Saturday, 29 November 2008
Financial Crisis? Or Something Else?
Wal-Mart Worker Dies in Stampede at New York Store
By Chris Dolmetsch
Nov. 28 (Bloomberg)
A worker at a Wal-Mart in New York City’s Long Island suburbs was killed when a throng of shoppers broke down the doors to the store early this morning and knocked him to the ground.
The event involved a temporary employee and was “a tragic situation,” Bentonville, Arkansas-based Wal-Mart Stores Inc., the world’s biggest retailer, said in a statement. “The safety and security of our customers and associates is our top priority.”
It wasn’t immediately clear if any shoppers or workers have been killed during similar incidents during sales on the day after Thanksgiving, traditionally known as Black Friday.
“We do not know of an incident such as what happened today,” Ellen Davis, a spokeswoman for the Washington-based National Retail Federation, said in an e-mail. “It is a horribly tragic situation. Retailers are reminded of the importance of employee safety.”
At least four shoppers were hurt in the melee at the store in the Green Acres Mall in Valley Stream, about 13 miles (20 kilometers) east of New York City, Nassau County Police said in a statement. A 28-year-old pregnant woman was taken to a hospital for observation, and three people suffered minor injuries, police said.
The 34-year-old worker, who wasn’t identified by police, was knocked down by the crowd shortly after 5 a.m. local time and taken to a nearby hospital, where he was pronounced dead at 6:03 a.m., the police said. The county medical examiner will determine the cause of death.
The man was working for a temporary agency on the company’s behalf, Wal-Mart said in the statement.
About 2,000 people had gathered outside the store as it prepared to open, Newsday reported, citing police Detective Lieutenant Michael Fleming, who spoke at a briefing. Shoppers in the back of the line pushed those in the front into the doors, which then came off their hinges, the newspaper said.
Hundreds of people then surged into the store, knocking over the worker and trampling him, Newsday said, citing Fleming. Authorities are reviewing surveillance video and are considering criminal charges although it may be difficult to identify individual shoppers, the newspaper said.
Some people continued to shop despite the efforts of upset store workers, who attempted to get them to leave, Newsday said, citing Kimberly Cribbs, a shopper from Far Rockaway.
The store was later closed by police, said Carolyn Kasdorf, a department spokeswoman.
U.S. retailers including Wal-Mart opened their doors as early as midnight and discounted merchandise as much as 70 percent on the day after Thanksgiving to counter what may be the weakest holiday shopping season in six years.
Retailers promoted “doorbuster” deals to attract customers on Black Friday, so named because the day after Thanksgiving was said to be when retailers started to make their annual profit, having paid off their costs from sales earlier in the year.
The Valley Stream store was offering discounted merchandise including a $128 Magnavox DVD player, a $97 Garmin GPS navigation system and a $69 Samsung digital camera, according to a promotional flyer posted on Wal-Mart’s Web site.
Wal-Mart fell 81 cents, or 1.4 percent, to $55.88 at 1:15 p.m. in a shortened session of trading on the New York Stock Exchange.
To contact the reporter on this story: Chris Dolmetsch in New York at email@example.com. Last Updated: November 28, 2008 14:19 EST
Monday, 20 October 2008
The New Yorker's endorsement of Barack Obama
I include the full text below. Although I normally provide only the link, TNY's website has been crashing a lot lately.
Never in living memory has an election been more critical than the one fast approaching—that’s the quadrennial cliché, as expected as the balloons and the bombast. And yet when has it ever felt so urgently true? When have so many Americans had so clear a sense that a Presidency has—at the levels of competence, vision, and integrity—undermined the country and its ideals?
The incumbent Administration has distinguished itself for the ages. The Presidency of George W. Bush is the worst since Reconstruction, so there is no mystery about why the Republican Party—which has held dominion over the executive branch of the federal government for the past eight years and the legislative branch for most of that time—has little desire to defend its record, domestic or foreign. The only speaker at the Convention in St. Paul who uttered more than a sentence or two in support of the President was his wife, Laura. Meanwhile, the nominee, John McCain, played the part of a vaudeville illusionist, asking to be regarded as an apostle of change after years of embracing the essentials of the Bush agenda with ever-increasing ardor.
The Republican disaster begins at home. Even before taking into account whatever fantastically expensive plan eventually emerges to help rescue the financial system from Wall Street’s long-running pyramid schemes, the economic and fiscal picture is bleak. During the Bush Administration, the national debt, now approaching ten trillion dollars, has nearly doubled. Next year’s federal budget is projected to run a half-trillion-dollar deficit, a precipitous fall from the seven-hundred-billion-dollar surplus that was projected when Bill Clinton left office.
Private-sector job creation has been a sixth of what it was under President Clinton. Five million people have fallen into poverty. The number of Americans without health insurance has grown by seven million, while average premiums have nearly doubled. Meanwhile, the principal domestic achievement of the Bush Administration has been to shift the relative burden of taxation from the rich to the rest. For the top one per cent of us, the Bush tax cuts are worth, on average, about a thousand dollars a week; for the bottom fifth, about a dollar and a half. The unfairness will only increase if the painful, yet necessary, effort to rescue the credit markets ends up preventing the rescue of our health-care system, our environment, and our physical, educational, and industrial infrastructure.
At the same time, a hundred and fifty thousand American troops are in Iraq and thirty-three thousand are in Afghanistan. There is still disagreement about the wisdom of overthrowing Saddam Hussein and his horrific regime, but there is no longer the slightest doubt that the Bush Administration manipulated, bullied, and lied the American public into this war and then mismanaged its prosecution in nearly every aspect. The direct costs, besides an expenditure of more than six hundred billion dollars, have included the loss of more than four thousand Americans, the wounding of thirty thousand, the deaths of tens of thousands of Iraqis, and the displacement of four and a half million men, women, and children. Only now, after American forces have been fighting for a year longer than they did in the Second World War, is there a glimmer of hope that the conflict in Iraq has entered a stage of fragile stability.
The indirect costs, both of the war in particular and of the Administration’s unilateralist approach to foreign policy in general, have also been immense. The torture of prisoners, authorized at the highest level, has been an ethical and a public-diplomacy catastrophe. At a moment when the global environment, the global economy, and global stability all demand a transition to new sources of energy, the United States has been a global retrograde, wasteful in its consumption and heedless in its policy. Strategically and morally, the Bush Administration has squandered the American capacity to counter the example and the swagger of its rivals. China, Russia, Iran, Saudi Arabia, and other illiberal states have concluded, each in its own way, that democratic principles and human rights need not be components of a stable, prosperous future. At recent meetings of the United Nations, emboldened despots like Mahmoud Ahmadinejad of Iran came to town sneering at our predicament and hailing the “end of the American era.”
The election of 2008 is the first in more than half a century in which no incumbent President or Vice-President is on the ballot. There is, however, an incumbent party, and that party has been lucky enough to find itself, apparently against the wishes of its “base,” with a nominee who evidently disliked George W. Bush before it became fashionable to do so. In South Carolina in 2000, Bush crushed John McCain with a sub-rosa primary campaign of such viciousness that McCain lashed out memorably against Bush’s Christian-right allies.
So profound was McCain’s anger that in 2004 he flirted with the possibility of joining the Democratic ticket under John Kerry. Bush, who took office as a “compassionate conservative,” governed immediately as a rightist ideologue. During that first term, McCain bolstered his reputation, sometimes deserved, as a “maverick” willing to work with Democrats on such issues as normalizing relations with Vietnam, campaign-finance reform, and immigration reform. He co-sponsored, with John Edwards and Edward Kennedy, a patients’ bill of rights. In 2001 and 2003, he voted against the Bush tax cuts. With John Kerry, he co-sponsored a bill raising auto-fuel efficiency standards and, with Joseph Lieberman, a cap-and-trade regime on carbon emissions. He was one of a minority of Republicans opposed to unlimited drilling for oil and gas off America’s shores.
Since the 2004 election, however, McCain has moved remorselessly rightward in his quest for the Republican nomination. He paid obeisance to Jerry Falwell and preachers of his ilk. He abandoned immigration reform, eventually coming out against his own bill. Most shocking, McCain, who had repeatedly denounced torture under all circumstances, voted in February against a ban on the very techniques of “enhanced interrogation” that he himself once endured in Vietnam—as long as the torturers were civilians employed by the C.I.A.
On almost every issue, McCain and the Democratic Party’s nominee, Barack Obama, speak the generalized language of “reform,” but only Obama has provided a convincing, rational, and fully developed vision. McCain has abandoned his opposition to the Bush-era tax cuts and has taken up the demagogic call—in the midst of recession and Wall Street calamity, with looming crises in Social Security, Medicare, and Medicaid—for more tax cuts. Bush’s expire in 2011. If McCain, as he has proposed, cuts taxes for corporations and estates, the benefits once more would go disproportionately to the wealthy.
In Washington, the craze for pure market triumphalism is over. Treasury Secretary Henry Paulson arrived in town (via Goldman Sachs) a Republican, but it seems that he will leave a Democrat. In other words, he has come to see that the abuses that led to the current financial crisis––not least, excessive speculation on borrowed capital––can be fixed only with government regulation and oversight. McCain, who has never evinced much interest in, or knowledge of, economic questions, has had little of substance to say about the crisis. His most notable gesture of concern—a melodramatic call last month to suspend his campaign and postpone the first Presidential debate until the government bailout plan was ready—soon revealed itself as an empty diversionary tactic.
By contrast, Obama has made a serious study of the mechanics and the history of this economic disaster and of the possibilities of stimulating a recovery. Last March, in New York, in a speech notable for its depth, balance, and foresight, he said, “A complete disdain for pay-as-you-go budgeting, coupled with a generally scornful attitude towards oversight and enforcement, allowed far too many to put short-term gain ahead of long-term consequences.” Obama is committed to reforms that value not only the restoration of stability but also the protection of the vast majority of the population, which did not partake of the fruits of the binge years. He has called for greater and more programmatic regulation of the financial system; the creation of a National Infrastructure Reinvestment Bank, which would help reverse the decay of our roads, bridges, and mass-transit systems, and create millions of jobs; and a major investment in the green-energy sector.
On energy and global warming, Obama offers a set of forceful proposals. He supports a cap-and-trade program to reduce America’s carbon emissions by eighty per cent by 2050—an enormously ambitious goal, but one that many climate scientists say must be met if atmospheric carbon dioxide is to be kept below disastrous levels. Large emitters, like utilities, would acquire carbon allowances, and those which emit less carbon dioxide than their allotment could sell the resulting credits to those which emit more; over time, the available allowances would decline. Significantly, Obama wants to auction off the allowances; this would provide fifteen billion dollars a year for developing alternative-energy sources and creating job-training programs in green technologies. He also wants to raise federal fuel-economy standards and to require that ten per cent of America’s electricity be generated from renewable sources by 2012. Taken together, his proposals represent the most coherent and far-sighted strategy ever offered by a Presidential candidate for reducing the nation’s reliance on fossil fuels.
There was once reason to hope that McCain and Obama would have a sensible debate about energy and climate policy. McCain was one of the first Republicans in the Senate to support federal limits on carbon dioxide, and he has touted his own support for a less ambitious cap-and-trade program as evidence of his independence from the White House. But, as polls showed Americans growing jittery about gasoline prices, McCain apparently found it expedient in this area, too, to shift course. He took a dubious idea—lifting the federal moratorium on offshore oil drilling—and placed it at the very center of his campaign. Opening up America’s coastal waters to drilling would have no impact on gasoline prices in the short term, and, even over the long term, the effect, according to a recent analysis by the Department of Energy, would be “insignificant.” Such inconvenient facts, however, are waved away by a campaign that finally found its voice with the slogan “Drill, baby, drill!”
The contrast between the candidates is even sharper with respect to the third branch of government. A tense equipoise currently prevails among the Justices of the Supreme Court, where four hard-core conservatives face off against four moderate liberals. Anthony M. Kennedy is the swing vote, determining the outcome of case after case.
McCain cites Chief Justice John Roberts and Justice Samuel Alito, two reliable conservatives, as models for his own prospective appointments. If he means what he says, and if he replaces even one moderate on the current Supreme Court, then Roe v. Wade will be reversed, and states will again be allowed to impose absolute bans on abortion. McCain’s views have hardened on this issue. In 1999, he said he opposed overturning Roe; by 2006, he was saying that its demise “wouldn’t bother me any”; by 2008, he no longer supported adding rape and incest as exceptions to his party’s platform opposing abortion.
But scrapping Roe—which, after all, would leave states as free to permit abortion as to criminalize it—would be just the beginning. Given the ideological agenda that the existing conservative bloc has pursued, it’s safe to predict that affirmative action of all kinds would likely be outlawed by a McCain Court. Efforts to expand executive power, which, in recent years, certain Justices have nobly tried to resist, would likely increase. Barriers between church and state would fall; executions would soar; legal checks on corporate power would wither—all with just one new conservative nominee on the Court. And the next President is likely to make three appointments.
Obama, who taught constitutional law at the University of Chicago, voted against confirming not only Roberts and Alito but also several unqualified lower-court nominees. As an Illinois state senator, he won the support of prosecutors and police organizations for new protections against convicting the innocent in capital cases. While McCain voted to continue to deny habeas-corpus rights to detainees, perpetuating the Bush Administration’s regime of state-sponsored extra-legal detention, Obama took the opposite side, pushing to restore the right of all U.S.-held prisoners to a hearing. The judicial future would be safe in his care.
In the shorthand of political commentary, the Iraq war seems to leave McCain and Obama roughly even. Opposing it before the invasion, Obama had the prescience to warn of a costly and indefinite occupation and rising anti-American radicalism around the world; supporting it, McCain foresaw none of this. More recently, in early 2007 McCain risked his Presidential prospects on the proposition that five additional combat brigades could salvage a war that by then appeared hopeless. Obama, along with most of the country, had decided that it was time to cut American losses. Neither candidate’s calculations on Iraq have been as cheaply political as McCain’s repeated assertion that Obama values his career over his country; both men based their positions, right or wrong, on judgment and principle.
President Bush’s successor will inherit two wars and the realities of limited resources, flagging popular will, and the dwindling possibilities of what can be achieved by American power. McCain’s views on these subjects range from the simplistic to the unknown. In Iraq, he seeks “victory”—a word that General David Petraeus refuses to use, and one that fundamentally misrepresents the messy, open-ended nature of the conflict. As for Afghanistan, on the rare occasions when McCain mentions it he implies that the surge can be transferred directly from Iraq, which suggests that his grasp of counterinsurgency is not as firm as he insisted it was during the first Presidential debate. McCain always displays more faith in force than interest in its strategic consequences. Unlike Obama, McCain has no political strategy for either war, only the dubious hope that greater security will allow things to work out. Obama has long warned of deterioration along the Afghanistan-Pakistan border, and has a considered grasp of its vital importance. His strategy for both Afghanistan and Iraq shows an understanding of the role that internal politics, economics, corruption, and regional diplomacy play in wars where there is no battlefield victory.
Unimaginably painful personal experience taught McCain that war is above all a test of honor: maintain the will to fight on, be prepared to risk everything, and you will prevail. Asked during the first debate to outline “the lessons of Iraq,” McCain said, “I think the lessons of Iraq are very clear: that you cannot have a failed strategy that will then cause you to nearly lose a conflict.” A soldier’s answer––but a statesman must have a broader view of war and peace. The years ahead will demand not only determination but also diplomacy, flexibility, patience, judiciousness, and intellectual engagement. These are no more McCain’s strong suit than the current President’s. Obama, for his part, seems to know that more will be required than willpower and force to extract some advantage from the wreckage of the Bush years.
Obama is also better suited for the task of renewing the bedrock foundations of American influence. An American restoration in foreign affairs will require a commitment not only to international coöperation but also to international institutions that can address global warming, the dislocations of what will likely be a deepening global economic crisis, disease epidemics, nuclear proliferation, terrorism, and other, more traditional security challenges. Many of the Cold War-era vehicles for engagement and negotiation—the United Nations, the World Bank, the Nuclear Non-Proliferation Treaty regime, the North Atlantic Treaty Organization—are moribund, tattered, or outdated. Obama has the generational outlook that will be required to revive or reinvent these compacts. He would be the first postwar American President unencumbered by the legacies of either Munich or Vietnam.
The next President must also restore American moral credibility. Closing Guantánamo, banning all torture, and ending the Iraq war as responsibly as possible will provide a start, but only that. The modern Presidency is as much a vehicle for communication as for decision-making, and the relevant audiences are global. Obama has inspired many Americans in part because he holds up a mirror to their own idealism. His election would do no less—and likely more—overseas.
What most distinguishes the candidates, however, is character—and here, contrary to conventional wisdom, Obama is clearly the stronger of the two. Not long ago, Rick Davis, McCain’s campaign manager, said, “This election is not about issues. This election is about a composite view of what people take away from these candidates.” The view that this election is about personalities leaves out policy, complexity, and accountability. Even so, there’s some truth in what Davis said––but it hardly points to the conclusion that he intended.
Echoing Obama, McCain has made “change” one of his campaign mantras. But the change he has actually provided has been in himself, and it is not just a matter of altering his positions. A willingness to pander and even lie has come to define his Presidential campaign and its televised advertisements. A contemptuous duplicity, a meanness, has entered his talk on the stump—so much so that it seems obvious that, in the drive for victory, he is willing to replicate some of the same underhanded methods that defeated him eight years ago in South Carolina.
Perhaps nothing revealed McCain’s cynicism more than his choice of Sarah Palin, the former mayor of Wasilla, Alaska, who had been governor of that state for twenty-one months, as the Republican nominee for Vice-President. In the interviews she has given since her nomination, she has had difficulty uttering coherent unscripted responses about the most basic issues of the day. We are watching a candidate for Vice-President cram for her ongoing exam in elementary domestic and foreign policy. This is funny as a Tina Fey routine on “Saturday Night Live,” but as a vision of the political future it’s deeply unsettling. Palin has no business being the backup to a President of any age, much less to one who is seventy-two and in imperfect health. In choosing her, McCain committed an act of breathtaking heedlessness and irresponsibility. Obama’s choice, Joe Biden, is not without imperfections. His tongue sometimes runs in advance of his mind, providing his own fodder for late-night comedians, but there is no comparison with Palin. His deep experience in foreign affairs, the judiciary, and social policy makes him an assuring and complementary partner for Obama.
The longer the campaign goes on, the more the issues of personality and character have reflected badly on McCain. Unless appearances are very deceiving, he is impulsive, impatient, self-dramatizing, erratic, and a compulsive risk-taker. These qualities may have contributed to his usefulness as a “maverick” senator. But in a President they would be a menace.
By contrast, Obama’s transformative message is accompanied by a sense of pragmatic calm. A tropism for unity is an essential part of his character and of his campaign. It is part of what allowed him to overcome a Democratic opponent who entered the race with tremendous advantages. It is what helped him forge a political career relying both on the liberals of Hyde Park and on the political regulars of downtown Chicago. His policy preferences are distinctly liberal, but he is determined to speak to a broad range of Americans who do not necessarily share his every value or opinion. For some who oppose him, his equanimity even under the ugliest attack seems like hauteur; for some who support him, his reluctance to counterattack in the same vein seems like self-defeating detachment. Yet it is Obama’s temperament—and not McCain’s—that seems appropriate for the office both men seek and for the volatile and dangerous era in which we live. Those who dismiss his centeredness as self-centeredness or his composure as indifference are as wrong as those who mistook Eisenhower’s stolidity for denseness or Lincoln’s humor for lack of seriousness.
Nowadays, almost every politician who thinks about running for President arranges to become an author. Obama’s books are different: he wrote them. “The Audacity of Hope” (2006) is a set of policy disquisitions loosely structured around an account of his freshman year in the United States Senate. Though a campaign manifesto of sorts, it is superior to that genre’s usual blowsy pastiche of ghostwritten speeches. But it is Obama’s first book, “Dreams from My Father: A Story of Race and Inheritance” (1995), that offers an unprecedented glimpse into the mind and heart of a potential President. Obama began writing it in his early thirties, before he was a candidate for anything. Not since Theodore Roosevelt has an American politician this close to the pinnacle of power produced such a sustained, highly personal work of literary merit before being definitively swept up by the tides of political ambition.
A Presidential election is not the awarding of a Pulitzer Prize: we elect a politician and, we hope, a statesman, not an author. But Obama’s first book is valuable in the way that it reveals his fundamental attitudes of mind and spirit. “Dreams from My Father” is an illuminating memoir not only in the substance of Obama’s own peculiarly American story but also in the qualities he brings to the telling: a formidable intelligence, emotional empathy, self-reflection, balance, and a remarkable ability to see life and the world through the eyes of people very different from himself. In common with nearly all other senators and governors of his generation, Obama does not count military service as part of his biography. But his life has been full of tests—personal, spiritual, racial, political—that bear on his preparation for great responsibility.
It is perfectly legitimate to call attention, as McCain has done, to Obama’s lack of conventional national and international policymaking experience. We, too, wish he had more of it. But office-holding is not the only kind of experience relevant to the task of leading a wildly variegated nation. Obama’s immersion in diverse human environments (Hawaii’s racial rainbow, Chicago’s racial cauldron, countercultural New York, middle-class Kansas, predominantly Muslim Indonesia), his years of organizing among the poor, his taste of corporate law and his grounding in public-interest and constitutional law—these, too, are experiences. And his books show that he has wrung from them every drop of insight and breadth of perspective they contained.
The exhaustingly, sometimes infuriatingly long campaign of 2008 (and 2007) has had at least one virtue: it has demonstrated that Obama’s intelligence and steady temperament are not just figments of the writer’s craft. He has made mistakes, to be sure. (His failure to accept McCain’s imaginative proposal for a series of unmediated joint appearances was among them.) But, on the whole, his campaign has been marked by patience, planning, discipline, organization, technological proficiency, and strategic astuteness. Obama has often looked two or three moves ahead, relatively impervious to the permanent hysteria of the hourly news cycle and the cable-news shouters. And when crisis has struck, as it did when the divisive antics of his ex-pastor threatened to bring down his campaign, he has proved equal to the moment, rescuing himself with a speech that not only drew the poison but also demonstrated a profound respect for the electorate. Although his opponents have tried to attack him as a man of “mere” words, Obama has returned eloquence to its essential place in American politics. The choice between experience and eloquence is a false one––something that Lincoln, out of office after a single term in Congress, proved in his own campaign of political and national renewal. Obama’s “mere” speeches on everything from the economy and foreign affairs to race have been at the center of his campaign and its success; if he wins, his eloquence will be central to his ability to govern.
We cannot expect one man to heal every wound, to solve every major crisis of policy. So much of the Presidency, as they say, is a matter of waking up in the morning and trying to drink from a fire hydrant. In the quiet of the Oval Office, the noise of immediate demands can be deafening. And yet Obama has precisely the temperament to shut out the noise when necessary and concentrate on the essential. The election of Obama—a man of mixed ethnicity, at once comfortable in the world and utterly representative of twenty-first-century America—would, at a stroke, reverse our country’s image abroad and refresh its spirit at home. His ascendance to the Presidency would be a symbolic culmination of the civil- and voting-rights acts of the nineteen-sixties and the century-long struggles for equality that preceded them. It could not help but say something encouraging, even exhilarating, about the country, about its dedication to tolerance and inclusiveness, about its fidelity, after all, to the values it proclaims in its textbooks.
At a moment of economic calamity, international perplexity, political failure, and battered morale, America needs both uplift and realism, both change and steadiness. It needs a leader temperamentally, intellectually, and emotionally attuned to the complexities of our troubled globe. That leader’s name is Barack Obama.
Saturday, 18 October 2008
Cry for me, Argentina
The numbers are becoming amazing, both in absolute terms and as a share of GDP. Remember that they do not include:
- State budget deficits
- Unfunded liabilities for social security, medicare and medicaid, at a time when the retirement of the baby boomer generation is creating a demographic bulge of retirees and senior citizens.
Lori Montgomery and Den Eggen report in today's Washington Post that the current surge in spending may push the annual deficit towards $ 1 trillion (Spending Surge Pushing Deficit Toward $1 Trillion).
Sarah Hernandez reports in Bloomberg that next year's deficit is already projected at above $ 500 billion, without taking into account EESA disbursements or new economic stimulus packages. (U.S. Debt May Grow $1 Trillion on Rescue, Barclays' Pond Says)
David Walker, former Comptroller General, issued a warning in a CNN commentary that according to his calculations, US public debt was on the order of $ 53 trillion is all unfunded liabilities are taken into account. (Commentary: America's $53 trillion debt problem)
My own post, back on 22 June ("Yes we can", or "No, we can't afford it") looks at some of the spending promises before EESA and the new stimulus packages were announced.
I can understand that in the last stages of a Presidential campaign, no self-respecting Presidential candidate is going to start promising tax increases and spending cuts across the board, on a scale necessary to reduce the debt. But unless the United States implements spending cuts (or revenue increases) on the order of at least $ 350 - 500 billion per year and allocate these towards debt reduction and re-funding Social Security, Medicaid and Medicare, the US will enter a debt spiral from which it will not easily exit.
Barack Obama has promised in the past to partially fund his spending plans through ending the War in Iraq. This campaign is costing about $ 10 billion a month, or $ 120 billion a year. This is mainly spent on combat operations deployment for 150,000 troops and support staff (not including contractors). Given the commitment to increase troops in Afghanistan, re-build depeleted military assets, and keep a "residual" force in Iraq (which I estimate would have to number between 35,000 - 40,000 troops), I don't see how more than $30 billion per year can be "saved" under optimal circumstances. That's a long way from funding either Obama's new spending promises (healthcare, infrastructure, middle class tax cuts, etc.) and debt reduction.
We should therefore not be surprised if many of the promises made during this campaign cannot be funded. If they are funded - through deficit spending - we should then not be surprised to see a far worse macroeconomic situation in 2010-2011. The dollar will plummet; the Fed will have to increase interest rates to fund debt instruments; economic growth will slow, and the US economy will start looking like Argentina's in the mid-1990s.
Friday, 3 October 2008
Recovering from the US Vice-Presidential Debate
Sarah Palin stuck almost entirely to her talking points and her version of history. I didn't see a single trace of humanity or humility, or that she could be trusted to think rationally or analyse anything beyond what she had memorised. Speaking politely, the facts did not feature prominently in what she had to say.
Her attacks on Barack Obama were delivered in this chirpy monotone that made me wonder if the control room was somewhere else, perhaps in Nome, Alaska. It was so contrived, so bereft of original thinking and spontaneity that I’m horrified to think of her as Vice President of the United States–a heartbeat away from the Presidency.
I was also struck by the CNN opinion graph, that was playing out like a little seismograph at the bottom of the screen. This gadget raised far more questions than it possibly could have answered: who were these "uncommitted Ohio voters?" Were they female or male? Young or old? How many were there? What education and income level did they have? How were they voting, exactly?
At the beginning of the debate, Sarah Palin was getting a high response for moral platitudes and tinned comments that had all the substance of marshmallow soup. The surge was surged to death; John McCain was ceaselessly intoned as the next messiah; the masses were addressed without the filter of the mainstream media. Repent, ye wicked media. Vade retro, Satanas.
And besides this, the medley of cloying, irritating words: "maverick," "no preconditions," "nucilar," “white flag of surrender,” “Joe Sixpack.” Was she speaking English, or was she speaking code? I had to change channels several times during the debate: watching the weather forecast on Greek public TV was more substantive, even soothing.
There were only two parts of the debate which I felt were vaguely interesting:
• When Joe Biden choked up over raising his sons as a widowed father;
• When Joe Biden unequivocally condemned Dick Cheney as the most dangerous VP in history. We need to hear more of this.
I was not impressed with the spending priorities of the two VP candidates – and the two campaigns. If the House passes EESA today, the public debt will swell to at least $ 11.3 trillion, out of a current GDP estimate of about $ 14.4 trillion. Unless we start a radical programme to pay down this debt, America will go bankrupt in 6-8 years, perhaps even sooner. Neither candidate mentioned debt reduction, yet this is the single most important priority, and will determine the extent to which the spending promises–renewable energy, healthcare “credits”, Iraq–can be financed.
Biden made a much more coherent statement about the role of the VP in the Obama administration, and I like the fact that he would be the point man on getting legislation through Congress. I had the impression that he and Obama have put a lot of through into planning and priorities, but they are still working on the costs.
In contrast, I didn’t see any such evidence from Sarah Palin. All I saw was the same dispiriting mix of lies, distortions and exaggerations:
• You can’t offer a “healthcare tax credit” and cut taxes. What’s the “credit” exactly? It’s a deduction from Federal income tax, obviously, and therefore the Federal budget. So the amount spend on the “credit” has to be reimbursed from other tax sources, or by cutting government spending (which is impossible given the spending promises and deficits).
• Troop levels in Iraq have not fallen to below pre-surge levels.
• She may have cut taxes in Alaska, but Alaska has benefitted from higher revenue due to a surging oil price which coincided with the years she has been elected governor (the last 2 years). Amazing how that's never mentioned. So her tax cuts have, in effect, been financed by all those people using oil. What you give with one hand, you take with the other.
• Her cheerleading for energy independence–through more drilling–is absurd. America’s domestic petroleum energy resources are nowhere near enough to offset petroleum imports. Energy independence is a myth.
• How can John McCain be such a maverick when he’s voted fully in line with Republican initiatives, spent so much time in Washington, and now has a campaign run by Republican lobbyists? Does anyone really believe this?
Over these past 8 years, I haven’t stopped asking myself: where has all the Republican political talent gone? Is this the best they can do? Is this the best America can do?
Is a President who comes to power based on a campaign founded on lies and misinterpretations legitimate? At what point does John McCain’s self-professed honour turn into dishonour? Is the fight for the Presidency worth the high cost of destructiveness and duplicity that we see every day in the media?
Read Sarah Palin’s comments, delivered towards the end of the debate:
"But even more important is that world view that I share with John McCain. That world view that says that America is a nation of exceptionalism. And we are to be that shining city on a hill, as President Reagan so beautifully said, that we are a beacon of hope and that we are unapologetic here. We are not perfect as a nation. But together, we represent a perfect ideal."
I believe that increasingly, American exceptionalism has become American delusion. You can’t possibly claim to represent a perfect ideal, when all you do is spin out lies and negativity while espousing politics that so clearly favour a few rich special interests at the expense of the large majority of the population, the environment and the future.
I’m sickened by the fact that this kind of rhetoric is so clearly in contrast with the reality of political achievement, and yet still so widely believed. With every election, I’m afraid that my faith in politics and the future of this country is further eroded, until I wonder what will be left.
It’s not just about Wall Street
EESA is primarily concerned with buying non-performing mortgage-backed securities. These are non-performing because the mortgage holders have either defaulted on their loan payments, and the bank has foreclosed, or because they are late with their loan payments, so the security is a non-performing asset. However, signing for a mortgage is the responsibility not solely of the bank, but of the signatory who has committed to the loan.
In evaluating a housing purchase, you need to understand the total cost of the mortgage at current interest rates and decide whether this is affordable. You need to evaluate your current financial situation, but also at what may happen if you lose your job or if interest rates rise. You need to ask the same questions before refinancing your mortgage and cashing out the balance to buy plasma TVs, your third car, or an expensive vacation.
There have definitely been instances of deceptive marketing and possible contractual moves to the detriment of the policy-holder, and the advantage of the bank. However, I also read of blue-collar workers who have taken mortgages on houses which were clearly beyond their ability to pay. I'm not condemning them: the dream of home ownership is a valid and powerful one. But they responded by taking on two or even three jobs, sometimes at minimum wage. With the slightest disruption - such as a 3-month recovery period due to ill-health, or a rise in interest rates - their careful payment plan became impossible to maintain. These things happen, and regrettably they happen more frequently in a country with a low minimum wage and without an effective public healthcare system.
But let's leave this aside for the moment: EESA is purchasing the mortgages of people who can no longer afford to pay for them. How it will manage these mortgages involves a number of decisions, but the government has already established two mechanisms to deal with foreclosures and mortgages, and I believe they will be able to muddle it out.
This is therefore not a bail-out only of Wall Street: it's a bail-out of a vast number of families and individuals who have purchased real estate which they could not afford. We have to be very clear on that if we are to understand why this situation has arisen, and what is to be done in the future.
We also need to be clear about the problems related to the broader credit crisis. This is the real problem, for two reasons:
(1) Banks cannot lend without a risk-assessed capital:loan ratio of 8%. Equally speaking, they cannot borrow to meet short-term obligations.
(2) The failure of banks and traders has led to significant market disruption, which in turn is causing incredible havoc in the derivatives market. This is where the real danger lies. Although the estimated value of outstanding derivatives has fallen from $ 62 to $ 53 trillion, the scope for a catastrophic loss provoked by a highly-leveraged firm or contract is immense.
It is this failure to regulate the contracting and trade of derivatives which is more serious than the current housing crisis. This is why EESA must be passed, and why the Fed needs to keep injecting liquidity into the market through opening its discount window for bank and financial services borrowing.
This is not a new problem - neither is the real estate devaluation, nor is the extremely low saving rate and high debt level of most American citizens. Yet to blame Wall Street exclusively for this problem is ignore other players with shared responsibility of this complex issue: the Federal Government, which has not updated its regulation to keep pace with the financial industry; the pension system, which is increasingly invested in equities; and aspirations of millions of people, and perhaps the society in which they live, which idealise the belief of easy money and immediate self-gratification.
Thursday, 2 October 2008
Understanding the Boom and Bust Cycle
My second crash was the dot.com crash in 2000-2001. Nearly every week in 1999, a business plan would land on my desk, with yet another idea to revolutionise some aspect of the economy by migrating it online. The problem was that everyone wanted to buy a Ferrari with someone else’s money, but couldn’t figure out how they would pay that money back.
I remember teaching a ecommerce course to executives in Cyprus. I made the comment that if you are going to go online, make sure you know how you will make money, because most online ventures are losing it. The disbelief and reprobation at my comment was nearly universal, and it was most pronounced by one insurance executive who stormed out of the room in protest.
The third crash, real estate, has been a long time coming, and so many people have warned against it. It was Robert Schiller who coined the term “irrational exuberance,” later used by Alan Greenspan in his 1996 speech at the American Enterprise Institute. Any objective price analysis in major urban areas in the United States, London, Paris, or other major cities in the past 3-5 years has usually shown that the price-value relationship is overvalued, particularly when total costs of ownership are taken into account.
I’ve been warning my clients since 2006 to guard their capital, scale back, watch out for leading indicators in their source markets (mostly US and UK) for higher inflation and higher interest rates: these are the advance signs of a crash. Most of them did not listen.
What have I learned from the boom-bust cycle? They tend to follow five phases:
1. Early Innovation
There are good profits to be made through innovation. Whether this innovation is sparked by a company like Amazon.com, which pioneered online book sales, or the Cypriot farmer who sold his land outside Paphos and bought a Porsche, it's clear that at the first stage of the cycle the economic returns are far in excess of any capital invested or any risks involved.
2. Mainstream Acceptance (Jumping on the Bandwagon)
In this stage, the sector and business model in question enters the mainstream. Time, Fortune and The Economist all run features on it as an exciting new field. Coverage branches into hagiography: Jeff Bezos, Captain of Industry.
In this stage, the boom has become institutionalised. Goldman Sachs develops a separate unit with offices in New York, San Francisco, London, Tokyo and, yes, Moscow, to manage the money they are making. Harvard Business School launches classes on the subject; INSEAD develops a new department. Everyone and their uncle is involved, starting a hedge fund or selling lingerie online. When your taxi driver is giving you tips on what shares to buy, you know a crash is imminent.
In this stage, economic returns are created by economies of scale and sophisticated trading and asset management techniques: much value is generated by foreign capital and late investors who don’t really understand what they are signing onto. The institutionalisation phase is also characterised by the gaudiest and most ostentatious consumption possible: think of Dennis Kozlowski’s $ 6,000 shower curtain, or Enron’s strip club lunch breaks.
This is also typically where you have near-constant references to "a new paradigm," "a revolution in ____ (fill in the blank)," "new horizons," "emerging opportunities in the growth markets of the future," etc. This is often hyperbole cheerleading a trend who's main potential is behind it, rather than ahead of it.
4. Desperation and the First Panic
By this stage, so much money is chasing so few investment opportunities, that the potential for producing an economic return to cover cost of capital and risk is difficult or impossible. Corners are cut: high valuations are justified through improbably forecasts; returns are made through high-risk bets. This is the stage where the risk of an illegal or unethical trade is the greatest. This is where companies advance-book their income, move debt to off-balance sheet vehicles, or take high risk positions. This is also where you will see the first valuation crashes: a share will lost 15-20% overnight; within a week it will have regained its value as investor see “an exciting investment opportunity at a historically low valuation.” Right.
The crash is when the shares of an entire sector drop, dragging the rest of the index or the economy with it. The main emotions of a crash are desperation, panic and ignorance. An observer never knows why the market is dropping; he only knows it’s dropping, and he’d better cash out as well.
The crash is when you have all the natural pessimists (about 75% of the population, in my opinion), come out of the woodwork and start the “I told you so,” and also when you have the craziest ideas surfacing: it’s the government's fault; it’s a Wall Street conspiracy to take over the world.
Politicians inevitably get involved, condemning the evil profit-makers. These are the same politicians who’ve been all too happy raking in the campaign contributions the past 7 years, and customising legislation to suit their important supporters.
Why does a crash occur? Because typically too much money is chasing too few real investment opportunities. When a market opportunity is saturated, it inevitably means that economic returns are far less than cost of capital, and in many cases less than the cost of inflation. Why? Because the innovation stage of the cycle is over; because market demand has been fulfilled; because too many competitors are driving down price; because markets have not yet adapted.
The point is that you can always tell when this point has occurred by fundamental financial analysis. The problem is that the very same people who are doing this analysis are usually the people who have the most to gain from propagating the current system. I’ve seen this up close, and while it's very seductive, it’s never pretty.
So what will come after this crash? The US Presidential Election will be held on November 4th: I’m betting Barack Obama will win. Equity values will settle in a few weeks, and start rising steadily from the first quarter 2009. (Some sectors will continue to be hit: retailers, home-builders, automobiles, etc.) The spring will bring new confidence and possibly a new bull market. It will be “morning in America” again, and as values of equities and homes begin to recover, everyone will optimistically plough their money into the next best thing.
What could go wrong? A number of things. The hedge fund sector could finally melt down. This would be a real crisis. There could be another terrorist attack, or an attack on Iran: these are likely to be mere speed bumps on the road to the next boom. That is, stock market boom.
What will that be? I’ll make two bets:
1. Renewable Energy
The Obama Administration and Democratic Congress will pass legislation favouring renewables, granting tax holidays, emissions limits and funding. Otherwise worthless tracts of the Sonoma desert will suddenly become priceless assets; little-known companies will appear with the solution to change our world. The cycle will start again. Everyone understands renewable energy: everyone loves it.
2. Biotech/Nanotech/Gene Therapy
For the first time, we are near real breakthroughs in mainstream gene therapy and the biotech/nanotech systems needed to deliver them. I’m less confident about this choice, since research is very capital intensive, valuations are already high, and big pharma is already involved. Also, it’s a terribly complex subject, and your average investor may not be in a position to evaluate it.
My advice? Be reasonable. Do the math, and do your homework. Don’t bet the farm. If you have a real opportunity, develop it within your means. All this has happened before, and it will all happen again.
Tuesday, 30 September 2008
Errata in Michael Moore’s polemic against the Emergency Economic Stabilisation Act
Michael Moore provides five criticism of the $ 700 billion Emergency Economic Stabilisation Act of 2008. It is strange, to say the least, that these reasons are chosen, given that there is so much evidence in the Act to the contrary.
I also wonder at his contention that “Of course, sane people know that nobody "lost" anything yesterday..” Is Mr. Moore not aware of that there are at least 60 million US holders of Individual Retirement Accounts and 401(k) plans which are heavily invested in stock market equities? Is he not aware that a significant share of pension assets held by CALPERS, various state and university endowment and other funds is in the stock market? Is it such a light thing to wipe off $ 1.2 trillion in value?
But let’s leave philosophy aside and get to the facts of his argument. Moore claims that:
1. The bailout bill had NO enforcement provisions for the so-called oversight group that was going to monitor Wall Street's spending of the $700 billion;
2. It had NO penalties, fines or imprisonment for any executive who might steal any of the people's money;
3. It did NOTHING to force banks and lenders to rewrite people's mortgages to avoid foreclosures -- this bill would not have stopped ONE foreclosure!;
4. It had NO teeth anywhere in the entire piece of legislation, using words like "suggested" when referring to the government being paid back for the bailout;
5. Over 200 economists wrote to Congress and said this bill might actually WORSEN the "financial crisis" and cause even MORE of a meltdown.
On the first four points, he is wrong:
The Act has sufficient enforcement oversight mechanisms, including the following:
a. The Financial Stability Oversight Board is established, comprising the Chairman of the Federal Reserve, the Secretary of the Treasury, the Director of the Federal Home Finance Agency, the Chairman of the Securities and Exchange Commission and the Secretary of the Department of Housing and Urban Development.
b. The Secretary of Treasury is required to report every 60 days, and for every tranche of $ 50 billion spent.
c. All transactions are to be reported within 48 hours.
d. The Secretary is authorised to draw down only $ 350 billion in the first tranche.
e. The Comptroller General is required to report every 60 days, implement an annual audit and develop monitoring mechanisms.
f. An Office of the Special Inspector General for the Troubled Asset Relief Programme is established to further inspect and monitor TARP’s actions.
g. A Congressional Oversight Panel is also established to monitor TARP every 30 days.
h. The Act enables the FDIC to take enforcement action “against any person or institution where the banking agency has not acted, and requires cooperation with the FBI and other law enforcement agencies.
i. The Government Accounting Office (GAO) is given space and oversight capacity within the facilities of the Department of Treasury to monitor the Act. This is in line with SEC regulatory practise.
Section 104 gives the Oversight Board the specific responsibility to “report[e] any suspected fraud, misrepresentation, or malfeasance to the Special Inspector General for the Troubled Assets Relief Program or the Attorney General of the United States, consistent with section 535(b) of title 28, United States Code.” The Board is also responsible for appointing a credit review committee for the specific purpose of evaluating the purchase authority and the assets acquired through the exercise of such authority.
This is fully in line with US government law, and operates in the same way that Congress provides an oversight function of Federal Government spending. It is simply not true that there are no enforcement provisions.
The Oversight Board is able to take criminal action against executives who improperly profit from TARP. Note that Moore uses the term “steals”: if this is the case, the issue will be handled by the Attorney General or the FBI, as per US law.
Section 101 (e) requires the Secretary to take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset.
Section 111 restricts executive pay, in particular the use of Golden Parachutes, as a further means of enrichment.
The argument that there are no specific provisions to minimise foreclosures is absolutely untrue:
Section 110: “For mortgages and mortgage-backed securities acquired through TARP, the Secretary must implement a plan to mitigate foreclosures and to encourage servicers of mortgages to modify loans through Hope for Homeowners and other programs. Allows the Secretary to use loan guarantees and credit enhancement to avoid foreclosures. Requires the Secretary to coordinate with other federal entities that hold troubled assets in order to identify opportunities to modify loans, considering net present value to the taxpayer.”
Section 110 “Requires federal entities that hold mortgages and mortgage-backed securities, including the Federal Housing Finance Agency, the FDIC, and the Federal Reserve to develop plans to minimize foreclosures. Requires federal entities to work with servicers to encourage loan modifications, considering net present value to the taxpayer.”
Section 124. “Strengthens the Hope for Homeowners program to increase eligibility and improve the tools available to prevent foreclosures.”
4. No Teeth
This is absurd. The language of the Act is filled with specific provisions, using languages like “requires,” “audits,” “must implement,” etc.
Furthermore, Mr. Moore ignores the provision of Section 134, which “Requires that in 5 years, the President submit to the Congress a proposal that recoups from the financial industry any projected losses to the taxpayer.”
This means that any losses incurred from lower asset prices will be refunded by the financial industry, most probably through a special tax.
I’m not going to respond to his fifth comment, except to say that (a) there will be inevitable policy disagreements with policy initiatives of this sort, and (b) recommendations on alternatives – such as direct injections of capitalisation into the banking system or nationalisation following the Swedish model are impossible in the current business climate and culture of this country.
To conclude: I’m rather surprised Michael Moore is this far off base. I can only presume that he didn’t read the plan, or is not aware of how the division of powers between the executive, judicial and legislative branches of the US government work. The alternative is that there is some bizarre political motivation to his writing, which given the current state of financial markets, is absolutely inappropriate.
The upside of $ 700 billion – and what you should be worried about
The $ 700 billion rescue package is not a “bailout” of Wall Street banks, as widely recounted. The US Government is getting assets for its money. By purchasing mortgage-backed securities, the government is receiving the title deed to houses, and/or the homeowner cash flow that pays for them. This is a hard asset, albeit a discounted one at the current moment.
We know that the problem with these securities is that they bundle mortgages of varying value and payment condition. For instance, consider a $ 150 million mortgage-backed security comprising 1,000 mortgages with an average value of $ 150,000 each. Of these mortgages:
· perhaps 17-25% are non-performing mortgages which have been or are in the foreclosure process
· perhaps a further 13-17% have delayed payments
The remainder are functioning mortgages, providing a steady, predictable income stream.
This is what the US government will be getting: either a future income stream, or a future asset value, because it is purchasing mortgages, i.e. title deeds to houses. It’s not just giving money for free to investment banks, as some commentators apparently believe.
Now, why is this a particular problem for banks? Because of three reasons:
(a) The main reason is that by law, commercial banks need a Tier 1 and Tier 2 capital ratio of 8%. That means that for every $ 100 they’ve lent, they need $ 8 in actual assets or cash reserves. Mortgages (and mortgage securities) have been used as part of this capital, but with the fall in housing prices and the write-down in property values, they are a declining asset. The problem, however, is not so much making up the difference of capitalisation, it’s that in an environment where panic dominates in the markets, one bank will not lend to another, IPOs don’t take place, and in general all assets are under question.
(b) The second, equally important reason is that if lending does not re-start, it’s not just banks which will be affected, but ordinary people and “real economy”: businesses looking for a car loan, working capital, or any other financial transaction.
(c) The third reason is that the more banks go out of business, the greater the turbulence in the derivatives market. More on this later.
In my opinion, the US government has a strong chance of fully recovering the full $ 700 billion in securities purchases. Why? Because the housing market will eventually recover, perhaps in 18-48 months (depending on the area). Don’t forget that the US population is growing, and that recessions have tended to be short-lived in recent decades.
As the property market recovers, the government will be able to sell off the mortgages or the assets (houses) they finance. This has happened a number of times before, both with real estate as well as other asset classes, and there is no reason it will not happen with this situation.
There are definitely flaws with the current plan. Given the Bush Administration’s propensity for favouring special interests, the main open question is one of value: what value will the government buy at, and what value will it sell at. Congressional, bipartisan oversight was supposed to address this, but in my opinion this oversight often does not work in practice – as current events show us.
Now, what should the average investor (and citizen) really be worried about? This crisis has cast at least three philosophical assumptions under grave doubt:
1. Assumption # 1: Equity Investments and Retirement
The sacred cow of US politics has been the end of the defined-benefit pension and the rise of retirement assets invested in equities. The 401(k) is the typical expression of this, but there are any number of others. We should make no mistake in underestimating the gravity of this problem. Some 79 million American baby boomers are set to retire in the next 30 years. Some estimates of unfunded pension and healthcare liabilities exceed $ 200 trillion, or over 13 times US GDP.
We cannot expect a financial system in which large-scale risk of the type posed by sub-prime mortgages and highly-leveraged hedge fund trading offers enough security for a pension system based on equity investments. If this is the case, a key Republican (and Democratic) platform is rendered logically inconsistent. In turn, this means two options:
(a) Either an entirely new set of safeguards needs to be built into the system to assure that pension assets cannot be used to leverage derivatives, equities and real estate trading, or
(b) We need to build up Social Security, Medicare and Medicaid, so that they are capable of serving as the “pension of first resort” (and healthcare plan) for the growing cohort of American retirees. This will require a massive fund injection, which the US government does not currently have.
In any case, we need to stop the hypocrisy that privatising Social Security will solve the problem – recent events this past decade indicate that it won’t.
2. Assumption # 2: Self-Regulation
The principle of a self-regulating system is self-restraint. Unfortunately, this can no longer be considered natural given the large amounts of money chasing bonus opportunities for bankers and other traders. Consider that:
(a) There is someevidence to suggest that many senior investment executives or credit risk managers do not fully understand the quantitative models being deployed by the under-30 rocket scientists they employ.
(b) The fact that there is no central derivatives register makes counterparty risk impossible to quantify.
(c) Leverage ratios of between 10 - 50 are common in a number of trades and strategies. The fact that investment banks are prime brokers to hedge funds provides an immediate conflict of interest between (a) lending, and (b) risk assessment.
(d) The extensive use of Special Investment Vehicles and other off-balance sheet mechanisms makes credit rating difficult to evaluate. Given the high speed of most market trading, credit rating would have to be implemented every 2-3 hours to be accurate: this is clearly impossible.
Given that greed is a human characteristic as old as the human race, it is highly likely that the equities market, i.e. the Stock Exchange, needs to be “decoupled” from the professional investment market. This may sound like a paradox, but remember that the fundamental purpose of a corporate stock market listing is to gain capital in the form of outside shareholders. This should be a transparent, well-regulated process, particularly after the Sarbanes-Oxley Act.
What we may need to do is create a separate system of regulating and managing hedge funds, investment banks, equity funds, traders and everyone else trading primary shares for profit. Don’t forget, it’s the speculative trading side of operations that has caused nearly all the major stock market crashes in recent history, from the 1987 Savings and Loan collapse to the 1997-1998 emerging market defaults to the 2001 dot com crash to the current sub-prime collapse.
None of these crashes has anything to do with the “real economy.” In the real economy, the share valuation of the company reflects assumptions about its future cash flow and profits, as well as an evaluation of sectoral and global competitiveness. Acceptable financial ratios and indicators exist which, together with international accounting standards and financial reporting, provide a transparent basis on which investors can make decisions. In no case to short-selling or SIVs or leverage ratios of 50 or more contribute to the long-term, sustainable growth of the economy.
Similarly, the real estate / property development sector can equally be analysed from the perspective of investment valuation and risk, either at the individual or corporate level. This is not a terribly difficult process: the question is why sub-prime and Alt-A mortgages were offered (or purchased in CDOs) in the first place by institutions who should have known better. The answer is quite simple, and that brings us back to greed.
The problem is that the amounts of money in the system are simply astronomical, and many people are dining at the table: bankers, quants, politicians, realtors, foreign investors, pension fund officers – everyone. As long as the financial sector remains a main source of campaign contributions to the Democratic and Republican parties and candidates, don’t expect to see substantial change. Sarbox was supposed to deal with issues like off-balance sheet entities after Enron: now they’re back, under a different name. Can anyone explain why?
Assumption # 3: $ 700 billion is sufficient for the total debt workout
It’s not. The mess left behind by sub-prime and Alt-A mortgages is only the tip of the iceberg. Don’t forget: the total [sliding] value of US mortgages is about $ 11 trillion. Sub-prime and Alt-A in total are estimated at perhaps $ 1.2 – 1.5 trillion. Not all sub-prime and Alt-A mortgages are underwater. The financial sector has already written down at least $ 650 billion related to sub-prime loans. So the end is in sight.
The problem is not the loans themselves, but hedge fund strategies based on the loans. Quite simply:
· Sub-prime/Alt-A loan write-downs reduce bank capitalisation;
· Banks cannot get more capital; their stock market valuation falls;
· Other highly leveraged or highly valued companies start to decline (e.g Apple, Dell, General Electric, General Motors);
· Hedge fund strategies on the one hand accelerate the decline by betting against a stock (shorting it); other funds suffer because their models may not have taken such rapid falls in value.
Result? Financial chaos. With highly leveraged bets going wrong, a hedge fund with $ 7 billion under management and a 10-1 leverage ratio that makes the wrong bet and loses, doesn’t risk only the $ 7 billion in asset value, but $ 70 billion in leverage. Given that total derivate contracts are estimated at $ 62 trillion, you get an indication of the magnitude of the problem (US GDP, by contrast, is $ 14 trillion).
While $ 700 billion should be adequate for the mortgage crisis, it does not cover the remaining constellation of trades, derivatives and debt out in the market. But unless we address the mortgage issue, we can’t get to the issue of settling the other debt – we merely exacerbate it.
As Geena Davis said in “The Fly,” “Be afraid. Be very afraid.” These problems have been apparent for a long time now, but so far we have allowed ourselves to be seduced by ephemera – a rising stock market, houses that are ATM machines, high executive compensation packages, and generous campaign contributions. Yet we are living in a time of unparalleled demographic, technological and economic change.
The fundamentals of the US economy and the political system that regulates it need to change if it is to compete in this new world. I’m sorry to belabour the obvious, but I haven’t yet seen a commitment or indication from either Presidential candidate that they understand these changes and have a plan to address them. Plans like health care, withdrawing from Iraq or investing in solar power are all interesting, but in many ways these are policies that address symptoms, not root causes.
Unfortunately, with the system of legislative development, lobbying and campaign finance being what it is, I do not anticipate major changes in US foreign or domestic policy that will bring about the conditions needed for long-term success. Maybe the system will muddle through and heal itself. In my opinion, however, the chances of this decline increase with each year that educational achievement falls and complexity and national debt rise. These are clear and evident symptoms of a lasting decline, and unfortunately I don’t see a plan to reverse them.
Saturday, 27 September 2008
Οι αρχαίοι ακόμη δουλέυουν για μας
We were talking about what had changed in the week since I left Athens, and this of course branched into a philosophical discussion of Greece, its politicians and its problems. He said something which I can’t forget:
Οι αρχαίοι ακόμη δουλέυουν για μας. “The ancients are still working for us.”
He meant all those great figures that made Greece: Themistocles, Pericles, Leonidas, Phidias, Callikrates, Herodotus, Homer. Why else does the story of Leonidas’ stand at Thermopylae still resonate today? Why do millions visit the Parthenon and Delphi every year? Why do doctors take the Hippocratic Oath? Why do we still read Socrates or run the marathon race?
Unfortunately, much of what we have created since then pales in significance, meaning and endurance. I very much doubt that any modern TV series or political speech will last as long as the words of Demosthenes, Sophocles or Pericles. Our natural landscape is desolated by fire and drought when it is not blighted by garbage and ill-planned urbanisation. Our politicians are figures of inspiration only for those craven few who seek public sector employment or government contracts, and neither their fame nor their utility last.
My own philosophy is that we should do as much as we can to leave this place a better one than we found it. We all have personal responsibility for how we live: how we dispose of our garbage, how we drive, how we communicate, what we consume, and how we educate our children.
I also believe that as inheritors of this civilisation, we should be working twice as hard, even more, to honour all those who have gotten us to this point. For me this is above all a profoundly personal commitment. It’s why I choose to live and work here, though all my work is based outside Greece, and could easily be run from an offshore location at much lower cost. It’s also why I try to live my life in line with a few invariable principles of honesty, objectivity, self-reflection and consideration for others.
To sit and wait in the hope that this crumbling edifice of the public sector will actually do anything is futile. Our institutions, political customs, and laws are anachronistic, and do more to ruin public life than help it to flourish. If we want to change anything, we need to start with how we live our own lives, and find those few areas where collective action by well-informed citizens and friends of Greece can lead to a real change.
Back from Rubezhnoye
Rubezhnoye is a small industrial town located about 150 km NE of Donetsk, near the Ukrainian-Russian border in Lugansk Oblast. It’s not like other cities in Ukraine, where you can find WiFi, western cafes and restaurants, and all the comforts of home. There is no internet, except for a highly overloaded satellite uplink which serves the 50-odd managers in the plant. Accessing any kind of news is impossible, and walking down to the newsstand to buy the Financial Time or Herald Tribune is an option which simply doesn’t exist.
So, after a week without news, I returned to Athens to find – NOTHING HAD CHANGED! Republicans still squabbling with Democrats about the $ 700 billion credit bailout, Obama still sniping away at McCain, who was sniping back: the only news was about whether they would be sniping at each other from the same room, since there was some doubt as to whether the first debate would take place. How anyone can take the two US Presidential candidates seriously on the financial crisis when they’ve taken massive campaign contributions from investment banks and Fannie Mae is beyond me.
In Greece, the Vatopedi scandal, involving an illegal land claim by the Vatopedi Monastery, followed by an even more illegal land swap, was still smouldering. Unfortunately, it looked as though ultimately no one was responsible. I have the feeling that the media in this country are already looking for the next big issue.
In Ukraine, there was some news, but again nothing really new. The Orange coalition had collapsed the week before. My estimate is that Iulia Timoshenko and Viktor Yanukovich will form a caretaker government until sometime next May or September, when conditions will be ripe for an election. Everyone party is scurrying around to raise cash to finance this election. The Gazprom gas price hike looms over everyone, yet nobody knows exactly what will happen – except that most likely, some Ukrainian politicians (and Gazprom) will make money, and Ukrainian citizens and companies will pay for it.
In short, it’s business as usual. Crooked government in the US, Greece and Ukraine. Dishonest or inept politicians across the political spectrum. The intersection of money-rich campaign donors (and even monasteries!) bribing politicians, so they in turn can make yet more money. A depressing state of affairs.
Yet in Rubezhnoye, the real economy continues at speed. A new packaging plant and paper machine are being built that will increase output, creating new jobs and enabling Ukraine to produce new packaging materials, supporting the movement of goods and economic growth. My client pays its taxes, pays its workers competitive salaries, and contributes to the environment: over 80% of packaging material is wastepaper, gathered from recycling points across Ukraine and Russia. Starbucks and Pizza Hut and WiFi may be missing, but life goes on without them, and pretty well, I would say. If only someone could do something about these politicians….
Thursday, 18 September 2008
A response to Brendan
Thanks for your comment. I always enjoy receiving your feedback. Here's a partial response to the issues you have raised.
1. Obama’s Health Care Promises
I unfortunately don't believe the Obama Administration will be able to finance its health care plan. At present, Medicare and Medicaid are already creating serious spending problems, as I'm sure you know, even though they are highly flawed systems (in terms of staggered deductibles and lack of government-mandated prices). Although a partial reform of either system would no doubt improve effectiveness, the growing demographic trend of senior citizens and the impending retirement of the baby boomer generation means that there will be a major funding problem in the "paygo" system in the next 25-30 years. Unless, of course, the US admits greater numbers of legal immigrants, increases payroll taxes, increases the minimum wage, or transfers tax income from other revenue sources to pay for these programmes.
Extending public healthcare to the majority of younger and middle aged citizens excerbates the problem, and requires at least three conditions to be successful:
(a) Very high start-up and ramp-up funding commitments, which currently neither the US federal nor state governments have the means to finance given its perilous public debt.
(b) An assumption that the economics of the system work only if employees and insured foresake private sector health insurance, and are content to trade off higher taxes (probably on payroll) in exchange for lower direct insurance costs. In my experience with mandatory public health insurance, most insured are unhappy with the necessity for high mandatory contributions, while they often take out supplemental insurance to cover the gaps in the public system. The US income tax system is already very fragmented and uncompetitive, and the sum total of US taxes (federal and state) are very high. Who is actually going to pay for public healthcare?
(c) A different demographic situation quite unlike the one the United States currently finds itself in. Please look at most objective studies on Social Security, Medicare and Medicaid funding projections, and offset these against the rise of US federal and state debt, and particularly unfunded pension liabilities which may amount to more than $ 200 trillion according to some studies. (The US GDP is currently about $ 14 trillion).
I can do some back-of-the-envelop figures if you will, but not this week (my schedule is really busy at the moment). In the same spirit, however, I would ask you to provide me with one example of a public healthcare system that has been developed in a US state, which has been within budget over the first four years of operation.
No public healthcare initiative that I know of, starting from an equivalent situation to that in which the US finds itself, has ever stayed within its public budget. Launching such a system given the current Federal budget situation and the demographic situation in the next 4-8 years will be financially unsustainable and lead to massive debt which cannot be offset by a reduction in the spending on the Iraq war.
If you like, let's revisit this conversation four years from now and see how the public medical insurance situation in the United States has changed. With your permission, I won’t get into analysing the range of other promises made by either candidate, unless you specifically want me to.
2. Foreign Policy
I believe that no major changes in US foreign policy will be made that will contribute to a fundamental solution to most of the current critical challenges we face, let alone emerging challenges. This is regardless of which candidate is elected in November.
Let's take just four critical issues, and leave issues like Guantanamo Bay aside: Guantanamo Bay is a problem solely determined by US decision-making; real foreign policy problems are not - other actors have a say. It is also not of any material importance: lives will not be saved by closing or relocating Guantanamo, which could not be saved by incarcerating prisoners elsewhere. Such a decision is a uniquely American one to make. It is a distraction, although obviously an unwelcome and unconstitutional one.
There is no long-term US strategy for victory in Afghanistan. There is no vision for what a stable, successful Afghanistan might look like, or how it would interact with its neighbours. There is no understanding of how long this might take (in my opinion, it will take at least one generation, or at least 20 years) or cost. There is no comprehensive, detailed or realistic analysis of the drivers, barriers and scenarios for such a vision, or a strategy for achieving it. If you have seen one, I would be very happy to read it.
Take just one factor: there cannot be victory in Aghanistan without a totally different political, economic and social situation in Pakistan. What solutions for helping Pakistan have you heard from the two candidates? The debate used to be about whether President Musharaf was an effective US ally or not, and currently its whether the US should carry out unilateral attacks within the Tribal Areas or not.
This is symptomatic of an extremely superficial approach: attacks on the Tribal Areas are not going to solve the core problem of Al Quaeda's or the Taleban's fundamental attractiveness as a social-political-religious force. If anything, it will increase that attractiveness, building the Taleban's identity as a movement capable of defeating Pakistani and US military forces.
Take another factor: there is abundant evidence to suggest that one main elements motivating the Taleban has been Pakistan's enmity with India. This has led the ISI to support the Taleban as a "fifth column", a potential source of jihadists against Indian troops in Kashmir.
How many times have you heard either the McCain or Obama campaigns mention Kashmir? What is US official policy on Kashmir? Are the tools chosen by the US government for working with the Pakistani and Indian governments at all conducive to regional stability and solving the Kashmiri problem? How would you address the disparity in the US approval for (and funding of) the Indian nuclear programme, and its official disproval of the Pakistani nuclear programme?
Contrary to popular opinion, I consider it highly unlikely that the US will implement a full withdrawal from Iraq. I fail to see the strategic motive for doing so, particularly given the costs and sacrifices of the past seven years. Please consider:
(a) A full withdrawal from Iraq would prompt an almost certain Iranian takeover of parts of the country, and the collapse/secession of others. This amounts of a vast strategic setback to the United States and its allies, since Iranian presence in the oil-rich, Shia heartland can hardly be beneficial. Should this happen, Iran’s influence over Hezbollah, Hamas and Syria will increase, and new targets for Iranian-backed instability will be created.
(b) A US strategic presence will probably be assured by a long-term force profile of about 35-40,000 troops, spread between Iraq’s territory and neighbouring states. This is subject, of course, to having an Iraqi government that makes the right decisions, which currently cannot be assumed.
(c) Although combat operations will gradually decrease, the key approach in the short term will almost certainly be military. Should Obama fully withdraw from Iraq, and should Iraq collapse, the Democratic party will lose all credibility in the area of foreign policy, perhaps similar to the debacle of the failed Special Forces mission outside Tehran during the Carter administration. The damage to US vital interests will be profound.
The military issue notwithstanding, I ask again: what is the US vision for a stable, successful Iraq? Are there any countries in the Middle East where such a vision is present in reality? What will be the long-term costs of our engagement in Iraq, and what impact will these have on other policy areas. If you have any signs that the Obama or McCain campaigns are thinking seriously about Iraq besides the political issue of military withdrawal, I would appreciate your input.
The major challenge of the incoming administration will be dealing with Iran’s nuclear ambition, which can only be addressed in the context of its broader place in the political, religious and economic framework in the Middle East and SE Asia. This issue cannot be solved militarily, and it certainly cannot be solved through the wishful, short-term thinking currently espoused by successive US administrations, as well as the two campaigns. Please consider only the following factors:
(a) Iran has a history of nearly 3,000 years of Persian culture and history, over which is overlain a more recent history of the Islamic faith and its subset, the Shia interpretation of that faith. This is not going to go away anytime soon, but will remain a powerful motivator for national(istic) political mobilisation, identity-building and engagement.
(b) The history of the last 60 years is, if anything, fuel on the fire in terms of nationalism. The US support for the Shah, the 1953 CIA-led coup d’etat against a democratically-elected government, the rise of Khomeini, the Iran-Iraq war, during which Iranians were killed en-masse by US-provided weapons, including chemical weapons. These events, real and re-imagined, are equally not going to disappear because of a UN or IAEA resolution on nuclear weapons. They are, if anything, a powerful reason why Iran should develop nuclear weapons, in the eyes of a certain part of the population.
(c) Given this past history, and given the US’s overwhelming support for Israel and its undeclared nuclear force, it is the utmost hypocrisy for the US to press for an end to the Iranian nuclear programme. Sad, but true. This is not to say I am in favour of Iran developing nuclear weapons: this thought fills me with horror. But the vapid declarations of successive US administrations, apparently marching in lock-step with the Israeli government and various lobby groups, is not a recipe for success.
(d) Iran is one of the most populous countries in the region, and with its present demographic growth rates will continue into the near future. Its major challenge will remain how to trade off religious extremism and economic growth. Its major political challenge is how to break its encirclement by US military power (Iraq, Afghanistan and the Persian Gulf) to exercise its growing “great power” status/aspiration.
(e) The demographic trends may present the most hope for a future political engagement, and “normalisation”, of Iranian society. The aspirations of the young are very different from the religious-military elites currently in power. Any change in Iran will be a change in the political role of the overwhelmingly younger population, who are concerned with the same issues young people everywhere are: developing their own identity, finding a job and self-respect, experiencing new cultures and influences. Policy tools towards the young and female populations, who are currently excluded from power, should be developed: university exchanges, cultural exchanges, employment opportunities, education, etc. A generational change in perceptions, history and political interaction is required. A bombing campaign will disenfranchise these groups further, and consolidate the current regime’s force through incendiary nationalism.
(f) Iran’s continuing support for Hezbollah and Hamas, and its ability to partner with secular regimes who are both harmful (e.g. Syria) and helpful (e.g. Turkey) to US policy is set to continue. A bombing campaign against Iran will only accelerate this support, since Iran will act in increasingly hostile, covert means.
There needs to be a comprehensive engagement with Iran in order to solve the problem. At this stage, I would argue that the nuclear issue is a non-issue: we have no means of solving the nuclear issue unless we solve the long-term motivating factors which have led Iran to seek nuclear weapons in the first place. The nuclear programme is now a matter of national pride, a last defence against “the Great Satan”, and a potent demonstration of Iranian science and competence.
Does current US policy do anything to solve this issue, besides view the problem through the seductive prism of a military solution? What options do the McCain and Obama campaigns provide, besides blanket statements about Iran’s nuclear weapons?
I’ve left this subject for last. US policy towards Israel remains the single greatest barrier to achieving diplomatic normalcy in relations with the large majority of countries in the Middle East. Israel’s continuing settlement policy, its overwhelming military dominance and willingness to use it in populated areas, the power of its lobbyists in Washington, its treatment of Palestinians and its recent incursion into Lebanon are a barrier to any kind of lasting solution.
The US willingness to back Israel at all costs, even when Israel takes steps that abrogate previous agreements, will cost the US much more in blood, treasure and credibility than we can currently imagine. “What goes around comes around”, I’m afraid to say, and as long as we support policies which are so manifestly detrimental to fundamental human rights and well-being, we should not be surprised when even more dangerous terrorist attacks are unleashed against us.
US foreign policy needs to be re-balanced:
(a) The Arab countries are far greater in importance and population than Israel. A realist foreign policy should focus on developing comprehensive relations with the Arab states, and not only through the prism of weapons sales and oil deals.
(b) US policy towards Israel should be steered away from military assistance towards other forms of assistance. The knee-jerk response of a large annual arms deal needs to be re-thought.
(c) If the US is to be engaged in the peace process, it needs to be a consistently fair partner. The elections in Gaza, for instance, were fully backed by the US: Hamas was elected. When the “Road Map” is repeatedly violated by Israeli settlements, the wall-building and military incursions, Israel needs to be brought to task and there need to be real counter-measures.
(d) A lot more has to be done to support the Palestinian side, either to the elected government or, if necessary, to ordinary people. There are plenty of Palestinians living in the US and Americans of Palestinian descent who would be ideal for this task, and who would be glad to help. Unless the ordinary people “disconnect” from Hamas’ social welfare network, political dominance will pass into the hands of the extremists. What would be the impact on US relations if for every $ 10 given to Israel, $ 10 in non-military aid were given to Palestinian causes?
Until now, both the Obama and McCain campaigns have engaged in the same reflexive bowing and scraping to the AIPAC lobby. There is no new thinking there, no real approach to a comprehensive solution. US foreign policy has been a total failure in this area, and one of the main enablers of the 9/11 attacks and the rise of Al Quaeda. Given the rapid advances in technology and inter-connectedness, we should not be at all surprised if future attacks against the US and our allies are launched, in part motived by the Israeli occupation of Palestine.
Please don’t mistake this statement as anti-Israeli, or anti-Semitic. I fully support Israel’s “right to exist”, and I fully support the Jewish religion’s right to free worship. I am against acts of terrorism and violence, against any target, and I am against religious and political extremism in any form.
I look at this issue objectively, and dispassionately: all sides have made grave mistakes in the history of the creation and growth of Israel: Western countries, Arab states, Israelis, Palestinians, the Soviet bloc. If you look at the history of the Jewish and Palestinian peoples in the last 125 years, you would conclude that there are few more shameful episodes in human history.
Yet the answer today is not more of the same, but a fundamentally new approach to solving the problem. This will not be easy, and I certainly don’t have the solution. But unless we approach things differently, you and I will be having the same discussion four years from now. Which I would welcome, of course, but I do wish we could be discussing more positive developments in human achievement!
To come back to your original question: Yes, Barack Obama has engaged in sit-down discussions and speeches and policy documents, as has John McCain. But these are far from offering a comprehensive solution to a series of very intractable problems. The US administration – as the two candidates – are focussing on symptoms, not root causes. They are seduced by the myth of US military power as offering a basic solution to problems which have been, in large part, caused by US military power (or assistance), or a heavy-handed US approach to international law and basic tenets of international law and human rights.
Look at the record of US involvement in Iran, Iraq, Afghanistan and Israel/Palestine, and you will see a record of coups d’etat, invasions, overt and covert military assistance, support for “friendly” dictators, support for torture, a preponderance of military assistance, and a range of other behaviours which are questionable, if not shameful.
The American people are apparently not aware of this record, although there are abundant sources from respectable US and international sources for them to find out, if they were truly interested. Things have been done in their name which, if they were done in Peoria or San Fransisco or Santa Fe, would have been inconceivable.
I fail to see how US foreign policy will solve problems if it is conducted against the fundamental values enshrined in our constitution, our national law or international law. We are inflicting our policies on people who have the same basic human motivations and needs that we do.
In a global society, how much longer do you think this can last without serious repercussions? Are we still living in the 1950s, when people had no alternative sources of information, no means of travel, and traditional political elites and family structures dominated? Of course not. We live in a fragmented, constantly-changing, inter-connected world, where everyone has access to the Internet, satellite TV and Western Union, and where the main battle tends to be one for attention rather than territory.
In this milieu, what we see from the US Presidential candidates is the same vapid, empty superficiality and stupidity that has been practised in the last 50 years. Sound bites are not a substitute for an objective, rational look at the facts, and rational solutions. I'm very much afraid that I do not see much cause for hope in “Change we can believe in” – just more empty promises.
This is the reason why although I am voting for Barack Obama in November, I have little hope that things will fundamentally change in the next four years. There is nothing in the record of US foreign policy in the last 25-30 years which gives me any great hope for the future. As demographic trends drive fundamental changes in the US and global economy and society in the next 25-30 years, I must confess I grow even more pessimistic, which is what led me to make the statement you have objected to:
"Neither party offers a comprehensive policy platform that addresses both economic competitiveness (education, tax reform, manufacturing, energy efficiency, legal reform, public sector reform) and social competitiveness (education, health care, environment) in any convincing way.
Neither party, or candidate, offers a credible plan for funding their many promises.
Neither party addresses the paradigm shift in economic, political, demographic, social and technological trends that have been occurring since 1990, and will dominate the next 25-30 years. "
Please, convince me I am wrong. I would like nothing better, believe me!