Tuesday, December 22, 2009
By Guy Cutrufo
$65 at www.chronaca.com
Review by Steve Glines
There was something about the Victorians you have to admire. They searched for the source of the Nile River; they built magnificent cast iron, filigreed suspension bridges; they published multi-volume novels and generally established what was meant by the word “Civilized.” If the project was enormous there was some crazy Brit or determined Yankee willing to try it. Although we still build enormous things like the Space Station or the Saturn V moon rocket or Boston’s “Big Dig.” Somehow they just don’t have the same magnificence, the same panache of their Victorian ancestors. Even the Channel Tunnel lacks the touches the Victorians would have embellished it with.
These are silly complaints of course, progress marches on. If projects on the scale of the Suez Canal aren’t done anymore then the progress in microelectronics and communications is just as astounding. Still it’s gratifying to find a humanistic project befitting of the highest Victorian standards. Chronologium Academicus is a project of this scope and perfection.
The Chronologium Academicus is an enormous poster that represents an intellectual timeline on a world wide scale. The Chronologium Academicus is to history and intellectual thought what a World Map is to geography. To quote from its website (www.chronaca.com):
“Just as a world map is a representation of the physical world, Chronologium Academicus is a representation of the academic landscape. Chronologium Academicus provides an overview of the “geographic” differentiations of academic areas, disciplines, and time that bound or computer-based references can not match. It presents the first visualization of the whole of history and academia, which effectively delimits and systematizes the scope, breadth, and parameters of academia.
The layout devised for Chronologium Academicus was of central importance to its development. Vertically, its 14 columns present the history of every major academic discipline from the development of language by Neanderthal man to the present, and it’s bordered by 700 portraits of the greatest contributors to that history. … its horizontal layout: at any point all the way across the columns, each row covers the same years. That feature places the isolated bits of information of every major discipline into the historical and academic context of every other discipline, which facilitates our ability to make linkages between events, individuals, and works that occurred during the same period.”
This is truly a monumental work. The poster itself is an enormous 53.25″ x 73.25″ which means it would take up far more space than anything but a “Jumbotron.” Unless you live in a barn or have an unusually large unused wall this poster is not for the amateur. We temporally mounted the Chronologium Academicus across a large glass sliding door (It still had to be curled up at one end) to get a good look at its breadth of information. We stood staring in awe until the spell was broken by a viewer who said, “I’d hate to have the fact checking job on this.”
A very spotty check of a dozen or so “facts” matched up with Wikipedia. That’s neither an endorsement or a condemnation of the data presented. Given the incredible volume of information presented it would be surprising not to find an error. However we will leave that onerous duty to others. In the mean time it will become a challenge to find a public wall in our little town that is unencumbered enough to do the Chronologium Academicus justice.
Tuesday, November 24, 2009
----- Original Message -----
From: Steve Glines
To: Paul Avella
Sent: Monday, November 23, 2009 5:54:03 PM GMT -05:00 US/Canada Eastern
Subject: G.O.P. Considers 'Purity' Resolution for Candidates – The Caucus Blog - NYTimes.com
So now I know what you stand for. ;)
----- Reply Message -----
Paul Avella wrote:
And which of the ten do you disagree with?
----- Reply Message -----
Steve Glines wrote:
PJ - Here are MY thoughts:
(1) We support smaller government, smaller national debt, lower deficits and lower taxes by opposing bills like Obama’s “stimulus” bill;
Calling it Obama's bill is a pushing it a bit. Everyone wanted it. If McCain had been elected he would have done exactly the same. Democrat and Republican economists gave exactly the same advice - pure Keynesian economics. Heck even Nixon once said, "We're all Keynesian now."
Obama was very conservative. Real Keynesian theory would have dictated almost $3 trillion in spending (the GDP deficit) but since the Fed created $3 trillion in new money to prop up friends of the Republican party (wall St.) Obama and friends restrained themselves. Besides it would have been hard to spend that much short of creating another war. Bush/Cheaney would have created another war (Pakistan? Korea?) which is one of the reasons why I think Obama got the Nobel Peace Prize.
(2) We support market-based health care reform and oppose Obama-style government run health care;
Why not support the 1960's style Blue Cross/ Blue shield system (which worked very well) where each state had only one non-profit monopoly. More to the point I believe that it's the function of government to provide (or at least regulate) those things we can't provide for ourselves. I think government should run (or heavily regulate) our education system, our "Public Works" - water & sewage, our communications systems, our roads, railroads and even the airline industry, our defense (including police) and, yes, our health care system.
(3) We support market-based energy reforms by opposing cap and trade legislation;
If global warning is real and CO2 is the problem then how would you propose solving the problem ... within a market economy of course? Cap and trade worked very well with CFC's in a market economy.
(4) We support workers’ right to secret ballot by opposing card check;
Absolutely so long as the ballot really is secret and organizers are allowed access to the employees and companies aren't allowed to manufacture artificial, temporary workers.
(5) We support legal immigration and assimilation into American society by opposing amnesty for illegal immigrants;
Well, they are here and they aren't going home. Since most of them are working, paying taxes and contributing to society (and we obviously need them as workers) why not acknowledge that fact and give those working to earn the American Dream a way into American Citizenship., After all most of us are immigrants and I'll bet not all of us started out as completely legal immigrants.
(6) We support victory in Iraq and Afghanistan by supporting military-recommended troop surges;
I may differ from most of my colleges in at least partially agreeing with you. The fact is we're there and we made a mess of Iraq so are honor bound to clean it up. As to Afghanistan I'm inclined to simply nuke it enough to get Bin Laden then declare victory and leave. If the Afghans can't get it together then to heck with them. Al qaeda is the enemy not a bunch of foolish religious nuts that are happy living in 1400. But then I'm not the president … thank god you're thinking.
(7) We support containment of Iran and North Korea, particularly effective action to eliminate their nuclear weapons threat;
Containment certainly but containment without engagement is a long term loosing proposition. Neither of the nut cases will be around forever and we must be in the position to take advantage of a change in leadership to bring those countries back into the international fold. Obama knows this but I get the impression that most Republicans don't. Bush and Chaney certainly didn't think that far ahead.
(8) We support retention of the Defense of Marriage Act;
When I was running for school committee in Belmont a lady asked me what I thought of abortions. My answer was that it was none of my business. As far as I was concerned the abortion issue was a very private matter between a woman, her doctor and her conscience/religion and that since it was none of my business, by extension, it was none of the states business either. I would say the choice of domestic partner falls into the same category.
(9) We support protecting the lives of vulnerable persons by opposing health care rationing and denial of health care and government funding of abortion;
Yikes you've got to be kidding, health care is rationed today and not providing a public non-profit option is a death sentence to many. The health care ration available to the indigent, low income and unemployed is limited to the suggestion that they take an aspirin and the advise that they get a job. That's not acceptable. The health care bill working its way through congress is designed to insure that health care is available to all regardless of economic status. There will always be some kind of health care rationing lets just not define it by income.
(10) We support the right to keep and bear arms by opposing government restrictions on gun ownership.
I've always read both clauses as forming a single sentence. If there were two thoughts the use of a coma would have been replaced by a period. As a single thought the first phrase frames the rest:
A well regulated militia being necessary to the security of a free State, the right of the People to keep and bear arms shall not be infringed.
In other words each town is allowed to have and manage its own police force (militia) and there is nothing the state or the federal government can say about it. To me that also says that the police (the well regulated militia) as controlled by the local government has the right to regulate all private arms within its jurisdiction. Of course, all citizens are part of the militia by default whether they are armed or not. I suspect most police would not necessarily like my interpretation any more than they like the Republican interpretation which permits a greater chance of being shot at.
Thursday, October 22, 2009
I wanted red meat and New York City was nothing but honey. There was no room in that tight little society for a newcomer, a raw talent in need encouragement. No, the New York City literary society could grind you up and spit you out like so much meat through a sausage grinder.
I went to Boston. The idea was this: Find a town where I was likely to find smart people at roughly the same stage in their career as I was. That meant college students not afraid to scribble without an assignment. I found lots of them. Then they left when their school days were over. What was left were a bunch of shriveled academics that refused to engage in enlightened banter outside of their own hallowed halls. The academic world of Boston was not the literary hub it once was. The preferred attitude is to snub anyone of lesser stature in your own microscopic field and to ignore everyone else. I had better chats with plumbers than with Nobel laureates. I went underground, I had no choice there wasn’t anyone to talk to.
Later I realized that Boston was just a suburb of New York and that anyone seriously into a literary career was already in New York not Boston. Dorothy Parker was dead but someone took her place at the Algonquin even if they no longer talk of poetry and polemics there. In Boston it’s hard to find anyone that knows what polemics means save that old adjunct professor of Rhetoric still hoping to get tenure after all these years. Good luck buddy.
Wednesday, May 13, 2009
Thursday, April 23, 2009
The last time I was in a large data center I was the only American citizen in the building. I'm not exaggerating. Everyone working in the data center was from South Asia. Every one working in the data center was working on an H1b visa. A visa that allows American companies to bring technical expertise from outside the U.S. if no such expertise can be found within the U.S. Of course, persons with H1b visas are supposed to be paid the same as their American counterparts which don't exist because if they did exist there would be no need for H1b visas holders.
I got this via email. My own opinion is that we should drop the H1b visa program altogether. It's clearly been abused. This is food for thought.
|Durbin bill introduced today: takes discrimination of US workers head-on!|
Legislation offered today by Senators Durbin (D-IL) and (R-IA) may finally remove the handcuffs that have long prevented effective federal policing of H-1b job outsourcing based on discrimination against US workers.
"Congress needs to put their "big-boy pants" on and fast-track this bill up to the President's desk," demanded Conroy. "IT professionals are now poised to join with the AFL-CIO and other national groups to make corporations play fair - now. No nation can remain strong when laws allow corporations to bypass its own citizens."
Here's a snippet of Durbin's press release:
Here's the entire release: http://durbin.senate.gov/showRelease.cfm?releaseId=311910
Who We Are:
Wednesday, April 08, 2009
International – It’s rough out there: the headline in the New York Times reads, “Pirates Seize Ship With U.S. Crew Off Coast of Somalia.” Few things change.
Old Ironsides sits in Boston harbor as a reminder that when push comes to shove the U.S. Navy can and does act worldwide in the interests of both the US and other nations. In 1803 she was designated the flagship of the U.S. Mediterranean Fleet and was used to blockade, bombard and intimidate the Barbary pirates.
Trouble began in July 1785, when the Barbary pirates from Algeria captured two American ships and the Dey of Algiers held their crews captive for a ransom of nearly $60,000. Thomas Jefferson, then minister to France, opposed the payment of tribute and proposed an association of countries to deal with them. Jefferson argued that "The object of the convention shall be to compel the piratical States to perpetual peace." The plan fell through when both England and France continued to pay ransoms.
When Jefferson became president in 1801 he rejected Tripoli's demands for an immediate payment of $225,000 and an annual payment of $25,000. The pasha of Tripoli then declared war on the United States. President Jefferson quickly dispatched a squadron of naval vessels to the Mediterranean. Jefferson said in his first annual message to Congress: "To this state of general peace with which we have been blessed, one only exception exists. Tripoli, the least considerable of the Barbary States, had come forward with demands unfounded either in right or in compact, and had permitted itself to denounce war, on our failure to comply before a given day. The style of the demand admitted but one answer. I sent a small squadron of frigates into the Mediterranean. . . ."
Ultimately a small force of marines was sent to re-install the hereditary ruler of Tripoli. The U.S. marines raised a mercenary army of Arabs and Greeks and began the difficult march across the Libyan Desert towards Tripoli, winning a bloody victory in the outlying town of Derne. Just as soon as victory was assured the marines were informed by messenger that the war was over. The treaty that was signed guaranteed the return of American prisoners but little changed. North African piracy continued until France brought the era to an end by invading and colonizing most of North-West Africa.
Monday, April 06, 2009
The metro box was empty save for a religious diatribe some intellectual vagrant deposited in the hopes of a miraculous conversion. It was empty the last time I looked too. I don’t know if it was empty because they didn’t fill it with enough papers or they too have stopped promoting their paper. I walked home empty handed.
The very first article I ever sold to a newspaper was a 300 word story about the development of teenage cabals. I was paid $30, or 10 cents a word. That was in the mid 1960’s. By the mid 1990’s I was paid $50 per story by Community Newspapers, still about 10 cents a word. Today Community Newspapers doesn’t buy stories and I won’t write for free as a matter of principle.
The last time I tried to sell anything to a Boston newspaper was back in the early 1980’s. Both the Globe and the Herald had the attitude that I should consider it an honor to get a byline in their paper never mind that the honorarium for a 1500 word story that took me 2 weeks to research and write wouldn’t pay my rent. At least back then you could rework the article and resell it until the Globe decided that they owned the article in all its forms forever. That decision made it impossible to earn a living as a freelance journalist in Boston and I stopped reading it Globe. There is no news in the Globe and just because it occasionally gets a Pulitzer Prize is no reason to read a newspaper with no news.
The joke was that the Wall Street Journal had more news on its front page than the Boston Globe had in its entire paper was not far from the truth until recently. Now the Happy News/Pretty News contagion has infected even the Wall Street Journal making it almost impossible to find “news” anywhere in print. Most newspapers have become nothing more than advertising mediums wrapped around AP and Reuters feeds. Who cares? Between Yahoo and the still useful New York Times web site I don’t need to read a printed paper. I’d like to read a paper, it’s more substantive than TV and more relaxing than the web but without news its worthless and without paying writers a decent wage why would I expect anything more than rewritten press releases or egotistical, self indulging pronouncements passing for news. I wouldn’t and I don’t.
I still have to wonder why a newspaper with over 300,000 paying subscribers can’t make money. When the New York Times paid over a billion dollars for the Globe many freelance journalists wondered why they didn’t just create a new newspaper for far less. If the Boston Globe goes out of business, and I think it will and should, someone will eventually step up to the plate and for very short money create a daily newspaper worth reading again.
Of course if all print newspapers go broke and freelance writing for the World Wide Web doesn’t begin to pay better I wonder if we could be on the edge of another dark age. I’ve often wondered if anyone bothered covering the last meeting of the Roman Senate.
Friday, April 03, 2009
The previous interpretation of the rule stipulated that if there is no market for a security then its implicit value on a banks balance sheet is zero. This makes a great deal of sense when we are dealing with items like Asset Backed Securities whose underlying value cannot be determined or Credit Default Swaps whose market has evaporated. When the mortgage bubble burst a large number of very large financial institutions discovered that when the Mark-to-Market rule was applied to their balance sheet they were technically bankrupt. This was the immediate cause of the financial gridlock that occurred in October 2008.
The new rule by the FASB allows greater latitude by banks in interpreting the rule. FASB said that the objective of the rule change was to allow banks to determine what an asset could fetch in an "orderly" market but would not include "distressed" or fire-sale transactions. In other words, banks are now free to fantasize what an asset might be worth if an "orderly" market can be found. The U.S. Government is attempting to create a market for these "toxic" or "legacy" assets. One dissenting FASB member said, "I’m afraid that this change will result in fewer impairments being recognized, and I don’t think it will help the investor have confidence in the balance sheet."
The FASB is charged with setting accounting rules for American industry. The rules often have unintended consequences such as the financial industry meltdown of this past fall. Since the IRS recognizes FASB rules as defining how a company recognizes profit and loss a change in FASB rules can have far reaching effects.
A FASB rule change in the early 1990’s virtually eliminated the equipment leasing industry. Equipment leasing is halfway between renting and finance and the FASB has long struggled with how to interpret this. For example with equipment rental the rental company depreciates the equipment and recognizes rental income as ordinary income. With equipment finance, the purchaser of the equipment gets to depreciate the equipment and deduct the interest expense while the bank must amortize the income over the life of the mortgage. Leasing is just like finance except the leasing company still owns the equipment until the lessee buys it at the end of the lease. In a typical lease, a lessee pays two or three month of the lease upfront – this is the typical profit fro a leasing company. The leasing company would then sell the cash stream generated by the lease to a bank while retaining ownership of the equipment. Thus a leasing company would recognize income upfront and the "residual" at the end of the lease when the lessee purchased the equipment at "fair market value," typically 5-15% of the initial cost.
A FASB rule change required leasing companies to amortize their profit (typically the first 3 months payment) over the life of the lease while also recognizing income from the residual over the life of the lease as well. Thus leasing companies had phantom income from residuals while not being able to recognize income when they received it so while a leasing company might be flush with cash they showed an immediate negative balance on their books while at the same time owing taxes on income they may or may not ever receive. Thus with a small accounting change the FASB put most equipment leasing companies out of business.
Banks Get New Leeway in Valuing Their Assets
Wednesday, April 01, 2009
International – it’s a mean place out there: The U.S. Dollar is the worlds "reserve currency." That means that most international transactions are conducted directly or indirectly in U.S. Dollars. The price of oil, grains and precious metals are all set in U.S. Dollars. For example if someone in Dubai wants to buy gold from someone in France the transaction is made, directly or indirectly, in dollars. The price of gold is specified in U.S. Dollars but if the actual transaction is conducted in Euros then the price of the commodity reflects the value of the Euro relative to the U.S. Dollar. This really irks the Chinese.
The Chinese are the largest holder of U.S. Dollars, somewhere around $2 trillion, and have an interest in seeing that money retain its value. The U.S. economy dwarfs that of all other countries including China and Russia, only the European Union comes close which is why the Dollar is the world’s primary currency and why other currencies are "pegged" to the Dollar. By pegging the local currency to the U.S. Dollar a country with a smaller economy is able to create external value for its currency. A Walmart coupon may have a $10 face value for anything purchased in a Walmart store but unless it can be exchanged for $10 in U.S. currency it has little value to anyone shopping at K-Mart. The Chinese currency only has value in so far as it can be exchanged for Dollars. This concept has a bruising effect on the egos of totalitarian rulers.
The trouble is that the Chinese have too many Dollars because they have artificially kept the value of their currency low relative to the Dollar. This keeps the price of Chinese goods low and the price of U.S. goods high on the international market. Our economy is large enough to tolerate this up to a point. Eventually the Chinese will have sold us everything we can afford to buy and will have all our money. Not really, of course, but that’s the idea behind an imbalance of trade taken to reductio ad absurdum. The larger a claim the Chinese have on our economy the less our money is worth. A dollar doesn’t buy what it used to. The Chinese don’t like that but one wonders if their totalitarian rulers have bothered to consult with professional economists. Eventually, whether the Chinese like it or not, the value of their currency must rise relative to the U.S. Dollar. The Chinese require payment in Dollars but if the Chinese allowed payment for their goods in Chinese Yuan then someone would have to buy those Yuan with some other currency and each currency would then float to its "natural" level.. This is true regardless of what currency becomes the "reserve currency" of the world. As long as the U.S. economy is the worlds dominant economy the U.S. Dollar will remain the defacto world currency.
Currently 1 Chinese yuan = 0.146323 U.S. dollars.
China Urges New Money Reserve to Replace Dollar
Asia split over China's "war of nerves" with U.S.
Friday, March 27, 2009
National – Lead, follow or get out of the way: In 1936 F.D.R. said at a campaign rally:
"We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob. Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred. "
Nothing changes; Barack Obama could almost say the same thing today. Not a single Republican voted for the bailout bill and three Republican senators held the bill hostage until its provisions were so watered down enough to almost become ineffective. The Republican hatred is so pervasive it extends to public pronouncements that they "hope he fails." The right to bear arms apparently includes the right to shoot oneself (and ones neighbor) in the foot.
The Secretary of the Treasury, Tim Geithner, went before Congress to ask for the power to regulate and take over any financial institution in trouble that is large enough to cause havoc in the banking system. Everyone admits that the Federal takeover of AIG was necessary even if there was no law explicitly permitting it. The Treasury took over AIG after it had failed. It failed because there was no one watching. "Credit default swaps," were an unregulated form of insurance which is why AIG, an insurance powerhouse, became so heavily involved.
Credit default swaps were created in the early 1990’s as a way to insure commercial loans . If a bank loans a million dollars to a company it could buy insurance, a credit default swap, to protect itself. By the late 1990’s CDS were being sold to cover Corporate and Municipal bonds. By 2000, the CDS market was approximately $900 billion and was working reliably. For example, CDS payments were made to cover some of the Enron and Worldcom bonds. In the original from CDS contracts were purchased by those who actually held the bonds and stood to loose if the bonds defaulted. As the new decade progressed a substantial change occurred in the market for CDS.
First, a secondary market developed for both sellers and buyers of CDS. The result was that it became impossible to determine the financial strength of the insurer since the chain of CDS coverage, the provenance of the CDS could not be determined.
Second, CDS were being traded for all sorts of exotic investments like asset backed securities (ABS), mortgage backed securities (MBS) and other exotic financial instruments. The problem was these new investments no longer had a known entity like a company or a municipality to follow to determine the strength of a particular loan or bond.
Third, speculation became rampant in the market. Sellers and buyer of CDS were no longer owners of the underlying asset (bond or loan), but were just betting on the possibility of a "credit event" for a specific asset.
By the end of 2007 the CDS market had a value of $45 trillion, but the underlying corporate bond, municipal bond, and structured investment vehicles market totaled less than $25 trillion. That leaves $20 Trillion in bets. Because of the secondary market for CDS the original two parties that entered into the CDS contract may very well not be the current holders of the rights of the protection buyer and protection seller. Some CDS contracts are believed to have passed through 10-12 different parties. The financial strength of all the intervening parties may not be known so it has became very difficult to determine, or "unwind," the final ownership and value of the CDS after our massive "credit event" in the fall of 2008.
Credit default swaps are really just the tip of the unregulated iceberg. The problem is that the FDIC, which insurers individual bank depositors, and the SEC, which oversees securities marketed to the general public, have no oversight authority for securities that aren’t sold to the public. The underlying issue is that deposits from the public are going into these unregulated financial instruments and that’s what the Treasury Department wants to be able to regulate just like the FDIC regulates banks.
Enter the time machine: Between 1910 and 1920 an average of less than 6 banks failed per year but from 1921 through 1929 more than 600 banks failed per year . The stock market crash of October 1929 triggered a huge wave of bank failures, almost 1400, and huge amounts of wealth disappeared over night. Borrowing money from banks to buy stocks, known as buying on margin, became the CDS of the 1920’s.
Prices began to slide in late September and early October of 1929, but speculation continued, fueled in many cases by individuals who had borrowed money to buy shares—a practice that could be sustained only as long as stock prices continued rising. On October 18 the market went into a free fall but the first day of real panic, October 24, is known as Black Thursday; on that day a record 12.9 million shares were traded as investors rushed to exit the market and salvage their losses. Still, the Dow average closed down only six points after a number of major banks and investment companies bought up great blocks of stock in a successful effort to stem the panic that day.
The panic began again on Black Monday (October 28), with the market closing down 12.8 percent. On Black Tuesday (October 29) more than 16 million shares were traded. The Dow Jones Industrial Average lost another 12 percent. President Hoover and Treasury Secretary Andrew W. Mellon declared that business was "fundamentally sound" and that a great revival of prosperity was "just around the corner."
The panics fed on themselves and investors sold stocks to cover margin calls the market sank triggering further margin calls which could no longer be repaid. Banks failed. Rumors of bank failures triggered "runs on the bank" as people took their deposits in cash. The Federal Reserve did nothing to ease the liquidity problems of even solvent banks and lending, for all intents and purposes, stopped.
To Hoover’s credit he created the Reconstruction Finance Corporation (RFC), financed with taxpayer’s money, to lend banks money and the Glass-Steagall Act which broadened the circumstances that the Federal Reserve could lend to member banks. In 1929 not all banks in the US were members of the Federal Reserve System. "Transparency," Congress desire to see where the money went put a quick end to the RFC effectiveness because banks that borrowed from the RFC were seen as unsound.
A failure to act early and decisively by both the U.S. Treasury and the Federal Reserve Bank is widely seen by economists today as the cause for the depth of The Great Depression. Waves of bank failures and a sinking stock market drove the depression deeper and deeper. By the winter of 1932-33 the banking system was in near collapse. The banking panic reached its peek in the three days leading up to F.D.R.’s inauguration on March 4th 1933. Visitors arriving in Washington to attend the presidential inauguration found notices in their hotel rooms that checks drawn on out-of-town banks would not be honored. By March 4, Inauguration Day, every state in the Union had declared a bank holiday. As one of his first official acts, President Roosevelt proclaimed a nationwide bank holiday would start on March 6 and last four days
On March 9th the Senate passed the Emergency Banking Act which legalized the national bank holiday, set standards for the reopening of banks after the holiday and expanded the RFC's powers by authorizing the RFC to invest in the preferred stock and capital notes of banks and to make secured loans to individual banks.
Throughout the 1920’s and early 1930’s there had been repeated attempts to introduce some form of depositors insurance. Many states had insurance systems but they were largely voluntary and were quickly overwhelmed by the circumstances of the early depression. On June 16th 1933 F.D.R. signed the Banking Act of 1933 which created the Federal Deposit Insurance Corporation and the Federal Reserve Open Market Committee. The Federal Reserve Open Market Committee sets monetary policy for the United States. In doing so it sets interest rates by buying and selling (mostly) government bonds.
In 1933 banking interests viewed federal deposit insurance with distaste. The President of the American Bankers Association declared that deposit insurance was "unsound, unscientific and dangerous."
Fast forward: It is the Federal Reserve Open Market Committee that has been buying so called toxic assets from banks and commercial paper from large corporations and loaned almost $200 billion to AIG in an effort to stabilize the financial system. The FDIC has been closing, reorganizing banks while the Treasury, with TARP money has prevented the largest banks from failing by investing in the preferred stock and capital notes of huge failed banks and by making secured loans to smaller troubled banks just as the Reconstruction Finance Corporation did 76 years ago.
The Secretary of the Treasury, Tim Geithner, is simply asking for the authority to regulate financial institutions large enough to wreck havoc on the Worlds Financial system. It’s a simple request, a conservative request, given the magnitude of the problem and the speed with which it arose.
History of Credit Default Swaps
History of the FDIC
Battles Over Reform Plan Lie Ahead
Wednesday, March 25, 2009
National – Lead, follow or get out of the way: In 1932, at the depths of the Great Depression, Franklin Roosevelt declared, "the only thing we have to fear is fear itself." Economists tell us that the psychological effects of fear on the economy can never be underestimated. When the real-estate bubble burst in the middle of a presidential election its effects were exacerbated by the pronouncements of aspiring politicians as well as the media. Nothing sells (fill in your media of choice) like a disaster. Fear and fear alone drove the public to withhold spending even while personal incomes rose. Fear and fear alone drove people out of the stock market. Of course the consequences of fear were the very things people feared most, rising unemployment and declining sales etc. Besides the momentary freezing of the banking system there were little signs of an impending recession. Inventories of everything except new and existing homes for sale were steady as was employment data. Auto sales were weak but only for American flagged manufacturers. In a more regulatory era "default credit swaps" and "mortgage backed securities" would not have been allowed and AIG, which triggered the calamity, would not have failed and taken the banking system with it. Make no mistake about it, AIG, Citybank, Bank of America as well as GM and Chrysler, all the brand name stock brokerage houses and many, many others failed. Without the intervention they would all be in federal bankruptcy court right now.
The source of the rise in bogus securities can be tied directly to our balance of trade deficit with the rest of the world, especially China. We sent so much money overseas we became a debtor nation while much of that money returned to U.S. financial institutions and was made available for loans. When financial institutions have too much money they begin to make dumb investments and there are no limits to the creativity of crooks willing to take advantage of dumb bankers. Fortunately the right lessons were learned from the mishandling of the Great Depression and the Federal Reserve Bank and the Treasury Department appear to have stepped in and solved the bank liquidity problem just in time. The first sign of success was the announcement in early March that Merck was going to buy Schering-Plough for $41 billion. Merck didn’t write a check for that amount, it was arranged by an investment bank someplace in the world with access to that kind of money. In November this transaction could not have taken place.
The tragedy of the Great Depression was that the crash of 1929 was not addressed until the election of F.D.R. in 1932 and an "economic stimulus" large enough to jolt the U.S. out of the depression wasn’t applied until the massive expenditures of WWII. By 1932 the recession had become endemic. People had three years to tighten their belts, loose their jobs and close down both banks and businesses. By 1932 demand for all things reached a low point. How people spend their money is largely a result of their psychological status. In certain times we may be willing to go out on a financial limb knowing there will be a paycheck tomorrow. In uncertain times we will be more cautious, spend less and save for a rainy day which could be tomorrow. By 1932 there had been enough rainy days to systemically reduce demand and anyone who still had money kept it in their proverbial mattress not in a bank.
Fortunately, our current crisis has not festered long enough to reduce underlying demand for goods and services. We may have 8, 9, 10% unemployment but that still means that over 90% of us are still taking home a paycheck and largely unaffected by the shenanigans of AIG executives or Bernie Madoff. Economic statistics showed that we paused briefly but that we are bouncing back, perhaps it’s just the Great American habit of shopping for bargains. For example:
- The Commerce Department said durable goods orders rose 3.4 percent to $165.6 billion in February, the biggest increase since December 2007. January orders fell a revised 7.3 percent. The Commerce Department had previously reported a 4.5 percent decline.
- Non-defense capital goods orders excluding aircraft, a closely watched proxy for business spending, expanded 6.6 percent in February. January orders fell an adjusted 11.3 percent.
- Inventories of manufactured durable goods fell for a second consecutive month in February, easing 0.9 percent to $336.8 billion, after dropping 1.1 percent in January. Falling inventories means that industry will be re-hiring workers to start up the assembly lines soon.
- The Commerce Department also said that sales of sales of newly built homes in the U.S. rose 4.7 percent to a 337,000 annual pace, the fastest increase since April last year, from 322,000 in January. The inventory of homes available for sale in February was the smallest since June 2002.
- The Mortgage Bankers Association (MBA)'s index of mortgage applications, which includes both purchase and refinance loans, increased 32.2 percent to 1,159.4 for the week ended March 20. Refinancing accounted for 78.5 percent of all applications.
- Borrowing costs on 30-year fixed-rate mortgages, excluding fees fell to an average 4.63 percent, the lowest since MBA began its weekly survey in 1990.
- The Stock Market rebounds – Ever since the Treasury Department announced a way to remove "legacy loans" from banker’s books it’s become apparent that the sluice gates are opening and the smart money is getting out of "safe" investments and back into the stock market.
It’s hard to say if we’ve dodged the bullet but the data looks good and Americans are spending again.
Personal Income Rise Lifts Consumer Spending
Merck to buy Schering-Plough for $41 billion
Durable goods orders rebound in February
U.S. home sales climb at fastest pace in 10 months
Obama Rally Reaches 22% in Recovery From Bear Market
Monday, March 23, 2009
National – lead, follow or get out of the way: There is a new buzz word circulating in Washington D.C. Bundled defaulted mortgages are no longer to be called "toxic assets" but rather "legacy assets." In this new guise the Treasury announced today that it plans to buy up to a trillion dollars worth of these "legacy assets" from banks … sort of.
The problem is simple: So long as the economy was growing and home sales appreciating wildly banks were more than happy to buy mortgages and mortgage backed derivatives. When the bubble burst banking rules required the banks to list these "legacy assets" at their current value. The trouble was that the market for mortgages and their derivatives stopped so it became impossible to sell these assets at any price. The value of these assets effectively fell to zero.
When this new reality became apparent most large banks, AIG and all the Investment Banks suddenly found themselves well underwater. Without these "toxic assets" most banks, insurance companies and investment bankers were as profitable as they were, say, five years ago. The bulk of their assets were still good but banking regulations required that the banks close up shop until their balance sheets met reserve requirements. This is the so called "mark to market" rule that bankers whine about. However, even with a change in accounting rules these assets would weigh heavily on the balance sheets of many financial institutions. The new Treasury Plan unveiled today by Timothy Geitner promises to begin removing these now "legacy assets" from the books of the banks.
The Treasury had two problems it had to solve before it began buying these assets: First, what should it pay for assets that couldn’t be sold at any price, second, how to create a market for these assets that no one clearly wants, least of all the U.S. Treasury. The hoped for solution includes a public/private scheme to remove these assets from Americas financial institutions. Here is how it is supposed to work:
- Banks identify the assets they want to get rid of
- The FDIC will conduct an auction of these assets. The highest bidder can ask the Feds to share up to 50% of the cost of the assets. This established a price and a market for these "legacy assets."
- Here’s the kicker: If the seller agrees to the price (and the seller might rethink the value of their assets) then the buyer can sell FDIC guaranteed bonds to finance the purchase while paying the FDIC a fee for that guarantee. If the bonds default then the FDIC owns the underlying asset.
- The private buyer will manage and control the assets until they are finally liquidated (subject to FDIC oversight) and the Treasury paid off.
See also The Fed Plan, Mark to Market
Friday, March 20, 2009
This is a game of very high stakes poker. What the Prime Minister of China did was threaten to stop buying U.S. debt. What he doesn’t realize is that he has no choice but to continue and we hope he knows it. He wants us to thinks that if he stops buying U.S. debt the recovery might falter. He thinks that he has the leverage to change U.S. policy. Perhaps he thinks he can make us stop talking about the Dali Lama and forget about Taiwan or Tiananmen Square. Chinese money financed George Bushes war deficit but our trade deficit with China created the great business boom that China has been enjoying and gave them that same cash that has been returned to the US in the form of investment in our debt. It was the industriousness of the Chinese people not the policies of the Chinese government that created the boom. The boom and the wealth it created could just as easily gone to India, the Philippines or even Mexico had the drive and talent become manifest at the right time.
There are advantages to being the world’s largest economy. The U.S. can do things that few second and no third world country can do effectively, that is, print money. When Ben Bernanke, chairman of the Federal Reserve Bank, announced that he was going to buy one trillion dollars worth of U.S. Treasury notes he was effectively telling the Chinese that he was going to print a trillion dollars and buy the notes that the Chinese threatened to balk at. Balking has its penalties. In baseball the runner gets to advance one base, in this case the threat is inflation.
Bernanke’s message to Wen Jiabao was play ball by the rules we’ve agreed to or we’ll make your investment worthless through inflation and we’ll inflate the U.S. Dollar to the point where it’s value is very low relative to the currency of, say, China. Chinese goods won’t look all that cheap and U.S. goods will begin to look very reasonable to the world. Bernanke was telling China that the U.S. was still the big guy on the block and ready and willing to compete.
It will be interesting to see if the Chinese get the message or if they are as dumb as the U.S. Congressman who asked Bernanke if the Federal Reserve Bank was solvent. Hint: Of course they are solvent if they need money they just print it.
Wen Jiabao, Balk, How the Fed prints money
Wednesday, March 18, 2009
"I managed a data center for yet another Internet startup," says John with enthusiasm, "but I had prostate surgery and was out for a month and a half. When I got back I learned that my job had been outsourced again, this time to an Indian company. Makes sense, I was the only non-H1B type in the building." John sits with a grin shaking his head, "You have to love the H1B visa system. Speaking Hindi is quickly becoming a prerequisite in my old industry."
Since being laid off John has applied for nearly 300 jobs. He’s received four polite rejections and has had one interview. "I didn’t get the job," he said laughing," they were obviously looking for someone very young, someone they could pay zilch to and I wasn’t inexperienced enough for that."
John’s two adult daughters, we’ll call them Melissa and Mary are also unemployed and that has worried John more than his own predicament. Melissa, a Grad School student working on her Masters in Architecture, had a well paying job as a draftsman but as the economy sank she was the first to be laid off. "I’m spending more time looking for a job as a bartender than I am looking for drafting jobs," she laughed, "Even those are becoming hard to find. I guess bagging groceries is next." Melissa has sold almost everything she owns, including her art and her car, to stay in school and remain independent and has downsized to a very small apartment that she shares with two others. The prospect of having to move home frightens everyone.
Mary, the older of the two sisters, was a mid career pharmaceutical advertising copywriter in New York City with a six figure income. She decided to move back to Boston with the promise of a job and to be closer to her family. She moved to an ocean view penthouse condominium in South Boston just in time for her promised job to disappear. Mary isn’t worried … yet and spends her time working on her version of the great American novel and doing pro-bono marketing and PR for a collection of non-profit organizations.
John’s wife Sally, that's not her real name either, is the only one working. She’s a unionized nurse with nearly 30 year’s seniority at the same hospital. "I’m the only security blanket we have," said Sally, "I’ll never be laid off but on the other we can’t move without losing all my benefits and seniority. About ten years ago John was offered an incredible job in Cleveland but when we looked at what we would have to give up it wasn’t worth the move."
"We are stuck no matter what we do," said John, "Our mortgage us underwater by $50,000 and so is my car which is only worth $4,000 although I still owe $7,000. We owe $30,000 in credit cards (which we mostly used to get the kids out of college) and almost $100,000 in student loans that we couldn’t get rid of even if we went through bankruptcy, which we can’t do anyway because Sally’s income puts us above the threshold." John says he’s missed several payments on his life insurance so that was cancelled and has cashed in his 401k retirement plan to keep the mortgage current. John is not sure what will happen but remains optimistic. "This too shall pass," he says with a smile, "In the mean time I look forward to coming out of retirement." John, when not scouring the Internet for jobs spends his time writing poetry and shooting photographs while Sally is at work.
Monday, March 16, 2009
Top chart: Lets start with income tax rates. Income taxes on the wealthiest Americans reached a peek of 95% at the end of World War Two. The agreement was that no one should profit from the war and few did. Under President Eisenhower, a conservative Republican, the tax rate on the wealthiest Americans remained at 91%. It took Jack Kennedy to begin the reduction of taxes on the super rich. President Obama simply wants to restore the tax rate to where it was at the end of the Reagan administration.
Second Chart: The conservative theory is that by giving money to the rich they will spend it and it will trickle down the rest of us. The alternative theory is that the rich are entrepreneurs that will create jobs and stimulate the economy. The truth is that it’s the middle class that are the entrepreneurs (the rich have ancestors that were entrepreneurs) that create most of the jobs and most of the wealth. Between 1965 and 2005 the income tax rate on the richest Americans was cut in half yet only the rich benefited. They didn’t spend it, they saved it.
Third Chart: If the conservatives are right then personal net worth should grow following a reduction in taxes. It hasn’t. Personal income has grown at a pretty steady rate while household net worth has largely been a combination of savings rates and fluctuations in the stock market. During the 1950’s when the income tax on the richest Americans was over 90% the net wealth of American households rose an average of 5.5% per year. The greatest years of growth in personal net worth began during the hyper-inflation years of the Carter administration and continued at at slower pace through the Reagan years.
Fourth Chart: The moral of the story is "Look at the data" before pronouncing one philosophy right or wrong. The press and even some in government have been screaming "Depression." Our current situation is no where near what it was during the Great Depression. This last chart shows how far away we are from our parents and grandparents nightmare. Note, however, that current unemployment statistics do not reflect the tsunami of State and Municipal layoffs that will begin in May as Budgets and services are slashed in the effort to balance the books. (Note U3 are conventional unemployment statistics while U6 include discouraged and those no longer eligible for unemployment - data comes from the U.S. Census Bureau)
According to economic theory Barack Obama and his minions are doing the right thing and the educated in the far right know it leaving only the hysterical fringe to comment.
See also Historical Unemployment In Relation to Today
Friday, March 13, 2009
Still an awful lot of folks outside the US want to come here, invest here and carry a U.S. passport. It’s become common for wealthy foreign couples (especially from South Asia) to fly in just to have their first baby here, an "Anchor baby," an American Citizen, so should all else fail they will have a way back into the U.S. That’s flattering considering the opinion many of their countrymen share about us.
For all the yelling and screaming in the media about where America stands and is headed people elsewhere believe America is still the best place to be. Take for example, a corner of the world where people of the local culture were expelled and replaced by a different but culturally similar group. We’re not talking about Israelis and the Palestians but rather Tibetans and Chinese. On the 50th anniversary of his exile, the Dali Lama said that the Chinese had turned Tibet into a "Hell on Earth."
The people in the Chinese government are not nice people. Like the Chinese emperors before them the government of the Peoples Republic of China believes in its divine right to govern as they please. In 1949 the government confiscated all western owned property but now they are complaining that their investment in the US, totaling over a Trillion dollars, may not be safe. The Chinese Prime Minister had the temerity to ask that the U.S. government "maintain its good credit, to honor its promises and to guarantee the safety of China’s assets." Of course the US will honor its obligations, they are illusory anyway. One way to eliminate this debt is to simply print more money. As a last resort the Federal Reserve could simply print money and buy the Chinese Treasury notes. That’ll put an end to Chinese prosperity in a hurry by making their goods more expensive out ours cheaper through inflation.
These are not nice people. These same people massacred their children at Tiananmen Square in 1989, invaded Tibet in 1959 and plan to invade Taiwan as soon as they think no one is watching. These are the same people that have invaded India, Vietnam and even the old Soviet Union. China is a crowded country but claiming jurisdiction over culturally similar neighbors smells of "lebensraum (breathing room)", which is the word Hitler used justified his invasion of Poland.
We need to remember who it is we are dealing with. Not everyone in the world shares our ideals and ethics. What might be considered normal behavior in the US could easily be considered foolish elsewhere. It’s scary out there but they still want to come here.
Dalai Lama Says China Has Turned Tibet Into a ‘Hell on Earth’
China Tightens Security in Tibet
China’s Leader Says He Is ‘Worried’ Over U.S. Treasuries
Wednesday, March 11, 2009
During the Nixon administration our national philosophy changed. We often credit Ronald Reagan for America’s sharp turn to the right but it was the centrist Nixon who brought tax relief to the wealthy and deregulated everything under the sun. It was Nixon’s inflation that paid off the Vietman War and put Jimmy Carter in office and Jimmy Carters efforts to fight inflation that put Ronald Reagan in office. Somewhere in that period the two income family became a necessity for the Middle Class.
Things have changed, we can feel it. Where do we stand? Economists have identified at least four cycles governing the world’s economy:
1. The Business Cycle, also known as the Kitchin inventory cycle – a 4 to 7 year oscillation between excess inventory and excess labor. If you have too much inventory you don’t need anyone making new things and vice versa. This cycle normally governs the boom and bust of a Bull or Bear market.
2. The Juglar fixed investment cycle of 7–11 years –Is just like the Business Cycle but governed by the stock of "durable goods" and other longer term assets. Think of how long an automobile or dishwasher lasts on average.
3. The Kuznets infrastructural investment cycle of 15–25 years – Think of our inventory of roads, bridges and housing. The boom years from 1990 till roughly now overbuilt our infrastructure. We have more houses than we can sell, more office space than we can fill and more capacity to build more automobiles than we need.
4. The Long Wave also known as the Kondratieff wave or long technological cycle of 45–60 years – defines what we normally associate with "Depressions." The same principles apply. In the Long Wave the growth of a new technology spends itself until it becomes ubiquitous. In the early Industrial Revolution there was a sudden need for dams, water wheels, tool smiths and other professionals who could build the factories that produced the goods. Eventually almost everything was industrialized and the need for large numbers of new factories diminished and the resulting unemployment caused a Depression. The initial crash traditionally has been triggered by the "last man in" going broke and unable to pay back debt needed to build the long term infrastructure.
Our current problem appears to be the unfortunate congruence of multiple cycles. The collapse of the automobile industry (and they were in trouble well before the housing bubble burst) signals Juglar cycle while the housing bubble signals a trough in the Kuznets cycle. Unfortunately we appear to be at the confluence of a Long Wave as well as the great Electronics Age wave has crested and is coming to an end just as the age of steam did. In case you haven’t noticed most of the electronics firms that made Route 128 famous are gone. DEC is gone, Data General is gone Prime Computer is gone … and the list goes on and on and on.
Since we’re postulating that this is going to be a bad one it will require a name. Periods of economic upheaval acquire names like "Tulip Mania" or "The Great Depression," "The Long Depression" of the 1830’s and "The Panic of 1873" which lasted 65 months. Go back far enough and you find references to "Goldsmiths crises" in the Middle Ages. We would like to propose a name for our current troubles: "The Great American Transfer of Wealth."
The early 20th century economist Vilfredo Pareto once said, "History is a graveyard of aristocracies." Pareto suggested that for stable economies there is a golden income ratio of the richest to the poorest and whenever the income ratio becomes too low as in socialist countries there is a middle class revolution (Think post-Soviet Russia) but if the ratio is too high there is a revolution of working people (Think French Revolution).
The collapse of the stock markets has eliminated massive amounts of wealth, most of it owned by the rich and super rich. It’s a sign of the times that the U.S. government has attached strings to bank bailouts that allow stockholders to vote on executive compensation. An article in the March 11 2009 New York Times (Some Banks, Feeling Chained, Want to Return Bailout Money) suggested that bank executives are having second thoughts about accepting bailout but the choice for many is accept the funds and strings or be taken over by the FDIC. If the solution to the survival of General Morors and Chrysler is bankruptcy then while labor contracts will be voided, stockholders and bond holders will be wiped clean since the loans made to these companies by the U.S. government takes precedence. Barack Obama is talking about universal health care. Whatever form it takes it will likely reverse the policy of deregulation of the insurance industry by Richard Nixon, the health care will become a non-profit industry again.
By all measures we are in the middle of "The Great American Transfer of Wealth." What it will look like is that the claim on Americas output will shift toward the middle and working class and away from the rich. No doubt it will swing too far. It’s just the nature of all economies.
Monday, March 09, 2009
The realities and dimensions of this little problem are just about to hit home. The Governor has been forced to cut his budget by over a Billion dollars while the "recovery act" so widely touted in Washington and opposed by EVERY Republican in the House of Representatives is only going to bring in a couple of hundred Million dollars. The difference is about to become evident. All over the Commonwealth Mayors, City Councils and Selectmen are struggling with the same question: Who is essential to keep the government running, to everyone else … You’re Fired! Between now and June expect the unemployment rate in Massachusetts to skyrocket.
Desperate times are ahead. Boston’s Mayor Minino has asked the unions not to take their raises scheduled to go into effect in June. He admits that won’t solve the problem. He may ask for rolling furloughs, no overtime or even temporary pay reductions. Boston may be able to keep most police and firefighters employed but the slack will be taken up by other departments. It’s clear that the net income of the Commonwealth is going to go down leaving more and more homeowners underwater. At what point do people start walking away from homes they can no longer afford?
Debt is the killer here. Without access to relatively easy credit no one from the Commonwealth to the average Joe can get anything done. This is not an issue of using a debit card instead of a credit card it’s the larger issue of how do you buy a car where there is no public transportation or how to you buy or sell a house if there is no credit available? How do you rebuild roads if you can’t issue bonds? Access to credit is essential but with declining asset values and incomes the majority of us are burdened with massive amounts of unserviceable debt. Something has to give before this is over.
Next time: exploring our National Problem.