Tuesday, December 30, 2008

Gunpowder and Airport Security

Security expert Bruce Schneier links to this story by a woman who claims to have passed security at the San Francisco airport with a counterfeit boarding pass in her hand and gunpowder in her carry-on luggage.

Last Thursday, December 5, I brought five ounces (140 grams) of old-fashioned black gunpowder to San Francisco airport. I also brought along a boarding pass for United flight 720 to Denver that I had created at home, in an computer art program. TSA agents accepted the boarding pass. They also took no notice at all of the gunpowder. Accepting the boarding pass was reasonable. Boarding passes that we design and print at home look just like ones designed by the airlines that we print at home. I had thought, though, that I might elicit a short conversation about the gunpowder. Mind you, I had packed the stuff safely. It was in three separate jars: one of charcoal, one of sulphur, and one of saltpetre (potassium nitrate). Each jar was labeled: Charcoal, Sulphur, Saltpetre. I had also thoroughly wet down each powder with tap water. No ignition was possible. As a good citizen, I had packed the resulting pastes into a quart-sized “3-1-1″ plastic bag, along with my shampoo and hand cream. This bag I took out of my messenger bag and put on top of my bin of belongings, turned so that the labels were easy for the TSA inspector to read.

Is her account true? I have no idea. There is a picture on her blog of her standing in what appears to be an airport security line, holding what appear to be little jars. But this hardly constitutes proof, so a degree of skepticism is warranted. But if her account is true, it would square with other similar stories of TSA security holes (e.g., here, here, here, here).

British Pound Falls to Parity with the Euro

The AIG Debacle

The Washington Post is running a three-part series on the collapse of AIG. A few takeaways:

  • AIG was long considered one of the safest companies in the world, as reflected in its AAA rating from the major credit rating agencies.
  • The demise of AIG was caused by its subsidiary, AIG Financial Products. AIGFP was formed in 1987 as a joint venture between AIG and three defectors of the junk bond firm of Drexel, Burnham, Lambert (Howard Sosin, Randy Rackson, and Barry Goldman). The deal was structured such that AIG would 62% and AIGFP 38% of the profits.
  • AIGFP specialized in derivatives, "financial jargon for a contract settling in the future that is based on something trading now."
  • "Under the joint-venture agreement, Financial Products received its profits upfront, even if the transactions took 30 years to play out. AIG would be on the hook if something went wrong down the road, not Sosin and his team, who took their pay immediately."
  • In 1993, Howard Sosin and Hank Greenberg, AIG's chairman, had a falling out, apparently precipitated by a deal that lost $100 million, and Sosin left (getting $150 million in the process), taking Rackson with him.
  • AIGFP became a subsidiary of AIG, with the parent company taking 70% of the profits.
  • In 1998, AIGFP got into "credit default swaps," a contract in which "the firm essentially would insure a company's corporate debt in case of default." AIGFP's computer model calculated that there was a 99.85% probability that the firm would never have to pay out on these contracts; that the "U.S. economy would have to disintegrate into a full-blown depression to trigger the succession of events that would require Financial Products to cover defaults."
  • "When the housing market tanked, a statistically improbable chain of events began to unfold. Provisions in the contracts kicked in, spurring collateral calls on swaps linked to $80 billion in questionable assets, requiring the firm and AIG to come up with billions of dollars in cash. They scrambled for almost a year to stave off the calls, but there were too many deals with too many counterparties.

    In September, the Bush administration concluded that AIG's position at the nexus of the deals meant that it could not be allowed to fail, triggering the most expensive rescue of a private company in U.S. history. So far, the government has invested $152 billion in its efforts to save AIG. Federal investigators are sifting the carnage."

Monday, December 29, 2008

The Downturn: Cyclical or Structural?

Last month the National Bureau of Economic Research declared that the economy has been in recession since December 2007, officially confirming what we all knew to be true. This has prompted a new parlor game, speculation on when the economy will return to "normal." Although there seems to be consensus that the recession will be L-shaped, there is hope, if not optimism, that with proper "stimulus" we will see the tepid beginnings of recovery sometime in 2010. Even the notoriously bearish Nouriel Roubini subscribes to this view.

If our policy reaction is appropriate, by 2010 there will be some recovery of growth. The only risk is that the recovery of growth could be so weak that it feels like a recession even though we are technically out of it.

As uninspiring as Roubini's comments are, they reflect the hope and expectation that the downturn, although severe, is still merely cyclical. There is a darker view that the problem is not cyclical, but structural, and that the age of "growth" as we have known it has come to a permanent end. James Howard Kunstler elaborates on the differences in these perspectives:

There are two realities "out there" now competing for verification among those who think about national affairs and make things happen. The dominant one (let's call it the Status Quo) is that our problems of finance and economy will self-correct and allow the project of a "consumer" economy to resume in "growth" mode. This view includes the idea that technology will rescue us from our fossil fuel predicament -- through "innovation," through the discovery of new techno rescue remedy fuels, and via "drill, baby, drill" policy. This view assumes an orderly transition through the current "rough patch" into a vibrant re-energized era of "green" Happy Motoring and resumed Blue Light Special shopping.

The minority reality (let's call it The Long Emergency) says that it is necessary to make radically new arrangements for daily life and rather soon. It says that a campaign to sustain the unsustainable will amount to a tragic squandering of our dwindling resources. It says that the "consumer" era of economics is over, that suburbia will lose its value, that the automobile will be a diminishing presence in daily life, that the major systems we've come to rely on will founder, and that the transition between where we are now and where we are going is apt to be tumultuous.
Go ahead and read the rest of Kunstler's weekly post - if you have the stomach for it, as his predictions for the new year are shocking and disturbing. You might be inclined to dismiss him as a crank, so with the familiar caveat that "past results are not predictive of future performance," here's an excerpt from his 2005 book, The Long Emergency.

By the time you read this, it is very likely that the housing bubble will have come to grief. With interest rates at rock bottom into the first half of 2004, practically everyone who could have refinanced has now done so. There cannot be another round of re-fi unless interest rates go to zero, which is unlikely to happen and, of course, re-fi doesn't make much sense when interest rates rise, which is what they did in the second half of 2004. In fact, re-fi lending tapered off smartly by late 2004. Housing prices will probably remain inflated for a period of time beyond the end of the re-fi spree because of the end-cycle hangover phenemenon, the persisitence of delusional thinking on the part of wishful sellers who refuse to believe that the boom is over and they might have missed out.

In February 2004, Fed Chairman Greenspan made the bizarre suggestion in a public statement that house buyers might consider adjustable-rate mortgages, but the idea seemed insane in a financial climate in which interest rates had nowhere to be adjusted but upward, which would leave many such a house buyer in a terrible predicament of having the mortgage payment go up just when the value of the house had reached its absolute peak and was very likely to fall, as other house owners (especially those with poor credit records, those living marginal lives, those who had lost their jobs since re-fi) lost control of their finances, were forced to sell, or stumbled into default and repossession. Why Greenspan made that suggestion has never been adequately explained. The only possibility is that there was no other way to keep the economy levitated.

The economic wreckage is liable to be impressive. If large numbers of house owners cannot make their mortgage payments, Fannie Mae and Freddie Mac, and by extension the federal government, would be the big losers. The failure of the GSEs would make the S&L fiasco of the 1980s look like a bad night of poker. The failure of the GSEs would pose a far graver situation than the LTCM [Long Term Capital Management] flameout. It could easily bring on cascading failures that might jeopardize global finance.
[The Long Emergency, 2005, Grove Press, New York, pp 232-233]

The Global Economy?

The NY Times published an interesting report last week about the growing construction in Europe of "passive houses" that are heated without furnaces. According to the owner of one such house in Germany, he uses one twentieth the heating energy of a comparably sized home.

So far, the majority of the 15,000 passive houses that have been built have been concentrated in Germany and Scandinavia. Why not the U.S.? The reasons given make you scratch your head:

The first passive home was built here in 1991 by Wolfgang Feist, a local physicist, but diffusion of the idea was slowed by language. The courses and literature were mostly in German, and even now the components are mass-produced only in this part of the world.

But the sophisticated windows and heat-exchange ventilation systems needed to make passive houses work properly are not readily available in the United States. So the construction of passive houses in the United States, at least initially, is likely to entail a higher price differential.

So the technology has not made it to the U.S. because of difficulties with translation and importation? Don't we all sing hymns to the glory of the global economy?

Barron's Early Suspicions of Madoff

Barron's reported on Bernard Madoff's unusually successful hedge fund in 2001.

But what few on the Street know is that Bernie Madoff also manages more than $6 billion for wealthy individuals. That's enough to rank Madoff's operation among the world's five largest hedge funds. What's more, these private accounts have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.

Who knows what the SEC was thinking at the time, but not everyone was convinced Madoff was legit:

Still, some on Wall Street remain skeptical about how Madoff achieves such stunning double-digit returns using options alone. Three option strategists for major investment banks told Barron's they couldn't understand how Madoff churns out such numbers using this strategy. Adds a former Madoff investor: "Anybody who's a seasoned hedge-fund investor knows the split-strike conversion is not the whole story. To take it at face value is a bit naïve."

The reporter who wrote the Barron's story was interviewed on NPR on December 18. Listen here.

Sunday, December 28, 2008

U.S. Oil Production

While working as a scientist at Shell Oil in 1956, M. King Hubbert predicted that oil production in the United States would reach a peak in 1970 and decline thereafter. The following graph shows that he was exactly right:*

*Hubbert did not take into account Alaska, which was not a source of production in 1956. As the line showing total production indicates, Alaskan oil was able to arrest the decline for a while, although not enough to permit the surpassing of the 1970 peak.

Hubbert later applied his methods to global oil production, predicting it would peak between 1995 and 2000. He was wrong. But was he wrong because his theory was wrong or was he wrong simply in the timing? The debate over "peak oil" rages, but the flatness of global production in recent years given overall economic growth makes one sit up and take notice. Here's a chart I posted earlier:

Info On Canadian Oil Production

In a previous post, we saw that the U.S. imports more oil from Canada than any other country, including Saudi Arabia. I thought it was worth doing some more investigation into Canadian oil production. The following information comes from the Energy Information Administration (EIA) of the United States government.

  • Canada had 179 billion barrels of proven oil reserves as of January 2008, second only to Saudi Arabia.
  • Canada sends over 99 percent of its oil exports to the U.S.
  • "In 2007, oil sands production represented approximately half of Canada’s total crude oil production."
  • "Despite the excitement surrounding the development of Canada’s oil sands reserves, there are still several difficulties that could impede the future development of the industry. Analysts predict that the production of synthetic crude from oil sands is only economically viable with relatively high crude oil prices."
  • EIA estimates that Canadian oil sands operators will produce 3.6 million barrels per day by 2030.
Some quick math to put some of the numbers into perspective:
  • World oil production is currently around 80 million barrels per day. With 179 billion barrels of reserves, Canada theoretically could supply the world for a little over 6 years.
  • At 3.6 million barrels per day, Canada's oil sands will amount to less than 5% of world oil production in 2030 (assuming world production in 2030 will be greater than or equal to current production - a controversial assumption).

Where Our Oil Comes From

Here's another graph I've created from data from the Statistical Abstract of the United States, showing America's sources of imported crude oil.

Some notable observations:
  • The nation that supplies us with the most oil is Canada.
  • Mexico's contribution dropped significantly in 2007. We can expect this to continue in the future, since its Cantarell oil field (the 3rd largest in the world) peaked in 2004 and is experiencing sharp drops in output.
  • Saudi Arabia's contribution has been flat in recent years, as has Nigeria's.
  • The "Rest of OPEC" includes Algeria, Angola, Iraq, Kuwait, and Libya. Only Algeria has shown significant growth since 2005.
  • The "Rest of non-OPEC" includes Brazil, Colombia, Ecuador, Russia, and the U.K. Only Brazil has had an increasing contribution. The U.K.'s provision of 37 million barrels in 2007 was 46% of what it was in 2005 and 25% of what it was in 2002.

Scenes from the Tennessee Coal Ash Spill

Will the Coming Infrastructure Stimulus Be Squandered?

There's an opportunity, given the broad political consensus for a massive investment in public infrastructure, to reorient our transit systems toward sustainability. This opportunity might well be lost in an attempt to prop up the doomed existing system.

Missouri’s plan to spend $750 million in federal money on highways and nothing on mass transit in St. Louis doesn’t square with President-elect Barack Obama’s vision for a revolutionary re-engineering of the nation’s infrastructure.

Utah would pour 87 percent of the funds it may receive in a new economic stimulus bill into new road capacity. Arizona would spend $869 million of its $1.2 billion wish list on highways.

While many states are keeping their project lists secret, plans that have surfaced show why environmentalists and some development experts say much of the stimulus spending may promote urban sprawl while scrimping on more green-friendly rail and mass transit.

Updated Rumsfeld

A poignant remark from Atrios:

It's a shame more journalists weren't spending time trying to figure out what was going on with the housing bubble instead of getting quotes from people with a vested interest in it continuing to expand, but you go to financial crises with the press you have not the press you want.

Saturday, December 27, 2008

Signs of the End Times in Chicago

The city of Chicago is home to the new President, a colorfully corrupt state governor, and this year's freakish midwest weather.

In less than a week, the days of snow and ice and 6-below temperatures melted into a 62-degree Saturday in Chicago.

But alike with the springlike temperature there was fog, flooding, high winds, and tornado watches posted for the evening — a Biblical forecast that was capped off with the possibility of more snow.

It has been more than just a day or even a week of extreme weather in Chicago. It has been a year like no other.

By early morning the city had broken a record: Wettest Year Ever — or at least the wettest since records were first compiled in 1871.

At 6 a.m., the National Weather Service in Chicago said 2008 had registered 49.84 inches of precipitation, breaking the record 49.35 inches set in 1983. By noon, the 2008 figure had reached 50.34 inches of water and was still rising.

That includes the 22.3 inches of snow this winter season, which is the seventh snowiest since 1884.

Fun With Statistics

The result of a snowed-in afternoon at the in-laws' with the Statistical Abstract of the United States.

Financial Egg Laying

I constructed the following charts from data provided by Niall Ferguson in his excellent piece in Vanity Fair, "Wall Street Lays Another Egg."

More on the Coal Ash Spill

NY Times, Tuesday, December 23, 2008:
The Tennessee Valley Authority estimated that 1.7 million cubic yards of fly ash, a byproduct of coal incineration that contains the heavy metals, broke through an earthen retention wall at a T.V.A. power plant early Monday morning near Kingston, about 40 miles west of Knoxville. Four to six feet of ash covered 250 to 400 acres in the area.

A sample taken near the intake for the water supply of Kingston met standards for drinking water, said Gilbert Francis Jr., a spokesman for the authority.

NY Times, Friday, December 26, 2008:
A coal ash spill in eastern Tennessee that experts were already calling the largest environmental disaster of its kind in the United States is more than three times as large as initially estimated, according to an updated survey by the Tennessee Valley Authority.

Officials at the authority initially said that about 1.7 million cubic yards of wet coal ash had spilled when the earthen retaining wall of an ash pond at the Kingston Fossil Plant, about 40 miles west of Knoxville, gave way on Monday. But on Thursday they released the results of an aerial survey that showed the actual amount was 5.4 million cubic yards, or enough to flood more than 3,000 acres one foot deep.

The amount now said to have been spilled is larger than the amount the authority initially said was in the pond, 2.6 million cubic yards.

A test of river water near the spill showed elevated levels of lead and thallium, which can cause birth defects and nervous and reproductive system disorders, said John Moulton, a spokesman for the T.V.A., which owns the electrical generating plant, one of the authority’s largest.

Mr. Moulton said Friday that the levels exceeded safety limits for drinking water, but that both metals were filtered out by water treatment processes.

But apparently, coal ash is not even considered a hazardous material:
The spill has reignited a debate over whether coal ash should be federally regulated as a hazardous material.

Coal Ash Spill in Tennessee

From the NY Times:
Environmentalists pointed to the accident as proof of their long-held assertion that there is no such thing as “clean coal,” noting two factors that may have contributed to the scale of the disaster. First, as coal plants have gotten better at controlling air pollution, the toxic substances that would have been spewed into the air have been shifted to solid byproducts like fly ash, and the production of such postcombustion waste, as it is called, has increased sharply.

Second, the Kingston plant, surrounded by residential tracts, had little room to grow and simply piled its ash higher and higher, though officials said the pond whose wall gave way was not over capacity.

Environmental groups have long pressed for coal ash to be buried in lined landfills to prevent the leaching of metals into the soil and groundwater, a recommendation borne out by the 2006 E.P.A. report. An above-ground embankment like the one at Kingston was not an appropriate storage site for fly ash, said Thomas J. FitzGerald, the director of nonprofit Kentucky Resources Council and an expert in coal waste.

A reminder from a voice of conscience:

"If we continue to be economically dependent on destroying parts of the Earth, then eventually we will destroy it all."

[Wendell Berry, "Compromise, Hell!", The Way of Ignorance.]

Friday, December 26, 2008

Unions and the Middle Class

Although my own personal experience left me with little admiration for the UAW, I've always been sympathetic to the argument that unions helped create our large middle class and allowed it to prosper for many years. Writing in The New Republic, Jonathan Cohn reminds us of this in the context of the fall of the American auto industry.
But, for all of Detroit's mistakes, it is also a victim of something it did right: ensuring a middle-class lifestyle for bluecollar workers. When the carmakers, pushed by unions, agreed to provide workers with a steady level of purchasing power, comprehensive health benefits lasting into retirement, and various forms of workplace rights, they were promising something that all Americans covet.

Cohn goes on to argue that the wages and benefits that were negotiated by the UAW and that ultimately added a devastating cost penalty on the automakers amounted to the creation of a private welfare state that would have been avoided had America opted instead for a system in which middle class benefits had been assured by taxpayers rather than private employers:
In a more enlightened society, after all, government would have made those promises and extended them to all workers, thereby spreading the burden of financing them to all taxpayers. That's how it's done in Europe and in Japan--which, not coincidentally, is the home of Detroit's most successful competitors. But the U.S. government never took that step. So, instead of a public welfare state, we got a private one, administered for only some workers and paid for by their employers. Sooner or later, this arrangement was bound to fail.

Ironically, the current venting and fuming at the generous compensation packages of the UAW reflects a tacit agreement that highly paid union workers should be brought down, when one would think we would be looking for ways to bring everyone else up.
But is the problem that UAW members get too much? Or that everybody else gets too little? There's a broad consensus that, over the last 30 years, real wages for the typical American worker have stagnated--in contrast to the 30 years before that, when unions thrived and real wages doubled.

Is it possible that this trend could be reversed? Cohn thinks so, calling for an approach that a year ago, I might have expected to hear from the farthest fringes of the left, but which I expect will become increasingly mainstream:
It's a model for the welfare state that already exists in other parts of the world and that, as it happens, has been getting a lot of international attention in the last few years. It's the Nordic or Scandinavian model, so named for the part of Europe where it's practiced, and its philosophy is simple. In these countries, government guarantees everybody, even blue-collar workers, most of the things Detroit once guaranteed its workforce--like middle-class wages, full health benefits, and subsidized day care. The government also guarantees nearly full incomes for the unemployed.

Even a Professional Skeptic Proved Gullible

Stephen Greenspan has just written a new book, Annals of Gullibility: Why We are Duped and How to Avoid it, in which he analyzes

the topic of financial scams, along with a great number of other forms of human gullibility, including war (the Trojan Horse), politics (WMDs in Iraq), relationships (sexual seduction), pathological science (cold fusion), religion (Christian Science), human services (Facilitated Communication), medical fads (homeopathy), etc.

He knows what he's talking about:

In Annals of Gullibility I propose a multi-dimensional theory that would explain why so many people behave in a manner which exposes them to severe and predictable risks. This includes myself — I lost a good chunk of my retirement savings to Mr. Madoff, so I know of what I write on the most personal level.

Protest Watch - #2

Greece continues to reel (here is an earlier report):

Greece has been torn apart by the worst riots in decades, now entering their third week. Bands of self-declared anarchist youths have rampaged through the streets of Athens and other major cities causing hundreds of millions of dollars in property damage, setting off a spiral of unrest in which the nation’s unions, among other groups, have taken part. Both shops and hotel lobbies have been ransacked, and hospitals, airports, and transport have been brought to a standstill. What sparked the riots was the accidental police shooting of a 15-year-old boy, Alexandros Grigoropoulos. But as usual in such cases, there was much more in the way of causes lying beneath the surface.

Tuesday, December 23, 2008


Despite their role in the 1987 stock market crash, in the 1998 crisis precipitated by Long Term Capital Management, and in the current mess largely prompted by their securitized mortgages, "quants" haven't lost their allure in the world of finance.

Last week, New York University and Carnegie Mellon sent a new class of math whizzes out into a profession that is both blamed for the financial collapse and charged with preventing it happening again.

Many of these so-called quantitative analysts, or "quants," graduating from elite financial engineering courses will end up writing computer programs that handle an ever greater share of market trading.

Because some of their mathematical models failed to take into account factors that later turned out to be crucial, quants have been blamed for compounding risk and exacerbating the crash in financial markets.

But far from going into decline, those with financial engineering degrees are still in demand as hedge funds and banks seek ways to measure previously unforeseen risks and factor them into their models.

Monday, December 22, 2008

On Tom Cruise at 46

Stephen Metcalf at Slate doesn't think middle age will be kind to Tom Cruise:

Cruise has that famous smile, of course, his boyish good trim, and a synthetic American normalcy that puts him over with audiences in Bhutan or Sri Lanka. Now think about what he lacks: humanitas, gravitas, carnality, whimsy—everything, in short, that might rise up to fill a midlife smile with feeling. Even premium Cruise, the A-game actorly actor of Born on the Fourth of July and Magnolia, who gears up a half-berserk lour when working with a directorly director, offers more of the same: bark, glare, seethe, repeat.

Not that I want to pile on, but I don't think I've ever seen a Tom Cruise movie where he didn't play the same character. "Bark, glare, seethe, repeat" - let's see, that about sums up Jerry Maguire, Charlie Babbit, Lt. Mitchell, Lt. Kaffee,...

Primer on the Federal Reserve

A truly informative post at Econbrowser that provides an excellent overview of the Federal Reserve System for the layperson and a wonkish explanation of the Fed's balance sheet for the not-so-layperson.

Let me begin by reviewing some first principles of what the Fed is all about. How did the cash currently in your wallet get there? You withdrew it from an ATM, perhaps. But these wonderful contraptions don't just give you the green stuff for free-- you had to have deposits in the bank to be able to withdraw the cash. You can think of your account with your bank as credits you can use to get cash whenever you want it.

But where did your bank get the cash? It likely has an account with the Federal Reserve System, which account, just like the one you have with your bank, shows a certain level of deposits that the bank has in its account with the Fed. Your bank can then go to the Fed and withdraw those deposits in the form of cash. So you can think of your bank's deposits with the Fed as credits it can use to get cash whenever it wants.

And how did your bank come to have those deposits with the Fed? These deposits are something the Fed has the power to create out of thin air. This indeed is its primary power-- the ability to create money. That's a power that could be easily abused, so our system is set up to prevent the Fed from creating deposits willy-nilly. Specifically, the traditional operation of the Federal Reserve was to purchase assets such as Treasury securities from a private dealer, paying for them by simply crediting the dealer's account with the Fed with new deposits. The Fed hasn't created any wealth with this transaction, it has simply introduced a new asset (ultimately, money) and retired an old (the Treasuries that were formerly held by a member of the public are now held by the Fed).

Sunday, December 21, 2008

Gas Prices

Their amazing drop, courtesy of Calculated Risk:

Voices of Genius #2 - Nabokov

From an interview of Vladmir Nabokov by Alvin Toffler that was published in a 1964 edition of Playboy:

Q: You have also written that poetry represents "the mysteries of the irrational perceived through rational words." But many feel that the "irrational" has little place in an age when the exact knowledge of science has begun to plumb the most profound mysteries of existence. Do you agree?

A: This appearance is very deceptive. It is a journalistic illusion. In point of fact, the greater one's science, the deeper the sense of mystery. We, as newspaper readers, are inclined to call "science" the cleverness of an electrician or a psychiatrist's mumbo jumbo. This, at best, is applied science, and one of the characteristics of applied science is that yesterday's neutron or today's truth dies tomorrow. But even in a better sense of "science" - as the study of visible and palpable nature, or the poetry of pure mathematics and pure philosophy - the situation remains as hopeless as ever. We shall never know the origin of life, or the meaning of life, or the nature of space and time, or the nature of nature, or the nature of thought.

Q: Man's understanding of these mysteries is embodied in the concept of a Divine Being. As a final question, do you believe in God?

A: To be quite candid - and what I am going to say now is something I never said before, and I hope it provokes a salutary little chill - I know more than I can express in words, and the little that I can express would not have been expressed, had I not known more.

Vladimir Nabokov, [Strong Opinions, First Vintage International Edition, 1990, pp. 44-45.]

Voices of Genius #1 - Nietzsche

For those of you who are plagued by doubts about the value of your quixotic wanderings around the internet; who wonder whether your consumption (or production) of blog posts amounts to so much dilettantism; and who harbor the guilty suspicion that the One True Way to knowledge must surely involve a more ascetic approach than lounging on the couch with your laptop - take heart! Flatter yourselves that Nietzsche's defense of his aphoristic approach to philosophy might be used to defend your own intellectual habits!

For I approach deep problems like cold baths: quickly into them and quickly out again. That one does not get into the depths that way, not deep enough down, is the superstition of those afraid of the water, the enemies of cold water; they speak without experience. The freezing cold makes one swift.

[The Gay Science, #381, Walter Kaufmann translation]

Winter Training for Cyclists

A tip of the hat to my cycling buddy Jason for this report from a professional cyclist on the off-season training habits of his species. Granted, a weekend warrior like myself, whose main goal is to survive fast-paced group rides, has no need to go to the extremes of the freakish wonders who race the grand tours. But as I invest a good deal of effort to keep fit, I've been able to combine reading, research, and empirical testing to form my own opinions about training. I certainly concur with this:

The curse of the athlete is that conditioning is lost much more quickly than it is achieved. To get our bodies back to the peaks we reached while we were racing, we need months of long, steady riding combined with hours in the gym and cross-training. In the off-season, we don’t rest as much as we build a foundation.

Riders who train meticulously through the winter not only perform better but also set themselves up for a consistent year with fewer injuries.

The Risks of Homeownership

Today's NY Times has a long article that links the collapse of the financial system to the Bush administration's vision of an "ownership society."

If you can fog a mirror, you've had it drilled into your brain that the American Dream depends on home ownership and that to achieve financial security and community respectability, you must carry as big a mortgage as you can muster and spend your weekends tinkering and puttering to enhance your "investment." These are articles of faith that are largely unquestioned, making it easy for the country to stifle a yawn and politely applaud when W made pitches that "stoked the mortgage bonfire:"

Let's just say that I was always skeptical of the unqualified benefit of owning a home, especially during the dreary period when I was a homeowner myself (as my own contribution to the literature on this subject attests). Every now and then, I run across the reports of others (both scholarly and anecdotal) that confirm my conviction. An example is this one, from a researcher at The Wharton School of Business, which doesn't address the financial aspects, but the psychological aspects of owning a home:

An interesting portrait of homeowners emerges from my analysis. I find little evidence that homeowners are happier by any of the following definitions: life satisfaction, overall mood, overall feeling, general moment-to-moment emotions (i.e., affect) and affect at home. Several factors might be at work: homeowners derive more pain (but no more joy) from both their home and their neighborhood. They are also more likely to be 12 pounds heavier, report lower a lower health status and poorer sleep quality. They tend to spend less time on active leisure or with friends. The average homeowner reports less joy from love and relationships. She is also less likely to consider herself to enjoy being with people. Contrary to popular belief, I do not find significant differences in family-related time use patterns, family-related affect, number of normal work hours, indicators of stress or measures of self-esteem and perceived control of life by homeownership.

I am indebted to Mr. Felix Salmon for the link to this research and for his insightful comment that:

For this we make mortgage interest tax deductible, we create monsters like Fannie and Freddie, we run election campaigns promising everybody their own home, we equate homeownership with the American Dream?

It turns out that Mr. Salmon has long believed, as I do, that homeownership is overrated, both in terms of its financial benefit and in terms of its supposed role as the bedrock of social stability, as he elaborates here.

Yes, if things go well then a homeowner ends up with a magnificent and hugely valuable asset which he owns outright. But if things go badly – and you only need one round of layoffs, or a single medical emergency – then the same homeowner can end up in foreclosure and bankruptcy. Those risks are much more remote for renters without huge debts – and make no mistake, a mortgage is one enormous debt. If owning a home is nice, then losing it can be devastating.

My point is that the kind of people who have stable and successful lives will have stable and successful lives whether or not they own their own homes. Naturally, a lot of them will indeed end up owning their homes, but it's not a necessary precondition. And if you wanted an example of a place where millions of people have successfully had stable and successful lives for decades, it would be hard to come up with a better country than Germany – which has extremely low levels of homeownership.

Saturday, December 20, 2008

Annual Cycling Results

The much anticipated digest of my personal cycling statistics has been released for publication. Not one, but two cycling seasons are graphically displayed below, each data point representing the mileage logged on a given day. By popular demand, I am again showing annual trendlines, with fifth-order polynomials selected for the way they follow the data points diligently, but not slavishly, just like trusty dogs.

Total mileage for 2008 came in at 6776, down from 2007's epic 8123, but still respectable. I passed the century mark on six occasions, up from four the previous year, with a 133-mile trip to and from Bull Valley taking top honors (although still modest compared to the chart-busting 190-mile brevet of May 5, 2007).

More Than Waifs Are Welcome Here

Friday, December 19, 2008

Busted Ponzis

Paul Krugman draws the parallels between l'affaire Madoff and the rest of our casino economy:

Yet surely I’m not the only person to ask the obvious question: How different, really, is Mr. Madoff’s tale from the story of the investment industry as a whole?

The financial services industry has claimed an ever-growing share of the nation’s income over the past generation, making the people who run the industry incredibly rich. Yet, at this point, it looks as if much of the industry has been destroying value, not creating it. And it’s not just a matter of money: the vast riches achieved by those who managed other people’s money have had a corrupting effect on our society as a whole.

Let’s start with those paychecks. Last year, the average salary of employees in “securities, commodity contracts, and investments” was more than four times the average salary in the rest of the economy. Earning a million dollars was nothing special, and even incomes of $20 million or more were fairly common. The incomes of the richest Americans have exploded over the past generation, even as wages of ordinary workers have stagnated; high pay on Wall Street was a major cause of that divergence.

But surely those financial superstars must have been earning their millions, right? No, not necessarily. The pay system on Wall Street lavishly rewards the appearance of profit, even if that appearance later turns out to have been an illusion.

Mary Schapiro at SEC

This week's news that the SEC was negligent in its oversight of Bernie Madoff makes Obama's appointee to head the agency more interesting and significant than it otherwise might have been. The nomination of Mary Schapiro for the job is therefore generating buzz and mixed reviews.

From Robert Kuttner at the American Prospect:

...if you have not heard of Mary Schapiro, it is because she has not been much of a player, much less a crusader, in the struggle for reform. She is the kind of Democratic appointment that allows Wall Street to breathe a huge sigh of relief.

From Floyd Norris in the NY Times:

In picking Ms. Schapiro, Mr. Obama has chosen someone who knows all the issues and all the players and who is committed to effective and rational regulation.

Gonna Get Me a Piece of the Bailout

Early in my investing "career," I was persuaded by my broker (a guy I genuinely liked) to put money into some sort of cranberry cooperative. Being green at high finance, I parted easily with my money after listening to his pitch and without doing any real due diligence of my own. Cranberries and their derivative products were destined to become consumer staples, cranberry juice would soon overtake Coca-Cola, and if I wanted in on the action, I needed to help whomever it was do whatever they were doing to corner the market on Wisconsin bogs. The money I lost when the firm went belly-up would have paid for my honeymoon and then some.

Since then I've found novel ways to lose much larger sums. For example, I resisted the temptation to participate in the tech mania of the nineties until after the bubble popped, PE's returned to double digits, and my broker convinced me that Lucent and Palm, having "corrected" significantly, were poised to resume their flight path to the heavens. I would discover that they were, of course, still in the early stages of their death spirals.

With the new millenium, I put a significant portion of my net worth into my employer, ready to have it treble or quadruple in a few years thanks to my own hard work. Having gained a lot more sophistication by then, I researched the industry thoroughly; diligently pored over financial statements and business plans; and paid large fees to attorneys and accountants for their expert advice. Things went swimmingly for a couple years and then business conditions changed dramatically and well, I don't want to talk about the rest.

This past summer the odor of the rat I had been smelling became truly objectionable, so I took measures to liquidate most of my stock holdings and to start buying Treasuries. I kept my most significant positions, however, figuring the energy companies I owned would continue to be propped up by the high price of oil and that the Polish firm that was coming to dominate alcohol distribution in emerging European markets would continue to sail above the fray. Wrong and wrong, respectively.

Until now, I thought losses were part of the game, although admittedly the unpleasant part. But I've learned there's a movement underway by some pretty savvy people to petition the government to make them whole in the wake of their investment missteps, so I figure I'm just going to go join that crowd.

FOX News Sues Treasury

Not to be outdone by Bloomberg, FOX News has filed suit against the Treasury Department for the latter's refusal to disclose bailout data.

Yves Smith at Naked Capitalism is surprised and delighted:

The end of days must be closer than I realized.

Conservative stalwart Fox News is not only taking on the officialdom, it is going after Republican authorities. This is almost as much fun as learning that J. Edgar Hoover was a cross-dresser.

Nobel not Noble?

Corruption in Sweden?

The integrity of the Nobel prize was called into question last night after it emerged that a member of the jury also sat on the board of a pharmaceuticals giant [AstraZeneca] that benefited from the award of this year’s prize for medicine.
It is not the only question mark hanging over the probity of the Stockholm-based foundation. The Swedish prosecutor yesterday opened a parallel investigation into bribery allegations after several members of Nobel committees admitted enjoying expenses-paid trips to China to tell officials how candidates are selected for prizes.

Thursday, December 18, 2008

Bonus Payments or Looting?

The NY Times has an article today that details some of the epic greed and excess that resulted in the stupefying bonuses paid to Wall Street employees in recent years. The facts will make your blood boil:

For Dow Kim, 2006 was a very good year. While his salary at Merrill Lynch was $350,000, his total compensation was 100 times that — $35 million.

The difference between the two amounts was his bonus, a rich reward for the robust earnings made by the traders he oversaw in Merrill’s mortgage business.

Mr. Kim’s colleagues, not only at his level, but far down the ranks, also pocketed large paychecks. In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.

But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.

Unlike the earnings, however, the bonuses have not been reversed.

More than 100 people in Merrill’s bond unit alone broke the million-dollar mark in 2006. Goldman Sachs paid more than $20 million apiece to more than 50 people that year, according to a person familiar with the matter.

Yves Smith at Naked Capitalism, however, believes The Times glossed the piece.
He argues that these investment bank executives were paying themselves more than their firms were worth and then defaulting on their obligations. One egregious example was Lehman:

Dick Fuld reportedly spends much of his days allegedly wondering why he didn't get a bailout. He should instead be thanking his lucky stars he is not in jail. Bankruptcy fraud is criminal, and fraudulent conveyance is subject to clawbacks. How could Lehman possibly have been producing financials that showed it had a positive net worth, yet have an over $100 billion hole in its balance sheet when it went under? No one has yet given an adequate answer on where the shortfalls were.

Yves calls on The Times to drop the euphemisms and tell it like it is:

It was looting [my emphasis], and it is high time the media starts describing it in those terms.

Here, here!

Satire in the Form of Haikus

From Angry Bear:

Biting satire

by James Flannery

Screw You Haikus, Take Two

Bubba in Ford Truck

made by Percy in Detroit

barks, "buy American!"

Percy in Nissan

made by Bubba in Dixie

scoffs, "Fords really suck!"

The end of NASCAR---

that might turn Alabama

blue in a hurry

Clinton, born Redneck,

sought to feign the aristocrat

revealed a Redneck

Bush feigned a Redneck

pedigree of aristocrat

revealed a Redneck

This is the fruit of

Woodstock Generation:

two stinking Yahoos

if red states are Ying

and if blue states are the Yang

both stuck up Ying-Yang


will need a Redneck buddy

when protein grows scarce

Ponder Cheney's stent:

it is not in the right place

to ease scatoma

--- Satire by James Flannery, 2008

Copyright waived. Please distribute freely.

author due credit

Wednesday, December 17, 2008

From One Suzanne to Another

Marlene on the Wall

OK, we've had a lot of depressing economic stuff. Let's change the pace for a brief return to our youth when waifish folk singers informed our sensibility.

Peak Oil Watch

I created these graphs myself based on data published, respectively, by the Energy Information Administration and the BP Statistical Review.

Note that oil prices began their steep rise in 2003 and crossed the $40 per barrel threshold in May, 2004, early in their eventual climb to the frightening levels of the past summer. If we look at what was going on in oil production, we see that production increased noticeably in 2003 and 2004 and then was effectively flat from 2005 through 2007, a period of robust world economic growth. Why?

Another Sensible Argument from Robert Reich

Robert Reich favors the auto bailout, but not as much as he favors democracy. Congress has said no, so why should the White House be able to trump this decision?

If TARP is a slush fund, everything's arbitrary. We're no longer a nation of laws; we're a nation of Treasury and White House officials with hundreds of billions of dollars of taxpayer money to dispense as they see fit. Why rescue autos and not, say, the newspaper industry, which is heading for oblivion. Better yet, why not rescue state and local governments? They're running short about $100 billion this year and as a result are slashing public services, including the nation's schools.

Did Obama Fumble on Agriculture?

The Organic Consumer's Association strongly opposes Tom Vilsack as Agriculture Secretary.

While Vilsack has promoted respectable policies with respect to restraining livestock monopolies, his overall record is one of aiding and abetting Concentrated Animal Feeding Operations (CAFOs) or factory farms and promoting genetically engineered crops and animal cloning. Equally troubling is Vilsack's support for unsustainable industrial ethanol production, which has already caused global corn and grain prices to skyrocket, literally taking food off the table for a billion people in the developing world.

Sometimes You Have to Burn the Village to Save It

A painful reminder that the man-in-charge is still the man-in-charge:

US President George W. Bush said in an interview Tuesday he was forced to sacrifice free market principles to save the economy from "collapse."

"I've abandoned free-market principles to save the free-market system," Bush told CNN television, saying he had made the decision "to make sure the economy doesn't collapse."

A Rich Woman Made Poor by Madoff

A New York artist and former editor of Self Magazine has lost everything thanks to Madoff.

I’ve lived a great and interesting life. I love beautiful things: high thread count sheets, old china, watches, jewelry, Hermes purses, and Louboutin shoes. I like expensive French milled soap, good wines, and white truffles. I have given extravagant gifts like diamond earrings. I traveled a lot. In this last year, I've been Laos, Cambodia, India, Russia, and Berlin for my first solo art show. Will I ever be able to explore exotic places again?

Airplane Toilet Safety

Garrison Keillor ponders the flush warnings in airplane bathrooms:

It is rather haunting, the notice above the Flush button in the toilet on the airliner, "Do Not Flush While Seated on Toilet." One imagines the engineers of the toilet running tests with flush dummies with big flat butts and the suction ripping the stuffing right out of them, and the engineers thinking, "Oh criminy, you mean we wasted three years on this sucker?" So lawyers were brought in to write the warning, which had to be short enough to be printed in large type so that geezers would see it, who are the ones most likely to flush while seated.

Caroline Kennedy: Noblesse Oblige

I have not closely followed the life of Caroline Kennedy, but she strikes me as an intelligent, sensible person who carries the privilege and burden of her family's legacy with grace and dignity.

I am firmly opposed to her appointment to the U.S. Senate, however, because I am firmly opposed to the nepotism that has become commonplace in our politics, whether the name be Bush, Biden, or Kennedy. This is not supposed to be an aristocracy.

SEC: The Sargent Schulz of Financial Regulation

"I see nothing. Nothing!"

The Securities and Exchange Commission said Tuesday night that it had missed repeated opportunities to discover what may be the largest financial fraud in history, a Ponzi scheme whose losses could run as high as $50 billion.

The commission said it received credible allegations about the scheme at least nine years ago and will immediately open an internal investigation to examine why it had failed to pursue them aggressively.

Tuesday, December 16, 2008

Prophets of the Next Catastrophe

Everywhere you turn these days, Nouriel Roubini is delivering gloomy economic forecasts in his Transylvanian monotone, his market value and celebrity secured by his spot-on prediction of our current economic mess. Others who bucked the boundless optimism of economic orthodoxy while enduring the contemptuous dismissals of Wall Street shills and free-market cheerleaders are now similarly basking in the limelight (e.g., Peter Schiff, Robert Shiller, Meredith Whitney, etc.). Their warnings of impending disaster were unheeded during the bubble, yet seem so obviously sensible in retrospect.

There's another epic catastrophe looming and another crop of Cassandras whose dire warnings are being largely ignored today, but who will be revered for their foresight tomorrow. The pending catastrophe is the decline of world oil production and its leading prophets include Matthew Simmons and Robert Hirsch.

Here's Robert Hirsch giving an introduction to the problem:

And here's Matthew Simmons (I believe from early 2007):

If you've got time while you're fixing your breakfast or ironing your shirts, you can listen to Simmons and Hirsch together last week being interviewed by Jim Puplava on financialsense.com.

Income Inequality

From Consider the Evidence via Edge of the American West:

Excellent Observations from Robert Reich

Most economic commentators that I've been reading are painting grim pictures of an L-shaped recession with no expectations of recovery until 2010 or beyond. But notwithstanding the arguments of non-economist social critics such as James Howard Kunstler, I haven't come across many brand-name economists that explain why we are headed so deeply into the doldrums or that suggest that we are destined for a radical change in our traditional notion of economic progress. Enter Robert Reich with a superb blog post.

The first assumption is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren’t much higher than they were in the 1970s. Middle-class families continued to spend at a healthy clip over the last thirty years despite this because women went into paid work, everyone started working longer hours, and then, when these tactics gave out, went deeper and deeper into debt.

The second assumption is that, even if Americans had the money to keep spending as before, they could do so forever. Yet only the most myopic adherent of free-market capitalism could believe this to be true. The social and environmental costs would soon overwhelm us.

This would be a problem if most of what we consumed during our big-spending years were bare necessities. But much was just stuff. And surely there are limits to how many furnishings and appliances can be crammed into a home, how many hours can be filled manipulating digital devices, and how much happiness can be wrung out of commercial entertainment.

What we most lack, or are in danger of losing, are the things we use in common – clean air, clean water, public parks, good schools, and public transportation, as well as social safety nets to catch those of us who fall. Common goods like these don’t necessarily use up scarce resources; often, they conserve and protect them.

Rather than a temporary stimulus, government would permanently fill the gap left by consumers who cannot and should not be expected to resume their old spending ways.

Indoor Training Blues

The snow and ice and brutal cold have finally forced me inside and off the road. My bike riding is now limited to a short morning workout on my indoor trainer.

Here are a couple of pics from just a few short months ago, when the air was warm and the roads were dry. This one is prior to the start of the Illinois State Championship Road Race, where I finished 10th of 50 in my lowly category:

And here's one from the midway rest stop at Riverwoods and Everett Roads in Lake Forest on my Sunday morning group ride:

And here's a must-see work of art that conveys for the layperson some sense of the passionate dedication of the lonely cyclist:

Monday, December 15, 2008

This Week from James Howard Kunstler

One doesn't turn to the acerbic observations of James Howard Kunstler for uplift and reassurance that everything is gonna be all right. But his sharp social criticism and sarcastic wit are a tonic for anyone who thinks our age should have its own H.L. Mencken. Here are a few choice morsels from this week's installment of the Clusterf**k Nation Chronicle:

The terrain of North America has been left scarred by unlovable objects and baleful futureless vistas that, from now on, will shed whatever pecuniary value they once had.

The economy we're evolving into will be un-global, necessarily local and regional, and austere. It won't support even our current population.

The new narrative has to be about a managed contraction -- and by "managed" I mean a way that does not produce civil violence, starvation, and public health disasters.

It is hugely ironic that the US automobile industry is collapsing at this very moment, and the ongoing debate about whether to "rescue" it or not is an obvious kabuki theater exercise because this industry is hopeless... A single leaky little lifeboat will be lowered and the chiefs of the Big Three will be invited to go for a brief little row, and then they will sink, glug, glug, glug, while the rusty old Titanic of the car industry slides diagonally into the deep behind them, against a sickening greenish-orange sunset backdrop of the morbid economy.

I'm convinced that farming will come much closer to the center of economic life, as the death of petro-agribusiness makes food production a matter of life and death in America -- as opposed to the disaster of metabolic entertainment it is now.

We still think that "the path to success" is based on getting a college degree certifying people for a lifetime of sitting in an office cubicle. This is so far from the approaching reality that it will be eventually viewed as a sick joke -- like those old 1912 lithographs of mega-cities with Zeppelins plying the air between Everest-size skyscrapers.

The American experience for a few generations has produced an adult population with very childish instincts, increasingly worse each decade. For instance, the desperate power fantasies among the younger tattooed lumpenproles -- those with next-to-zero real economic power -- suggest a certain unappetizing playing-out of resource competition when the supply of Cheez Doodles and Pepsi starts to dwindle.


The question is what, if anything, will be done :

The abuse of detainees in U.S. custody cannot simply be attributed to the actions of “a few bad apples” acting on their own. The fact is that senior officials in the United States government solicited information on how to use aggressive techniques, redefined the law to create the appearance of their legality, and authorized their use against detainees.

Conclusion 1: On February 7, 2002, President George W. Bush made a written determination that Common Article 3 of the Geneva Conventions, which would have afforded minimum standards for humane treatment, did not apply to al Qaeda or Taliban detainees.

Conclusion 2: Members of the President’s Cabinet and other senior officials participated in meetings inside the White House in 2002 and 2003 where specific interrogation techniques were discussed.

Conclusion 3: The use of techniques similar to those used in SERE resistance training – such as stripping students of their clothing, placing them in stress positions, putting hoods over their heads, and treating them like animals – was at odds with the commitment to humane treatment of detainees in U.S. custody.

Conclusion 6: The Central Intelligence Agency’s (CIA) interrogation program included at least one SERE training technique, waterboarding. Senior Administration lawyers, including Alberto Gonzales, Counsel to the President, and David Addington, Counsel to the Vice President, were consulted on the development of legal analysis of CIA interrogation techniques. Legal opinions subsequently issued by the Department of Justice’s Office of Legal Counsel (OLC) interpreted legal obligations under U.S. anti-torture laws and determined the legality of CIA interrogation techniques. Those OLC opinions distorted the meaning and intent of anti-torture laws, rationalized the abuse of detainees in U.S. custody and influenced Department of Defense determinations as to what interrogation techniques were legal for use during interrogations conducted by U.S. military personnel.

Conclusion 13: Secretary of Defense Donald Rumsfeld’s authorization of aggressive interrogation techniques for use at Guantanamo Bay was a direct cause of detainee abuse there.

Conclusion 17: Interrogation policies approved by Lieutenant General Ricardo Sanchez, which included the use of military working dogs and stress positions, were a direct cause of detainee abuse in Iraq.

Conclusion 19: The abuse of detainees at Abu Ghraib in late 2003 was not simply the result of a few soldiers acting on their own.

Goldman Sachs Shorting Municipal Bonds

Our illustrious Wall Street wizards are able to feed from the public trough at the same time they short the public debt. From Bloomberg via Angry Bear:
Goldman Sachs Group Inc., one of the top five U.S. municipal bond underwriters, is angering politicians and public-finance officials in New Jersey, Wisconsin, California and Florida by recommending that investors purchase credit-default swaps to bet against 11 states’ debt.


It’s “disturbing” to advise investors to bet against the financial health of a state whose bonds Goldman helps sell, Assemblyman Gary S. Schaer, a Democrat who chairs the Financial Institutions and Insurance Committee, said last week in a letter to Chief Executive Officer Lloyd C. Blankfein.

Sunday, December 14, 2008

A Suspicion I Share

I agree with Josh Marshall on his suspicion about l'affaire Madoff:

What we're hearing is that this was a classic, if vast, Ponzi scheme. So in the annals of the great financial sector collapse of 2008, unlike the various Wall Street firms and high flyers who were ruined because of the Real Estate Bubble, illiquid mortgage-backed derivatives and generalized speculative euphoria, Madoff's operation was just a scam, an old-fashioned fraud, that a lot of big players got suckered into.

But put me down as suspicious -- suspicious that the difference between Madoff's and the other investment implosions we've seen over recent months will turn out to be so clearly one of kind rather than degree.

Saturday, December 13, 2008

Glenn Greenwald on Bill Moyers Journal

Bill Moyers interviews Glenn Greenwald, the Constitutional lawyer and blogger who has relentlessly researched and exposed the assault on the rule of law undertaken by the Bush administration.

The video of the interview, along with a complete transcript, can be viewed here. For convenience and emphasis, I've selected a few key excerpts below:

GLENN GREENWALD: ...But rather than announce that they intended to indict him [suspected "dirty bomber" Jose Padilla] and bring charges against him, as the Constitution requires, the Bush administration instead announced that it has the power to arrest and detain American citizens on U.S. soil indefinitely based solely on the say so of the president without having to charge that person with a crime and without even having them have access to a lawyer.


BILL MOYERS: What do you mean when you call President Bush a Manichean warrior? I mean, most people don't know what Manichean is and don't care. What do you mean by it?

GLENN GREENWALD: Well, the idea of being a Manichean comes from this third century BC philosophy that - or religion really that basically understood the world, a never-ending battle between the forces of pure good and the forces of pure evil. And all human events could be understood said adherence to this religion through that prism.

And it was a very simplistic idea that even early Christianity rejected as not appreciating the complexities of how the world actually is and the ambiguities, the moral ambiguities that characterize who most of us are in most situations. George Bush views the world and his followers viewed the world through this lens of pure good versus pure evil.

And it's not me saying that. He said that in virtually all of his speeches. And when you see the world that way what it means is that if you're on the side of pure good, as he asserted that he was and we are, it means that anything that you do, no matter how limitless, no matter how brutal and immoral, is inherently justifiable because it's being enlisted for service of the good.

And by contrast, anything that you do to those on the other side is inherently justified as well because they're pure evil. And from the war in Iraq to the torture camps and secret prisons that we set up all of the things that have done so much damage, I think that's the mentality that lies at the heart of it.


What you have is a two-tiered system of justice where ordinary Americans are subjected to the most merciless criminal justice system in the world. They break the law. The full weight of the criminal justice system comes crashing down upon them. But our political class, the same elites who have imposed that incredibly harsh framework on ordinary Americans, have essentially exempted themselves and the leaders of that political class from the law.

More Interesting Graphs From the Federal Reserve

If you're like me, you hear economic statistics every day that mean little unless they are placed in context. Here then, is some context:

TARP vs. Fed Lending

Is the financial system in even worse shape than we think? The Treasury has been authorized under TARP to spend $700 billion to do whatever it's doing (buying toxic assets? injecting capital? subsidizing AIG boondoggles and bonuses?), but getting lost in the shuffle is the fact that the Fed is also handing out an unprecedented amount of money. Take a look at this graph, which comes directly from the Federal Reserve Bank of St. Louis, and which shows the Total Borrowings of Depository Institutions from the Federal Reserve through November 1 of this year:

Thus far, the Fed has refused to reveal to whom these loans have gone and what it has accepted as collateral. Bloomberg News has filed a lawsuit against the Federal Reserve under the Freedom of Information Act to find out. According to Bloomberg, the loans now exceed $2 trillion.

From Bloomberg's latest article about this:

“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.

The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.

Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.

Friday, December 12, 2008

Stiglitz on the Causes of the Meltdown

Joseph Stiglitz summarizes the events that led up to the financial meltdown in this month's Vanity Fair. He finds five key reasons:

1. Reagan's replacement of Paul Volcker with Alan Greenspan.
To deal with the high-tech bubble, he [Greenspan] could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation—or “liar”—loans, the interest-only loans, and so on).

2. The repeal of the Glass-Steagall Act
Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.

3. W's tax cuts
The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity.

4. Bad accounting practices and perverse ratings agencies
Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

5. Treasury's mismanagement of the $700 billion bailout
The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

Protest Watch

Although it's likely that the protests occurring in Europe are for now the result of opportunistic malcontents, it will be interesting to see if the economic crisis begins to produce broader demonstrations. The Continent has a rich history of social protest, with middle class participation not at all unusual.

The unrest that has gripped Greece is spilling over into the rest of Europe, raising concerns the clashes could be a trigger for opponents of globalization, disaffected youth and others outraged by the continent's economic turmoil and soaring unemployment.

Protesters in Spain, Denmark and Italy smashed shop windows, pelted police with bottles and attacked banks this week, while in France, cars were set ablaze Thursday outside the Greek Consulate in Bordeaux, where protesters scrawled graffiti warning about a looming "insurrection."

Sunday, December 7, 2008


Mr. Obama is addressing the accelerating loss of jobs, announcing countermeasures in the form of massive public works projects. This is what he calls for in his video presentation, which you can view in its entirety below.

  1. Make public buildings more energy-efficient.

  2. Make the largest investment in infrastructure since the creation of the interstate highway system. As an incentive for this to be done quickly, states will be under a "use it or lose it" deadline.

  3. Modernize and upgrade school buildings.This will include making them energy-efficient and filling them with new computers.

  4. Expand broadband access.

  5. Expand the use of technology in health care by putting medical records on-line.

I believe these are sensible and necessary investments in any case and I think it is wise to take advantage of the current broad political support for government stimulus to get them rolling. However, by themselves, I do not think they will be sufficient, nor do I believe their deployment will produce the immediate jolt that is sought.

We hear the term "shovel-ready" used to describe the numerous projects that state and local governments are said to have in queue. The implication is that as soon as funding is made available, large swarms of workers, presumably composed of unskilled laborers, skilled tradespeople, engineers, and managers, will be immediately put to work, with dirt being dug, concrete being poured, and cranes silhouetting the sky. In reality, these projects will unfold much more slowly, in some cases over months, in others over years. Many, if not most, will be subject to bidding, meaning that specifications will have to be drafted and sent to potential vendors who will in turn have to invest time and effort in developing their proposals. Then the bids will have to be reviewed, vendors selected, and orders negotiated. The chosen vendors will then have to engage in detailed design, developing the plans and drawings necessary for the construction phase. Finally, "work" as imagined in the popular mind will begin.

In other words, the effects of these investments in terms of new job opportunities will build slowly over time. Again, there's no doubt that these will have a positive long-term effect and I hope more like them will be announced as well. But if the goal is to jump-start the economy from the bottom up, I think they will need to be supplemented with other measures that will boost confidence and help overcome the shock and anxiety of dropping asset values and rising unemployment. Examples that come to my mind:

  • Dramatic expansion of unemployment benefits

  • Large short-term tax cuts for lower- and middle-income people

  • Short-term moratorium on foreclosures