Signing the Dow

Ok Ok, settle down guys, it's just a cartoon. I happen to think it's pretty funny, though I'm embarrassed at my drawing skills, which are obviously severely limited. Don't sue me, OK? :-)

However, it's occurred to me that some of you guys over at Goldman Sachs probably are geniuses, just like everybody says. And, assuming you finally got your High-Frequency Trading software back, which enables you to do so many thousands or millions (whatever) trades a second, and assuming you're too arrogant (why shouldn't you be, you're geniuses, right?) to care what everyone's saying about this type of software making it possible to manipulate the market "in unfair ways," then I have a proposition for you. Because after all, becoming world famous is probably even more of an incentive than making lots of money, and by doing what I'm suggesting you do, you will definitely become world famous, so . . .

Here's the challenge. Take a good look at my cartoon. Do a bit of genius type thinking. And figure out a way to use your really amazing software to do something even more amazing than has ever been done in history. Use every bit of programming skill you can muster and actually do in real life what I've only dreamt of in my cartoon: sign your name to the Goddamned Dow by manipulating the Hell out of it, microsecond by microsecond, just make it dance to your tune all the way from the opening bell to the closing bell -- and listen for the huge round of applause you'll get at the end of that trading day.

Don't worry. You won't get arrested. Because signing the Dow is not, last time I checked, against the law. And if you get fired, so what? The genius that can do this trick can do anything with the market, so you'll be getting plenty of offers.

Hey, if a group of Japanese chemists can manipulate bacteria to draw a picture like this,



then a red blooded, blood sucking, shameless and greedy American trader ought to be able to do something even more spectacular -- and egotistical -- with the Dow.

Go for it guys. Let's see who can get there first.

Is the Market Being Manipulated?

I wonder . . .

Re-Born Again

I was SO proud of myself. I thought I'd really invented a great new line. (Actually a variation on an old one.) Get this: A Sucker Is Reborn Every Minute.

But just to be sure, I did an internet search. And there it was, multiplied five times, on five different websites. My favorite is this photo someone put on Flickr:



Just made me think about all the other "bright ideas" I've had over the years, back in the days before the Internet. Sigh . . . Guess I'm not as original as I thought I was.

Nevertheless, there is a great truth hidden in my minor embarrassment. A sucker really is reborn every minute. Because all the old misconceptions, miscalculations, fantasies, illusions and delusions -- they're a'comin back, big time.

One of the biggest suckers of them all, Ben Bernanke has certainly been reborn, with wings a'flappin'. Here's the NY Times headline: Fed Chairman Says American Economy Is Poised to Grow. Read all about it:

Ben S. Bernanke, the chairman of the Federal Reserve, offered his most hopeful assessment in more than a year on Friday, asserting that “the prospects for a return to growth in the near term appear good.”

In a much-awaited speech here to central bankers and economists from around the world, Mr. Bernanke went beyond the Fed’s most recent assessment that the nation’s economy was “leveling out” and that the recession was ending.

Noting that short-term lending markets are functioning “more normally,” that corporate bond issuance is strong and that other “previously moribund” securitization markets are reviving, Mr. Bernanke said that both the United States and other major countries were poised for growth.

The Times reporter isn't quite buying it, though:

In emphasizing not just the imminent end of the recession — the worst since at least the early 1980s if not since the Great Depression — but also the “good” chances of actual growth, Mr. Bernanke’s assessment was in some ways surprising.

Despite encouraging signs on many fronts, American retailers have reported unexpectedly weak sales in the last week — a sign that that consumer spending could drag down economic growth in the months ahead. And on Thursday, the Labor Department reported that new unemployment claims jumped again.

Not to mention all those hundreds of billions in "toxic assets" still lingering unsold in the banking system. Nor the ongoing meltdown in commercial real estate. Nor the millions of impending mortgage foreclosures. Nor the inconvenient truth that this country no longer has anything much to sell in the world marketplace, meaning that unemployment will remain high for the indefinite future, so where is all the consumption the economy needs in order to recover. Not to mention the question of why anyone in his right mind would want the old economy to recover, which would only mean the re-inflation of all the old bubbles.

Maybe Bernanke is playing us for suckers.

Interlude

The Hammer Without a Master

(Economics with a hammer)

(and a grateful nod to the New York Times Editorial Page)

Sure enough, last week Morgan Stanley
explained its quarterly loss by saying
that some of its traders were still “gun shy”
after last year’s near-death experience in the financial markets,

Sure enough, last week Morgan Stanley
explained its quarterly loss by saying
that some of its traders were still “gun shy”
after last year’s near-death experience in the financial markets,

Sure enough, last week Morgan Stanley
explained its quarterly loss by saying
that some of its traders were still “gun shy”
after last year’s near-death experience in the financial markets,

that some of its traders were still “gun shy”
after last year’s near-death experience in the financial markets,

still “gun shy” after

“gun shy” after

“gun shy” after

after last year’s near-death experience in the financial markets,

after last year’s near-death experience in the financial markets,

last year’s near-death

last year’s near-death

last year’s near-death

experience

year’s near-death experience in the

year’s near-death experience in the

year’s near-death experience in the

financial markets.

but

that the firm now planned to increase its risk taking.

that the firm now planned to increase its risk taking.

that the firm now planned to increase its risk taking.

that the firm now planned to increase its risk taking.

firm now planned

to increase its risk taking.

increase its

risk taking.

To try to stay competitive with Goldman and other banks,

Morgan Stanley has also allocated a big chunk of its net revenue for compensation.

a big chunk of its net revenue for compensation.

a big chunk of its net revenue for compensation.

of its net revenue

for compensation.

Great Time for Bankers

This is a comment I just sent in response to the article, A Great Time to be a Banker, by NY Times columnist, Floyd Norris. Can't quite figure out if the title is meant ironically or he's actually being sincere. Maybe a little of both. I decided my comment is too good to bury there among all the other comments, so I've decided to bring it over here as well:

These bankers are like drug addicts or chronic gamblers. Surely they are intelligent enough to realize their day is done, that the "profits" they are now realizing are as much an illusion as they were before the last meltdown. They must also realize that, unless they are willing to totally insulate themselves, their wives and their children, from the rest of the world, they'll soon be enduring hateful stares, hurtful remarks, threats, veiled and otherwise, or worse. Their millions won't be worth it, but, like the addicts they are, they won't care.

Sadly, for us and also for them, they have become hooked on "the action" and can't help themselves. And since they have become too powerful and connected to be stopped, their path to total self-destruction, both moral and financial, is now insured. Truly, this is a morality tale writ large, for all the world to witness, and it's fascinating to see it being played out in the media and the Internet in such exquisite detail.

It should be clear to anyone following the events of the last two years that they are literally living in a bubble, the bubble created by the highly questionable, but possibly "necessary" decisions of both the Bush and the Obama administrations, to keep them in business at all costs. And since the only business they know is gaming the financial system, and since that system has been force-fed to the point that it can still be gamed no matter what, they are going to continue to play and play and play no matter what, with all the "skill" at their disposal, until the bubble finally bursts, totally and completely, beyond the power of any individual or any government to patch. And when that time comes, then we -- and they -- will finally and for all time be free of the drug called: money.

Interlude

Vom armen B. B. -- On the Poor B.B.

German poem by Bertolt Brecht, interleaved with English translation by DocG, and paraphrase by DocG

Ich, Bertolt Brecht, bin aus den schwarzen Waeldern.
Meine Mutter trug mich in die Staedte hinein
Als ich in ihrem Leibe lag. Und die Kaelte der Waelder
Wird in mir bis zu meinem Absterben sein.

I, Bertolt Brecht, am of the dark forests.
My mother bore me from there to the cities
As I lay in her womb. And the cold of the forests
Will be with me to my death.

I, DocG, am of the white river.
My parents once took me to New York City
On a boat. And the winds of that voyage
Will blow through me all my life.

In der Asphaltstadt bin ich daheim. Von allem Anfang
Versehen mit jedem Sterbsakrament:
Mit Zeitungen. Und Tabak. Und Branntwein.
Misstrauisch und faul und zufrieden am End.

In the asphalt city I feel at home. Right from the start
With every last sacrament supplied:
With newspapers. And tobacco. And brandy.
Mistrustful and lazy and, in the end, self-satisfied.

In New York City was I at home. Until the very end
Supplied with every last sacrament:
The Village Voice. And Schimmelpfennig cigars. And Jack Daniels "Sippin" Whiskey.
Cynical and lazy and far too self-confident.

Ich bin zu den Leuten freundlich. Ich setze
Einen steifen Hut auf nach ihrem Brauch.
Ich sage: es sind ganz besonders riechende Tiere
Und ich sage: es macht nichts, ich bin es auch.

I'm a friendly sort. I set
A Bowler on my head as people do.
I say: They’re animals with a very peculiar odor.
And I add: it doesn't matter, I smell too.

I set myself apart from the others. I wear
A floppy hat so I’ll stand out.
I say: people are very very strange
And I ask: isn’t that what it’s all about?

In meine leeren Schaukelstuehle vormittags
Setze ich mir mitunter ein paar Frauen
Und ich betrachte sie sorglos und sage ihnen:
In mir habt ihr einen, auf den koennt ihr nicht bauen.

Mornings, in my empty rocking chairs,
I bring some ladies nigh,
Study them casually and say:
I’m one on whom you can't rely.

Mornings I fantasize about finding a lady
To rock in my all too empty chair.
She’ll study me casually, and say:
Why don’t you come over here?

Gegen abends versammle ich um mich Maenner
Wir reden uns da mit "Gentlemen" an
Sie haben ihre Fuesse auf meinen Tischen
Und sagen: es wird besser mit uns. Und ich frage nicht: wann.

Toward evening I gather some men around me.
We address one another as "Meine Herren."
They place their feet up on my table
And say: our time will come. I don't ask: when.

From time to time I get together with a friend or two.
We address one another as "Monsieur."
They plant their muddy feet on my brand new rug.
One says: I've got a promising interview coming up next week. And I say: Oh, sure.

Gegen Morgen in der grauen Fruehe pissen die Tannen
Und ihr Ungeziefer, die Voegel, faengt an zu schrein.
Um die Stunde trink ich mein Glas in der Stadt aus und schmeisse
Den Tabakstummel weg und schlafe beunruhigt ein.

Toward morning in the grey dawn the fir trees piss
And their vermin, the birds, begin to cheep.
At that hour, in the city, I drain my glass, stub out
My cigar and drift into troubled sleep.

Toward morning in the gray dawn the Hudson River belches
And its victims the fish begin to weep.
At that hour, in the city, I rise to take a piss, then flush
The toilet and return to fitful sleep.

Wir sind gesessen ein leichtes Geschlechte
In Hausern, die fur unzerstoerbare galten
(So haben wir gebaut die langen Gehause des Eilands Manhattan
Und die dunnen Antennen, die das Atlantische Meer unterhalten).

We, a heedless generation, have made ourselves at home
In buildings we thought immune to destruction
(Thus we erected the skyscrapers of Manhattan
And the thin antennae which bemuse the Atlantic Ocean).

My generation has made itself homeless
In mad pursuit of some vague ideal
(Thus we dabbled in drugs and religion,
Trod the thin red line between the real and the unreal).

Von diesen Staedten wird bleiben: der durch sie hindurchging, der Wind!
Froehlich machet das Haus den Esser: er leert es.
Wir wissen, dass wir Vorlaeufige sind
Und nach uns wird kommen: nichts Nennenswertes.

Of these cities will remain: that which passed through them — the Wind!
The house makes the diner merry: he wolfs it down.
We know we’re not here for long
And after us will come: nothing of much renown.

Of our dreams will remain: that which fueled them — hot air!
The balloon will lift slightly, then falter and sag.
We know we’ve been here much too long
And hardly have much cause to brag.

Bei den Erdbeben, die kommen werden, werde ich hoffentlich
Meine Virginia nicht ausgehen lassen durch Bitterkeit
Ich, Bertolt Brecht, in die Asphaltstaedte verschlagen
Aus den schwartzen Waeldern in meiner Mutter in frueher Zeit.

In the earthquakes to come, I hope I won’t
Let bitterness dim my cigar’s red glow
I, Bertolt Brecht, smuggled to the asphalt city
From the dark forests in my mother long ago.

In the disillusionment to come, I hope I won’t
Start smoking again in desperation
I, DocG, sold down the river
To New York City by the older generation.

Interlude

Illness is a kind of intoxication
In which you drink pure pain
Like a freezing glass of pure grain
Alcohol. All your senses strain
Against a kind of ontological membrane --

If it breaks you die.

Slowly that psychological feeling like sky
Infuses the room where you lie
And your inmost you, letting go,
Presses itself against the dirty window
Where the dirt seems to form a kind of rainbow.

So few and so slow
Are the things you remember to know
As you fall behind
With lazy motions of the mind

And really begin to unwind.

An Economist Gets It Right!

I was about to give up on them. I was saying things like "the economy is too important to be left to the economists." If you go to just about any professional economist's blog these days you'll often get more thoughtful, logical, probing and realistic analysis in the comments section. For example, here is one of my favorites, Paul Krugman, in a recent column titled The Stimulus Trap: " . . . policy makers should stay calm in the face of disappointing early results, recognizing that the plan will take time to deliver its full benefit. But they should also be prepared to add to the stimulus now that it’s clear that the first round wasn’t big enough." Not particularly edifying -- and almost certainly wrong. But check out the following response from a reader named David, from San Francisco:

If the credit driven excesses of the past, like the dotcom and the housing bubbles, could simply be cured by even more borrowing and essentially creating money out of thin air, then it follows that there are no consequences to economic malfeasance and crimes.

The implicit premise in your insistence for massive additional stimulus is that we can somehow get back to the "good old days", or somewhere close.

What if we have so abused our economy, our dominant economic position in the world, and the reserve currency status of the US Dollar, that the whole system is trying to reset at a new, rational, and lower equilibrium? It is foolheardy to fight an avalanche. Our standard of living is going to go down regardless of what you advocate or what Obama does. The only question is if we are going to gracefully accept this new paradigm.

Thank you, David! And that was only the second comment on the list. I don't have time to sift through all 380, but I'm sure there are many other laymen like David, with meaningful things to say.

And, to my surprise and delight, I just now found a real live economist with something meaningful to say. Robert Reich! You remember him, he was Secretary of Labor during the Clinton administration, when he also had meaningful things to say. Maybe it's his tendency to speak meaningfully -- and honestly -- that got him into trouble with Obama, who seems to have fallen in love with just about everyone else from the Clinton crowd.

Anyhow, Reich just came up with an amazing article, just now published at the AlterNet blog, entitled: When Will the Recovery Begin? Never. This is very good stuff, especially since it echoes things I've been saying for months now. But who pays attention to little me? Maybe now these ideas will get some serious attention, because, and I'm sure I'm being just a bit egotistical when I say this, but: I know I'm right. And if I'm right, Reich must be right too. Say that 25 times in a row. Only Reich will be taken seriously. Why? Because he is an economist. And I am . . . . not (not really, no). Here are a few gems from Reich's great piece:

The so-called "green shoots" of recovery are turning brown in the scorching summer sun. In fact, the whole debate about when and how a recovery will begin is wrongly framed. . .

In a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70 percent of the U.S. economy. And this time consumers got really whacked. Until consumers start spending again, you can forget any recovery, V or U shaped.Problem is, consumers won't start spending until they have money in their pockets and feel reasonably secure. But they don't have the money, and it's hard to see where it will come from. . .

Eventually consumers will replace cars and appliances and other stuff that wears out, but a recovery can't be built on replacements. Don't expect businesses to invest much more without lots of consumers hankering after lots of new stuff. And don't rely on exports. The global economy is contracting.

This economy can't get back on track because the track we were on for years -- featuring flat or declining median wages, mounting consumer debt, and widening insecurity, not to mention increasing carbon in the atmosphere -- simply cannot be sustained.

The X marks a brand new track -- a new economy. What will it look like? Nobody knows. All we know is the current economy can't "recover" because it can't go back to where it was before the crash. So instead of asking when the recovery will start, we should be asking when and how the new economy will begin. More on this to come.

Yes, Robert, please. More! This is one economist I'm happy to listen to.

Moment of Truth

A moment of truth has arrived for President Obama and the Democratic party. According to the NY Times, in order to pay for meaningful health care reform, Democrats in the House are proposing an income tax surcharge on the wealthiest Americans: a piddling 2% for those earning more than $250,000, somewhat more for those earning $500,000 and still more for those earning $1,000,000 or over. Considering the extreme inequalities of compensation that have been the norm in this country for many years now, this is the sort of legislation that is long overdue. However, according to the Times, it's "an idea that Senate negotiators have all but dismissed as unworkable."

We keep hearing complaints about the cost of "entitlements" (fat-cat-speak for the social safety nets that keep our country from descending into barbarism), but when even the most modest tax increases on the most entitled among us are proposed, all we hear is that such measures are "unrealistic," politically out of the question, "unworkable."

Interesting. Especially in the light of the latest news regarding the Swiss bank UBS, where reportedly as many as 52,000 of the wealthiest Americans, hiding billions from the IRS, will most likely remain safely anonymous, protected by the "honor" of the Swiss government as part of a shameful "deal" with the Obama administration.

If every single Democrat in the House and Senate does not actively support this long overdue tax surcharge on the wealthy, then the name of each and every one opposing it should be posted on every blog on the Internet -- and every store front on "Main Street."

Curioser and curioser

How many of you knew Goldman Sachs was using proprietary computer software designed for "low latency (microseconds) event-driven market data processing, strategy, and order submissions"? What does that mean???? Good question. Anyhow, a story is now breaking via Reuters that a former G. S. employee named Sergey Aleynikov made off with the the secret code referred to above, code that G. S apparently uses routinely to do something called "programmed trading," aka market manipulation. The story, as Reuters is reporting it, is one of business espionage and theft. But over at a much more interesting Internet venue called Zero Hedge, a guy named Tyler Durden is seeing through the smoke and mirrors and telling it like it is. According to someone who is apparently a G. S. lawyer, “The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.” Durden definitely has this guy's number:

At least it is refreshing that none other than Goldman's own de facto attorney admits that the firm has created a piece of code that permits "market manipulation." When Goldman is the perpetrator, the manipulation is conveyed via "fair ways." And when the manipulator is someone else, the ways become "unfair."

Faithful readers of this blog may recall two posts entitled Reading the Entrails and Reading the Entrails -- Part 2, in which I wrote (in part 2):

By all means, correct me if I'm wrong, but it looks to me like these markets are being manipulated, possibly according to a scheme similar to the one I presented in my last post, where bets are made based on the relation between the principal index and the VMA (voume moving average). If this is the case, then what does it mean when, at the end of the day, the "market" is up or down by this or that number? As far as I can tell, all it means is that this is where things stood at the time the betting window slammed shut.

Here's the scheme I was referring to, as posted on How to Read the Dow Jones Industrials Indicator:


I'm sure the Goldman Sachs software is far more sophisticated than what we see above, but this will give you some idea of the potential for "programmed trading," i.e., market manipulation. This is legal, supposedly. When used by Goldman Sachs. In the hands of a "rogue trader," I suppose it becomes illegal -- but only because it's stolen. NOT because it makes investing in the stock market a total crap shoot for everyone other than those doing the manipulating.

Meanwhile, for your amusement, here's the latest Youtube sensation, a video of Aleynikov and his wife in a dance competition. Don't forget, you saw it first on this blog:



What's next, I wonder, for the magical US economy?

The Madoff Enigma

His story is yet to be told. Madoff himself has said hardly anything publicly, and I have a feeling he hasn't said much privately either. No one really knows whether he had accomplices, though my gut feeling is that just about all the big financial firms funneling money to him were accomplices, in the sense that they had to know something was fishy -- but so long as the profits were rolling in, they chose to look the other way.

What interests me more is Madoff himself, why he did what he did, what motivated him through all those years when he was getting away with what has to have been the greatest scam of all time. Sorry, but the guy doesn't look like a con artist. I know, I know, the most successful cons are the types that don't come across as crooks, the ones that inspire trust. But still, in just about every case I've ever seen, there's a certain unmistakeable sleaze factor that can be spotted a mile off. Sure, in principle a con has to be able to convince you he's on the level. But in fact your typical con comes across like a con anyhow, a bit too smooth, a bit too slick, probably because most suckers either deep down want to be conned, or else they're conned into thinking they're being let in on something just a wee bit illegal. Madoff just doesn't come across as the type.

His lawyer said it best yesterday, in a remarkably astute observation predictably ignored by the media: if he were a real crook, then he'd have been in the airport with a ticket to some exotic island instead of confessing that he'd been conducting a Ponzi scheme -- and then sticking around to face the consequences. The guy had access to billions. As soon as the financial system began to collapse last summer, he would have realized it was just a matter of time before the game was up. Time to pay off the appropriate officials, arrange for the hideaway, pay a visit to the Swiss banks, reserve the hotel rooms, book the airline tickets, etc. Instead, he meets with his sons, tells them what he's been up to and patiently waits in his apartment for the FBI to show up. As I see it, this part of the story is every bit as fantastic as all the rest.

Here's what I think happened. I think Madoff must have started out perfectly legit, doing what your typical novice financier in the making does, enticing relatives and friends to invest with him in some deal that would have looked like a sure thing. And I think at a certain point something must have gone very wrong. A big, heavily leveraged investment must have gone sour. Put yourself in his place. You've managed to convince your closest relatives and dearest friends to place their life savings in your care, you feel confident you are investing all this money wisely -- and then suddenly the bottom falls out. You are ruined! But more important, your relatives and friends have lost everything. How do you tell them? What do you say?

I really don't think Bernie Madoff was ever a con man, a swindler, a ruthless manipulator, not at least in the sense of someone who starts out with such intentions. I think he's someone who got caught up in something beyond his control. Not out of greed, but, like so many of the "smart operators" who got us into our current mess, simple naivete, lack of imagination, a sappy uncritical faith in what was once known as "The American Dream." Like any true believer in the essential benificence of the "free market," he must have gotten carried away by his own ambitions without seriously considering the consequences -- until it was too late. Faced with two really bad options, either confessing to friends and family that, thanks to him, all their savings were gone -- or sucking other investors in as a way to cover their losses -- I think he chose what, for him, would have been the lesser of two evils. As he might well have seen it (and of course I am totally speculating at this point), the only truly compassionate thing to do was to find some way, any way, to avert disaster for himself and those closest to him.

This story might or might not have some grain of truth, as far as Bernie Madoff is concerned. But there is a larger lesson to be learned, nevertheless. Because the "Great American Dream" that is "free market" capitalism is far too vulnerable to exactly this sort of dilemma. When things go well with the market, then all is well and everyone is happy, but when something goes wrong, it's not always that easy to accept. And all too easy to caste about for some way, any way, of averting the inevitable disaster. This may be the answer to the enigma of Bernie Madoff, I'm not sure. But there's no doubt it explains what's happened just now to the world economy as a whole. Very sadly, it's what is still happening, as the powers that be float more Ponzi schemes on top of the old ones, in a futile effort to get us all out from under the latest, greatest, disaster. Purely out of compassion, of course.

The Dow of Bernie Madoff

The Dow that can be explained with words is not the Dow.

Beyond the gate of experience flows the Dow,
Which is ever greater and more subtle than the world.

Those who know do not speak, those who speak, do not know.

The sage manages affairs without doing anything, and conveys his instructions without the use of speech.

The sage experiences without abstraction,
And accomplishes without action;
He accepts the ebb and flow of things,
Nurtures them, but does not own them,
And lives, but does not dwell.

The thirty spokes unite in the one center; but it is on the empty space for the axle that the use of the wheel depends. Clay is fashioned into vessels; but it is on their empty hollowness that their use depends. The door and windows are cut out from the walls to form an apartment; but it is on the empty space that its use depends. Therefore, whatever has being is profitable, but what does not have being can be put to use.

The Dow is a limitless vessel;
Used by the self, it is not filled by the world;
It cannot be cut, knotted, dimmed or stilled;
Its depths are hidden, ubiquitous and (seemingly) eternal.

The Dow is not kind;
It treats all things impartially.
The Sage is not kind,
And treats all people impartially.

The Dow is like a bellows,
Empty, yet never ceasing its supply.
The more it moves, the more it yields.

The sage places himself after and finds himself before,
Ignores his desire and finds himself content.
He is complete because he does not serve himself.

In its rising there is no light,
In its falling there is no darkness,
A continuous thread beyond description,

The Dow flows and ebbs, creating and destroying,
Implementing all the world, attending to the tiniest details,
Claiming nothing in return.

It nurtures all things,
Though it does not control them;
It has no intention,
So it seems inconsequential.

When the best swindlers achieve their purpose
Their marks claim the achievement as their own.

Who accepts Wall Street's flow becomes all-cherishing;
Being all-cherishing he becomes impartial;
Being impartial he becomes magnanimous;
Being magnanimous he becomes natural;
Being natural he becomes one with the Dow;
Being one with the Dow he becomes immortal:
Though his body will decay, the Dow will not.

Fate does not attack, yet all things are conquered by it;
It does not ask, yet all things answer to it;
It does not call, yet all things meet it;
It does not plan, yet all things are determined by it.

Fate's net is vast and its mesh is coarse,
Yet none escape it.

The Rapture

For yourselves know perfectly that the day of the Lord so cometh as a thief in the night. For when they shall say, Peace and safety; then sudden destruction cometh upon them, as travail upon a woman with child; and they shall not escape.

St. Paul, Thessalonians I, 5:2-11

As you may have guessed from reading this Blog, I am patiently awaiting "The Rapture": the day the whole impossibly complicated, convoluted, contrived and corrupted apparatus known as "The Financial System" definitively and for all time collapses into dust. However, the degree of denial, obfuscation, explication and out and out lying has become so enormous it might seem well nigh impossible to say with any degree of certainty exactly when that momentous moment of truth has actually arrived. Fear not. Because the great Gods of finance have in fact provided us with a totally reliable indicator of economic truth: the Tao. Usually spelled: Dow. (Pronounced the same.)

When the Tao goes up everyone is happy. When the Tao goes down everyone is sad. What a simple world we live in, no? But what if one day the Tao were to go down down down down down down down? That will be the sign. By that we will know: The Rapture is at hand.

It could happen today. It could happen tomorrow. Or next week. Or next month. It could come, like a thief in the night, at any time and without any warning. The market could be in the middle of a downswing or an upswing, there will be NO way to tell. But verily, my Brethren, I assure you: sometime soon, that day will come. And on that day, the market will fall so drastically, by thousands of points, that Wall St. will literally be forced to close down. And once it closes, that will be that. It will not open again. Ever. This will, indeed, be the financial End of Days.

It shall come as destruction from the almighty... cruel both with wrath and fierce anger, to lay the land desolate: and he shall destroy the sinners thereof out of it...And I will punish the world for their evil, and the wicked for their iniquity; and I will cause the arrogance of the proud to cease, and will lay low the haughtiness of the terrible. Isaiah 13: 5-11

Interlude

Cygnus -- At Bay

A swan in flight has been arrested
Her bright wings splayed upon the Northern Cross.
Impaled, she there from high where high on high she’s nested,
Looks down through diamonds on this world of dross.

The wind abruptly shifts then calmly stands
And the slant rain freezes all its glitter drops
To cop a sheet of brilliant mirror strands.
Even the beaded Gypsy stops.

I spot a Mobile station round the bend
Slow down a bit then brake to brush the guards
Skidding skiddy skidmarks where the milky Thruway ends
To signal where the end of time begins.

"Fixing" the System

When a Ponzi scheme becomes too big to fail (see previous post), there is, very simply: no fix. The "free market" fundamentalist solution is: let it fail. This is essentially the "solution" endorsed by the hapless, clueless, Republicans. "Let 'market forces' do their thing," say the Republicans, because for the Republicans "the market" is, like Mother Nature herself, a self-regulating force. However, if the market were truly self regulating then our financial system, guided for many years now by massive deregulation of that market, would not have experienced the huge meltdown we are now seeing. It would have righted itself long before things came to such a dire pass. Market forces got us into the mess we are now in. It's absurd to assume that they will automatically get us out if only we allow them, once again, to do their thing, unimpeded.

Allowing our too-big-to-fail financial system to fail anyhow would mean wiping out so much wealth at one fell swoop that the world economy would be forced to a sudden, and potentially disastrous, halt. The stock markets of the world would crash to the very bottom, trillions would be lost instantaneously, the fortunes of the rich and famous would be wiped out, but so would the pensions, 401(k)s, and other nest eggs of ordinary people everywhere. Every bank would fail, every mortgage would be foreclosed, every insurance policy suddenly be rendered worthless, as a wave of bankruptcies swept the world. Unemployment would become almost universal as business after business failed. "Market forces" could not come into play because the private sector driving such forces would, very simply, have ceased to exist.

The Ponzi scheme that is the world financial system is indeed too big to fail. Bernie Madoff's system, as outrageously inflated as it became, could be allowed to fail. The world financial system, very clearly, cannot.

If it cannot be allowed to fail, then what means do we have at our disposal to fix it? As with any Ponzi scheme, there are really only two alternatives: allow it to fail, as in the Madoff case, or find some way to perpetuate it. The latter "solution" is, as I argued in my last post, the one chosen, albeit indirectly (i.e., deceptively), by the Obama administration. However, perpetuating a Ponzi scheme can never be a fix -- unless we find some magical way of perpetuating it unto perpetuity, i.e., keeping it afloat forever -- possible only if one has unlimited monetary resources, or is in a position to print ever increasing quantities of money forever. This latter option is indeed being attempted at the present time, under the absurd rubric "quantitative easing" -- and maybe we can pull it off for a while. But sooner or later, the amounts of virtual cash needed to keep the game going will reach truly absurd levels -- and the classic "Emperor's New Clothes" syndrome will inevitably take effect. At some point, confidence in the system will totally collapse, taking the system with it. (See, for example, the recent blog post at The New Republic: Is the Dollar Doomed to Crash? by Zubin Jelveh.) And returning us to our first alternative: allowing the system to fail after all. But the system cannot be allowed to fail. And so on and so forth, ad infinitum.

This is what was called, by the ancient Greeks, an aporia -- literally "without a path" or "impasse."

"Nan-in, a Japanese master during the Meiji era (1868-1912), received a university professor who came to inquire about Zen. Nan-in served tea. He poured his visitor's cup full, and then kept on pouring.
-------------------------------------------------------------------

When the nun Chiyono studied Zen under Bukko of Engaku she was unable to attain the fruits of meditation for a long time.

At last one moonlit night she was carrying water in an old pail bound with bamboo. The bamboo broke and the bottom fell out of the pail, and at that moment Chiyono was set free!

In commemoration, she wrote a poem:

In this way and that I tried to save the old pail
Since the bamboo strip was weakening and about
to break
Until at last the bottom fell out.
No more water in the pail!
No more moon in the water!

Ponzi Economics

It's being called by many names, all perfectly reasonable sounding: troubled assets relief, public-private investment, liquidity enhancement, the stimulation of aggregate demand, the minimizing of rollover risk, the normalization of credit markets, financial stabilization, quantitative easing, Keynesian economics, etc. When we look at the fundamentals, however, we see a much simpler, far more troubling picture.

Back in January, in some of my earliest blog posts, I was already referring to our entire financial system as "a huge Ponzi scheme":

Now, over and over again, we hear that the real problem facing us is the need to restore "confidence." But confidence in what? If a Ponzi scheme is a confidence racket, and if, as many are now beginning to realize, our whole financial system for a great many years now, has been little more than a huge Ponzi scheme, then the restoration of confidence can have only one purpose: the perpetuation of the bubble for as long as possible into the future. Which is in fact what the current "experts" seem to be telling us needs to be done -- only this time by the government, operating as a kind of legal surrogate for all the Bernie Madoffs who no longer have the funds to perpetuate their own versions of the scheme.

I was not alone. Here is economist Peter Schiff, as quoted in a Fortune article, also from last January:

"We have an economy that's based on the same principles as Bernie Madoff's investments," he says. "It's a Ponzi economy. It's not real. We don't save and we don't produce anything anymore. We simply borrow from the rest of the world, and then we spend it. We've had a giant party. We bought all these plasma TVs and iPods. We remodeled our houses and took vacations. But you know what? The bills are coming in."

In case you don't know who Schiff is, I suggest you take a look at this youtube video, a collection of his market predictions between 2006 and 2007, in which he stands alone among smirking, laughing, supremely overconfident Wall St. pundits, in predicting, with striking accuracy, the disaster that was to befall us in the Autumn of 2008.



I've been criticized for occasionally quoting with approval economists holding strongly conservative views, and Schiff, a Libertarian follower of Ron Paul, is no exception. However, while I definitely do not endorse either Paul or the Libertarian philosophy, this does not mean I can feel free to ignore such people when, on occasion, they get things right. In my view, the conservative position generally is, for the most part, simply laughable. But that doesn't prevent me, along with a great many liberal leaning economists, from agreeing with most Republicans regarding the futile and ultimately destructive nature of the Obama-Geithner-Bernanke "recovery" plan.

While I can agree wholeheartedly with Schiff's analysis of what went wrong, I cannot agree at all with his prescription for the cure: "Shrink the government radically, cancel all bailouts immediately, take plenty of tough medicine, and let the free market do its job - however harsh it may be for, say, autoworkers in the meantime." Schiff should know better, but is blinded by his ideology. It was the free-market, laissez faire, economics of the conservative/ libertarian ideologues that fueled the Ponzi scheme in the first place.

Regardless of what any of us might think regarding a possible cure (in my view NO cure is possible), it is important for all of us to take some time to think a bit about what Ponzi economics is and how it works. Once such a scheme gets started, there is only one way to perpetuate it: pulling in yet more money from yet more investors (aka "suckers"). New money from new investments is used to maintain the appearance of legitimacy by paying off on the old investments. When the returns are substantial, as they must be for the scheme to succeed, then everyone is happy and all progresses smoothly. It's only when it is no longer possible to raise new investment capital that the scheme collapses.

This is what happened to Bernie Madoff last Fall. And it is also what happened to the world financial system over the last several months. Money was being made simply on the basis of new money being invested, and when the source of such investments dried up, i.e., when the banks could no longer raise additional leverage, over and above the huge amounts they'd already raised, the resulting "credit crunch" brought down the entire system. There were no longer any new sources of cash to pay off on all the outstanding investments, loans and collateralized debt obligations (aka "toxic assets").

What the Obama administration wants to see is a financial system that got temporarily out of hand and overextended itself, which under ordinary circumstances would require a certain amount of government intervention to provide temporary liquidity until the imbalances in the system could be corrected. What I see is a Ponzi scheme that, at one point last summer seemed on the verge of total collapse until congress decided to pony up hundreds of billions to keep the thing afloat. Because by then it had become "too big to fail." Since then literally trillions more have been committed to the same effort, either through the sale of treasury bonds, the forced merger of failing institutions with (relatively) healthy ones, huge loan guarantees from the Fed, the totally irresponsible printing of dollars out of thin air, or the easing of accounting rules to give the false impression that failed institutions are actually solvent.

Call it what you will, "quantitative easing," "liquidity enhancement," "financial stabilization," whatever -- when new money, regardless of the source, continues to be fed into any Ponzi scheme, that scheme can be made to look very good indeed. What has been optimistically described as a turning of the corner, the beginnings of a full recovery, based on the appearance of various "green shoots," etc. is, to my eyes, simply the predictable effects of a Ponzi scheme enormously extended, and overextended, through the infusion of huge amounts of highly dubious cash.

At some point, however, the limit will be reached, the source of new funds and/or leverage will evaporate. And when that point comes, then, finally, the hour of full -- and final -- reckoning will be upon us.

Belling the Cat

Here's how Aesop tells it:

Long ago, the mice had a general council to consider what measures they could take to outwit their common enemy, the Cat. Some said this, and some said that; but at last a young mouse got up and said he had a proposal to make, which he thought would meet the case. "You will all agree," said he, "that our chief danger consists in the sly and treacherous manner in which the enemy approaches us. Now, if we could receive some signal of her approach, we could easily escape from her. I venture, therefore, to propose that a small bell be procured, and attached by a ribbon round the neck of the Cat. By this means we should always know when she was about, and could easily retire while she was in the neighborhood."

This proposal met with general applause, until an old mouse got up and said: "That is all very well, but who is to bell the Cat?" The mice looked at one another and nobody spoke.

The moral: It is easy to propose impossible remedies.

In the present case, "the cat," as I'm sure we're all aware, is not simply one cat, but several. All FAT. The FAT cats who, as we've recently been made aware, but should have known all along, are running this country -- and by extension, the world. Their secret is now out. We know they are running things. And we know, in at least some cases, who they are and even where they live. We are the mice. And the Congressional Democrats, along with our newly elected President, can be understood as the council, brought together to see what measures can be taken to control the anti-social behavior of these FAT CATS before they devour us all. And a solution has been proposed, a solution suspiciously like the solution arrived at by Aesop's mice: "Why don't we hang some regulations on the behavior of these fat cats?" says our young President. And everyone says, "Yes, that sounds like a great idea." Only a wizened old mouse (docG, natch) rolls his eyes and declares: "That is all very well, but who is to regulate the Fat Cats? And how is this to be done?"

Yes, indeed, there's been all sorts of discussion of this matter of regulation and all sorts of things have been proposed. But when the all important question arises of who is going to do the regulating and how the regulating is going to be done, there has been an ominous silence.

So, it should come as no real surprise that the council convened to deal with the problem of controlling the problem posed by the Fat Cats is now declaring for the world to hear that there isn't really a problem at all, it was simply a big mistake. After all, what's good for the Fat Cats is good for the rest of us, right? Didn't we always know that?

Many of the ironies characterizing The Situation In Which We Now Find Ourselves (TSIWWNFO) emerge in a recent New York Times Op-Ed piece, by Wall Street cognoscenti Sandy B. Lewis and William D. Cohan, who insist that, all indications to the contrary, The Economy is Still at the Brink. Here are some highlights:

WHETHER at a fund-raising dinner for wealthy supporters in Beverly Hills, or at an Air Force base in Nevada, or at Charlie Rose’s table in New York City, President Obama is conducting an all-out campaign to try to make us feel a whole lot better about the economy as quickly as possible. “It’s safe to say we have stepped back from the brink, that there is some calm that didn’t exist before,” he told donors at the Beverly Hilton Hotel late last month. Mr. Obama thinks that the way to revive the economy is to restore confidence in it. If the mood is right, the capital will flow. But this belief is dangerously misguided. We are sympathetic to the extraordinary challenge the president faces, but if we’ve learned anything at all two years into the worst financial crisis of our lifetimes, it is that a capital-markets system this dependent on public confidence is a shockingly inadequate foundation upon which to rest our economy. . .

The storm is not over, not by a long shot. Huge structural flaws remain in the architecture of our financial system, and many of the fixes that the Obama administration has proposed will do little to address them and may make them worse. . .

Lewis and Cohan then propose a series of especially tough questions for our new President. For example:

Six months ago, nobody believed that our banking system was well designed, functioning smoothly or properly regulated — so why then are we so desperately anxious to restore that model as the status quo? Nearly every new program emanating these days from the Treasury Department — the Term Asset-Backed Securities Loan Facility, the Public Private Investment Program, the “stress tests” of major banks — appears to have been designed to either paper over or to prop up a system that has clearly failed. . .

Why is so much effort being put into propping up those at the top of the economic pyramid — the money-center banks, the insurance companies, the hedge funds and so forth — when during a period of deflation like the one we are in, any recovery will come only by restoring the confidence of the people down at the bottom of the pyramid?

Confidence will return only when jobs can be found and mortgage payments are made. Even if Mr. Obama’s claim is true that his $780 billion stimulus package “saved or created” some 150,000 jobs, we seem a long way away from the point where those struggling to get by will feel like spending again. What happens when people buy a car once every 10 years instead of once every two or three, especially now that we taxpayers own such a big percentage of the American auto industry?

Why isn’t the Obama administration working night and day to give the public a vastly increased amount of detailed information about what happens in financial markets? . . .

Why is the government still complicit in making the system ever less transparent, even when it comes to what should clearly be considered public information? For instance, it took more than a year for the Federal Reserve to disclose that it had agreed to pay BlackRock — the huge money manager that is 45 percent owned by Bank of America — and others $71 million in a no-bid contract to manage the $30 billion of toxic assets that JPMorgan did not want when it bought Bear Stearns in March 2008. And that is only one of the five contracts BlackRock has with the government as a result of this crisis — the nature of the other contracts remains secret. . .

Why hasn’t President Obama insisted on public hearings over what happened during this financial crisis?

Not a single top executive of a Wall Street securities firm responsible for causing the financial crisis has had the courage or the decency to step forward in front of the cameras and explain to the American people in his own words exactly how and why he allowed his firm to cause the crisis. Both Mr. Fuld and Alan Schwartz, the chief executive of Bear Stearns at the end, in their Congressional testimony blamed the proverbial once-in-a-century financial tsunami. Do they or any of their peers really think this is true?

Not that Lewis or Cohan have a much better handle on the fundamental problem than Mssrs. Bernanke, Geithner and Obama. They pride themselves in being Wall St. insiders, and what really gets their goat is the presence of "academics" like Bernanke and Geithner at the helm:

Why has Mr. Obama surrounded himself largely with economic advisers who are theoreticians and academics — distinguished though they may be — but not those who have sat on a trading desk, made a market, managed a portfolio or set a spread?

In our view, one of the ways out of this economic conundrum is to have experienced traders — not hothouse flowers — design incentives that will encourage the market to have buyers and sellers meet anew around the proper valuations of assets, not some artificial construct of a market propped up by a pliant Financial Accounting Standards Board or government-sponsored programs that appear to be virtually giving money away to hedge funds and private-equity firms so that they will buy assets they would not ordinarily buy. We’re not talking about putting the fox in charge of the henhouse, just putting people who know how markets function in the real world into the important seats in Washington.

The bit about "putting the fox in charge of the henhouse" says it all, as far as I am concerned. Bernanke and Geithner may well be clueless academics, but shrewd Wall Street "foxes" like these guys we need like a hole in the head.

Meanwhile, back at the henhouse, it seems as though things are really not so bad, so maybe the old cat (aka fox) might not need a bell after all. Here's what Philip Stephens of the Financial Times has to say, in an article called Crisis? What Crisis? The Market Confounds the Left:

Surely it was only yesterday that the west was engulfed by the crisis of capitalism? Markets buckled under the strains of the credit crunch. Portraits of Adam Smith made way for freshly-burnished busts of John Maynard Keynes. Popular rage against greedy bankers promised to restore politics to parties of the left.

Pace the doomsayers who predicted imminent Armageddon, liberal market capitalism has survived: somewhat humbled and, in the case of the financial services industry under much tighter official supervision, but recognisably much as it was. Governments have stepped in to prop up markets rather than to dismantle them. Nationalising the banks has been a means to an end rather than an end in itself. . .

. . . [P]redictions of a return to the 1930s have proved as misjudged as the reckless complacency of policymakers and economists during the boom years. This week banks started paying back some of the money they borrowed from taxpayers.

Yes, indeed, those banks that took billions from the US Treasury are now eager to pay it all back. And, yes, it seems as though they might actually be able to raise at least some of that money on their own. Whoda thunk it? Never mind that their lobbyists succeeded in getting new accounting rules put into place, rules that have enabled them to claim their "toxic assets" are actually worth just about whatever they want to say they're worth. And never mind that other sources of government largess, including billions in loan guarantees, plus a commitment from the Treasury and the Fed that they will not be permitted to go under regardless of the circumstances, i.e., regardless of how recklessly they continue to play their same old same old market games.

And if that weren't outrageous enough, here's another huge "revelation" regarding these same incredibly resilient institutions: the vaunted Public-Private Investment Program (PPIP), instituted by the government to take the burden of all those toxic "assets" off the books of the failing banks, is -- we are now being told -- not really necessary. The banks would rather not sell them after all. No need. Again, thanks to the same new bookkeeping rules. Since they need not be valued on a mark to market basis, they can be valued on a mark to madness basis -- which suits the bankers fine, since they are the ones who invented that same madness in the first place.

Just how mad that madness can get is neatly summarized in an article by Felix Salmon, of Reuters, Why the failed PPIP should prevent TARP repayments:

When the PPIP was introduced, everybody was scared about the amount of toxic assets on banks’ balance sheets. Don’t worry, said Tim Geithner: between the stress tests and the PPIP, we’re going to be able to put a price on all those toxic assets, work out what the banks’ losses are, and ensure that the banks have enough capital to absorb those losses.

The market loved this idea, and started going up rather than down, to the point at which people weren’t scared any more about the amount of toxic assets on banks’ balance sheets. And so it didn’t matter that the adverse scenario in the stress tests is looking positively sunny these days. And it didn’t matter that PPIP disappeared with a whimper, the toxic assets no more priced now than they were six months ago. So long as the stock markets are happy, what’s to worry about?

In other words, the market went up because investors were reassured that the PPIP plan was going to deal effectively with the problem posed by all those toxic assets. But since the market went up, boosting the value of the bank stocks, the bankers have decided they don't really need PPIP after all. And the investors no longer care, because, as the man says: "So long as the stock markets are happy, what’s to worry about?" Talk about a shell game!

What's important to the US economy, in other words, is not that we ever become truly solvent or that our economy ever really recovers or that we emerge from this catastrophe with any semblance of a social safety net, or decent employment opportunities, or a market for our goods, etc., etc., but that the compensation packages of the bankers and other masters of the financial universe be maintained at full value or better, no matter what. It is easy to propose impossible remedies. That's for sure. And when it comes to belling these particular Fat Cats, the remedy may well be just that: impossible.

A Socialist's Guide to the Future of Capitalism -- Part 2: the Need for Hyperdeflation

I've already written, in an earlier post, about the importance of deflation, and the insane efforts of our financial leaders to force our economy to move in the opposite, inflationary, direction:

Sure, prices went down during the depression, but that is NOT what caused it. The last depression was caused by the same greed, manipulation, deception and dishonesty that caused this one. If anything made the last depression tolerable and, no doubt, saved millions from the streets or worse, it was deflation, i.e. lower prices. And if there is anything that could make our present situation truly impossible, for everyone concerned (aside from the bankers and their sycophants), it would be what the geniuses in Washington seem bound and determined to produce: inflation, aka higher prices.

To my immense gratification, I recently found an article, written in 2003, by a leading economist, Llewellyn H. Rockwell, Jr., of the Ludwig von Mises Institute, that expresses essentially the same view. It's called, appropriately enough, The Blessings of Deflation. Here's some of what Professor Rockwell has to say:

Now we get to the crux of the matter: the Great Depression. The assumption is that falling prices somehow caused the economy to crumble. In fact, it was the after-effects of the boom combined with massive government intervention that caused the depression. The only silver lining in the entire period of the 1930s was precisely the falling prices that made the dollar count for more. Falling prices (a falling cost of living) are what Murray Rothbard has described as the "great advantage" of recessions. If you can imagine the Great Depression without falling prices, you have conjured up an image that is far worse than the reality.

Ask yourself whether during economic downturns, you want your money to grow or shrink in value? If your future job security is in doubt, do you want to pay more or less for goods? If your savings are meager, do you want them to have more or less purchasing power in the future? If you answer these questions rationally, you can see that deflation is wonderful for everyone, and the saving grace of a period of economic contraction. Throughout the 19^th century, prices fell in periods of economic growth, which is precisely what one might expect. This is all to the good.

So, first of all, it's important to remember that the "deflationary spiral" held up as a kind of economic bogeyman by the bankers and their government enablers is in fact, as far as the great majority is concerned, the best possible response to the financial collapse we are now experiencing. But, second of all, and this is my real point here, it looks to be the only means of getting our economy back on track, now that the "free market" investment mirage has been dispelled and it's increasingly clear that we must actually earn our way to economic health from now on.

What's needed, however, goes far beyond anything that happened in the Great Depression. We don't just need deflation, we need a veritable Tsunami of deflation, a deflationary spiral that will take our economy on a truly frightening, but absolutely necessary, ride, all the way to the abyss. But please: do not panic. Before everyone reading here has an absolute fit, it's important for all of us to remember that what we are talking about here is money. Only money. The deflationary spiral of which I speak will effect the value of pieces of paper -- and their virtual counterparts in the world of electronic banking. No resources will be destroyed, no jobs (necessarily) lost. No living creatures, human or otherwise, will (necessarily) be harmed by what I am proposing.

I've added those parenthetic "necessarily"s because everything depends on how our deflationary Tsumani develops. If it occurs in an orderly, controlled manner, then no harm will be done. If it occurs in a lopsided, uncontrolled manner, in which the natural forces impelling us toward deflation are continually undermined by artificial attempts to reverse the trend, through additional government borrowing, or the frantic printing of endless amounts of money (so-called "quantitative easing") as is now being attempted, then some very serious distortions will develop, which could be devastating.

Why do we need this? The reason can be found in my previous post. We presently cannot compete with third world industries and labor, because we have literally priced ourselves out of the world markets. Our role as the world's most extravagant consumer culture ended rather abruptly when all our credit dried up. Not enough of us are now making enough income to actually purchase all the stuff we used to put on the credit card tab, which means that, as far as the world economy is concerned, we have made ourselves irrelevant. Third world producers are still in shock over this turn of events, since we (or rather the con men who kept lending us other people's money) were their best customers.

They will adapt, however, to the new situation, also via a drastic process of deflation, but of a somewhat different kind -- a price deflation that will ultimately place their goods within reach of the workers who manufacture them, whose incomes will be steadily rising as part of the same process. If our own economy deflates sufficiently, then we will finally be able to legitimately compete in this market. And if all goes reasonably smoothly (let us pray), it will be a tremendous market that could have the potential to revolutionize the world economy as has nothing else since the industrial revolution.

What difference does it make if I earn $80,000 a year, $8,000 a year or $800 a year, so long as my living expenses, and the cost of consumer items I might desire, have been adjusted accordingly? During the Great Depression, my father, a highly skilled tailor and sewing machine operator, was always able to find a job. But his income was often meager, sometimes as low as $15 a week. However, as he explained to me, his rent was less than $10 a month, and he could buy a very satisfactory restaurant meal for around 25 cents! He was able to live adequately on what he earned, put something away toward the car he eventually bought, and have enough left over to participate with his brothers and sister in the support of their mother.

I'm not advocating the impoverishment of the American working class. That is something that's already happening, as we know very well, especially from the events of this week, with the bankruptcy of General Motors and the consequent loss of what will amount to tens of millions of jobs. What I'm contemplating is very different: the adjustment of the US economy as a whole to the realities of the new global economy, the real one, not the phony one promoted by the "masters of the universe." In order to adjust meaningfully, we have to give up all the phony pipe-dreams and find a way for American industry to once again compete.

A Socialist's Guide to the Future of Capitalism

OK, OK, finally I'm finally getting around to what I promised, the answer to the question posed at the end of the last post. For those of you too lazy to go back and check, I'll repeat it here:

Let's face it, the real engine of growth in this country over the last 25 years -- or more -- has been the financial industry, which has accounted for a whopping percentage of the GNP. And if it gets cut down to size, as MUST happen, then what will become the basis for the American economy during the "recovery"? Where will the jobs be?

My own personal preference is for a managed economy, where jobs and resources are allocated on the basis of ability and need. You know the drill: "from each according to his ability, to each according to his need." Karl Marx -- via Jesus Christ. (If you can't find it in the New Testament, it's because you don't know how to read between the lines.)

Since hardly anyone in this country really cares much for the gospel according to either Marx or Christ, there's no point in going on forever along such lines. In my opinion, we'll eventually get a managed economy whether we want one or not, but meanwhile, for the benefit of those bound and determined to fight socialism, in any way shape manner and form, to the bitter end, it might be fun to contemplate what sort of future capitalism might have as the current financial crisis inevitably morphs into an economic crisis of unprecedented depth and breadth. So here goes:

The really really deep -- deep deep deep -- fundamental beyond all other fundamentals -- reason for the situation in which we now find ourselves (SIWWNFO), is not really the greed, mismanagement and outright corruption of the knaves and fools who've been driving the financial markets, though that's certainly been a hugely contributory factor. No, the most fundamental reason is a very gradual, but probably inevitable, rise in awareness and aspiration, also education and ability, on the part of the hundreds of millions of third world citizens who have for much too long been willing to labor continually, day and night, week after week, month after month, without complaint, in order to simply subsist on the margins, regardless of the debilitating work, the grinding poverty and the endless cruelty and exploitation they've been forced to endure. Over a considerable length of time, this group has gradually made itself aware, or been made aware (probably a little of both) of its economic power. Which is not to say that it isn't still being exploited, because the exploitation has probably, in most cases, gotten even worse. No, what is different is that this group has now made its appearance on the radar of the world economy and is now becoming a force to be reckoned with on the global labor markets.

But you already knew that, didn't you? Only you were content to think of it merely as "outsourcing." And you've been conditioned to believe that many of our problems will be over once we force our manufacturers, service providers, information processors, etc., to end this practice so we can have all our wonderful jobs back. Dream on. Capitalism is based not only on greed and manipulation of financial markets, but also, and fundamentally, on competition. So if you are really truly devoted to the principles of "free market" capitilalism, you are going, at some point, to be forced to admit that we, in the good old US of A, are no longer in a position to compete on the world market.

Our labor force can no longer compete. Because we both expect and need far more income than our competitors, who can now do the same jobs just as well, but for a fraction of the cost. And our products can no longer compete, because the costs of producing such products in the USA are far greater than they are when produced abroad.

Don't give up hope, however, because, as I promised, there is an answer. You might not want to hear it, but I swear that for now at least I will have nothing whatever to say about the joys of socialism. My answer lies totally and completely within the realm of capitalism. Within this realm, we have one hope and one hope only: deflation.

(to be continued)

The Future of the American Economy

I've been reading lately about the "future of the financial industry" and I must say I'm both amused and alarmed. The Wall St. Journal had some sort of forum on this topic, but all the noted financiers and economists could think to talk about was regulation. The gist of it was that we had to regulate the industry in a meaningful manner -- but if we did, then the industry would no longer be in a position to make any real money. Which got me to thinking: how on Earth are any businesses of any size and scope in the USA going to make any sort of money in the coming months -- and years?

The backbone of our financial industry for the last 25 years has been all the uncontrolled trading. Money has been made, gobs of it, specifically because highly risky, highly questionable, but also high profitable (because the risk could be deferred almost endlessly) trades were not only permitted but encouraged. All the Wall St. "talent" the banks are now afraid of losing (unless obscene bonuses can continue to be awarded) were seen as talented only because they had mastered this highly dubious -- and dangerous -- system. If the system is going to be sensibly regulated from now on, that game will be over. So what are they going to be doing with themselves from now on? No wonder the bankers are lobbying like crazy against meaningful reform. With no possibility of gaming the market, there will be no "interesting" money to be made, the traders will get bored and the entire financial industry will be cut down to size. WAY down. Nevertheless, without such reform, the same gamers will be back in business and we'll soon be forced into yet another round of bluster cum bailouts. That can NOT be allowed to happen.

So forget the bankers for a minute and let's concentrate on some other businesses and where they might be after the eagerly awaited recovery? What businesses, exactly? you well may ask. The major US production industry has been the auto industry, which will never be the same and will for a very long time operate on a very limited basis. The computer industry? That's been outsourced for years. Other service industries? Also for the most part outsourced. The health industry? That's due for a very large haircut in the near future if our President has anything to say about it -- and he has.

Let's face it, the real engine of growth in this country over the last 25 years -- or more -- has been the financial industry, which has accounted for a whopping percentage of the GNP. And if it gets cut down to size, as MUST happen, then what will become the basis for the American economy during the "recovery"? Where will the jobs be? Any thoughts? Anyone at all?

I have an answer in mind, by the way. I always do. But I'm wondering if anyone else has any ideas on this topic.

The Guantanamo Flap

Guantanamo should be returned to Cuba. The base there serves no purpose and never did serve a purpose -- other than military intimidation, bullying and posturing. But the prison at Guantanamo does serve a purpose. Obama's decision to close it is one of the dumbest things he's ever done. Return the base and make a deal with Cuba to lease the prison.

Back in January, I kept this issue within parenthesis, planning to return to it at some later date: "President Obama has already decided to eliminate the prison. (Whether this is a wise decision is open to debate, but I'll leave that issue for a future post.)" Well, the time has come to discuss it here -- I should have discussed it sooner. I never thought closing the terrorist prison at Guantanamo was a wise decision. And the matter is no longer open to debate. Even the Democrats now see that. Obama is due to give a speech tomorrow and hopefully he'll back down. If he doesn't he's a fool. (This is a Democrat talking, by the way, in case you're new to this blog.)

The problem Obama and the Democrats rightfully seek to address has nothing to do with the facility at Guantanamo, which is simply a prison, neither more nor less. It also happens to be a very convenient prison, because it's located many miles off the shores of the USA, an ideal spot for the incarceration of those who might want to do us harm. The Senators who expressed skepticism regarding the closing of this facility were absolutely right, and the Democrats among them should be commended, because this country should never be run on the basis of empty ideology, but on the basis of sound, critical thinking. In opposing Obama, they are making an all too rare show of responsibility and guts.

If there is a problem with the legal status of the prisoners, that has nothing to do with Guantanamo. Their status is a completely different issue from the issue of where they are to be held. Guantanamo has a purely symbolic significance, of course. Certain highly questionable practices took place there. So end those practices, fine. As far as I'm concerned, water boarding definitely looks like torture. Sleep deprivation doesn't. (Been there done that -- insomnia can be pretty awful, but it's something millions of people endure and if innocent people can endure it, terrorists can endure it.) But the larger point is that these practices have been examined and meaningful decisions are being made regarding them. Fine.

As far as the question of whether or not they are to be treated as prisoners of war, as I see it they are most certainly not prisoners of war. Nor are they common criminals. We need to face the fact that their status is unique and we need to treat them in a unique manner. War in the 21st Century is going to be very different from the way it was in the 20th, just as war in the 20th Century was very different from the 19th. The role of terrorism is going to be increasingly important, which means that protecting our borders is going to be increasingly important -- along with many other things, such as the growing importance of intelligence -- both kinds of intelligence, the spying kind but also the intelligent kind, aka simply being smarter, better informed, and also, when necessary, even more deceptive than your enemy.

Planes, ships, missiles, high tech weaponry, etc. are going to be increasingly unimportant. The ability to outsmart your opponent is going to be increasingly important. Torture is reprehensible for many reasons, and it is also ineffective. So why bother with it? If you have someone in custody who might have important information don't bother torturing him, first because it's wrong, but also because it won't do you any good. Lie to him! Manipulate him. Fool him. Hire a magician to make him think he's in the presence of Allah almighty. Be smart, not dumb.

Closing Guantanamo purely because it's taken on some sort of symbolic significance that makes it politically incorrect, is not smart. Transferring possibly dangerous individuals to the US mainland because it makes you feel better about yourself is not smart. I hate to say it but imo the ACLU has outlived its usefulness. Listening to anyone from this organization is a waste of time, i.e., also not smart. The facility at Guantanamo has never been the problem. Our failure to get beyond the political correctness thing, our failure to think more critically, deeply, logically and dispassionately about the world we now live in -- that's the problem. I like my fellow Democrats, I'm proud to be one of them. I admire my president. However: can we drop all the kid stuff and finally: GROW UP??????????

Climate Change -- Some Inconvenient Truths

One of my favorite columnists, Paul Krugman, has a piece in today's New York Times, entitled Empire of Carbon, that I have some serious problems with. Focussing on China, a favorite target of NY Times China-bashers for a great many years, he writes:

The scientific consensus on prospects for global warming has become much more pessimistic over the last few years. Indeed, the latest projections from reputable climate scientists border on the apocalyptic. Why? Because the rate at which greenhouse gas emissions are rising is matching or exceeding the worst-case scenarios.

And the growth of emissions from China — already the world’s largest producer of carbon dioxide — is one main reason for this new pessimism.

I felt impelled to respond with the following comment:

I am alarmed and disheartened by the persistent manifestations of naivete, hysteria, and yes, neo-colonialist arrogance, on the part of intelligent, well meaning individuals, many of whom, as is certainly the case with Dr. Krugman, should know better. Yes, global warming is undoubtedly a reality. Yes, in all likelihood it is caused, or at least hastened, by human activity. And yes, it is likely to present the human race with some serious challenges over the next 50 to 100 years. Nevertheless, there are some other truths, no less apparent, compelling and “inconvenient,” that must also be taken into consideration when evaluating this situation.

For examples of what I am talking about, I directed his readers to this blog. Here are some of the "inconvenient truths" I have in mind:

1. The Earth has undergone many cycles of climate change in the 150 to 200 thousand years we Homo Sapiens have roamed the planet. In every case, humans have found ways to adapt.

2. While persistent droughts in parts of Africa have been attributed to global warming, “a new study of lake sediments in Ghana suggests that severe droughts lasting several decades, even centuries, were the norm in West Africa over the past 3,000 years. The earlier dry spells dwarfed the well-documented drought that plagued West Africa in the late-20th century . . .” While drought is naturally of great concern in Africa, as elsewhere, global warming due to industrial activity is clearly only one, relatively small, part of the problem.

3. Many sources of greenhouse gas have nothing to do with industrial activity: “By burping, belching and excreting copious amounts of methane — a greenhouse gas that traps 20 times more heat than carbon dioxide — India's livestock of roughly 485 million (including sheep and goats) contributes more to global warming than the vehicles the animals obstruct”; recent studies of “black carbon” emissions (aka “soot”) from the inefficient stoves of hundreds of millions of third world households have shown that they, too, have a significant role to play in global warming: “ ‘It’s hard to believe that this is what’s melting the glaciers,’ said Dr. Veerabhadran Ramanathan, one of the world’s leading climate scientists, as he weaved through a warren of mud brick huts, each containing a mud cookstove pouring soot into the atmosphere.”

4. Any attempt to slow global warming by imposing economic restrictions is sure to have devastating effects, not only on the economies of emerging industrial nations such as China and India, but the poorest of the poor in every part of the world. And in the face of the worst economic downturn since the Great Depression, the effects on many working and middle class families may also be dire. If global warming can be characterized as a man-made disaster, ill informed and panicky attempts to reverse it can be seen as part of the same depressing trend, founded in human arrogance, hubris and sheer pig-headed ignorance. If nothing else, the recent ethanol farce should give us pause before we embark on yet another, possibly far more costly, folly.

5. A recent study suggests that global warming has already reached a point of no return, where the worst of its effects may well be irreversible, no matter what we do: “The damage will persist even when, and if, emissions are brought under control, says study author Susan Solomon, who is among the world's top climate scientists."

6. Global warming is a potentially disastrous, but also slowly developing, trend that we will have ample time to prepare for. The key to dealing with it clearly does not lie in desperate, hasty, attempts to reverse the irreversible, but in the sort of long-term planning that would help us adapt. Not emission control, but population control, thus emerges as a key factor in facing the coming challenge. Since China has been a leader in dealing, however clumsily, with this absolutely fundamental problem, the many criticisms that have been directed at this country with regard to climate change are both ironic and disturbing in the extreme.

Sign of the Times, from The Times

Hot off the presses, here's the headline, and subscript, from today's NY Times:
Jump in Food Costs Drives Up Prices -- "Wholesale prices rose slightly in the U.S. in April, the government reported, blunting fears of deflation."

Wholesale prices in the United States rose slightly in April, the government reported on Thursday, as falling oil and gasoline prices leveled off and food prices rose the most in a year. The Labor Department reported that prices received by producers of finished goods rose 0.3 percent last month, further discounting the prospect that the economy was veering into a vicious cycle of lower prices and lower wages known as deflation.

So rising food prices, at a time of high unemployment and low wages, is good news. Well Halleluyah! That should make you feel a whole lot better as you decide what you can afford to feed your kids tonight. In the interests of journalistic balance, the Times does present another viewpoint, though it seems a bit half-hearted:

But for some economists, the prospect of rising energy and food prices at a time of deep unemployment and shrinking wages raised concerns that strapped consumers could see their cost of living rise even as the job market continued to get worse. . . “There’s this squeeze going on,” John E. Silvia, chief economist at Wachovia Corporation, said. “We still have job losses. We still have a lot of pressure. And now you’re going to tell me that a lot of these basic commodities are rising? People’s real income is going to get squeezed.”

Exactly! The "squeeze" referred to is part and parcel of the more fundamental aporia I've alluded to in some earlier posts. At every level of the economy we literally do not know which way to go. Do we allow the banks to fail, which could destroy the world economy, or do we prop them up with trillions in bailouts, which could destroy the world monetary system? Do we nationalize the banks, which could lead to socialism, or do we try to restore the status quo, which could re-inflate the old bubble, leading to an even greater disaster? Do we encourage prices to rise, which would lead to serious hardship, not to mention the very real possibility of runaway inflation, or do we allow them to fall, which could lead to that dreaded "deflationary spiral" so many economists are now so worried about.

I looks very much as there is no way out, one way or another we are going down the tubes. There is another alternative, however, a very logical and sensible alternative, which I've been writing about here, a fresh approach to the economy that could certainly work. But it would require a major paradigm shift that few in this country are in a position to accept. Until we do, be prepared for a continual roil of the economy, as it lurches from one extreme to the other, from recapitalization to nationalization, from endless bank failures to endless bailouts, from price increases to price decreases, from runaway deflation to runaway inflation and back. If you really like roller coasters you might enjoy the future, but be careful, because too much of this sort of thing could make you very, very sick.

Stress Tests, Regulatory Capture, and the Fatal Flaw of Capitalism

Let's deal with the last-named item first. The fatal flaw of capitalism is that it is fundamentally beyond regulation. Advocates of laissez faire have always recognized this, arguing that in order for capitalism to work it must be allowed to proceed free from external constraints. The theory has always been that "the market," driven by "enlightened self-interest" (aka "greed is good"), will naturally regulate itself, because self-regulation is in the interest of all market players. External regulation, so the argument goes, will only introduce distortions that interfere with the natural balance of an inherently self-regulating system. As has long been known, however, laissez faire capitalism works only for the benefit of the few, with maybe some degree of trickle-down to the rest of us, if we're really lucky. And as we've only recently learned, laissez faire capitalism, when carried to an extreme, can be so self-destructive as to put everyone at risk.

So if capitalism cannot be relied on to regulate itself, then government needs to step in and regulate it, right? Wrong. The "free market liberals" were in fact correct in arguing that external regulation won't work -- though probably for the wrong reasons. Which brings me to the second topic in my title: regulatory capture.

Regulatory capture refers to a situation in which a regulator becomes so entangled in the mechanisms he is attempting to regulate that he can no longer perform his duties effectively. The assumption is that such a person can become co-opted in one way or another, to the point that he develops a conflict of interest. This is what happened to the institutions, such as Standard & Poor, Moody's, etc. that gave so many of our failing banks triple A ratings. In this instance the evaluators became dependent on the good-will of the bankers, who were, after all, paying their salaries.

In theory, a completely independent regulator ought not be vulnerable to co-option and ought not, therefore, develop conflicts of interest. A government regulator would be paid by the government, not the banks or investment houses, and would thus, in theory, be in a position to offer a completely independent, unbiased and honest assessment. The setting up of such an independent regulatory system is, of course, an essential part of the Obama-Geithner-Bernanke-Summers plan.

Which brings me to the first element in my title: the stress tests (forgive me folks, I seem to be going bass-ackwards here). Here's what one of our most knowledgeable and widely quoted bloggers, Yves Smith, had to say, in a piece pointedly invoking one of my favorite heroes, The Banks and Orwell:

I'd prefer an open sales effort to this mingling of hucksterism with supposed regulatory policy. And they have clearly been intermingled. Note how the prime objective of the stress tests has been above all to restore confidence. Huh? The most important aim should be to assess their condition so as to determine what if anything needs to be done. To subordinate proper regulatory action to reassuring "the markets" is backwards. If the public had faith in the integrity of the process, the need for a confidence exercise would vanish.

Herein lies the crux of the problem, because the stress tests have two contradictory goals: first, to objectively assess the condition of the banks; but second, as Obama and Geithner have repeatedly insisted, to restore public confidence in the banking system. As everyone knows, most if not all of these banks would have failed had there been no bailout. What would have been expected from an honest stress test would, therefore, have been a dire assessment indeed. But that would hardly have restored confidence in the system. Consequently, the stress tests were compromised, serious problems were papered over, and a truly Orwellian process of doublethink came into play. Think two contrary thoughts at the same time, first the unpalatable truth that our financial system has been ruined; second the necessary lie that everything is really OK, that with a little tweaking the system is going to recover quite nicely. Because the primary goal of the exercise was not proper regulation of the banking industry, but the restoration of confidence.

While so many economists are expressing irritation and disdain, few seem to realize that the fundamental flaw at the heart of the tests cuts also to the heart of any hope for regulatory reform. Over and over again the pattern repeats itself. Some institution becomes hopelessly overextended, for whatever reason, legal or illegal, by choice or by chance. Everyone at the top sees what is going on, knows very well exactly how terrible things are -- and yet, the whistle never gets blown. I'm thinking, for example, of that famous speech by Enron CEO Ken Lay, declaring Enron was doing great at a moment when he knew full well it was on the rocks, that all was lost. Why would he make such a speech at such a time? Well, what other choice did he have? If he had told the truth, the company would have tanked then and there. And he'd have been blamed. Lay was in a classic lose-lose situation. If he told the truth, his words would have precipitated a run for the exits and he'd have been blamed for Enron's fall; by forcing a smile and insisting all was well (as he did), he bought himself some time -- knowing in his heart that it was just a matter of time before his lies would be exposed.

I think it highly significant that no one with any real influence blew the whistle on Bernie Madoff, despite all the many alarm signals going off for so many years. It's hard to believe that no one, none of the experienced traders he did business with, none of his alleged victims, not even anyone at the SEC, was aware that he was perpetrating an outrageous scam. Regardless, he was simply too hot to handle, the consequences of exposing him would have been too disastrous, not only for his associates and those invested with him, but even the functionairies at the SEC, who would certainly have been blamed for the billions in losses.

Something similar must have been at work with the agencies rating the banks, as they began to realize how serious a situation their clients were in. When things reach a certain pass it's not so much a feeling of loyalty or obligation to the guys who write your checks, as a feeling of responsibility for the entire financial edifice, which could collapse to the ground if you said the wrong thing at the wrong time. What sort of courage would it have taken for some functionary at Moodys or S&P to get up one fine morning and announce to the world that Lehman Brothers must be downgraded from AAA to ZZZ? If that had happened and Lehman had gone bust, guess who would have been blamed? When one gets into a situation of this sort, ones mind must definitely incline toward magical thinking. Because being realistic and hard nosed is going to get you exactly nowhere. Let someone else take the hit when all goes bust.

Obama, Geithner and Bernanke are in essentially the same untenable situation. And in fact any regulator or regulatory agency would inevitably be placed in the same untenable situation. So long as all goes well and there is nothing to regulate, then you can do your job of regulation really well. As soon as something goes wrong, however, then, simply by exercising your regulatory responsibilities, you run the horrible risk of precipitating the calamity you were hired to avert.

And hence: the fatal flaw of capitalism is that it is fundamentally beyond regulation. QED.

(Of course, for some, that is its supreme strength.)