition of the descendants of northern abolitionists, liberal northern Jews, enlightened White southerners and the Black Churches (together with the NAACP, CORE, and an assortment of other civil rights organizations) that brought about the voting drives and subsequent Civil Rights Act.

Many of the people in the civil rights movement moved into the anti-Vietnam War movement that followed. And, that movement had various elements of its own...some religious in nature (Peace, not War), some political in nature (SDS), and some neither (Make Love Not War...the Flower Children). And, while the divisions between these groups was often fierce, they came together in being anti-establishment, chiefly on the grounds of what they perceived as contradictions and hypocrisy in the society in which they lived.

One could make an argument that the polarization of American society began in the sixties, with a semi, for the most part non-violent, revolution. For those too young to remember Vietnam, today's differences between Clinton and Obama, and Democrats and Republicans, are minute compared to the sixties. Today's hard-core left wing of the Democratic Party came into being during this era: from the Civil Rights Marches to Anti-War Protests, which usually ended with mass arrests, often with violence, and occasionally with deaths.

One movement that emerged from this era was Black Power. Organizations such as the Symbonese Liberation Army and the Black Panthers, many based on an American version of Islam formed the basis of this sub-movement of the times and there was a sort of loose coalition between these strictly Black organizations and the more radical of the largely left wing and White anti-war groups.

What followed was a serious challenge to much of the African American Christian Church establishment, who were viewed by the Black Power extremists as "Uncle Tom's." In part to counter this challenge,many Black Christian Churches re-emphasized African cultural roots...i.e. you could still be a militant Black and remain a Christian.

Here my interpretation gets a bit sticky. The Civil Rights movement was perceived by many Black Americans has having achieved success for relatively few of its members - i.e. generally the Black leadership of the Civil Rights movement, many of whom were pastors of Black Christian Churches. In countering this Black community perspective and the challenge of the Black Muslim's, Christian African American Churches and pastors such as the Reverend Wright moved toward increasing militancy to hold the flock.

Wright is not a stupid person. Perhaps not brilliant; but not dumb. He served in the U.S. Marines; apparently speaks a number of languages; holds various degrees, including a PhD from somewhere, and obvious to a child of the sixties like myself, draws his criticism of America based on that era.

One of the lasting images of the Vietnam War is a small, naked child, maybe six years old, running down a street, screaming, after being burned supposedly by American napalm. I would guess it was this sort of image that Reverend Wright conjured up following 9/11, when he said "God Damn America." He doesn't hate us, he hates his perception of our history...from slavery to Vietnam, to what he perceives as White America's establishment actions that led to 9/11. He's every bit as "bitter" a man as any of those in White blue collar Pennsylvania.

THe United States, Western European Democracies and former communist countries are curiously the "exception" on the issue of separation of church and state. I suspect in MOST of the world, whether via Christian Catholicism in Latin America or Shinto Japan, or Islam there is far more unity between both religion and politics. The Reverend can no more turn his back on what he perceives our faults to be than an Islamic cleric could turn his back on our attempt to "secularize" Iraq. As both pastor and political leader within his community his "duty" is to speak his perceived truth, whether it offends us or not. Fortunately, for him, he lives in a country that respects his right to do so, if not his beliefs.

I think all of the above is basically what Obama means when he says: "He is from a different era." And, of course, one can understand a position even while disagreeing with it. Nor does one have to understand his perspective to respect his right to free speech.

I would hope that the Reverend appreciates at least that much of our society. I suspect that in Shaka's Zulu Kingdom of 19th Century Africa and in far too many countries today, he'd have lost his head.

Note: Next, my view of the recent history of the Democratic Party and the Obama Phenomena.

P.S. The Weathermen were a militant group that practiced a low grade of terrorism (if there is such a thing) in the late sixties and early seventies. It was a splinter group from the left wing Students for a Democratic Society (SDS). They took their name from a line in Bob Dylan's "Subterranean Homesick Blues" ("You don't need a weatherman to know which way the wind blows."). They were anti-war, but also anti-capitalist and advocated a form of communism. They probably never numbered more than 100. They planted bombs, chiefly in government buildings and killed two policemen and a security guard in a Brinks armored car robbery. Three of them blew-up themselves in a botched bomb building exercise in Greenwich Village in 1970. There were two fractions within the group: those who wanted to blow people up and those who wanted to just blow-up buildings. The latter argued that while bombs were OK, they should take care NOT to kill anyone, but practice non-lethal terrorism.

All of this touched recently on the Obama campaign. The Weathermen broke up in the mid-seventies. Most of its members had left of their own accord or been captured, tried and sent to prison for long terms. One member, Bill Ayers, now teaches education at the University of Illinois Chicago campus and remains unrepentant (Charges were dropped against him after he turned himself in in 1980. He apparently was part of the non-lethal faction). Ayers and his also-former Weatherman spouse, Bernardine Dohrin are active in Democratic politics today in Chicago. In 1995, Illinois State Senator Alice Palmer had decided to run for Congress and took Obama around to various meetings (similar to fund-raising coffees) introducing him as her chosen successor. As part of these rounds, Palmer and Obama attended a meeting at the Ayers' home. Ayers and Obama also served on the same board of a Chicago foundation. The curious thing about Ayers is why were charges against him dropped?

I would contend that it would not be unusual for a young and up-coming Black politician coming out of the South Side of Chicago (the largest Black neighborhood in the country) to have the types of relationships Obama had with both Wright and Ayers, who were of the same "sixties generation."

Iraq: Behind the Scenes and What Isn't Covered in the Media

2008-04-16T09:57:00.000-07:00

This morning, I've been doing some superficial Internet research on the "legal" aspects of both our initial Iraq invasion and our on-going presence. Here's some of what I discovered.

Based on all of my reading to date, the Bush Administration determined to invade Iraq for the purpose of regime change, shortly before or after 9/11. In fact, one could make an argument that Iraq was always the intended target and that 9/11 and Afghanistan "distracted" the Administration from that purpose.

This is NOT to say, the Administration didn't have some legal basis for this intent. In 1998, the U.S. Congress passed a resolution for Iraqi regime change.

[Note: the Congressional Resolution stopped short of "authorizing" the use of U.S. force to secure regime change. In international law, chiefly through the Charter of the United Nations, "regime change" in itself is not a valid reason for the use of force. If it were, any war, for virtually any reason would be "legal." International law is more theory than substance and is, in part, "made" by actions, not intentions. But treaties, national commitments, etc. are essentially "contracts."]

Having thrown out U.N. inspectors earlier, Hussein was in clear violation of the U.N. cease fire agreement, or contract, signed following Gulf War I.

Following 9/11 and while still "wrapping up" in Afghanistan, the Bush Administration began building the case for forcing Hussein to comply with the U.N. cease-fire agreement and collecting intelligence to build the cause for invasion. In this environment, there were apparently two competing factions within the Administration. One faction, led essentially by Powell and the State Department, believed that it was necessary for the United States to go back to the U.N. to obtain their agreement on potential U.S. action, since the Hussein violations were linked to the U.N. sanctions and Gulf War I cease fire agreement. The second faction - Cheney, Rumsfeld and the neo-cons - argument was two-fold: 1) if the worse interpretation of the intelligence being gathered was true, the United States had the legitimate right to respond unilaterally to "imminent threat." And, 2) even without imminent threat, the U.S. had the "right" under the U.N. Charter to separately and alone determine that Hussein was in violation of the U.N. ceasefire agreement and to independently take action.

Secretary of State Powell believed the safer course of action was to return to the U.N. and obtain their acknowledgement of Hussein's violations and authorization for the use of force, if necessary for compliance. Bush apparently approved Powell's approach and this led to both his speech to the U.N. General Assembly and to Powell's presentation to the U.N. Security Council (the only U.N. body which can authorize the use of force).

The outcome of this was a sort of "last chance" resolution by the U.N. to Hussein, which in turn led to the return of U.N. inspectors. The inspectors returned and subsequently reported back to the U.N. that Hussein was "partially" complying, but that they required additional time to complete their work. With patience running out and "military timing" a factor (invasion before it became too hot for bio-chemical protective suits to be worn by the invading force), Bush began to shift toward the Cheney-Rumsfeld line of thought.

There was a brief final attempt, largely to please Tony Blair and the British, to obtain a U.N. sanction for the invasion. When it was discovered, due to the resistance of France, Russia, Chile (which was serving in a rotating seat on the Security Council at the time) and others, that we didn't have the votes, Bush proceeded.

The invasion went forward, not in defiance of the U.N., but under the tenuous argument that violations of the original ceasefire agreement and subsequent resolutions "authorized" the U.S.-U.K. coalition to act independently.

Had this logic been challenged, it probably would not have stood up to any sort of international judicial review. The U.N. General Assembly had the power to demand an investigation, but ultimately any meaningful condemnation of the invasion would have, under U.N. rules, been returned to the Security Council, where we (and the U.K.) possessed veto authority. Under a cloud of its own due to the Food for Oil U.N. program and largely dependent on the U.S. for operating funds, the U.N. let the invasion issue drop, with the General Secretary frowning and noting that the war was "probably" illegal under the U.N. Charter.

[Note: the Bush Administration was to use similar doubtful legal arguments with the U.S. Congress subsequently on the issues of torture and wiretapping.]

The Administration intended, from all I have read, to be in and out of Iraq in three months. Orders for withdrawal and redeployment had actually been issued, when things began to fall apart. By October 2003, it was becoming apparent that the situation was not going according to plan; the withdrawals were halted and the Administration turned again to the U.N. to get a formal declaration and sanction for our continuing presence. This is a fact largely ignored by American media and, consequently, the general public. The Multinational Force (the U.S., the Brits, Poles, Ukrainians, et al) are presently in Iraq under United Nations authority.

This "authority" has been granted and periodically renewed (annually) in coordination with the Iraq government and therein comes a big glitch.

The new Shite and Kurd dominated Iraqi Parliament apparently has the same sort of problem the U.S. Congress has been having with the Administration. A majority of the Parliament consider the status of the MNF (multi-national force) in Iraq to be, constitutionally, a subject for Parliamentary approval (just as the U.S. Congress believes they have the right of review of U.S.-Iraq agreements, under the advise and consent provisions of our Constitution). And, just as Bush has ignored the Senate's power of advise and consent, Prime Minister Maliki has ignored the Iraqi Parliament.

Apparently, the majority of the Iraq Parliament want a "timetable" for the withdrawal of the MNF, as well as the right to review (advise and consent) the U.N. required request from Iraq for a U.N. resolution authorizing our continued presence. They also want the right to review any agreements between the Maliki government and the Bush Administration regarding the U.S.-Iraq relationship (such as the Declaration of Principles recently signed between the two administrations). Again, this is a point virtually ignored by U.S. media.

This Fall, the Iraqis will hold, as we will, new elections. The present U.N. authorization for MNF presence runs out at the end of the year. The United States cannot confront a hostile Iraqi Parliament, a hostile U.S. Congress and a hostile U.N. over Iraq much longer.

In addition to the "surge" goal of stability, bringing the Sunnis into the Iraqi political system (even by "buying" their support), is essential to these forthcoming events. The Sunnis largely stayed out of the prior Iraqi elections and hence, out of Parliament. If a substantial bloc of Sunnis-Kurdish representatives cannot be created in Parliament in the next election, there will be increasing Shite and U.N. pressure for a timetable for withdrawal. Add to this problem, our own domestic and military problems.

Then, there is Iran. If the Bush Administration comes to believe that we will be "forced out," of Iraq, by either a U.N. resolution, a Shite dominated Iraqi Parliament and/or a new U.S. President/Congress, what action will they take regarding Iran?

Have a nice summer...it may be a very dangerous fall and winter.

A Quick Postscript

2008-04-14T23:49:00.000-07:00

It's 1:00 AM and I've just finished watching a CSPAN panel discussion at some Washington luncheon on the Presidential Campaign. Panelists were the former editor of the NY Times, a prominent Democratic Pollster and Campaign Consultant (who managed Clinton's 1994 campaign) and Karl Rove. Wanted to get this observation down before I forget it and may follow-up with a later post.

In listening to the panel's analysis of the present presidential campaigns and their weaknesses and strengths, it occurred to me that a good political campaign is similar to a good umbrella. It protects you against whatever Mother Nature throws at you and consists of two important parts: the ribs of the umbrella and the cloth the ribs support. The various ribs are the specific policy elements, while the cloth is the overall campaign theme; both are essential to the umbrella's or campaign's purpose. And an umbrella or campaign without both is useless. The Obama campaign suffers from a lack of ribs/policies, but has an excellent theme/cloth; the Clinton campaign suffers from the opposite, sturdy ribs/policies, but a lack of cloth/theme.

Haven't exactly figured out McCain's position in this analogy, since thus far it appears to me as if he's standing in the rain with an umbrella composed of a single rib...Iraq.

Incidently, it took a foreign journalist (a Jordanian) to finally bring up a question I asked in an earlier post: if Obama is 50% African-American and 50% White-American, why do Americans refer to him as the "black" candidate? Somewhat embarrasingly, the ex-Times editor, who was originally from Alabama, had to explain that it may go back to Southern racial laws, which legally defined anyone with 1/64th black heritage to be "black." Ah...the Obama candidacy may be symbolic in showing both how far we've come and little we've come on race. Reminded me of the French proverb: the more things change, the more they remain the same.

P.S. to the P.S. There is, of course, a third element to both umbrellas and political campaigns...the handle, which allows you to use the umbrella and to open it...namely money.

Miscellaneous

2008-04-13T08:43:00.000-07:00

Before returning to the posts on economics, a little "this and that."

For family members who read this: remember the tommyblog and Alex and Rebecca's new website, with a "family forum." Alex is hoping to start a family forum.

On the campaign. I am over saturated with media coverage, but still have the vague feeling that I don't have a clear picture of where each candidate stands on issues. Media seems to love controversy and will spend days "picking" at a candidate over the smallest misstep, encouraged of course by the other candidates.

On reading: My current interests are in Iraq and the economy. Finished two books during latest trip to Seattle: "The Assassins' Gate: America in Iraq," by George Packer, and "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," by Ha-Joon Chang. A few words on each.

"Assassins' Gate," was an excellent overview of the whole Iraq mess, from a reporters perspective. There are a lot of different "perspectives" on Iraq: the military perspective ("Cobra II" and "Fiasco"), the intelligence perspective ("In the Center of the Storm,' "The One Percent Doctrine" and "Imperial Hubris"), the American on the ground perspective ("My Year in Iraq" and "Imperial Life in the Emerald City"), the terrorist's perspective ("The Looming Tower"), the Iraqi perspective ("The Occupation of Iraq") and the political perspective (all three Woodward books and Buchanan's books), etc., etc. "Assassins' Gate" touches on each, but is primarily the personal story of the author, as he struggles to make some sense of it all. It's an interesting and comprehensive book, but after 465 pages, there is no final answer, due perhaps to the fact that there are so many "potential answers" from so many conflicting perspectives. It's a tough nut to crack.

For every point of view on Iraq, there is a legitimate counter-point, even if one throws out the crazy neo-con ideas, which contributed so much to our initial invasion.

My own opinion is that our response to 9/11 should have been limited to destroying those who attacked us - Al Qaeda, rather than blowing up the 9/11 event into a "War on Terror." We should have gone into Afghanistan with considerable more force than we did, destroyed Al Qaeda, including its leadership, and left. Period. At the same time, we should have made it crystal clear that our actions were in retaliation for the attack on 9/11 and that such action could be expected in response to any future attacks. Assuming responsibility for the "Afghan people," and nation-building was a commitment that far overreached our resources. [Alternatively, since Bush had decided on the nation-building course, we should have increased taxes and built an imperial military force consistent with that goal. I would not have supported such a course, but it would have made more sense than the mess we have now.]

Regarding Iraq, in my opinion, the proper course would have been to increase pressure on Hussein (much as we did) regarding U.N. inspections and then to have let them run their course, while simultaneously and diplomatically ensuring effective international sanctions. Based on what we NOW know, it is clear to me that had we taken such a course, Hussein would have probably been destroyed from within, in 3-5 years, with aid to insurgent rebels coming from his neighbors: the Saudis, the Turks, the Iranians and the Iraqi exiles, with our own covert assistance.

There is also the fact that within 24 hours of the launch of the invasion Hussein offered to leave the country, along with his family and a great deal of money, via Egypt. The rejection of his offer strikes me as similar to the beginnings of World War I, wherein the act of armed mobilization on the part of all parties concerned made last minute diplomacy impossible and made war inevitable.

While no one can be certain that Hussein's departure and the conditions of that departure could have been successfully negotiated, it seems to me that the offer was worth a delay of 24 to 48 hours to allow time for exploring the alternative to war.

In retrospect, the failure to give "peace" one last chance, has cost us 4,000+ dead, as well as coalition losses and 100,000+ Iraqi dead, and the trillions of dollars which the war and occupation may ultimately cost us. And, a negotiated end to the Hussein regime may have well held our traditional allies, calmed the "neighborhood," and put the U.S. in a better strategic position in the Middle East vis a vie Turkey, Iran, Saudi Arabia, Syria, et al than we now have.

Such an outcome would have probably left a Baathist dictatorship of some sort in power and would probably have not avoided the subsequent insurgency (i.e. civil war), but this would have been their problem (and/or a possible international police force), not ours.

Unfortunately, our President's competency (and control) was somewhat akin to Kaiser Wilhelm's in WWI. To paraphrase Churchill, seldom have so few done so much to harm so many.

The Bush Administration's various disasters will shortly become history. The question is really not what we should have done, but what must we do now, with the next Administration?

The definition of "winning in Iraq," seems to change with the wind. There is a vast difference between leaving the country "civilly stable" and "stable in sovereignty." One may imagine the former to be accomplished in 2-3 years. The latter may require generations, in the same sense that we are still in Korea. In Korea, the on-going division between North and South geographically and politically required our continuing presence. In Iraq, the division is both geographic (in Sunni Anbar and the Kurdish semi-autonomous northern state), and religious/political (in the central and southern Shite regions).

Iraq itself is a creation of British/French map makers following the collapse of the Ottoman Empire after WWI. It may be both "natural" and advantageous in terms of Western diplomacy, to allow the country to divide itself into three distinct semi-autonomous regions (which seems to be the way things are working out, independent of what we are doing). As of the moment, the removal of the Baathists and Hussein regime seems to have only reconstituted and inflamed sectarian divisions that have been a characteristic of the region for hundreds of years. Unlike Korea, Japan, and Germany, an Iraq analogy may be found closer in Northern Ireland or Bosnia.

What seems often overlooked is the truth that there is, in essence, no natural Iraqi State and that we currently are there, with 160,000 troops, to essentially hold together a British construction of Post WWI colonialism. Aside from exiles and a secular minority, in all likelihood, "self-determination" on the part of the Iraqi people would mean the willing partition of the "country."

Unlike our post WW II occupation of Germany and Japan, we are not dealing with a homogeneous people, nor with the type of complete devastation found in those countries following the war. The situation in Iraq is more of one wherein we play the role of their former conquerors, going back to the Persians, the Ottomans and/or the British; ensuring some minimal level of stability among essentially tribes based on religious affiliations intend on killing one another, as well as the "ruler" of the moment.

If this scenario is accurate, I see no reason for any long-term occupation that would be to our advantage, either in creating some sort of democratic state as a base of sanity in the region, or in terms of our own national security; a democratic state may be impractical given religious differences in the region and our national security may be better ensured by "quarantine" and containment.

Within this context, I believe a timetable for withdrawal to be in the best interests of the United States. The Iraqis have had 5+ years to "put it together" and it is becoming increasingly clear that allowing them to essentially determine their own timetable for our withdrawal is not working and may ensure only the continuing loss of American lives and dollars.

A "reasonable" withdrawal timetable will force the present Iraqi government to either put their own house in order or face civil war. "Reasonable," in this case means 2-4 years, which is roughly the same time period being offered by Obama and Clinton.

With U.S. public opinion running 2 to 1 against our continuing presence in Iraq and given that we are, theoretically still a democracy, I can see only two reasons for remaining: 1) it has to do with the Bush Doctrine of "democratizing" the world, whether they like it or not, or 2) stubbornness in not wanting to admit to a failed policy. Both of these may be misguided, but understandable, reasons for a Bush Presidency, but I'm hard pressed to understand the thinking of John McCain. McCain, to date, has offered no good reason for remaining.

The second book, "Bad Samartians: The Myth of Free Trade and the Secret History of Capitalism," was essentially a view of the world economy from the view point of the developing countries. It's author is a transplanted Korean, who is now a UK citizen and professor at Cambridge University. "The Secret History of Capitalism" part of the title is a bit overstated. It's there because he believes that the present western world's emphasis (and imposition) on free markets, free trade and laissez faire capitalism is some sort of "conspiracy" to globally enforce western dominance on the global economy. Pat Buchanan fans (of which I count myself as one, in part) will be delighted to discover, in this book, that the developing countries dislike organizations such as the World Bank, the International Monetary Fund, and the World Trade Organization as much as they do. In fact, after reading this book, you might ask: Just who is for these organizations? The answer to that is too complicated to get into here, but what struck me about the book was how many similarities there were regarding populist arguments within the United States and the arguments of the developing countries on free trade and globalization.

At one time I worked for a Fortune 500 company. During the course of that employment, I had occasion to meet once or twice with the CEO of the company (in a group meeting), to discuss the divisional level business strategies, of which I was a part. During one such meeting, the CEO told us (the divisional level people) that what he wanted was a 10% increase in market share annually. This was back in the days when the current fad was "market share." At that time, we held 85% market share. As the guy out on the front lines trying to sell a product, this struck me as self-defeating, because given really basic rules of capitalism, dominating market share would only encourage increased competition. In other words, with that kind of market share, who among our customers would really believe our pricing? Given that my understanding of free markets was that only competition produced the best value, I foresaw actually losing business to smaller competitors that were higher priced than I was, in order for the customer to over the long haul determine true value.

So, rather than achieve a monopolistic market position, which would only encourage additional competition, my strategy was to be the low cost producer in a competitive market. And, beyond that, I believed (as a good capitalist) that a monopolistic position would also lead to internal sloppiness and inefficiencies. In sum, I welcomed competition, believing that it got the best out of both myself and the company.

It strikes me that American "globalization," has taken on many of the attitudes of my former CEO; that our present drive to "dominate" the world economically and militarily is basically counter-productive, over the long haul. "Over the long haul," is a key phrase; what I didn't realize in that meeting is that the CEO and I were at cross-purposes. At the same time, he was planning on selling the company and wanted maximize market share, not for the long term benefit of the company, but to make it an attractive "sale," via Wall Street deal makers. I have similar concerns about the "movers and shakers" of today's U.S. economy - i.e. as long as we "appear" to dominate, we'll be an attractive investment, regardless of the actual state of our assets.

I will get into this more in later posts, but present American economic globalization theory strikes me more as a perverse sort of mercantilism rather than advanced capitalism. I say "perverse" because mercantilism is associated with protectionism and tariffs; in its present perverse way, we are "eating our own" through the sale of overvalued assets, with overvalued dollars.

Finally, for today, a word on Obama's latest gaff; the "bitterness" comment referring to fundamentalist Christians, gun owners, and that loose category of Americans the elites refer to as "rednecks." Although severely criticized for the comment by both Clinton and McCain, it struck me as encouraging regarding his candidacy. I interpret the comment within the context of a general feeling of helplessness in the face of globalization and a dysfunctional government, leading to a feeling of "bitterness" about the "system" and a focus on the things that make up their daily lives. That is the key; it wasn't that they are bitter about their religion or right to own guns, but that these aspects of their lives are the only aspects over which they still feel they have control - i.e. you can take my job; you can take my house; you can open our borders; etc., etc., but don't mess with my right to own a gun or my religion...that's mine. And, if you get to that point, you are bound to be bitter, if not damn angry, about the rest.

The response was sort of: How can he say that, when we're all basically happy, thankful people, participating in the Great Democracy? For me, again, this was rather an example of how in tune Obama is with the actual mood of the majority of the country and the feeling that there is not really much difference between the parties; that there is tremondous dissatisfaction and the bitter feeling of betrayal by the "system," in the "heartland," which largely goes unnoticed by those either figuratively or mentally within the "beltway." I think if you understand this about his comment, you understand the "Obama Phenomena" and if you don't, you're on the outside looking in...or maybe on the inside, looking out.

Enough for today!

The New Economy - Part II (Continued - 6)

2008-03-20T08:50:00.000-07:00

Before returning to the central theme of this series, which gets back to the rise of laissez-faire capitalism in the eighties, Ronald Reagan and "share holder value," a few notes on other topics.

After massive intervention by the federal government in response to the housing meltdown, this morning markets appear to be calming somewhat. The market (as of the moment) is up, the price of oil and gold down from their recent highs and the dollar strengthening. I suspect we may be entering the "eye of the hurricane," and there will be increasing market volatility as we settle into recession. I am still waiting for the other shoe in the credit crunch - credit card defaults, which may make the housing foreclosures look mild.

Senator Obama has come out in favor of tapping into the strategic oil reserve to bring the price of gas at the pump down. Mistake. The reserve is held for national defense emergencies, not market adjustments. I am afraid this smacks of old time Democratic economics and doesn't measure up to the "change," he has been promising. So far, it isn't enough to change my vote, but stay tuned.

The argument herein is that the country under at least two Presidential administrations (Clinton and Bush) have pursued short-term economic policies that have long-tern negative effects, largely due to the failure to move to an effective New Economy (a service/idea-based economy), while departing from the Old Economy (a manufacturing based economy). The short-term problems lie primarily in the creation of a "credit economy" under Clinton and Bush, by which the failures of this movement from Old to New were masked or hidden. In other words, the major problem is "debt." Debt at the individual level, the state level, and in financial markets. Another way of describing over-indebtedness is to say we're over-leveraged, which in turn is another way to say, we're getting ahead of ourselves, and in a position where commitments have come to exceed resources.

And, the conclusion, I am slowly developing, is that the country will not be on sound economic footing until this is recognized and fixed. Use of the strategic oil reserve, aside from its national defense implications, is basically like the fed throwing money into the system to cover bad investment banking decisions - i.e. it's creating more debt; debt in oil, not dollars.

The thesis herein is that we need a new economic policy for a self-sustaining national economy, without giving up the "goal" of moving toward (or continuing in) a globalized economy. This will not be an easy task and will require some additional government intervention in the economy and government willingness to use the economic tools they have at their disposal: taxation, tariffs, interest rates, regulation and oversight, etc.).

The time for such a change is opportune; it is an election year and candidates and politicians always seem to be more responsive to populist arguments in such years. We have also just had a prime example of "investor error," within the context of the most laissez-faire environment since the late 19th century, in regard to the housing crisis.

Let's now turn back for a few more words on free trade in this context.

I am presently finishing a book titled: "The Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism." It's not as revolutionary as its title might suggest and based on considerable fact, as opposed to myth. It was written by Ha-Joon Chang, a Cambridge University professor of economics, with a Korean background.

There is a major debate among economists over the economic direction of countries with developing economies. Generally, economists representing the developing countries complain that international organizations such as the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO) are dominated by developed western countries seeking to impose economic hegemony. [The opposite argument, generally by western economists is that we've given up too much authority to these same organizations.] They also complain that the very economic ideas the west atteempts to force on the developing countries are largely "myths," which had nothing to do with the economic success of the developed countries in their own histories.

Most of Chang's book focuses on these topics, from the developing countries perspective. One passage, however, caught my attention:

"When economic prospects in a developing country are considered good, too much foreign capital may enter. This can temporarily raise asset prices (e.g. prices of stocks, real estate prices) beyond their real value, creating asset bubbles. When things get bad, often because of the bursting of the very same asset bubbles, foreign capital tends to leave all at the same time, making the economic downturn even worse."

Economic terms are relative and generally descriptive of multiple causation - ie. multivate analysis, wherein cause and effect holds true, but there are multiple causes leading to multiple effects, making analysis difficult. It strikes me that Chang's observation in the above regarding a problem within developing countries is equally true of developed countries in economic transition. The key is not "developing" or "developed," it is the degree and pace of economic transition.

Chang's observation may hold true equally for the United States, which although "classified" by economists as a "developed country," is in fact developing from the Old Economy to the New.

You may ask, so what? The significance of this perspective returns us to the two exceptions to free trade, generally recognized by economists as useful: protection of national defense industries and protection of new/infant industries. In other words, limited, selective tariffs (related to either foreign investment or goods and services) regarding both our defense industry and our high tech industries may be beneficial in helping to restore a sound American economy, through the creation of additional well paying American jobs.

Again, free trade, like globalization is a positive "goal," provided that development toward both is done in such a manner and pace that the pursuit of these goals do not destroy our national economy. But, the reckless pursuit of these goals is something akin to a policy of "pre-emptive war," wherein the risks of unanticipated consequences outweigh the tangible gains.

The point is that, without abandoning free trade goals, we must come to see selective tariffs as a tool of government to ensure the protection of both national defense and the elements of the new economy, upon which we expect to base our future economic success. In this, a selective tariff policy also is a tool by which to adjust the pace of globalization to protect our own internal economy (i.e. additional, better paying jobs for our citizens).

In the absence of the use of such tools, the cost of labor will seek an equilibium - i.e. developing countries wages will rise and developed countries wages will fall at "market rates." In a democratic society, the dramactic shift in such a fall can be sustained only by loose credit and the devaluation of currency.

More next time.

A Brief Update on Bear Stearns

2008-03-16T19:55:00.001-07:00

A few posts ago, in reference to Wall Street nemesis ex-Governor Elliot Spitzer, I scored his fall from grace as: Masters of the Universe 1; Caped Crusader 0. This evening, the Masters of the Universe lost a point.

The collapse of Bear Stearns does not bode well for the rest of the market. As I understand the news, JP Morgan, Chase & Company have bought Bear for $2.00/share. At this point, I would imagine the shareholder base consists of three types of people: long term investors hoping to ride out the storm, partners of the firm, and a few who believed financial institutions had "bottomed out" and bought in at roughly the closing trading price on Friday, $30/share.

So, if you were in the latter category, which would be the best of the three groups, your losses would be only 1500%. If you bought in around Bear's high last year of approximately $160/share, your loss would be 8000%.

The buy-out price of $257M or so is for Bear itself. The Fed has promised JP Morgan & Chase to cover losses they may incur in assuming the Bear portfolio - i.e. the specific investments made for its clients, as well as help JP fund the buy, up to a total of $30B of our money...don't worry, they'll just add it to the national debt.

Since the Fed is the lender of last resort, one may assume some valuation of the Bear holdings had been completed prior to going to the Fed and that the holdings were found to be mostly worthless junk. That means JP Morgan will be calling on a substantial portion of the promised $30B. Bear was perhaps the investment bank most heavily into the subprime mortgage securitized debt instruments. Another bank heavily invested in the same is USB, United Bank of Switzerland. Expect them to take a heavy hit on Monday and be in a "touch and go" situation for the next few weeks.

The Bear failure brings up the question of who - if anyone - is next? Is this the beginning of a domino effect? The market may answer that question in the coming week. Some degree of unrest and uncertainty is highly probable, despite the Fed's eagerness to further reduce short term interest rates, beyond the additional quarter of a point they gave up with the Bear news today.

As I pointed out in the earlier post on Bear, my guess is that the banks are in the Phase II process of "revaluing" bad investments. That, coupled with an analyst prediction, I've read somewhere, that said we are only about half-way through the subprime mess, tells me that whereas Bear's demise may be the first, it won't be the last. A whole lot of over leverage and lousy management. Apparently, a few Wall Street CEO's made mistakes similar to those home mortgage borrowers who felt "things can only get better" when they signed up to ARM's.

I have a gut feeling, with nothing really to base it on, that we may see 2-3 additional bank failures; possibly one larger than Bear and one or two smaller failures. If that is the worse case then we may get through this with a recession lasting one-two years, before the house of cards gets repaired and re-building begins. If worse, however, then the underlying problems of the American economy are going to be exposed and the recession could conceivably go into depression, requiring 10 years for recovery...and a generation of very, very nervous and angry, but humbled people.

My preference is that we endure as mild a recession as possible, but take this as a warning of worse to come unless fundamental economic changes are made. The unfortunate thing is that a mild recession may not force policy makers to make the basic changes necessary (if I am right in my theory on the negative effects of globalization on the American economy).

Those necessary changes are what I am building up to in the New Economy posts, but a "preview" of those changes is: a step back from globalization and taking a more selective approach, while pulling back some of the jobs lost overseas, and creating a national economic policy that aims at a "Self-Sustaining National Economy," while not abandoning the longer term benefits of a global economy.

I don't think McCain can go there, given the constraints of Republican economic policies. Neither will Clinton, given the restraints of Wall Street. But, at the moment, Obama (from that great windy city in the mid-west) is still in a position to do so. He is new enough not to be a prisoner of his financial backers and ill-defined enough to still put forward significant changes in his platform.
Will he have the courage? Time will tell...and it will have to be sooner than later.

P.S. After all of this is over and the losses are totaled, I hope someone compares those losses to the amount of money involved in the Bush tax cuts.

Free Trade - The New Economy II (Continued -5)

2008-03-16T10:28:00.000-07:00

The central theme of this series of posts is what I believe to be the negative effects of globalization on the American economy. It may be a subtle point (and one difficult to make), but I am not against the long range goals of globalization - as I understand them - but only the means by which we are transitioning to this goal.

For one thing, globalization has for all practical purposes already occurred, although I would reverse some aspects. For another, given today's technology and future trends, globalization is pretty much inevitable. That inevitability is like the old, classic story about what do buggy whip manufacturers do with the coming of the automobile? Transportation, communications, global consumer trends, education, etc., etc. are all among the various forces driving globalization, in terms of a common global society.

This trend is neither unique or necessarily harmful over the long run. Prior to the Civil War, the United States was essentially one government with two regional economies. It was only following that War, in the late eighteen hundreds, chiefly through technological advances, that a national economy came together. The J.P. Morgan's, the Rockefeller"s, the Carnegie's, may retrospectively have been "robber barons," but they were also entrepreneurs, who sensed the commercial advantages in moving a politically re-united nation, through technology, to a national economy.

Most of these "advances," (and some would argue the Civil War itself) may be traced back to the beginnings of the industrial revolution in the early 1800s and the general movement in the western world from agriculturally based economies to "materialism." Materially, the world has moved further and faster in the last 200 years than in the approximate 9,800 years of human civilization that came before it.

Environmental concerns, the use of natural resources, and population growth, have added a tremendous impetus to globalization. Our collective advances in human knowledge - primarily science - have had an equal impact. But, this new awareness of global interdependency doesn't spread easily to the human consciousness. Just as regional oil producers were among John D. Rockefeller's foremost critics (and contributed to massing public opinion against Standard Oil), we have today many who find it difficult adjusting to new realities.

The enormous growth of scientific knowledge (both pure and applied) made the industrial revolution possible, just as it has made globalization and a post-industrial society possible.

In this process of what is really an exponential growth in human knowledge, science knows no religion; no national boundaries and, in a great sense, makes both obsolete, in terms of human organization.

It is this belief that causes me to conclude that "globalization," of virtually all aspects of human life, is a postive development for the progress of mankind. Ultimately, the alternative is sort of a Mad Max world, back to a point in human history in which life was "short and brutish."

In earlier posts I have tried to explain how the greatest challenge to global economics today is how to organize fast enough to incorporate the approximately 3 billion people added to the global labor market due to the fall of communism, without having these people face starvation and the resulting digression of their societies back into wars and revolutions.

So, I basically agree with President Bush that global democratic-capitalism is the best means of providing global peace and stability [although I have serious disagreements on how that is defined and how we get there]. Actually, initially, this was the same goal as communism. "From each, according to their abilties, to each according to their needs." In a moment, I'll try and show this is a position not too far different than the underlying principles of free trade, but first a few more words on the really Big Picture.

There are distinct differences between science and religion, but these differences are essentially in methodology and not in "truth." In both realms, "truth" changes with time and position. Generally, religious truth claims to be eternal, but if we look at the details in the history of religions, even they change in perception over time. These changes usually occur as the original teachings are passed on from one generation to the next and religious hierarchies evolve from their starting points. Hierarchies produce "experts" at interpretation, who differ slightly from the last generation of experts, and so forth and so on. The overall message may remain approximately the same, but as they say: "the devil is in the detail." And, it is in these detailed interpretations, changing in space and time, that produce events such as the Christian Crusades or present day Al Qaeda.

Unlike religion, science does not even pretend to offer eternal truth. The "truth" of science lies in proving functionality - i.e. what works - based on today. And science offers a temporary explanation of temporary truth, based on present knowledge. As that knowledge expands, essentially through our ability to "see" things differently through advances in measurement, the old "truths" are changed. The process of change is not usually easy, but probably a great deal easier than in religion because scientists as a group generally follow the same "religion" - the scientific method.

Perhaps, one of the foremost "shifts" in scientific truth lies in Newtonian physics versus the physics of Albert Einstein. And, not being a physicist, here is a layman's explanation.

Newtonian physics is essentially a three dimensional world: length, width, depth. Sort on physics based on Euclidian Geometry. And, if one isn't too precise about measuring, it works...here on earth...or "locally." But, you can't get to the Moon and back using Newton alone, for that task you need Einstein and the principles of "curved space" and time.

Before I get in too deep for my own good, let me say, the point is that science incorporated Einstein's thoughts into its "body of work" and we did get to the moon and back. If Newton had expressed eternal truths, true for all time, everywhere, we wouldn't have made it.

The two major attributes of science are, in my mind, its flexibility and its functionality. This is why, in attempting to look ahead, or to predict the future, I tend to place it ahead of religious belief. While both science and religion are capable of "change," the thrust of direction in religion is generally oriented toward the past, while science's is toward the future.

Change is biologically a tough proposition for human beings, as it is for all living organisms. One of the keys to our success as a species (to date at least...don't know about tomorrow) is "adaptability." This says, that while we may not like change, we'll accept it if it means our survival.

That is a long, roundabout way of explaining why I believe that globalization is inevitable. The global environmental problems we are facing today, some of which may be traced to the industrial revolution and our material success, cannot be resolved without global cooperation. Example: Solving pollution problems within the United States will not help us unless China, India, etc. also resolve their pollution problems. And, there are many other examples, the Amazon Rain Forest, Global Warming, etc.

Library shelves are filled with books on this subject: post-industrial society. In sum, however, the direction of science points in the direction of global interdependency. It won't help things if THIS society makes the transition to a post-industrial society; interdependency demands we move in the same direction - as a species.

The great question, however, coming back to economics, is what is the best means for achieving this transition? And, this question brings me back to the global economy, free trade and, fundamentally, the loss of American jobs.

There are two driving assumptions behind our present approach to globalization: lower cost labor and free trade. In my last post, I tried to explain that lower cost labor involved a "bet" that in the long run, "ideas" would be more valuable than "things." Thus, long-run wise, we "swap" a North Carolina textile worker for a computer programmer. It's brain power (New Economy) substituted for manual labor (Old Economy). That's not a bad cure, if the medicine doesn't kill you, and my point has been, the medicine is killing us.

The basic problem is that we can't train computer programmers for the New Economy fast enough to replace Old Economy workers. The result is alot of displaced people who must be "kept" through cheap credit and low cost imports; the means of which have been achieved largely through low interest rates, devalued currency and (now I'll add a third, coming to the topic) free trade.

Economics 101 on free trade. The underlying theory of free trade is economic efficiency. Global free trade, i.e. one that doesn't try to "balance" through tariffs/taxes, allows each country to do what they do best ("From each according to their abilities, to each according to their needs," providing they can pay the going market price.) By specializing in what they do best, they acquire greater efficiencies of production and bring the best product to the global market, at the lowest price. Without tariffs, these products find their "true value" in a free market. Until recently, the vast majority of free trade economists, qualified this general "rule" with two exceptions: 1) new, infant industries, which require temporary government help and protection to get started and 2) national defense industries, under the theory that no one knows what the future will bring and it is safer for a country to maintain a defense capability within its own borders, even if it isn't efficient to do so.

Most discussion of tariffs today revolve around 1) above. The exception of 2) above has generally been ignored for the past twenty years or so. A recent bi-partisan national committee on just this subject concluded that defense mobilization planning has virtually disappeared. In time of a serious war this neglect could be disasterous for the country, but even short of such a war, it probably severely handicaps our foreign policy options. [Note: We have essentially placed economic efficiency and globalization ahead of national security. This is a topic that gets virtually zero coverage in the media. I suspect the lack of attention is due primarily to the fact that neither major party wants to discuss it, because they both hold the same position.]

The United States, from its inception to WWII, grew economically through tariffs. Although there were ups and downs, particulaly in regard to specific industries, we were as a nation, "pro-tariff. " This isn't surprising, because generally net importers tend to be pro-tariff (i.e. they want to import goods, but at a competitive price to their own products), while net exporters tend to be free traders (i.e. they don't want the prices of their products driven up in foreign markets).

Our national position on tariffs pretty much follows the above rule. While we imported more than we exported, we were pro-tariff. We began becoming "free traders" following WWII, when we were producing approximately 50% of the world's manufacturing products and became net exporters. When we ceased to be net-exporters (e.g. when the trade balance in goods and services went negative) we should have given this position another look, but given the "bet" of the New Economy and the anticipated increase in the valuation of "ideas," we've remained free traders. There are occasional exceptions, such as steel, aluminum, auto, but they are usually short term and temporary responses to overwhelming lobbying pressures.

[Note: Many Republicans like to refer to the Smoot-Hartley tariffs of the nineteen thirties as leading to the Depression and WWII. Although, I need to do additional research, Smoot-Hartley may have played a part in the Japanese attack on Pearl Harbor, insomuch it was related to Japanese expansion in China and SE Asia and the availability and price of U.S. oil, but the act had nothing to do with the Great Depression, which started in 1929, before the tariffs.]

All else being equal, free trade is a positive goal in a global economy. The catch is in the first phrase, "all else being equal," which is not the case at the moment. The trade deficit is proof. If free trade was working for the United States, the trade in goods and services would be either far lower, balanced, or even a surplus. Today, we are giving away more than were getting and because of the "bet," this will not change under present economic policy until the "idea" products start selling. [Note: There are off-setting trade accounts that mediate the imbalance in goods and services, such as foreign investment. Until recently, the United States "invested" more abroad than foreigners invested here. That has changed, but is to some degree off-set again by improvements in the trade of goods and services through a weak dollar. Remember, that whereas a weaker dollar helps the trade deficit in goods and services, it also makes our foreign investment more expensive, in that it takes more dollars to buy foreign assets. I would suggest that "overall" over, say, a year, it won't get better and the total deficit will continue to rise.]

Free trade also, through the principle of each country doing what it does better than anyone else, assumes, at the macro - or Big Picture - level, a global division of labor. This division of labor, in turn, is based on the principle of the evolution of a skilled work force that results in a superior and low cost product based on economic efficiency, which competes on a more or less level playing field. Today, in China's case, this is not the situation. Cheap Chinese imported goods are based on an enormous surplus of Chinese labor, not subject to the same type of quality controls found in the United States and Europe, and controlled by a communist/socialized government. In the United States a CEO may fail and walk away from the company with tens of millions of dollars; in China, they are often simply shot. Perhaps, in our next round of trade negotiations, we could get the Chinese to institute better quality controls for products we are importing in return for our agreement to start executing errant U.S. executives?

The point is, that today "free trade" occurs between societies so different, it can scarcely be called "free trade." I would repeat: Free trade, in its totality is a positive attribute for a global economy, but when it becomes little more than a search for cheap labor it falls apart, with devestating consequences.

More in the next post.

Back to Eccles

2008-03-15T08:59:00.000-07:00

It's time to return to the Eccles remarks on the Great Depression. Basically, Eccles contributed the Great Depression to inequality of wealth and income. This inequality put a disproportionate amount of capital into a few hands, who would NORMALLY have invested in new plants, to produce more product to be bought by an increasingly wealthier general population. But, since the distribution of income was disproportionate, the general population consumer market for additional products wasn't there and capital simply accumulated. On top of this, what spending was done was largely done on credit (credit used to even out the disproportionate wealth/income distribution). Eccles wrote: "When their credit ran out, the game simply stopped."

There are similar problems in today's economy with two variations: 1) today, "globalization" takes the place of the nineteen twenties "capital accumulation" and is the prime cause of the failure to build new plants in the USA. 2) cheap imports, combined with extraordinary access of the general population to credit markets, relative to the twenties, in the form of "new financial instruments" - ranging from credit cards to mortgage and home equity debt instruments - has obscured, until recently, the disproportionate wealth distribution.

In regard to 1) above: In other words, in today's global economy, wherein the American manufacturing sector has shrunk to 14% of the total GDP, and consumer goods are for the most part imports, capital spending on "new plant" simply isn't an issue. It's a guess (for which I need to do additional research), but I'd suggest that the trend in capital investment over the last twenty years has been toward foreign investment and commercial real estate (and at a different general population level, 401Ks, based on over-valued stocks and/or inflated housing prices) and that together, today, invested capital in these categories far exceeds investment for the production of consumer goods. The key word in the last sentence is "production." There HAS been substantial capital investment in high tech products related to improved distribution systems for foreign produced product. But, in sum, investment is going toward foreign "new plant," and domestic distribution.

The effect, however, is the same as in the nineteen twenties dealing with a national economy and low imports - i.e. whereas the giant suction pump of the twenties was in capital accumulation, that pump in nineties and early 21st century is globalization.

This brings us to 2) above. This pattern of investment only makes sense (from a populist national economy perspective) if the American consumer keeps consuming, otherwise the house of cards falls. Foreign plant investment and U.S. distribution systems are "valueless" to most of the U.S. population in the absence of mass consumption.

In the absence of an American consumer market, foreign plant will simply turn to production for domestic markets - to the extent possible and as wages adjust - the plant owner doesn't care who he sells to, as long as there is a sale. And, if that American consumer stops buying, we'll be left with a lot of unemployed "service economy" workers wandering among a lot of empty shopping centers and warehouses.

The point is that in the New Economy world, national economies cannot survive a global division of labor, without a single, global set of rules and regulations.

I am coming to the credit problem, but hang on a bit longer.

The bi-partisan American political approach to globalization and the global division of labor was to place a very, very high risk "bet." We bet our manufacturing base on a projected post-industrial society, wherein the United States would make its contribution to the global economy through "ideas." And, these "ideas" would be "packaged" as services. We did this without guarantees of international intellectual property rights; we did it while continuing to train, in our universities, new foreign elites (Note: 60% of science and engineering degrees granted by U.S. universities go to foreign students). We did it without an understanding that "ideas" transfer across borders without controls far, far easier than product production facilities and that it is much more difficult to "value" an idea than it is a hard product.

Sound pretty stupid? Well, I'd argue that this is one result of Eccles' theory of "disproportionate wealth." When that distribution becomes top heavy (and today it is as top heavy as it was in the twenties), you end up with an economy largely separated from most of its peoples. You end up with CEOs who worry a lot more about this year's bonus than how much the guy at the bottom of his corporation is making. Marie Antonite, just before the French Revolution, supposedly, when asked about how the general population would eat, said "let them eat cake," the line today would be, "let them shop at Wal Mart." There is another side to all of this, which I'll come to in a moment.

The big "bet" essentially failed...or, at least, wasn't coming true fast enough to hold the economy together and the answer to this problem was "cheap credit."

[Note: The next part "assumes" the "service economy" failed to replace the former manufacturing economy on a 1 to 1 basis and that cheap credit had to make up the difference. I need further research into this proposition regarding employment shifts in the economy over time. I am suggesting that such a study would show that much of the former economy moved into service jobs ranging from financial services, computer programming, fast food, retail sales, self-employment, etc., but that all of this did not raise household income consistent with overall economic growth. Without the research, at the gross or macro level, there are plenty of income statistics today to show household incomes have either remained flat or increased minimally over this time period.]

Few in either political party are today willing to step up and lay all of this out for the American people. With the current economic crisis most would probably go as far as saying: "the jury is still out." But, no one (other than Pat Buchanan and a few others on the outskirts of the political system) is willing to say: "We've lost the bet."

Instead, the United States poured more and more money into the system, via loose credit and low interest rates, to prop up an "American Consumer Society," which much of the developing world had come to depend upon. This wasn't entirely altruistic. American consumers bought cheap, foreign produced products, on credit. In turn, the importing countries recycled much of their profit back into the U.S., either directly, through the purchase of U.S. assets, or in market investments, pumping up overvalued financial markets. [Note: A few foreign firms actually built "new plant" in the U.S., generally automotive plants; largely to off-set a growing demand for tariffs to protect American industry. But, this is a very small portion of the national economy. Also, the argument that we have an "investor" or "ownership" society - i.e. we're all going to live off the rest of the world - just doesn't hold up to statistical analysis, as shown by the growing stratification of wealth.]

So, we are now verging on the "tipping point," which Eccles described:

"The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment."

This is, basically, the situation in which we are in today - or will probably be shortly. There is one substantial difference, which is not good news. In the above Eccles quotation, the fall in prices mediates the severity of the fall in employment. True for the nineteen twenties. In the 1930s, after government invention, the coming of WWII and the transition of the United States into the "Arsenal of Democracy," created an opportunity for Americans to return to their plants, their factories. Today, there are no plants to return to, and there are other markets for importers to sell into. As already noted, foreign plant product may turn inward, improving their own economies, but doing nothing for us. Further, oil - still the energy source that drives much of the world economy, such as all of those manufacturing plants we shipped abroad - will probably remain at high prices due to increased non-U.S. foreign demand and a dwindling supply. [Note: Drilling in ANWAR and Canadian shale won't save the situation. ANWAR might delay the worst for a couple of years (of course, we may need those years) and processing of Canadian shale is very expensive at present. The "energy problem" long term may be handled; it is the immediate future, wherein its price and availability create enormous economic difficulties.

Before moving along, a word on "the other side of the picture" - the non-populist side. Culturally, I would suggest that much of the traditional American "elite,"(elite in terms of wealth), over a period of time, lost confidence in the country...in its politics, its peoples and in its declining values. To a significant degree, down at the nitty-gritty level, I believe this accounts for a large measure of the willingness to sort of "get out of town" via globalization. This is a factor most liberal economists simply do not want to address. Important as this perspective is, it is not the subject of the current set of posts on the economy. I am trying to avoid "value judgements," whether applied to Wall Street or Welfare. This is merely a series of thoughts on: how we got here, where I think we are, and where we need to go in the future.

I still have to return to "shareholder value," at some point, to show how the "Perfect Storm" arrived. But, first, in the next couple of posts, let's look at "Free Trade," and "How Bad Can It Become?"

Bear Stearns and Bush Speech

2008-03-14T09:21:00.000-07:00

Another quick interruption of the main theme for comment on the news of the day.

This morning, JP Morgan and Chase and the Fed of NY announced a "bail-out" for Bear Stearns. Forty-eight hours ago, the Bear CEO was assuring CNBC that everything at Bear was great and there were no problems. Another indication that financial institutions are approaching panic?

OK...the way I see it, is that the financial markets are now in an "unraveling" phase - i.e. they are slowly working through their valuation problems with mortgage backed securities. Phase I was to determine what they actually held and the details of what those holdings contained. This phase, Phase II, is now valuing the holdings and it's "hot potato" time...i.e. trying to get rid of a lot of the mortgage stuff they've determined has about the quality of junk bonds.

As the extent of Bear holdings and problems spread on the street, other banks closed their doors to Bear (some undetermined European Bank and Goldman Sachs, according to rumors). The refusal of these banks, most notably Goldman, threatened to throw Bear into default and bankrupt the company. Enter the Fed and JPM&Chase. As I understand it, the Fed will loan Bear sufficient funds to meet its obligations, but through JPM&Chase. That's curious. Two possibilities: 1) JPM&Chase is about to take over Bear, or 2) the situation at Bear is so desperate that the Fed is expecting them to go under, regardless of their support, and required a third party to essentially step in and take over managing Bear. As part of the deal, JPM&Chase will NOT be held liable for Bears' losses, which - if any - will be presumably be borne by the Fed. In other words, it is a "bail-out."

All of this is consistent with the Fed Chairman's testimony before Congress about two weeks ago, wherein he stated that he thought it possible that some banks would fail before the subprime crisis was over. Of course, big question is: Who else?

I suspect that as of this moment no one can answer this question. However, as the valuations of mortgage backed securties continues, expect further losses and the strong possibility of additional failures. Bank write-offs to date apparently were based on sketchy information regarding their own holdings. If they were overly conservative...then one might expect a reasonably quick "recovery" (and we continue building the house of cards, if my theory of a generally overvalued economy is correct). If they initially underestimated their losses...there is more to come. Unless we are willing to tackle what I believe is the real underlying problem (the pace of globalization), either way we lose.

All in all, having lacked necessary oversight all along, valuation is a tough cookie, because ultimately those valuations depend on what is going on at the other end of the problem - the homeowners who are facing default. First tier lenders and the government are supposedly working through this end of the problem. To date, about 120,000 home owners have done "something" to work a deal to avoid foreclosure. By the end of this year, the government expects this number to rise to 300,000. Ah...300,000 out of the 2 million that may go into default as their ARMs roll-over.

Sound like the government's response to Katrina? Well, there is a significant difference, because it won't be individual home-owners pressuring the government for a work-out; it will be Wall Street.

Bush addressed the Economic Club of NYC this morning. Nothing really new...still in denial. Tax cuts, free trade, etc. No recession, just a small down-turn. Economy is actually great. Clearly, in his mind, society is a sub-set of the economy and not the reverse. His answer to the lost of American jobs? More training. If he considered the reverse, the economy as a sub-set of society, then the economy would reflect the capabilities of the work force. Training is certainly part of the solution to job losses overseas, but the shift has to be over a greater time span, and quite possibily is generational. Current policy is "we're totally changing our economy and you (the former textile or steel or automotive worker) better keep up with it or you're screwed and it will be your fault." And, of course, once the present crisis rolls out add to the un-or underemployed, textile, steel and automotive workers, a sizable army of "financial service workers," who have probably already re-trained once or twice. The alternatives are reasonable government policies, which protect American workers (and the economy) as we move through this global realignment, but such clashes with Bush economic philosophy.

He did mention, in passing, that the government (including the Fed) was moving to increase "oversight" of the mortgage business, although he went on to link the "oversight" with the necessity to ensure that borrowers could still find loans in the housing market. Right. Sort of like curing your headache by banging your head against the wall harder.

Two Administrations, over sixteen years, have refused to stand up and tell the American voters the truth, while hollowing out the American economy, with cheap, feel-good credit. But, more on all of that with a return to the central theme - The New Economy.

The New Economy - Part II (Continued - 4)

2008-03-13T08:24:00.000-07:00

Before continuing with the train of thought in the last post, a few comments on the "news of the day." On Eliot Spitzer...Masters of the Universe 1; Cape Crusaders 0. Or, one could subtitle the Spitzer Story as "More Irrational Exuberance." If he'd been some obscure Congressman (or U.S. Senator), maybe he could have ridden it all out. But, not as CEO of New York State. What he apparently did was certainly wrong, but it was the hypocrisy that got him, not the crime.

Ferraro comment on Obama...stupid comment from a stupid person. Does not reflect well on Clinton, even though she disavowed it. For those not following the news: Ferraro (Walter Mondale's VP running mate, formerly an obscure Congresswoman) said essentially, Obama would not be where he was today if he wasn't black. Hmmm? While that may certainly be true of Obama's victory in the Mississippi primary, she didn't say that. Her statement was all-inclusive. Old time Democrats (largely Hillary supporters) don't get it. Outside of the Deep South, it's his message and not his skin color. To most blacks, his candidacy may be "racist," in the sense they will not pass up the chance to vote for a person of color, with whom they can agree and one can hardly blame them for that stance. But, Black America isn't going to get Obama elected...they have neither the numbers or the money needed. Obama is beating Clinton for three reasons: 1) he captured the "Change" theme and made it his own); 2) the ABC fear - i.e. "Anybody But Clinton" - that Hillary will bring Republicans out of the woodwork to vote against her; Republicans that might otherwise sit the election out; and 3) The Clinton Years never lived up to their promises - NAFTA, Greenspan, Rubin, the dotcom boom, balanced budget, surplus, etc. may have been good for a minority of the Party, but were viewed by many as a betrayal of the Party's ideals. "Change," in these people's minds, means change not only from Bush, but from the Clinton's as well.

It may be abit of a stretch to call Hillary "Bush Lite," but many of the Obama supporters view her as such. Bush took policy so far to the right, that even "center" today is further to the right than where most Obama supporters feel we need to be. Hillary's big mistake is to try and play to the "New Center."

Broadly, Franklin Roosevelt redefined the center of American politics, by moving it considerably to the left (Keynesian economics, banking controls, government work projects, increasing national debt, etc., etc.). Although Republicans are loath to admit it, I believe that without FDR's policies the country may have well moved farther to the left to some form of radical socialism. Roosevelt, through his policies, largely prepared the country for war and saved the rich from themselves.

Bush has moved the loci of the center of American politics back to the right...sort of the pre-Roosevelt "center." Clinton is now playing to this center. Obama supporters see a McCain-Clinton race as returning to the days of "choosing the lesser of two evils." Sort of which group do you want to vote for: rich Democrats or rich Republicans?

In Obama, they see the "potential" for radical change...IF such change is necessary to hold the country together ala 1933. In this, he has the charisma of both JFK and FDR...the ability to move the country beyond "business as usual." And, of course, it is this feeling that makes "recent experience in American politics" a drawback, not an attribute.

Very little, if any, of this has to do with his skin color.

Speaking of 1933...the Feds have, as a CNBC commentator put it this morning, thrown everything but the kitchen sink, at the subprime mortgage crisis without much effect. Government, as we know it, is running out of options. Did anyone think that a Bush appointee would ever call for additional government regulation? Well, Secretary of the Treasury Paulson did this morning. And to top it off, Paulson is the former head of Goldman Sachs.

It is becoming increasingly clear that the underlying prime mover behind the crisis isn't "liquidity," but confidence. Flooding the market with money doesn't mean a damn if people don't want to spend it. Meanwhile, in large measure, driven by this "flood," the dollar continues to fall and oil and gold continue to rise. Global markets are sensing that the barn door is being closed after the horses have left.

Paulson's speech, which was basically a repudiation of Bush economic policy, will I believe have a positive long term impact. He said, today, what has been obvious for some time and echoed much of what I wrote about in a recent "Guest Commentary" in the local paper. Econ 101: The prime purpose of free markets is to establish value. That value is established by transparency, or "equal information to all market participants."

Many of the new financial instruments do provide a benefit to the market as a whole, but their dangers may off-set their value, through the loss of transparency and being beyond the scope of oversight and regulation. Sort of like, the tail beginning to wag the dog.

Your typical Las Vegas casino contains approximately 30 games of chance. "New financial instruments" probably offer three or four times that number.

Let's say you're a typical Vegas toursit, who is in town primarily to see the shows and eat lots of cheap food, and put a few coins in the slot machines. You know that slot machines are pretty much luck...that the casino operators, by law, have a range of returns (odds) they must obey, and a further range, by specific machines, which they must meet, within the overall range.

The first type of advice you want is which machines give you better odds at this casino (a financial advisor). This person tells you pretty much what you could figure out for yourself - i.e. try the machines by the restaurant...or the machines by the reservations desk. So, you go to one of those machines and gamble a few coins. Ah, but there is another player sitting beside you and that player says: You aren't doing it right; you've got to pull the lever a certain way, or play a certain way...doubling down, etc. So, while you're trying these various methods of playing, another person comes up and tells the person sitting next to you, "I'll bet you he losses on the next play." The person takes the bet; then a third person walks up and tells the person sitting next to you, "I just saw your side bet; I'll let you hedge that bet, by betting that you win your bet, so if you lose, your side bet won't be a total loss."

And, so forth and so on. In a short time, there are numerous bets riding on your next quarter. One person has been watching your particular machine for a year, calculating each outcome; another has inside information on the odds set, by the casino, on that particular machine an hour ago. Another person who is absolutely certain they know the outcome of the next play, but doesn't have the money, borrows to place their side bet. Etc. In sum, you have a lot of money wrapped up on the outcome of your next play. Then, you remember that the show you came to see starts in five minutes and walk away. There is no next play. And, when you get out of the show two hours later, you find you no longer have a room, because the casino has gone into bankruptcy...all because you failed to play a quarter.

I believe that the market today is in a similar unraveling. Like Chaos theory and the butterfy effect, someone, somewhere thought: "I don't want to play anymore; let them foreclose," and walked away. The rest followed. What failed? No regulation of the side bets and no one who questioned: "What if he doesn't want to play?"

[I've gone "off topic" again. I'll continue "on topic" in next post.]

The New Economy - Part II (Continued -3)

2008-03-09T12:14:00.000-07:00

I keep getting sidetracked from my thoughts on our economic development from the late eighties to the present.

Basically, my theory is that various pressures took the economy from one similar to a bowling ball to a balloon and much recent "growth" has been little more than that which causes a balloon to expand and rise...a lot of hot air.

But, in this post, I want to borrow a lengthy quote from Marriner Eccles, Chairman of the Federal Reserve from 1934 to 1948, and the principal architect of the post-Depression safe guards built into the banking system to avoid another Depression.

In his memoirs, "Beckoning New Frontiers," Eccles gives his own explanation of the Great Depression:

"As mass production has to be accomplished by mass consumption, mass consumption, in turn, implies a distribution of wealth - not of existing wealth, but of wealth as it is currently produced - to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of the currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.

This is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spending by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product - in other words, had there been less savings by business and the higher income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929.

The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but in reality was under consumption when judged in terms of the real world instead of the money world. This, in turn, brought a fall in prices and employment.

Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the cycle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And, thus again the vicious circle of deflation until one third of the entire working population was unemployed, with our national income reduced by fifty percent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population.

This then, was my reading of what brought on the depression."

Eccles, of course, lived in a different era. The late twenties and early thirties of the 20th century were in a totally different time frame, with apparent differences in economic fundamentals. Eccles' pre-WWII economy was essentially a national economy, not a globalized economy. American imports comprised less than 5% of the GNP. And, of course, the Depression occurred prior to an overhaul of the U.S. banking system, in which Eccles played a major role; an overhaul that created numerous safeguards to avoid another Depression.

However, in my next post - delaying the return to "stockholder value" a bit longer - I hope to show how similar our situation is today with the situation Eccles described above...albeit with new terms and on a much larger playing field, namely "a globalized economy."

The New Economy - Part II (Continued - 2)

2008-03-07T15:08:00.000-08:00

This a series of blogs regarding our present economic status and how we got here. Before continuing that subject, a brief word on election year politics.

Congressional Democrats are going to come under intense pressure to maintain the House of Cards Economy by prematurely voting to make the Bush temporary tax cuts of 2002 and 2003 permenant. Republicans will argue strongly (and incorrectly) that fear of losing these cuts under a Democratic Administration and Democratic Congress are playing a part in the virtually freezing credit markets; thus, shifting the blame to the Democratic Congress. To withstand the onslaught, Democrats are going to have to begin marshalling arguments to the contrary; in some aspects this is going to bring them smack up against The New Economy, which they've largely supported since the Clinton presidency, and their supporters on Wall Street.

Although the next series of posts will attempt to show the fallacies of The New Economy, namely the rush to a post-industrial society and globalization, the principal counterargument is that expecting tax cuts to resolve our economic problem is like pouring money down a dry hole (Texas parlence for pouring good money after bad) and that, as temporarily painful as it may be, it is time to move the total economy back on firmer ground through improvements in classic fundamentals (the strength of the dollar, national debt, trade imbalances, improvement of infrastructure - including the military - and the restoration of reasonable regulation and oversight).

The theory herein is that while the goals of The New Economy are in themselves admirable, and eventual globalization of the economy virtually inevitable, the error lies in the rapid pace by which we are trying to reach these goals. In order to restore fundamental economic sanity, we are going to have to move, through government policy, back to a better "balance" between a manufacturing and service economy (currently at approximately 20% manufacturing and 80% service), make hard choices regarding current entitlement programs, move rapidly toward alternative energy forms, restore national infrastructure, revise the tax code and restore government regulation and oversight, largely ignored for the past eight years. The following posts will, hopefully, show that the movement from maufacturing to service, at too rapid a pace led to a "fee/credit based" economy that essentially became far, far overextended.

In the late eighties and early nineties, the separate elements of the "Perfect Storm" began arriving on the economic scene: the fall of communism, the large scale disenfranchishment of organized American Labor, the explosion of information technologies (largely made possible by the personal computer), the decline of OPEC and an undervaluation of oil, Alan Greenspan, the rise of the "business press"(based largely on phony social science), and "stockholder value."

I'll continue, beginning with the latter, in the next post.

The New Economy - Part II (Continued)

2008-03-05T09:24:00.000-08:00

Before I begin this post let me state a caveat. To emphasis a point, much of the following may sound conspiratorial. While I am sure that, as in most aspects of our human society, there are thousands of "conspiracies" going on constantly within our financial institutions, there is no single overarching conspiracy and that much of "my explanation" is simply a perspective, utilizing the benefit of hindsight. So, please keep in mind, that I believe much of this "just happened," perhaps driven in certain directions by free market forces. Indeed, the principal advantage of the free enterprise system is that it is an economic expression of free choice and democracy, neither of which are particularly "efficient." We are free to be "wrong," as defined by hindsight. Economic "bubbles," are the price we pay for free markets, just as government inefficiency may be the price we pay for democracy. Neither is "perfect."

However, I believe that over the past twenty years or so, we as an electorate have been led to believe that "free, unrestrained, markets" are intrinsically "good," while government is intrinsically "bad." This attitude reached a peak with the Bush Administration. Rather than leading the government, Bush has largely been a competitor to the government. In numerous non-partisan, reasonably objective studies, which show a given task of government could be accomplished at less cost by the civil service than private enterprise, privatization moved ahead based on principle, rather than efficiency.

As a result of this ideological approach to management, much of our national strength (and capital) has been sapped up in "free enterprise economic bubbles." I would include Iraq in this category, wherein the invasion and occupation seems to have stimulated more through venture capitalists than a clearly thought out instrument of American foreign policy.

I believe that it is time to give the other side equal time. To try and make Americans understand that national greatness cannot be solely measured by an over-valued GDP; that much of our greatness comes in the strength of our institutions, our infrastructure, and our democratic processes, as inefficient as they at times may be.

Economic strength IS largely concerned with efficiency and the productivity such efficiency produces. However, "economics" is a subset of society and not vice versa. The point of my own "economic interpretation," is to call for a pull back in the national march to a globalized economy, without abandoning that ultimate goal; to call for a greater balance between a manufacturing based economy and a service economy, rather than reliance on a global division of labor; to call for more national investment in deteriorating infrastructure; to call for improvement in health care and education; to call for a reform of our political system to return it to "original intent" and rid it of the graft and corruption spawned largely by the run away costs of our electoral system; to call for a sensible solution to saving social security and medicare by improving its efficiency, cutting benefits and moving toward some method of graduated means testing; to call for an overhaul of our tax code, without abandoning the principle of "progressive taxation," which is nothing more than an admission that no matter how much wealth you've acquired, that accumulation was, at least in part, due to the society in which you live; to call for an overhaul of our armed forces to adequately meet the anticipated threats to our national security in the 21st century.

And so forth and so on...the point is that I believe there is a viable and practical "middle course" between a socialized state from the left or an oligarchy from the right, but "common sense" has been obscured through political polarization. To begin to find this middle way, it might behoove us to postpone our rush to globalization for a bit and do some entrenchment at home; to shore up the very aspects of our society that have made us great and which, I believe, we are on the verge of losing.

I'll return in the next post to how our financial institutions "reformed" corporate power and put us on the road to globalization with "stockholder value."

The New Economy - Part II

2008-03-04T08:15:00.000-08:00

[Note: A post on this same subject was posted on a second blog inadvertently. The second blog was set up in error at approximately the same time as this one. I've deleted the second blog just to clear up the clutter.]

There is an old "New Yorker Magazine" cartoon of two guys in a dungeon. They are both suspended in mid-air, side by side in their cell, by chains from each of their arms to the roof and from each of their legs to the floor. One guy turns to the other and says: "Now here's my plan."

Another favorite, also from the New Yorker, pictures two guys in suits walking down a busy and crowded street in New York. One guy's pants have fallen down to his knees. The other guy leans over and whispers in his ear: "Just bluff it through."

Both of these cartoons remind me today of Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Paulson.

Welcome to The New Economy - Part II. Part I was the dotcom bubble; Part II is the present housing crisis, which I'll get to in a couple of posts, after re-reviewing Part I.

The term New Economy refers to the shift, beginning in the late eighties, in the U.S. economy from one based on manufacturing to one based on service. The motivation for this shift was, supposedly, due to technological advancements ranging from massive reductions in shipping costs to personal computing. Our future, we were told, lay in a high-tech, post industrial society, which would create less pollution and make everyone rich. All the old nasty stuff would go to the developing Third World, who would feed manufactured products to us, the inhabitants of the "Shinning City on the Hill."

If you thought about it much, it was all sort of Orwellian "1984" stuff (or perhaps more accurately Huxley's "Brave New World") and it virtually mandated one global economy, with a global division of labor. The idea, I suppose, was that the United States would become the World's "bank" and global regulator, providing a safe harbor for the world's wealth, overseeing its investment and distribution (in part through international institutions such as the World Bank, the International Monetary Fund and the World Trade Organization). Key's to maintaining this position were a strong dollar, a strong military, strong financial institutions and strong graduate education at our universities, the latter of which allowed us to maintain our high-tech lead and educate the World's elite to the "American Way."

The driving force behind all of this was relatively simple: Technology had opened the door to an inevitable "globalization" of the world's economy and it was far better for us to be leading this process rather than following it. Additionally, the end of communism offered an enormous opportunity in expanding western free markets globally. The trick was to bring literally billions of people (the former Soviet Union, China, India, SE Asia, etc.) into the free market system before their failed communist systems drove them into anarchy and chaos, thus endangering all of us via the rise of new dictatorships and war.

Overall, this was not a bad plan; there were, however, a few problems that were overlooked.
The first was the underestimation of how easily the new technology (our advantage) transferred across borders. It's one thing to build a factory; it's another to transfer software over a global internet. The second was an underestimation of one of the few benefits of communism, universal education and, as a result of that education, how quickly the ex-communist countries would be capable of assuming our former role. Third, we transferred our manufacturing base (the Old Economy) before securing our high-tech position (the New Economy) with effective global intellectual property rights agreements - lower labor costs trumped common sense. Fourth, we underestimated the importance of our dependency on middle eastern oil and its linkage to fragile dictatorships, facing a fantical religious awakening. Fifth, we overestimated the ease of transition of American Labor from the Old to the New Economy. And, sixth, we allowed our "real power," military force, to deteriorate within the context of the "peace dividend" provided by the fall of the Soviet Union and China's move toward a fledgling market economy.

In sum, the "plan" required far, far more control over the global economy than we actually had. This rise in a "Masters of the Universe," American mentality came, I think, from several sources, but most significantly from the belief that we "beat the Russians." In turn, this interpretation strengthened the Goldwater/Reagan/Bush brand of economic conservatism, which in turn distorted our perception of the global reality (partially genuinely believed, partially for political gain).

By the time Ronald Reagan won the Presidency, the Cold War had practically ended. Reagan largely, in his mind, "fought" the Soviet Union of the fifties and sixties, not its reality in the eighties. It was sort of like applying the coup d grace after the firing squad had finished their work. With or without RR, it is difficult to see how the Soviet Union could have carried on much longer without the same type of economic changes as those being embraced by China. Fundamentally, the people of the Soviet Union brought down the Soviet Union themselves. I suspect, with a little more distance from the actual events, historians will find that economic pressures, not from the West, but from the successes of Communist China and an unwanted war in Afghanistan, contributed more than RR to the dissolution of the "Evil Empire."

But, the American public perception was it was a Reagan victory and therefore the rest of the stuff must really work as well...such as supply side economics, etc.

I was in Europe during this period working with the European automobile industry. A few days after the wall in Berlin came down, I was having lunch in the Executive dining room of Mercedes-Benz. I was the only American at the table; the others were customers and friends from Mercedes, with whom I'd worked closely for two-three years. We were discussing the impact of the end of the Cold War and Communism and, of course, the problems in integrating East Germany into West Germany. I noted that this would be an enormous task requiring vast resources from the entire western world (referring to the larger problem, not just East Germany). One of my friends at the table spoke up: "East Germany is a German problem, not an American one." And, everyone else at the table agreed. I went back to my office thinking, "the end of the Cold War and Communism probably also means the end of U.S. hegemony in the West." I don't think this thought computed well with Goldwater/Reagan/Bush Republican economic planning. Rather, it was "to the victor go the spoils."

William Jefferson Clinton inheirted the "plan" and the problems. The first two years of his Administration were pretty much lost on universal health care. For the remaining six years of his Presidency he was faced with a Republican Congress, so it really didn't matter too much whether he spent his time conjuring up programs he knew he couldn't get past Congress or defending himself against ill-considered personal behavior.

Following the failure of the health care plan, he basically pursued economic policies not too different from the Republicans, with the occasional rheotical crump thrown to the Democratic base. In fact, off-hand, I can recall only three "accomplishments." He balanced the budget, supported NAFTA and took us militarily, via NATO, into the Balkans. The other side of the coin to each of these was balancing the budget through a reduction in government spending, largely at the expense of the military, and raising taxes; the formation of NAFTA as a counter to the European Union; and the commitment of U.S. forces abroad, without Congressional approval. However, as long as casualties in the Balkans were kept low through a predominately fought air war and everyone was getting rich, the Republican Congress was content with its efforts to impeach him over lying to a grand jury regarding his personal sexual behavior. Republicans were actually so happy with an impotent (perhaps the wrong adjective in this case) Democratic Presidency, they were kind enough to run Bob Dole against him in the second term election.

During the Clinton Administration, however, the modus operanti for the "phony economy" was established. With the help of Alan Greenspan and Robert Rubin (and the zeitgeist of The New Economy, which all three pushed heavily) Clinton was effectively able to practice a Democratic version of supply side economics without the down side; an economic approach his predecessor, George Bush Senior, had labelled as "voodo economics."

Embracing the "Plan," through support for NAFTA and free trade, and masking the impact of American jobs being shipped overseas through new ways of accounting for unemployment and cheap money, the Administration provided the "fuel" for the dotcom bubble. It was during the Clinton years that I first noticed it seemed that as the national economy became stronger and stronger, the middle class became weaker and weaker. Ultimately, under Bush II, Clinton would look like a piker, but turning the American economy into a giant Ponzi scheme, sustainable only through devalued currency and overvalued assets, to mask the impact of globalization, begin with the Clinton years.

As the manufacturing based economy transitioned to "The New Economy" - essentially a service economy, $20/hr jobs were lost overseas to be replaced, basically with $10/hr jobs. The impact of this on the bulk of the American workers was lessened through the flow of cheap goods from abroad and a generous monetary policy at the Fed.

National growth in gross domestic product is generally a leading indicator of a nation's economic health. If the economy grows at 4% a year, in 18 years (or about a generation), the economy will approximately double in size and if you look at the statistics you'll find this overall trend in American economic history, with slower or even negative growth occasionally, and faster growth occasionally. All economics is comparative, so the final judgement on our economy is how fast or slow we're growing compared to other nations. Given the "plan" of bringing heretofore absent nations into the global economy (China, India, the Soviet Union, etc.), successfully developing nations grow at roughly 6-9%, while most of the developed world, grows slower, in the 3-5% range.

This, however, says nothing about the nature of the growth or how the added wealth is distributed. Through the Clinton and Bush years growth floated around the 4% figure. If that wealth had been distributed equally throughout the population, household incomes would have approximately doubled. Instead they remained essentially flat for the middle class, slightly improved for the poor and skyrocked for the top 10%. The stratification or dispersion of wealth in the United States is now approximately what it was during the Age of the Robber Barons (the late 1800's and early 20th century). This growing stratification was certainly intentionally promoted via supply side economics and the urgency in expanding the global economy; it also conveniently fit the replacement of those $20/hr jobs with $10/hr jobs. National poverty improved abit under Clinton and got a bit worse under Bush; middle class income rose with the dotcom bubble, flattened and lost ground under Bush, recovering slightly in 2006-07. However, middle class households today are still approximately $1500/yr behind where they were in 2001.

This isn't that unusual in times of significant economic shifts. The Robber Barons may have taken a bit more than their fair share, but they also moved the country from essentially a regionally based economy to a national economy, from which we've all benefited. Capitalism does work. Today's "Masters of the Universe" (the new Robber Barons) are taking us from a national economy to an international economy via globalization. While I have no qualms about that in itself, my concern is that we are moving at too fast a pace in this transition and that both the pace and method will not result in an ultimately stronger nation, but descent to Third World status.

Much of this is due to the "phony economy," I noted above. Unlike the period in the late eighteen hundreds and early twentieth century, today's growth consists of very little substance.
Instead of expanding national infrastructure, our existing infrastructure is declining. Our assets are being bought by foreign importers and the only new factories that are being constructed are by these same importers seeking to find some way of evening out trade imbalances and getting rid of their value declining dollars as fast as possible.

Instead of "genuine growth," we have through the dotcom and housing bubbles grown largely through low interest rates, cheap money, overvalued product and loose credit; credit for consumers, credit for the nation. If one takes away the effect of the bubbles, I suspect growth over this period would be either flat or negative. U.S. household savings fell throughout this period and are now negative - i.e. America is not only dependent on foreign oil, but on credit. Once this is obvious, global confidence may fail and the house of cards fall. In this respect, I suggest we are rapidly arriving at the "tipping point."

A fundamental tenent of free markets is that they behave "rationally." This is a cornerstone to generally Republican arguments for small government, deregulation and free markets, as opposed to higher taxes and "government planned economies." Much of our national economic policy from Ronald Reagan on, including the Clinton years, has rested on the fundamental belief that free markets behave rationally. As a result of this "rationality," buyers in the market will search for the best products at the lowest price, thus forcing efficiencies upon competing sellers. Lacking in these motivations, government will perform inefficiently and so the less money the government receives, the more efficient the economy as a whole becomes. In a nutshell, that's pretty much Republican economics (or was until Bush II, who managed to bring the worst of both worlds. I blame much of it on his Harvard Business School training).

But do markets really behave rationally and are they really "free?" In a recent appearance on CNBC (the business channel), Warren Buffet, who was rejected by Havard Business School and who would be the last person on earth to call himself an "economist," when asked for a prediction on where the stock market would be in a year, replied: "Oh, I don't know. I don't pick stocks on market trends; it's hard to know where a market will go, they're so irrational."

Instead, Buffet's method, as he described it, is a bit of an obsolete Mid-West-Main Street approach. Buffet buys companies, not stocks. [Buffet's own company, Berkshire Hathaway's stock has done reasonably well, with Class A stock now trading at approximately $140,000/share.] In other words, Buffet looks for soundly managed companies with a competively priced, quality product and tries to sort out the clutter that has come to dominate our "free market." He dosen't worry about stock appreciation or the influence of pension fund managers or, in a curious way, "stock holder value," yet achieves just that by largely ignoring it in the day-to-day conduct of his business. And, his stock holders, who at $140,000/share must be among the world's most sophisticated investors, leave him pretty much alone to do "his thing."

Another example of the point I will eventually make here was in the recent film, "American Gangster," based on the true story of a black businessman, whose "business" happened to be drugs in Harlem. As he watched the "trade," he decided that the best way to grow his business was to eliminate the "middlemen" (figuratively and literally). In this way, he also eliminated the commissions and fees and controlled his own product. His success was that he sold a better quality product, with less costs and at a lower price. [He was eventually caught by the newly formed DEA, who themselves were, in a different way, shaking up the old trade, with all of its police payoffs, MAFIA connections, etc.].

The message, in both Buffet and "American Gangster," is that free markets are often corrupted over time and fail to serve their original reason for being...bringing a quality product to a buyer at a reasonable price.

In the wake of the end of communism and the rising economies of a post WWII Western Europe, and the Third World, American financial institutions sought to expand their markets globally and to somehow remain "on-top," a position they had been in since WWII. In my next post, I will show how they accomplished this during the eighties, by taking control of Corporate America through "bribery" and the phrase: "stockholder value."

Conversations with Vladmir...Putkin

2008-02-21T12:00:00.000-08:00

Before moving on to Jodie Foster, a few comments about the politics of the day.

I am one of those people who tends to blame EVERYTHING on George Bush...the war in Iraq, the health care mess, the economy, deficit spendiing, the weather, etc.

So, in that vein, here's the following:

"Hello, Vladmir?"

"Yes, George. What may I do for you today?"

"Well, Vladmir, we've got another problem with the news cycle."

"Again, George?"

"Yeah, well, Karl's been running loose again."

"Ah...I see. What is the problem?"

"Well, he put out this phony story about McCain and its on the verge of being traced back to him. We need to get it off the front pages ASAP."

"Hmmm? Why would Karl put out a phony story on McCain? I thought he was the presumptive nominee of your Party?"

"Yeah...it's kinda complicated...maybe I'd better put Karl on the line. You know, I really don't like to get into details. I am the Chief Decider. Delegate is what I say. Delegate and then look into their eyes, right Valdmir?"

"You are a wise and courageous man George. I have learned much from you. Now, put Karl on."

"Hi, Vladmir. We haven't talked in a while..."

"Not since Dan Rather, Karl. What is it this time?"

"Well, Vladmir, we put out this story on McCain, via the New York Times, that implied he's had an affair with a lobbyist."

"Ah...a man?"

"No...no Vladmir...a woman lobbyist, who represented clients he did favors for."

"And this is a damaging story? I don't see the scandal."

"Actually, Vladmir, that's sort of the point...there is no point...no real scandal."

"I'm not sure I'm following."

"Yes...well...it was basically a pointless story, but the story would dominate the news cycle and could never actually hurt McCain, because it wasn't true."

"Ah. And why would you want to dominate the news cycle with a false story about your Party's nominee?"

"To help Hillary."

"Ah...the hated Billary. But why would you want to help your rival?"

"Because we'd rather run against her than Obama and she's in very deep doo-doo at the moment. Even Bill has said that unless she can win in the Texas and Ohio primaries, she's out."

"Yes...and how does this relate to the McCain story?"

"That's the clever part...he'll be on the front page instead of Obama. If Obama keeps dominating the news, he's liable to win the Democratic nomination. It really shuts down the Big Mo for him."

"Ah yes...the all important Big Mo. I see...you are attacking McCain with a story that will be proven false, to prevent Obama from winning the Democratic nomination, giving the nomination to your arch foe Hillary Clinton, whom you expect McCain to beat."

"Well, Vladmir, it's a little more complicated than that, because no one expects McCain to actually win, even if the Democrats ran Donald Duck...but that's sort of the general idea at the moment. You know what we say...control the process; control the result."

"Hmmm? Your democracy works in strange ways, but we are trying to learn. So, what can I do for you?

"Well...we were thinking about a small fire at the U.S. embassy in Belgrade. Nothing serious. No one gets hurt...just set a few fires, break some furniture, that sort of thing."

"It can be done...with no more than a few cases of good Russian Vodka in the right hands, but how does it help?"

"It will take the McCain story off the front pages."

"But I thought you wanted it on the front pages?"

"We did, but not at the expense of an investigation at the New York Times that exposes our connection."

"Ah...but Judith Miller is gone...you have a second mole at the Times?"

"The Vice President hasn't authorized me to reveal that, Valdmir. Let's just say the McCain story threatens to outlive its usefulness, but we don't want to go back to Obama."

"Karl...you make us blush with envy at your talent for misdirection. Our forgery of the Rather letters about George worked well, no?"

"Perfect Vladmir. Once the letters were exposed as forgeries, no one ever questioned the content. We forged the truth. Perfect."

"Well, we try and be helpful. You may count on Belgrade. Goodbye Karl."

"Would you like to say goodbye to George?"

"No, that won't be necessary. We've looked into each others eyes and have seen our souls."

"The Brave One" with Jodie Foster

2008-02-13T18:52:00.000-08:00

"The Brave One" is the liberal, feminist remake of Bronson's "Death Wish" series. Proving, I suppose, that women are as capable as men of doing evil things, but they struggle with them more.

Foster plays a Manhattanite who, while walking the dog in Central Park with her fiance, is beaten, the dog stolen and her fiance murdered. After several weeks of trying to cope with this, she buys a gun and becomes a vigilantte. Similar to Bronson in "Death Wish I," her first experience is accidential...i.e. she gets into a bad situation and defends herself, killing her attacker. Unlike Bronson, however, the "accidents" keep reoccuring and she just keeps shooting. [In Bronson's case, it only takes a single incident to put him in the "hunt."] At the end, and after four or five "accidents," she finds her fiance's killers and takes them all out, although not without remorse and abit of luck in being trailed by a street-wise and understanding cop. Does she get her dog back? I won't say and spoil the film for you.

Intellectual depth is presumably shown through Foster's struggle with herself on whether or not to keep killing. She understands, at some level, that what she is doing is "wrong" but just can't keep from doing what, on another level, she believes is right.

The question posed is how do good people survive in the face of evil without becoming evil themselves?

I am not sure there are any breakthrough moral issues here. In fact, the film could be easily interpreted as saying: "If you believe, in your heart, that revenge is OK; it's OK as long as you worry and fret about it." Eye for an eye; tooth for a tooth trumps turning the other cheek.

But, it's probably a reasonable portrayal of approximately where Christians stand today.

"The Invasion" with Nicole Kidman and the Meaning of Life As We Know It

2008-02-13T14:25:00.000-08:00

Briefly, "The Invasion" is about some alien organism that infects earth via the breakup of the Space Shuttle Columbia. Presumably, this method of infection is due to the destruction of the vehicle over Texas, preventing the Shuttle from going through a normal "detox" procedure following a successful landing. This also gives the film a "sense of believability" and allows the use of a lot of inexpensive film footage obtained from networks and NASA.

The "infection" causes humans to behave like robots, with the loss of human emotions. Although there is apparently some "intelligence" behind this and some ill-defined goal, the primary one seems to be "inclusiveness" - i.e. to infect everyone on earth and eliminate human emotion. The government tries to prevent the infection from spreading, while they search for an antidode at some heavily guarded facility. But, since the infection seems to manifest itself during sleep, their efforts initially fail. Most of the film regards Kidman trying to stay awake and avoid infection, while trying to get to "home base" and safety. During the course of all of this, there are a couple of "think about it" scenes, wherein the infected explain to Kidman how great it all is and how much better off we'd all be without emotions. In one scene, an aspen grove is used as an example of interdependency, although, as you may imagine, the direct link between aspen groves and human emotions is somewhat glossed over.

Along the way, Kidman's boy friend is infected and turns against her and the climax of the film comes when Kidman learns that the alternative to infection must be death (i.e. accept the interdependency of the aspen grove and join the team or die, because "group think" cannot withstand individuality). Of course, Kidman escapes, reaches the government facility, discovers the antidode, and "humans" win.

My first thought about all of this was this must be a theme born in the mind of fellow Australian actor Mel Gibson. Who else would revive the old cold war "Body Snatchers" theme of individualism vs. collectivism? This is the "me vs. we" debate and as such becomes vaguely relevant to evolution, Christianity, politics, etc.

However, before I launch into this relevancy, a bit on my personal background thinking.

First of all, in an increasingly populated and complex world, I confess that I have a shade of bias in favor of Zombies. I have come to conclude that the main goal of life - in any form - is to a) stay alive and b) in failing to do that for eternity, perpetuate the species. This is the one, single goal all living things seem to, for the most part unconsciously, share. If our "human emotions" have not evolved to a point wherein we are biologically capable of supressing individual emotions that threaten to destroy the species, then it just may be time to rethink exactly which emotions are necessary (such as love) and which are not (such as hate).

For the Huckabees amongst us (and Libertarians), the key word in the above is "evolved." I must also confess, that I am a "believer" in evolution. Is evolution certain? Probably not, but it appears to me the vast amount of scientific evidence falls on its side. The three "certainties" in my thinking are probability, logic and change. In other words, "change" is a given and through probability, we are able to logically and reasonably predict the effects of change.

In turn, these "predictions" allow us, to one degree or another, to "adapt" and adaptation is the apparent key to species survival.

Neither individuals or species may survive truly "alone." Even the rare species capable of self-reproduction rely on their environment for their survival. Individually, most of us are biologically "wired" for reproduction, but species survival is an awareness we must come to intellectually. So, as we climbed down out of the trees and "evolved" to our present circumstances, there has been this constant tension between what is good for "me" versus what is good for "we."

I suspect that which predominates at any given time is highly situational, but that within the broad sweep of human history there have been long periods in which a given orientation did, in fact, dominate. I would distinguish these periods of "me" and "we" historical orientations with structures and processes. "Me's" create structures which lead to "we" processes. And, while this has been a far from perfect history, it has generally worked well in that "we" as a species are still here. To date, human emotions, as destructive as they may be on occasion, have not resulted in the termination of the species itself...but no bets on the future.

I think one reason for this may have been religion, which may have been a way of intellectualizing the "we" side of the argument...i.e. the existence of a superior being is secondary to the effect such a possibility has on human psychology. With all of its follies, "religion" has in a curious way acted as a "brake" on the "me's" in human history, by introducing a "power" beyond ourselves as individuals and, in a curious way, is species survival insurance. Life after death, to me, is a present awareness that regardless of whatever may happen to me, as an individual, the species will continue. It is the "promise" of life everlasting and a means of overcoming the greatest of individual fears, non-existence.

This intellectualizing religion - whatever religion it may be - is/was a complex process in itself. For the vast majority of individuals, throughout most of human history, life has been "short and brutish." Some type of "promise" in the form of religion may have been necessary to the evolution of human behavior in our relatively lengthy care for our young, which in turn, contributed to our overall intellectual development [Note: This doesn't exclude a basic biological predisposition toward some basic after birth care, but as we have "evolved" this period of care seems to have extended to both pre-birth and after birth care and in a curious way is what anti-abortionists on the right and anti-individualist responsibility adherents on the left have in common].

While it seems to me that all religions offer "something" to their followers, as one who espouses basic Christian ethics, if not the hierarchy and events of Christianity, I "believe" the message of Christianity is to suggest that we arrived at a point of "re-evaluation" of the me vs. we controversy approximately 2000 years ago. I believe Jesus came to understand, in the wake of human agricultural and technological advances, that the "threat" to human species survival lies not in nature external to us but within ourselves, or in other words, that we are, in fact, part of nature, not separate from it.

This "thought," which may indeed have been far ahead of its time, was expressed in what might be termed the 11th and 12th commandments: love thy neighbor and turn the other cheek...or, perhaps in other words, you may be faithful to yourself only through faith in others, for we are all essentially one...a species. "Under God," was, given human history up to that time, a perhaps necessary, but non-essential concept.

I consider this thinking as a swing in human history from "me" to "we." And, I consider it in the vein of "all else being equal" and as a "goal" for which to strive. Practically, I do not think we've arrived at a point wherein this premise can be integrated into our basic fiber or DNA. Evolution is a long and painful process. In a sense, communism was a theoritical attempt to move from "me" to "we" and it failed, perhaps in its magnitude of change and/or the peoples on whom it was imposed. Western, liberal democracy, with all of its own follies and corruption, seems a surer and safer path.

And, too, none of this would be terribily "urgent" were it not for my feeling that we are rapidily arriving at a point through our specific technology and general ignorance of placing the species itself in danger.

Finally, on this topic, is the question of how can human individuality survive in the face of the need for increasing collectivism for species survival, without some quantum leap in the evolution of human behavior that, in essence, prevents evil thoughts and doers? A lot of "good communists" died in the camps of Siberia. A lot of "good Muslims" have died in the streets of Baghdad.

One thing that comes to mind, within the context of Christianity, are the events preceeding Jesus' death by crucifixtion. It occurs to me that Jesus suspected his betrayal at the Last Supper, and hence his reference to it, but was of two minds. Such a betrayal would be the total refutation of everything he had been trying to teach. His later "doubt" on the cross was a doubt regarding his own belief, i.e. the belief that human beings had within themselves the power to change for the greater good; if they did not, as evidenced by his betrayal, then he would have died for nothing. The resurrection was sort of like ornaments on the tree...necessary for only those who later misinterpeted what he was really trying to say in terms of the changes necessary in human behavior to ensure species survival. What came later...the resurrection, the trinty were stories in the tradition of most religion...i.e. to be believed he had to be shown as something more than human; thus, entirely missing his point.

Jesus was in the first instance, a Jew who believed in Judism. He may or may not have been aware that he was taking the religion onto a broader plane, in that he had discovered the common theme of the Ten Commandments and, indeed, of all "law," be it religious or civil...betrayal...i.e. in commiting a crime, you wrong not only another individual, but society as well. I believe that the lesson of the cross is that Jesus saw us as all part of the same human family and as such deserving of a certain respect that prohibits betrayal. Judas' betrayal undermined, in his mind, the basis of his ministry.

I suspect the concept of betrayal may be a central theme of most, if not all, of the world's major religions and is not unique to Christianity. Perhaps, somehow therein lies the key to the survival of our species, in foregoing specified rules (or,as my father once said: "If there are no exceptions, there is no need for a rule") by intergrating respect and faithfulness into human behavior itself. What lingers is the fear that we no longer have the time to wait for evolution.

So, while Nicole Kidman battled infected Zombies outside of herself, Jodie Foster fights the demons within, in the next topic..."The Brave One."

Miscellaneous Notes on a Failing Society

2008-02-13T13:33:00.001-08:00

This is the first post in three months, due to 1) preparation for the holiday season; 2) the holiday season; 3) recovery from the holiday season.

First comment concerns the shabby state of American journalism. One small example (and they occur daily) is today's story on a cable network (MSNBC) regaarding John McCain. McCain was asked if he thought Huckabee should withdraw from the Presidential race due to his losses in the Virginia, Maryland and D.C. primaries. McCain replied that of course he would like to see Huckabee withdraw, but had long defended his right to stay in the race as long as he wants. Headline of story then became: "McCain asks Huckabee to Withdraw." Within four hours or so (in time for the evening pundants), the story will be "McCain Pressures Huckabee to Withdraw."

Thus, McCain's point of "it's really up to him," gets twisted and distorted to pressuring Huckabee to withdraw. Sooo...when the media talks of how the country has polarized itself, it should look to itself in the first instance. [And, of course, when asked about McCain's comment, Huckabee will probably twist the story to his own advantage, rather than challenging the media with: "I don't think that's really the point McCain was making."]

I doubt this is intentional. In most cases, it is more likely that most shabby journalism is simply the pursuit of controversy for the sake of ratings.

MSNBC, by the way, has apparently become the left's counterpart to the right's Fox News.

Meanwhile, sports fans, we all know deep down inside, its really all about baseball. Despite the minor problems facing the country regarding Social Security, health care, immigration, two wars, education, the economy, etc., etc., Henry Waxman today took up roughly 5-6 hours of national media time pondering the question of whether or not Roger Clemens really told the truth concerning his use of steriods.

This is a story that would have died out long ago had not some enterprising "reporter" complimented the main story with "news" that apparently Mrs. Clemens also received steroid injections, thus enabling the networks to re-run an ad photo of Mr. and Mrs. Clemens in Speedo and bikini. What's better than sex and baseball?

So much for sports and politics. Next up is the rather mundane subject of what is the meaning of life...as seen through the eyes of Nicole Kidman's recent film "Invasion."

I am a sucker for Kidman's films (as well as Jody Foster's stuff). Their latest offerings, however, are along the lines of "occasionally we have to do something to pay the rent." Foster's latest is "The Brave One," sort a feminist version of the old Charlie Bronson "Death Wish" series. Kidman's is sort of a remake of the cult classic, "The Invasion of the Body Snatchers." Because, I suppose, both films feature genuinely good actresses, they must pretend to have some "deeper meaning." Like, people who normally go to Kidman and Foster films do not expect to see Grade B (or lower) movies.

But, being niave and not wanting to believe that either of these great actresses would "sell their art for money," I played along and really, really tried to understand the deeper meanings with which each professed to be dealing. Next post will deal with Kidman and the one after that with Foster.

Hubbert's Peak, the New Economy and Coming Oil Wars

2007-11-10T08:50:00.000-08:00

M. King Hubbert was a geologist specializing in global oil resources. He worked for Shell Oil in Houston and in the fifties began formulating a mathematical formula for the prediction of oil resources and the impact of production upon these resources. Initially, his work was met with skepticism. Hubbert's "curve" (a bell shaped curve tracking the world's oil production) was sort of a "black box." Few in the industry understood the math and formula behind it, adding to the initial skepticism. In the sixties, Hubbert elaborated and refined the curve, predicting that "peak" oil production would occur around the year 2000 and thereafter begin to decline.

While I don't pretend to understand the mathematical assumptions behind the curve, I may imagine that it is based essentially on the best historical production figures Hubbert could obtain, combined with a healthy margin of error regarding potential new discoveries, coupled to an understanding of supply and demand. Essentially, Hubbert forecast that "peak" oil production would occur at a point in time at which the world's oil resources would be generally known and its complete depletion could be reasonably forecast. At that point, in defiance of the normal law of supply and demand, wherein supply always rises to meet demand, production would instead begin to drop in anticipation of the end of the era of oil and the resultant rise in prices.

Hubbert's 2000 production peak wasn't exactly on target, but close enough to emphasis the obvious: oil is a depletable resource and the industrial age has depleted it much faster than it can be replaced. One, of his followers, Kenneth S. Deffeyes, a retired professor of geology from Princeton, in a book entitled "Beyond Oil," published in 2005 and updated in 2006, estimates that we hit peak oil production in December of 2005. Today, most geologists believe that we have either already hit peak production or will shortly (within the next ten years).

What this basically means is that the world, at some point within this century, will lose the cheap energy source that fueled the industrial revolution and most of the material conveniences we enjoy today. Worse, this is occuring at a time when political and technological changes are "promising" to bring those same material conveniences to approximately half of the world's population that had been denied to them under communism.

In theory, eventually, the price of oil will rise until a less expensive alternative energy source is found, so that, in the long run, the transition to a new renewable and inexpensive energy source will be but a blip in human progress. But, the key concern today is, as is the case in globalization, the degree of disruption occuring in the transition.

To minimize this disruption a key element of U.S. foreign policy must be to ensure the more or less uninterupted flow of oil, at more or less free market prices, from the Persian Gulf. Basically, four countries: Saudi Arabia, Iran, Iraq and the UAE hold two-thirds of the world's oil reserves. The continued participation of these countries within the global free market system, even though they may not be democratic, is essential to global economic stability for at least the next fifty years.

Although no longer the strong industrial power we once were, the U.S. remains the world's largest single user of oil. With it, we heat our homes and offices, fuel our transportation system, etc. Indeed, much of our entire "new economy" has been built around the premise of cheap energy: suburbs, shopping centers, highway systems, drive-through everythings, etc. As a result, hegemony, if not outright occupation, in the Middle East is of prime importance to U.S. economic national security, which in turn, is directly linked to our status as the world's remaining superpower. Indirectly, it is also linked to our rather tenuous relationship with the world's new and growing industrial base, the southeast asian "tigers," India and China.

The United States retains its superpower status primarily due to three factors: consumption - i.e. what we import (increasingly based on credit), a safe harbor for investment and stable currency - i.e. Wall Street and the dollar, and military force - i.e. the ability to "project" control abroad. [Agriculture exports might constitute a fourth]. All three of these factors are reaching their limits and the limits are becoming increasingly visable to the rest of the world. And, as this visibility becomes clearer, our superpower status becomes increasingly in doubt.

Throughout the Clinton years we managed to sustain the fiction by means of selling much of the world with the idea of a "new economy" and the coming of a post-industrial age, in which the United States continued to dominate through cutting edge information technology. Unfortunantely, the nature of the technology we touted undercut the rationale of a U.S. advantage. To maintain an industrial advantage, requires hardware - i.e. the physical infrastructure of factories, equipment and cheap labor. To maintain a "new economy" advantage requires a "license" - i.e. a piece of paper that promises to respect intellectual property rights.

In a sense, we leapt ahead of much of the world's political development and "bet" our economic future on the global acceptance of democratic principals, the rule of law, and universal property rights. We believed our own hype, in a post Cold War world.

Two events caused the world to "reevaluate" our worth. One was the dot.com bubble burst. Any new technological innovation that comes hard and fast tends to be over-valued in a free market economy. It has happened periodically throughout the history of capitalism and, I should think, pretty much confirms human nature and Adam Smith's "invisible hand" of free and rationale choice in the market. But this time, it happened on a global basis and the result was a reappraisal of the U.S. advantage in a "new global economy."

The second shoe dropped on 9/11. Our attackers flew airplanes (taken over with box cutters) not into the National Cathederal or Riverside Church, or the George Washington Monument but into the World Trade Towers and the Pentagon. In other words, they selected their targets as those representative of the foundations of our superpower status, instead of targets representative of our religious beliefs or our democratic values.

Our response has been consistent with our own self-image, in turn distorted by a failure to appreciate the genuine causes contributing to the end of the Cold War and the failure to come to grips with the substantial changes in the global situation wrought by that end. And, if left unevaluated and unchallenged, these false assumptions leave us on a path toward a future of on-going "oil wars" and the continuing decline of American society. In sum, unless we are now ready to institute serious political and economic reforms and face the serious errors made in our post Cold War history, things just "ain't goin to get better."

[More to come]

Iraq (Continued)

2007-11-04T11:28:00.001-08:00

With approximately 4,000 dead American soldiers and approximately one trillion dollars spent, we now may be facing a revitalized, democratic Iraq aligned to Iran.

The administration's reaction to 9/11 was initially "an emotion seeking a policy." They had been caught off guard by a relatively simplistic plot that had worked with unbelievable effectiveness and one that undermined many of the assumptions of globalization. The natural response to the attack, locking down the country, cancelling the tax cuts, mobilizing the country, ran contrary to many of these assumptions. The answer to the response problem was to, rather than retreat behind our own borders, strike outwardly and the neo-conservatives were right there, in DoD and CHeney's office, to assist them in this thinking.

The foreign policy element of this thinking had a long history within the Republican Party going back to John Foster Dulles and the concept of "roll-back" following WWII (many would trace it back further to Teddy Roosevelt or even the concept of manifest destiny in the 1840s, interrupted by the Civil War and continued in the late 1880s, calling for an expansion of American power).
Basically, roll-back following WWII called for a more aggressive American posture versus communism and the Soviet Union. Roll-back advocates called for things like the invasion of Cuba, direct military support for the Hungarian Revolution of 1956, support of revolutions from the right and, where necessary the pragmatic support of anti-communist dictatorships. One of their favorite witchhunts during this period was: Who Lost China? Although roll-back never achieved its goals and the official U.S. foreign policy of the Cold War became, in face of Soviet nuclear weapons, "containment," the wishful thinking of its supporters never completely went away.

This was also the hey day of the newly formed CIA and one of its great "successes" lay in the Iranian coup that ousted a communist leaning, but more or less democratically elected government and placed the Shah in power. This was a major cause of the subsequent Iranian Revolution which deposed the Shah and led to the seizing of our Tehran embassy, for which in turn, we've never forgiven the Iranians. [Note: if one is looking for a new start in U.S.-Iranian relations, we might start by "calling ourselves even" and each acknowledging our own errors].

So, following a relatively easy victory in Afghanistan, the administration having taken the first bite of the apple of regime change and nation building turned toward the "axis of evil." As part of the axis, North Korea was sort of a "no-brainer." An oppressive state, run by a deranged person, North Korea was on every body's list of rogue states. Another, on our list, if not the rest of the world's, was Iraq.

Iraq was from the Administration's viewpoint a "win-win" situation. Hussein wasn't exactly a poster boy for good deeds and had defied us in the first Gulf War and whenever thereafter he had an opportunity. Although an on-going nuisance of the first rank few other than ourselves (and subsequently Tony Blair in Britain and the others who joined the "Coalition of the Willing") considered Hussein an imminent threat to anyone other than the Iranian Kurds in northern Iraq and southern Iranian Shias.

There are only two strategic interests of the United States in the mid-east: Israel and Oil. It would be nice if the entire region was dominated by freely elected governments, respecting minority rights, women's rights, etc. It would also be nice if the same goals were achieved throughout Africa and elsewhere...but achievement of these goals (until the Bush Doctrine) is not essential to the national security of the United States. The security of Israel is essential if for no other reason than the Israel Lobby in the United States, a legitimate and important part of our own political system. The security of the Persian Gulf region is essential to the free flow of oil and its impact on the world economy. Other than that and despite a long history of missionary work and limited trade, its pretty much a large sand box inhabited by curious and quarrelsome people, who in the annuals of human civilization have seen better days (and hopefully will see better days again, although not at our expense).

For a long time following our invasion of Iraq I assumed that the "win-win" scenario within American politics consisted of pro-Israeli liberal Democrats and oil focused right wing Republicans. However, following a read of a controversial new book, "The Israel Lobby and U.S. Foreign Policy," I have revised my opinion.

I now believe that Israel did not initially want a U.S. invasion of Iraq and considered it likely to de-stabilize a region in which stability was a major component of their own national security, barring a real threat of nuclear proliferation in the region. Indeed, Sharon's initial advice seems to have been, "oh no, don't go there." I also believe that the Mossad (Israeli intelligence) to be among the most informed services on earth and that they did not buy into Hussein's possession of WMD. Rather, I now think that prominent American Jewish neo-cons more or less hijacked the U.S. Israel Lobby, along with key policy makers within the Administration. Right wing pressures in Israel, plus the shift of the U.S. lobby drove Sharon to ultimately agree with and support the invasion.

There is no evidence that anyone at the time was seriously worried about relating 9/11, Saddam Hussein and the flow of oil through the Persian Gulf to a need for a quick invasion. Without imminent threat, the Administration had to build a case for invasion based on weak linkages of Hussein to 9/11, old WMD activities (which Hussein actually encouraged) and the general proposition that he was a very bad guy who killed his own people by the thousands. Indeed, thanks to the sanctions and the corrupt U.N. oil for food program, more Iraqi oil was folowing through the Gulf than we wanted.

In fact, other than the neo-con loony Weltanschauung, I see only one authentic national interest in the invasion (discounting for the moment the personal and political reasons of the President and assuming he hadn't been hoodwinked by the neo-cons around him), namely something called "Hubbert's Peak."

[one more to come]

Iraq (Continued)

2007-11-04T09:21:00.001-08:00

Bremer found the vast majority of pre-invasion assumptions regarding Iraq to be incorrect. People were not greeting us in the streets with flowers. The years of sanctions against the Hussein regime had virtually destroyed the country's vital infrastructure, ranging from electricity, to water, to oil. What middle class was left was fleeing, basically leaving middle (and upper) class Iraqi ex-patriots quarreling with Kurds who were playing for independence, Sunnis, divided between secularism and Baathists and a fractured Shia community, at least half of whom were motivated by little more than revenge.

Post World War II Germany and Japan, Korea, Vietnam, etc. all paled in comparison to the complexity of post invasion Iraq. Kurds who advocated a unified, but federalized Iraq, fought Kurds who favored independence. Secular Sunnis fought Baathists and Sunnis Al Qaeda. Iranian leaning Shias fought Iraq Shias. And, on and on. On top of all of this, key policy makers in Washington still fought for Plan A and the transfer of Iraqi sovereignty as quickly as possible to the now present former Iraqi exiles. The military seemed undecided in what its next role would be. In Plan A they were to be gone in a few months. The "coalition of the willing," aside from the Brits, in the south, was virtually worthless in the new situation, although through no particular fault of their own. Most had entered the coalition with only token forces and expected to be little more than a symbolic presence. Separate Rules of Engagement meant very little integration into the overall coalition structure and American military leadership found themselves dealing with political issues they were unprepared for and far fewer resources than they needed to deal with the military ones. And, the Iraqi Army had simply dissolved, complicated by a Plan A de-Baathification policy.

Perhaps, no other American diplomat in history faced as complex a situation as Bremer. That he physically survived was no mean feat. That he accomplished what he had been sent to do was nothing short of a miracle.

He did not do it alone. His first "Ally" came from a curious source, the Grand Ayatollah Sayyid Ali al-Sistani.

Sistani was the chief Shia cleric in Iraq and his religious authority in the country was un-questioned among Iraqis Shias. Bremer, a Catholic, compared him to the Pope, but that would be (as I am sure Bremer would admit) an oversimplification that failed to describe the complex relationship of state to religion within the Muslim world. I have tried to explain this relationship in earlier posts and won't dwell on it here. Suffice to say that as Sistani went, so would go Iraq and Sistani grasped the fundamental tenant of democracy...majority rule...and, of course, as the senior religious leader of Iraqis Shias, he spoke for that majority.

Although he and Bremer never met (Sistani refused to meet with any of the coalition), together and subtly through back channels, they prevented the Plan A transfer of power from occupation forces to the former Iraqi exiles, by simply and effectively demanding a democratic Iraq. Sistani accomplished this by insisting that the new democratic Iraqi Constitution could only be written by freely elected Iraqis, not by any coalition appointed Iraqis. The effect was that in an Iraq composed of 60% Shia, the Shia would rule. Minority rights, the extent of religious influence, women's rights, Kurdish autonomy, de-Baathification, etc. were all important issues to be debated and decided, but Sistani never waivered from the basic democratic principle of majority rule. He had caught and stimied the Bush neo-cons and Iraqis ex-patriots with their own words.

Bremer, in his book and in practice, never waivered from his own loyalty to President Bush and Bush's stated intentions in Iraq. But, he effectively destroyed Plan A (which was in reality dead on arrival) and in many ways came closer to Sistani's position than the positions being proposed by Washington.

To deal with Washington, Bremer turned to Rice and by highlighting the failures of the American military in the post-invasion milieu, finally managed to essentially transfer Washington decision-making from DoD to Rice and the NSC and away from Rumsfeld and the generals, who were sort of bumbling around without a Plan B.

There were unfortunate casualties along the way, both among the Iraqi ex-patriots and the American military. Among the latter was General Paul Abizaid, who was damned if he did and damned if he didn't. Abizaid, who had been Frank's second in command and promoted with Frank's retirement, was exceptionally well qualified but like Bremer, caught between the rock and the hard place. With a Plan A force structure and an American presidential election in the offing (2004) he was effectively prevented from any increase in that structure. Caught between a seriously changed situation on the ground and a Pentagon reluctant to pull the plug on Plan A, he was virtually doomed to failure. But, as a scapegoat, he played a part in Bremer's success in transferring decision-making from the Pentagon to Rice.

The United States military remains mired in Iraq. Perhaps, with a bit of luck, Petraeus, like Bremer, can pull it off. Increased U.S. forces (but not by much) coupled with the apparent growing exhaustion of the various insurgents may lead to some temporary stability, sufficient for us to declare "victory" and get out. However, similar to our backing elections and democracy in Palestian, the long term result in Iraq may be a quasi-democratic/religious state, allied more closely to Iran than the United States. A free and democratic Iraq may be in the interests of the Iraqi people, but not in the "real" interests of American national security. And, if as the President insists, we stay until victory...whose victory? Our victory may not be the same as that perceived by the democratically elected majority of Iraqis. If we stay longer than the Iraqis want, the policy of the neo-conservativism evolves into a policy of neo-colonialism.

In my next and last post on this subject, I'll try and tie things together with a bit of repetition regarding what I've said in earlier posts on why our intervention in Iraq was wrong and the changes I believe necessary in American foreign policy to bring about global stability and U.S. security.

Iraq (Coninued)

2007-11-04T07:54:00.000-08:00

Paul Bremer apparently arrived in Iraq caught between "the rock and the hard place." As a professional diplomat, in all probability, he had a far better comprehension of the challenges he and the United States faced in post-invasion Iraq than did the policy makers in Washington who had sent him there.

The emerging picture of what our policy makers "thought they knew" about Iraq and how things would go following liberation is now reasonably clear. In a great sense, Iraq, as Afghanistan, as the U.S. post 9/11 economic recovery, etc., etc. would be "business as usual" and a cake walk. Based on information being fed policy makers in the Vice President's Office and DoD from Iraqi exiles (namely Ahmad Chalabi and the ex-patriot INC), Iraq was a reasonably prosperous middle class country (relatively speaking) waiting to be freed. This conception "fit" what the Administration wanted to hear, although it contradicted much of what the State Department, the CIA and the professional military believed.

Much of this willingness of the key policy makers to accept this misconception uncritically went to the neo-conservatives in the Vice President's Office and among DoD civilians. However, I would suggest that of almost equal weight in this fundamental error was the Bush decision-making process itself. Unlike democratic political processes, business hierarchies are not in essence "consensual." Politics is the art of the possible and with the exception of periodic elections not a "zero-sum game." As a result, in politics, there is a constant and on-going adjustment of strategy based on tactical capability. In business, it is much the reverse. The "Chief Decider" (CEO or President) approves the strategy and appoints subordinates to implement and carry out the tactics necessary to achieve the strategic goals. In politics, tactics are almost always "second guessed." In business, tactics are delegated and seldom second guessed in the absence of catastrophic failure.

"Loyality" in politics, is often talked about and seldom practiced. In business, it is seldom talked about, but always expected. If the American people come to understand this difference, Bush will be our first and last Harvard MBA President.

Having bought into a post 9/11 foreign policy strategy that required a forceful U.S. message to the world based on the proposition that a strong offense is better than a weak defense and to the "idea" of an "axis of evil" which included Iraq, the Chief Decider left the tactics to subordinates, namely the Secretary of Defense and the Vice President. And, most of the others (Powell, Tenant, Rice et al) jumped in line. When that occured, the decision making process bowed to "group think" along hierachical lines.

Bush's failure to seriously question tactical decisions made by subordinates, in the name of loyalty and delegation of authority led to an atmosphere wherein conflicting intelligence was not questioned. The plan then formed to take Baghdad as quickly as possible, with as few forces as possible and turn the government over to the Iraqi exiles, again, namely Chalabi. Forces needed to protect long communication lines weren't necessary because of the smooth transition anticipated. Troops to protect Iraqi borders weren't necessary, because it was originally intended to simply replace the Iraqi military top leadership and to continue with an Iraqi Army in place.

Small tactical changes, such as the Turks refusal to allow U.S. forces entry through Turkey, or the failure to achieve a "coalition of the willing" of any sizable scale, did not provide a reconsideration of the overall strategic objective. Nor did the initial opening of the invasion provide for a reassessment. Baghdad was taken; regime change occurred. And, then, around the time of Bremer's arrival, things began to fall apart.

"Falling apart" was incremental, thus adding to the fog of war. General Franks, who had achieved his portion of the plan (getting to Baghdad), was basically waiting for retirement. The State Department, which perhaps logically should have taken the lead at this point, was less than inspired, partially due to substantial opposition within the Department to preemptive war and partially due to the decision to have DoD lead the occupation. In sum, Plan A failed and there was no Plan B.

With the U.S. government now in an essentially "reactive mode" and reluctant to admit Plan A failure, Bremer's opening days as head of the CPA were spent picking up the pieces of a failed policy.

[continued in next post]

Positive News From Iraq

2007-11-03T14:59:00.000-07:00

Within the last week, positive news has been emerging from Iraq. Casualties appear down significantly (both Coalition Forces and Iraqi) and Baghdad residents who had fled in fear of the insurgency are returning. It's an old clique from Vietnam, but there may be "light at the end of the tunnel."

Of course, it is a different story regarding whether or not stability in Iraq will ultimately lead to accomplishment of our professed goal...namely, the formation of a stable, democratic Arab state in the region and, in turn, whether or not the benefits of such a state really apply to American national security. Yet, for now, we should applaud the present progress if for no other reason than the safety and security of the Iraqi people themselves.

I've just completed two books: "The Occupation of Iraq: Winning the War and Losing the Peace," by Ali A. Allawi and "My Year in Iraq: The Struggle to Build a Future of Hope," by L. Paul Bremer. Allawi, related to the first post invasion Prime Minister, and former Minister of Defense and later Finance, is sort of the inside story of Iraq from the perspective of an Iraqi. Bremer, of course, was the head of the Coalition Provisional Authority (CPA) and led the Coalition's post invasion administration of Iraq from roughly April 2003 until June 2004.

The books agree to a remarkable extent. If one puts aside the argument over whether or not the invasion should have taken place at all, there seems to be common consensus that the two significant errors were: 1) insufficient Coalition troop commitment and 2) insufficient planning and/or erroneous assumptions about a post-invasion Iraq.

It is difficult to see how Bremer may now be blamed for either error. His book is both a textbook and warning for future "nation building." It was exhausting to read the book, much less to have lived it. In fact, on what I believe still to be only a slight chance, should Iraq turn out to be a "success," Paul Bremer may have two distinctions as a father of modern Iraq and as the spoiler of a misguided neo-conservative American foreign policy.

When evaluating Paul Bremer, one must keep in mind that while consistently pushing for the idealism of President Bush, he always kept one foot in the realist school of foreign policy thinking, ala Henry Kissinger. While his book is (as most biographies are) in places self-serving, it is largely the modern day story of a "founding father." The record is replete with those who backed democracy in Iraq for their own purposes, but Bremer appears to be a figure that took it all quite seriously and literally. In reading Bremer's book, I was constantly reminded of Madison's "Notes" on the Constitutional Convention.

It becomes more and more apparent that the reasons we entered Iraq understaffed and with poor planning may be attributed to those within the Vice President's office and Defense Department civilians who essentially accepted Iraqi exile's tactical interpretations of the Iraq milieu, while in pursuit of a larger, more theoretical construct for American foreign policy in the post 9/11 world, within the zeitgeist of globalization, otherwise known as the "neo-conservatives." Without trying to elaborate on neo-conservative principles, I'll contrast them with "realists" as those in pursuit of a defined ideology and who believe the United States has both a right and duty to actively shape the global political stage. Realists, on the other hand, believe that the pursuit of American national interests involves taking the world and dealing with it as it is given, without the "shaping" portion.

In large measure, the differences between the two are ones of degree and timing. Kissinger and Nixon "opened" China by dealing with the Chinese as they were and not on the basis of "as we wish they were." They sold this approach to the Republican Right with the logic that the recognition of China and improved relations would "eventually" lead China toward moderation and democratization. They sold the same approach to the Republican business interests with the promise of trade and the rest of us (loosely grouped as the American Consumer) on the basis of cheap goods at Wal Mart.

Neo-conservatism would presumably take a similar position vis a vie China, but with a somewhat more aggressive stance, insisting on faster and more significant Chinese internal reforms, coupled with the "always on the table" position of preemptive war, if necessary. No one minds the U.S. pressing for the former, but the latter scares the hell out of most of the world community. Yesterday it was Iraq; today, it's Iran; tomorrow it may be China.

Unfortunately, fear is seldom a good motivation for long-term cooperation. People or nations may temporarily acquiesce in being forced to "obey," but will simultaneously interpret their acquiescence as necessary to their survival in the face of evil (e.g. neo-colonialism, Zionism, Western dominance, etc.) - i.e. they'll wait for a time to get even.

So, I suspect much of the world views the present Bush Doctrine as little more than a means by which the United States continues its post World War II super power status and dominance within a New World Order, brought on by the end of communism and globalization, as opposed to a more desirable outcome of the increasing diffusion of power and equality among nations, large or small. Again, the differences between neo-conservatives and realists may lie not so much in end goals, as in the means to achieve them. Sort of the difference between say a Tip O'Neil and Tom DeLay...the difference between "do it this way because..." versus "do it my way or else..."

To return to Bremer, et al and post invasion Iraq, Bremer tried whenever possible to diplomatically guide the Iraqi people via a "do it this way because." In this, he had help from two significant individuals: the Grand Ayatollah Sayyid Ali al-Sistani and Condi Rice.

[continued in next post]

This and That

2007-10-09T10:29:00.000-07:00

On Blackwater: Since yesterday, Associated Press has been reporting on the Iraqi government's report regarding the September Blackwater incident regarding the death of Iraqi citizens caught up in a Blackwater convoy operation. Blackwater claims its people were responding to an attack. The Iraqi report, based on their own investigation, says this isn't so and is recommending that the U.S. turn over the Blackwater employees involved for possible trial in Iraqi courts; that the families of the 17 Iraqis killed be compensated with a total of $136M, and that Blackwater be out of Iraq in six months. The State Department, which was conducting its own investigation, has turned their investigation over to the FBI. Presumably, there is a third investigation being completed by the U.S. military.

The U.S. investigations have yet to be completed, however, a leak regarding the U.S. military effort pretty much confirms (thus far) the Iraqi government's story.

The curious thing is that although MSNBC, Fox News, AP, NPR, et al have reported the above, both the New York Times and the Washington Post have remained silent and have not reported the story, which is now more than 36 hours old. Why?

Meanwhile, the situation in Iraq apparently continues to deteriorate. The British have announced half of their remaining force will leave by year end, with the probability of a complete pull-out of their remaining 2,500 troops by the end of 2008. I would guess that these remaining 2,500 will basically be a "covering withdrawal force," and be unable to conduct large scale offensive operations from January 2008 on. The British Prime Minister, while not quite claiming "victory," stated "things are calmer." We may expect to see Iranian influence increase in the region.

To the north, the Turkish government has approved across-the-border "reconnaissance-in-force" by Turkish forces in pursuit of PPK Kurdish terrorists, who killed some 14 people in a Turkish village over the weekend. A projection of future events is pretty simple. If the Kurdish regional government in northern Iraq cannot control the PPK, Turkey will move into northern Iraq to do so, while making an "arrangement" with the Iranians to divide the oil resources.

In Baghdad, a number of prominent Iraq politicians announced that they've given up on "reconciliation" between Sunnis and Shites. This basically blows the argument of a surge for stability, needed in turn, for political progress.

Things in the third major area of Iraq (Anbar Province) seem to be remaining relatively calm. The U.S. decision to make peace with Sunni tribal interests in the region appears to be working for the moment. In fact, this shift of position in Anbar, which has NOT been greeted with approval in the central Baghdad government, may be an indication that the best we can hope for is a relatively stable and semi-independent Anbar, with ties to the Saudis. Anbar borders Saudi Arabia and Syria. It is mostly desert and relatively untapped regarding potential oil resources. And, it is predominately Sunni.

"Truth" in this region appears to be a matter of perspective. The Iraqis-in-the-Street appear to be convinced of Blackwater's guilt (right or wrong). Best course for the U.S. is to pay the $136M, get the Blackwater people out, with the promise of a trial in the U.S., and get rid of Blackwater in Iraq (replacing them with U.S. Marines) ASAP. The alternative may be a complete breakdown of the Maliki-U.S. relationship and/or an end to the Maliki government.

What is becoming abundantly clear is that Iraq per se is no more. It was largely a "phony country" created by the British and oil interests following WWI and held together largely by the dictatorship of Saddam Hussein.

Bush's options are running out. It's difficult to see how he can maintain his quest for "victory" through the end of his term in office. Events on the ground are beginning to move too fast.

An air attack on Iran would not change the situation in Iraq, but in all probability lead to increased Iranian infiltration (if not a stronger response), leading in turn to increased U.S. casualties. Further, the Administration has semi-committed to a withdrawal of 5,000+ U.S. troops by year end, thus they will not be available to fill-in for the British withdrawal.

If the U.S. withdraws an additional 50,000 next year, this leaves us with approximately 100,000 troops in-country by the end of 2008, most of whom will be needed in Anbar and the northern Kurish regions, if not simply to protect our new $160M embassy in an increasingly hostile Baghdad.

"The Israel Lobby and U.S. Foreign Policy"

2007-10-07T08:34:00.000-07:00

I am about half-way through this controversial book and, so far, the question that comes to mind is: What's the controversy?

The basic theme of the authors is that collectively the various pro-Israel lobbying groups constitute the single most powerful political lobby in the United States and that as a result U.S. foreign policy in the middle east is essentially a "rubber stamp" approval of whatever policy the Israeli government is following at the moment.

The book bends over backwards NOT to come across as anti-Semitic. It seems as if one sentence in every paragraph is devoted to the anticipated charge of anti-Semitism. They take pains to point out that the Lobby is entirely legal and in the tradition of the American politics and special interest groups. Their complaint is that the Lobby's effectiveness (in terms of organization, influence and money) occasionally distorts U.S. policy positions that are not in the "objective" interests of U.S. national security.

As a "read," the book is a bit tedious and reads more like a dissertation than a best seller. Also, the central theme is something akin to "The Emperor's New Clothes." Someone has finally written and documented what has been a fact of life for the political system for at least a half century. Despite that, it's a worthwhile read concerning "the elephant in the room."

However, to agree with the authors one has to accept their basic perspective regarding the formation of American foreign policy, i.e. the "realist" school of thought. While I personally agree with this perspective, I understand there are others, so while agreeing with the book, I'll play devil's advocate for a moment.

The counter perspective to the author's is that the formation of American foreign policy is no different than the process that is used for the formation of any other area of government policy and that special interest groups are vital for this process. Secondly, special interest groups are seldom, if ever, "objective." Be it the "oil lobby" or the "environmental lobby," NO lobby may be expected to pursue activities contrary to their essential purpose.

While the author's certainly seem to understand this, they do seem biased to the old school of thought that American foreign policy is best left to the "wise old men" who understand what American interests REALLY are and who may take a longer and more "reasoned" approach regarding those interests - i.e. American foreign policy issues are too important to be left to the normal democratic process. My personal belief is that the best approach lies somewhere in between the two extremes and I also believe that looking back on the historical record of American foreign policy, a case could be made for a middle ground. For example, one could argue that the "wise old men" approach took us into Vietnam and kept us there far too long. Or, conversely, had FDR listened more to the "wise old men," and been less worried about American public opinion, we would have entered WWII in 1939 instead of 1941, saving millions of European lives and, perhaps, avoiding war with Japan.

So, while I believe the author's have written something worthwhile for the literature of American political science, I am not sure I completely agree with the conclusions they reach.

What does interest me is a question the book poses, but has (thus far at least...I'm only half way through it) not addressed. Due to the enormous power of this lobby and the strategic importance of the United States to Israel, is it possible that the "tail is wagging the dog?" Rather than the lobby taking orders from Israel, is it possible that Israel takes its cues from the lobby?

Following that possibility, it is also reasonable to ask how the lobby arrives at it's stands on issues? Is there democratic debate and thought within the lobby or has it been "caputured" by neo-conservative thought, which I believe in itself may contain the seeds of racism.

The chief criticism of Israel by the authors lies in Israeli policies in the "Occupied Territories," Gaza and the West Bank. This is a complicated issue and there is, within Israel, no absolute consensus on what those policies should be. Aside from the problem of Jerusalem, the basic difficulty would seem to lie with the proposition: How do you reconcile Israeli security with indefensible borders? And, further, does the lack of Israeli security on the ground enhance the probability of nuclear warfare in the region?

It would seem to me that even the Likud government in Israel is wrestling with this problem. Without Israeli dominance and essential control of Gaza and the West Bank (and in the Golan Heights), the "buffer zones" seized by Israel disappear, thus leaving it more susceptible to physical invasion. This, in turn, makes the use of Israeli nuclear weapons, in the event of war, more likely, not less likely.

The solution lies in a viable Palestinian state that recognizes Israel's right to exist and, which is capable of ensuring Israeli security. The democratic election of Hamas in Palestine is an indication (without substantial changes in Hamas goals) that the region is moving further away from these two conditions than closer. [The other option is to redraw Israel's borders, but this seems less likely.]

Were it not for the U.S. situation in Iraq and current U.S.-Iranian relations, we would certainly be in a better position to act as arbitrators in the Israeli-Palestianan dilemma. Indeed, the "democratization" policies of the Bush Administration appear to have led to Hezbollah's election victory in Palestine and may well lead to pro-Iranian Shia election victories in Iran. "Wise old men" might have avoided both.

There is one part of the book that the author's and their critics seem to disagree on and the suggestion above of the "tail wagging the dog" might explain. The authors point to the Israeli influence in the decision to invade Iraq. Their critics point to Israeli advice to the U.S. government NOT to invade Iraq. On this apparent difference one must look to a) the timing of events and b) Israeli national security interests.

Let's take the latter first. The invasion of Iraq did nothing to help Israeli security. One supposes that the Mossad (Israeli intelligence) understood the Iraqi WMD issue better than we. Further, the sanctions imposed on Iraq were having a serious impact on the infrastructure and stability of the country. Saddam Hussein was a dictator with dwindling support, being squeezed slowly into a corner. He was a "threat" to no one outside of his own people in terms of resources, if not personal ambitions that amounted to little more than fantasy. Yes, he may have "sponsered" some terrorism directed toward Israel, but Israel has lived and controlled terrorist attacks for years. The threat he posed directly to Israel may well have been in the "continuing nusance" category, but it was not in the "strategic" category. The regional instability our invasion was likely to produce was a far greater threat to Israel than the regime of Saddam Hussein. This, then explains why Israel would advise the U.S. NOT to invade Iraq.

But the authors have missed a critical point. If we support Israel in actions not to the benefit of U.S. national security, Israel does the same toward American foreign policy. This brings me to the second point; Israeli policy on the U.S. invasion appears to have shifted only AFTER they came to the conclusion that the U.S. was going to invade regardless of their advice...i.e. after they consulted the Israel Lobby.

My suggestion that the tail may be wagging the dog would explain the Israeli shift, i.e. it was the Israel Lobby, dominated by neo-conservatives, that influenced the invasion decision, not Israel itself.