Friday, January 30, 2009

The Rooster Crows Again

Long the object of scorn, ridicule, and exasperation on the part of "Anglo-Saxon" business and political elites, the French system of generous social welfare and big government appears to be getting new respect and perhaps generating a touch of envy. At least, that's a prominent viewpoint in France.

Sunday, January 25, 2009

Status Quo Ante

Following a week in which a dynamic new President assumed office and an anxious nation wondered whether he will somehow find a way to restore our lost national luster, the talking heads on This Week with George Stephanopoulos dedicated the first ten minutes of their babble-fest to analyzing the reasons why Caroline Kennedy withdrew her candidacy for the U.S. Senate. Cokie Roberts took particular umbrage at the "sexism" involved in l'affaire Caroline, as if it were patently obvious that Ms. Kennedy's storied name, enormous wealth, A-list connections, and telegenic celebrity were assets unequal to the massive liability of her gender. That Governor Paterson appointed another woman to the post in lieu of Kennedy did not dissuade Cokie from the righteousness of her ridiculous argument.

Friday, January 23, 2009


Our economy is in shambles with the nation's treasure being squandered in a desperate attempt to rescue our corrupt and profligate financial system from insolvency. Millions of citizens are confronting unemployment, or foreclosure, or the impossibility of retirement, or lack of access to health care, or some combination of these. The luckier among us are merely confronting nauseating insecurity. Capitalism is in severe crisis and its catastrophic collapse, if not certain, is uncomfortably possible. Yet it is now clear that if the crisis cannot be remedied with solutions emerging from within the bounds of conventional economic thinking and entrenched political ideology, then the crisis simply will not be remedied.

Liberal Patriotism

Refreshing, isn't it, that we learned on election night and again at this week's inauguration that patriotism can be expressed with hope and joy and without elegies to empire and the hooahs of soldiers.

Tuesday, January 20, 2009

The French Are Responsible for Obama's Presidency

Ségolène Royal, who lost against Nicholas Sarkozy in the latest French presidential election, reveals to the world that "yes, I inspired Obama, and his teams copied us."

Relax, all you French-bashers. The public reaction to her comments in France is rollicking laughter.

Saturday, January 17, 2009

The Big Bummer for Tom Friedman

Tom Friedman, he of Lexuses, olive trees, the flat earth, "suck on this," the Friedman unit, and lately, a proselytizer for a Green-driven economic utopia, seems to have fallen on hard times - at least to the extent that times can be hard for someone with a plum writing job for The New York Times and who collects a reported $50,000 per speaking engagement.

Tom's wife is apparently heiress to General Growth Properties, a Real Estate Investment Trust and the nation's second largest owner of shopping malls. General Growth has seen its market value plunge more than 97%, reducing the Friedman family fortune from $3.5 billion in December 2007 to its present $25 million. [Source: Harper's Magazine Index, February 2009]


From this Month's Harper's Index

  • Number of times in 2008 that the S&P closed up or down 5 percent in a single day: 17
  • Number of times between 1956 and 2007 it did this: 17

Just in Time for Inauguration

Israel's ready for a cease-fire.

Wednesday, January 14, 2009

Protest Watch #4 - Latvia

NY Times:

Violent protests over political grievances and mounting economic woes shook the Latvian capital, Riga, late Tuesday, leaving around 25 people injured and leading to 106 arrests by the police.

Remember When Nortel Was Flying High?

Despite 16 rounds of layoffs, the company hasn't been able to turn itself around and has now filed for bankruptcy protection.

Investors had little apparent faith in the company whose shares once reached 123.10 Canadian dollars on the Toronto Stock Exchange. Adjusted for a 10 to 1 consolidation, they closed at just under 4 Canadian cents on Tuesday.

A Good Way to Calm the Stomach

No better antidote to a nauseating Tom Friedman column than medicine administered by Glenn Greenwald.

Time for a National Bank?

I'm trying to understand this. The banks get in trouble because of bad lending practices exacerbated by securitization. They stop lending. The government swoops in and gives away piles of money to induce the banks to lend. The banks don't lend because they can't find credit-worthy borrowers. So instead, they take the money and use it to shore up their own balance sheets. But if the banks aren't lending, they're not making money, and therefore their health is still very much in question.

Since the banks aren't lending, businesses can't get loans. This puts them in trouble and makes the weak economy weaker. So the piles of government money aren't doing anything for the general economy. For the banks themselves, the money is doing nothing more than insuring that they will eventually need more money to postpone their collapse again.

Wouldn't it be better for the government to cut out the middle man, forget about giving money to the banks, and instead loan it directly to businesses and consumers? In other words, why don't we set up a national bank?

Monday, January 12, 2009

The Questionable Practice of Subsidizing Homeownership

The Richmond Fed, of all institutions, recently published an article critical of the subsidization of homeownership. Some takeaways:
  • Government attempts to boost homeownership, dating from Clinton's "National Homeownership Strategy," resulted in the loosening of lending standards that led to the financial meltdown.
  • The tax deduction for mortgage interest encourages people to buy bigger and more expensive homes.
  • An assortment of government subsidies steer more investment capital to the housing market than would otherwise occur. This has resulted in an overinvestment in housing relative to other capital goods.
  • It is not clear that using one's home as one's primary investment is a sound financial decision. The opportunity costs of other investment choices are generally not taken into account.
  • Homeownership reduces labor mobility.
  • Because of the interest homeowners have in keeping the property values high, they have a bias toward land-use regulations. These restrict the number of houses that can be built in a given area, keeping inventory low and values artificially high.
  • Notable quote from Nobel-prize-winning economist Edmund Phelps: "It used to be that the business of America was business. Now the business of America is homeownership."
These observations support the argument that suburbanization has been a terrible misallocation of resources.

Graph of the Change in Unemployment

Telling graph from Paul Krugman.

Loathsome People

Amusing profiles of 50 prominent personalities. A couple of my favorites:

20. Joe the Plumber

Charges: The Che Guevara of bald, pissed off white men. In a lot of ways, Samuel Wurzelbacher really does represent the average American—basing economic opinions on unrealistic expectations of personal future success, blaming his failure to meet those expectations on minorities and old people, complaining about deadbeats getting his taxes when he isn’t actually paying his taxes, and advertising his own rudimentary historical and mathematical ignorance by warning of creeping socialism in a country whose highest income tax rate has dropped by half in thirty years. “Joe” indeed symbolizes the true American dream—to become undeservedly rich and famous through a dizzyingly improbable stroke of luck. As American folk heroes go, Wurzelbacher ranks somewhere between Hulk Hogan and Bernie Goetz.

Exhibit A: "Social Security is a security I've never believed in, don't like it. I hate that it's forced on me."

Sentence: After blowing his fifteen minutes and all his money on coke and Thai hookers, an infirm, elderly Joe finds that social security actually is a joke, and is finally forced to snake toilets for a living.

5. Alan Greenspan

Charges: The mortgage meltdown may seem complicated, but it started simple, with Al Greenspan pegging the Fed fund rate at 1%. This made Treasury Bonds a fairly lame investment, and led to investors looking for other seemingly safe securities to buy, which led to a flourishing demand for mortgage-backed securities, which led to banks increasingly lowering their standards for mortgage applications, eventually giving liar loans away to anyone willing to take them, which used to be called usury. This led to a decline in the real value of these MBA securities due to high probabilities of foreclosure, but somehow they were still AAA-rated by credit agencies displaying either hopeless incompetence or criminal collusion. Even a monkey wouldn’t need a slide rule to see what would come next. But Alan Greenspan, super-genius guru of the glorious realm of the self-regulating free market, is totally flummoxed. Refusing to accept any blame for years as the housing bubble, long-predicted by out-of-favor economic realists, bloated and burst, only recently has Greenspan accepted even marginal responsibility, admitting only that he was “partially” wrong, professing a state of “shocked disbelief” that lenders couldn’t regulate themselves, and thinking to himself, “This isn’t how it worked in Atlas Shrugged!”

Exhibit A: “Parasites who persistently avoid either purpose or reason perish as they should.”

Sentence: Recurring role as a senile great uncle on new C-grade sitcom “Krugman’s Krew.”

Better to Be Wrong in a Herd than Independently Right

A number of exasperated commentators (Digby and Glenn Greenwald are two prominent ones who come immediately to mind) regularly blast the Washington establishment and the major media for continuing to publish the opinions and analysis of pundits who have proven rarely, if ever, to be correct. Yves Smith explores the economic side of this phenomenon in a post that discusses the spectacular failure of most economists to foresee this, the second worst economic downtown in the past eighty years, and the absence of accountability for this failure. Shockingly, many of the very economists who were so utterly wrong continue to guide and shape economic policy. Yves' analogy:

But if a doctor repeatedly deemed patients to be healthy that were soon found to have Stage Four cancer that was at least six years in the making, the doctor would be a likely candidate for a malpractice suit. Yet we have heard nary a peep about the almost willful blindiness of economists to the crisis-in-its-making, with the result that their central role in policy development remains beyond question.

Saturday, January 10, 2009

Unshakable American Faith

Americans, famously, are a people of faith. We believe in many things, but we're in our present straits because we believed in debt - unlimited debt. The mass of us trusted that we could have what we wanted when we wanted it by borrowing to get it. Since we always wanted more, we always borrowed more. The wise among us - at least those in our leadership - made no attempt to dispel the people's faith in debt because they shared it. To be sure, like any priestly class, they testified to their faith with sophistication and nuance, in the liturgical language of financial engineering. But whether our faith was expressed through a deck of credit cards and an interest-only mortgage or through collateralized debt obligations and credit default swaps, the fundamental belief that prosperity depended on debt was the same.

Wealth through debt is just one of our colorful faith-based initiatives. There are others and they continue apace. We believe in unlimited resources. We believe in unlimited power. We believe in unlimited growth. And we have more than a mustard seed of faith that whatever bumps we may encounter on the road to more will be smoothed by our unlimited ingenuity.

Our childlike faith in limitlessness is encouraged as a matter of official policy. We equate prosperity with growth, measuring our society's health by its increase in gross economic output, without bothering to ask about the quality of the output or the sustainability of the growth. The quality leaves much to be desired and the sustainability is not only doubtful, it is impossible. But we treat these facts as heresies and so in the unshakable spirit of true believers, we rebuke any who recite them and collectively cling ever more tightly to The American Way of Life.

We continue to believe in suburban expansion. We yearn for a new boom in housing starts, in new office parks, in new retail complexes, and in the highways and byways that connect them. We believe in suburban expansion because we consider home ownership the essence of the American Dream, the sine qua non of responsible adulthood.

Consistent with our belief in suburban expansion, we believe in unlimited resources. First, we believe in unlimited land. We have faith there will always be land for new houses and that if the land we need for lawns and swimming pools displaces land for crops and animals, we do not fret, because our faith in unlimited land spills into our faith in unlimited food.

We believe in unlimited energy. We have faith that fossil fuels will serve our energy needs until they are gone, at which point we will seamlessly shift to a new energy source that will heat our homes, run our gadgets, and fuel our cars.

Declining asset values, including that fortress of wealth, the suburban home; rising unemployment; and economic anxiety have, perhaps, shaken our belief in unlimited debt. But they show no signs of weakening our conviction that American life is fundamentally limitless.


I don't claim to have more than a rudimentary understanding of the complexities of the Israeli-Palestinian conflict. I do believe, however, that U.S. policy is too strongly pro-Israel and that we often confuse Israel's interests with our own. I am troubled that there are almost no prominent politicians in either party who deviate from reflexive support of Israel and I was sickened when Jimmy Carter, of all people, was attacked when he published "Palestine: Peace Not Apartheid," with some of the more rabid and paranoid Israel-backers accusing him of anti-Semitism.

In the context of this latest round of bloodshed in Gaza, I've been listening to hear what voices might be raised in opposition to Israel's policies. Glenn Greenwald is one who has stepped forward with sharp criticism. He posted the following clip from Bill Moyers' Journal, in which Moyers also takes issue with Israel's actions and blind support for them by the American government.

Elsewhere among the commentators and analysts in my orbit, David Seaton has posted a BBC video in which a former captain in the Israeli air force publicly condemns his countries latest actions in Gaza. Seaton also links to this article by Naomi Klein, who calls for an international boycotts and divestment initiatives aimed at Israel, similar to those directed at South Africa during its apartheid regime.

Interesting Fact

Before he became president of Russia, Dmitry Medvedev was chairman of Gazprom.

A Soldier's Declaration

From Lapham's Quarterly, the declaration of a British soldier who endured World War I:

I am making this statement as an act of willful defiance of military authority because I believe that the war is being deliberately prolonged by those who have the power to end it. I am a soldier, convinced that I am acting on behalf of soldiers. I believe that the war upon which I entered as a war of defence and liberation has now become a war of aggression and conquest. I believe that the purposes for which I and my fellow soldiers entered upon this war should have been so clearly stated as to have made it impossible to change them and that had this been done the objects which actuated us would now be attainable by negotiation.

I have seen and endured the sufferings of the troops and I can no longer be a party to prolonging these sufferings for ends which I believe to be evil and unjust. I am not protesting against the conduct of the war, but against the political errors and insincerities for which the fighting men are being sacrificed.

On behalf of those who are suffering now, I make this protest against the deception which is being practised upon them; also I believe it may help to destroy the callous complacency with which the majority of those at home regard the continuance of agonies which they do not share and which they have not enough imagination to realise.

Rents and Mortgage Payments

I've found a fellow traveler when it comes to my skepticism at the unquestioned good of home ownership. Felix Salmon, whom I've already quoted here, argues here that mortgage payments should be less than rents.

It is not the job of government to prop up house prices to the point at which mortgages cost more than prevailing rents. In fact, right now, it is entirely rational that a new mortgage should cost less than prevailing rents. Here's a few reasons why:

  1. Mortgage rates are extremely low -- which means that when you come to sell the house, they'll probably be higher. Since resale value is an enormous part of the price you're willing to pay for the house, this is a very important consideration.
  2. Cash is king, right now -- everybody wants liquidity. To get a mortgage, you need to make a downpayment, in cash. The opportunity cost of that downpayment has never been higher.
  3. House prices rose for over a decade; they've been falling for a couple of years. It's entirely reasonable to expect them to continue to fall, whatever happens to rents, for many years yet.
  4. A house, right now, is a liability, not an asset. It ties you down to one place, which makes it harder to get a good job if you become unemployed. It needs constant maintenance, it comes with obligations to pay property taxes and insurance, and, if you do end up renting it out, there's all the inevitable hassles with the renters. Without much if any expectation of house-price appreciation, why go there?

Friday, January 9, 2009

More and More People Are Sounding Like James Howard Kunstler

Matthew Yglesias calls this "the misallocation of resources," echoing the very phrase that Kunstler has been using for years to describe the tragedy of the suburban building boom.

We imported tons and tons of capital over the course of the last expansion. But an awful lot of that capital didn’t wind up going to stuff that enhances our ability to produce goods and services in the future. Instead, at best it went to making it the case that people live in somewhat larger homes than they used to, and at worst it went to building homes that nobody wants to live in. This is a bigger deal than lost notional wealth—it’s a lost opportunity.

A View That Captures My Own Pessimism

Here's a Bloomberg interview with Mark Faber, publisher of the "The Gloom Boom & Doom Report."

Some key points from Faber:
  • 2009 will be an economic catastrophe. It could be 5-10 years before we see a recovery, as at the moment, there is no apparent catalyst for one.
  • The monetary policies of the past 10 years are responsible for the present financial crisis.
  • Big mistakes were made in bailing out Mexico in 1994 and Long Term Capital Management in 1998 because they set a precedent that encouraged excessive risk-taking.
  • The Fed exacerbated the credit bubble by keeping the Federal Funds rate at 1% for nearly three years (2001-04). When savers are confronted with interest rates that are less than the rate of inflation, "they do stupid things."
  • The Fed's current policy is having the effect of creating another bubble, this one in Treasury bonds.
  • Inflation will eventually accelerate, forcing the Fed to raise interest rates.
  • The current stock market will remain extremely volatile, offering opportunities for traders, but not for investors.
  • The U.S. government is running a Ponzi scheme massively larger than Madoff's.
  • The Zero Interest Rate Policy of the Fed will lead to weakness in the dollar and possibly to competitive devaluations among currencies. "The dollar is a disastrous currency, but the others aren't much better."

Wednesday, January 7, 2009

Geoghegan on the Unconstitutionality of Gubernatorial Senate Appointments

Tom Geoghegan cuts to the chase regarding the controversies over who will get appointed to the Senate in Illinois, New York, Delaware, and Colorado by arguing that all such "appointments" are unconstitutional. Special elections are required.

A Curious View of the Middle Class

Republicans are working hard to stay in the minority.

With Friends Like These...

Andrew Sullivan linked to this piece on Politico, in which a true blue Goldwater/Reagan conservative reflects on the damage Bush has done to the movement.

Bush’s legacy for the cause of free market capitalism may be even worse. Our first MBA-holding president has turned out to be the worst economic manager since Herbert Hoover.

The bailouts of Detroit and — much worse — the vile Wall Street profiteers now open the door to an unprecedented expansion of invasive welfarism throughout the economy. It’s hard to call proposals that build tennis courts in yuppie towns or subsidize performance artists in Flint, Mich., wasteful after the billions Treasury Secretary Hank Paulson has lavished on his compadres in Richistan.

In the coming years, the only legitimate opposition to the bipartisan pro-Wall Street policy will come from the scruffy populists of both parties, many based in the heartland regions of the country. Bush may even make quasi-Marxism respectable again. Hearing about $20 billion in new bonuses for government-subsidized Wall Streeters this year should be enough to bring out the hidden Bolshevik in even rational people.

The New York Times in Trouble

A piece in The Atlantic argues that the New York Tiimes could go out of business and sooner than you might think.

Specifically, what if The New York Times goes out of business—like, this May?

It’s certainly plausible. Earnings reports released by the New York Times Company in October indicate that drastic measures will have to be taken over the next five months or the paper will default on some $400million in debt. With more than $1billion in debt already on the books, only $46million in cash reserves as of October, and no clear way to tap into the capital markets (the company’s debt was recently reduced to junk status), the paper’s future doesn’t look good.

Regardless of what happens over the next few months, The Times is destined for significant and traumatic change. At some point soon—sooner than most of us think—the print edition, and with it The Times as we know it, will no longer exist.

Photographing Global Warming

This site provides provides dramatic photographic documentation.

A Prediction for the Future of the Family

For the past century or so, the nuclear family has served as an incubator for a new generation of nuclear families. It has prepared its offspring to go off on their own to form detached, independent families of their own, often far away in different cities or different states or different parts of the world.

I predict this will change and there will be a trend back to the traditional structure of the extended family. Economic necessity will drive this change. The family will become first and foremost a unit of economic security, characterized by both intergenerational and intragenerational resource pooling. Not only will parents sacrifice for their children, but children will sacrifice for their parents, and for their siblings, and probably for their cousins.

There. You see? The changes of our time will not all be apocalyptic.

Another Strong Endorsement for Tom Geoghegan

This one from Thomas Frank in the Wall Street Journal:
Now that conservative orthodoxy has collapsed in a heap of complex derivatives, I can't help but think what a refreshing dose of plain-spoken Midwestern reality Mr. Geoghegan could bring to the nation as a whole.

To begin with, Mr. Geoghegan thinks big while Democrats in Washington tend to think small, proposing a stimulus package here and better oversight there. The government's goal, as he explained it to me a few days ago, should not merely be "to pump up demand again." It should be to enact sweeping, structural change, "to get in a position where we're not bleeding jobs out of the country."

It is also time, he says, to change the relationship between the financial sector and the rest of the economy. After all, as he tells me, "We bought into these banks, we ought to have directors on the boards. We the people, as stockholders, have different interests than some other stockholders because we have some other ideas about how we prosper in the long term."

For example, "rather than go for high-roller returns on financial speculations," a publicly appointed director "might be willing to accept lower returns in manufacturing where we can be globally competitive and create good jobs."

This is supposed to be a time for bold ideas on the left, with the failures of the free-market consensus becoming more glaring and more painful by the day. And Mr. Geoghegan's ideas should be part of the debate.

Urban Heat Island Mitigation

Here's a proposal for a low-cost, easy-to-implement way of slowing global warming, reducing carbon emissions, and conserving energy: Make roofs and pavements more reflective and plant large numbers of trees.

According to Lawrence Berkeley National Laboratory’s Hashem Akbari and California Energy Commissioner Arthur Rosenfeld:

If only roofs are changed from their current dark colors to white for flat roofs and cool colors for sloped roofs, we can offset 24 billion tonnes of CO2. If we take 20 years to implement just the cool roofs portion, it’s the equivalent of taking half of the cars in the world off the road for every year of the 20 year program.

If this is true, then it looks like we've found a good place for some of the economic stimulus.

It's Still An Insider's Game

I'll admit to some unease over some of the recycled members of Obama's economic team, but I've been willing to give the new President the benefit of the doubt. Dean Baker, however, brings to our attention a matter that rather smells:

The media seem to have largely overlooked the Citigroup tax credit in their discussion of the latest items in President Obama's stimulus proposal. According to the Washington Post, the proposal will allow companies to write off current losses against taxes paid over the last 4-5 years, not just 2 years, as in current law.

There are relatively few companies that could benefit from this tax break since most companies will not have losses so large that they would need more than two years of tax payments to balance them against. But, really big losers, like Robert Rubin's Citigroup, and other badly failing financial institutions, are losing much more money in 2008 and 2009 than they earned in 2006 and 2007.

Tuesday, January 6, 2009

More on Tom Geoghegan for Congress

Tom Geoghegan has officially announced his candidacy to replace Rahm Emanuel as Congressman for the 5th District of Illinois. I encourage you to visit his campaign website, especially his position on various issues.

This is the type of candidacy that inspires and thrills people. A small sample:

From Kathy G (read the whole post!):
I can't tell you how utterly thrilled and delighted I am by this development. Because there is nobody -- nobody -- whom I'd rather see holding elected office in America than Tom Geoghegan. For some years now, I've had the pleasure and the privilege of being Tom's friend. He's one of the most brilliant people I've ever met, and also one of the kindest. A passionate progressive from the top of his bald spot down to the tips of his toenails, Tom has spent a lifetime tirelessly fighting on behalf of underdogs and the dispossessed -- steelworkers being cheated out of their pensions, say; or stressed out single mothers being harassed by predatory lenders; or union reformers trying to run a clean election in their corrupt local.

From James Fallows:
Having been a friend of Geoghegan's for most of my life, I couldn't be more enthusiastic about his deciding to run.

Canadian Oil Sands

The NY Times reports on the problems and promise of Canadian oil sands
, providing another perspective on the energy dilemmas we face.

As I pointed out in an earlier post, the United States gets more of its foreign oil from Canada than any other country.

According to the United States Energy Information Administration, more than half of Canada's production comes from oil sands. (See this post for more.) The EIA also states that Canada has 179 billion barrels of proven reserves (second only to Saudi Arabia), which makes me wonder where the Times gets its figure of 1.7 trillion barrels.* Whatever the correct number is, the point is clear: Canadian oil is extremely important to the United States.

The first problem with this is environmental.
In a recent study, the RAND Corporation estimated that oil from the oil sands generates about 10 to 30 percent more greenhouse gases than conventional crude.


Spent water used in oil sands projects is placed in lake-size tailings ponds, one of which killed about 500 migrating birds in April. Seepage from the ponds is polluting rivers in northern Canada, some scientists argue. In December, Environmental Defense, an environmental lobby group based in Toronto, estimated that about four billion liters of contaminated water leaks from the ponds each year. (The Alberta government and the oil industry dispute that finding.)

Strip mining of the oil sands, the most common method of extraction, has destroyed large swaths of boreal forest, an important habitat for migratory birds and other wildlife. In December, a study published by the Natural Resources Defense Council and two other groups found that six million to 166 million birds could be lost over the next 30 to 50 years because of that disruption.

The second problem is the expense involved in extracting oil from the sands.
With oil prices around $49 a barrel, profitability is fast eroding at oil sands projects and may already be vanishing at some operations. Producers have widely differing cost structures and varying definitions of profitability. But Andrew J. Leach, a professor of environmental economics at the University of Alberta in Edmonton, estimates that long-established plants can operate with prices as low as $30 a barrel. But he said newer operations need $60 to $70 a barrel for acceptable returns, and no one will proceed with proposed projects until prices return to the $80 to $90 range.
Thus, in order for the United States to continue to receive large portions of oil from its northern neighbor, we must accept higher oil prices and greater environmental destruction. Folks, this is not sustainable.

*To add to the confusion, consider that this graph from the Financial Times, apparently based on data from BP, does not even include Canada in its list of top 10 countries of proven reserves - not even beating number 10 Nigeria's 36 billion barrels.

Better Start Production on Lilypad

An earlier post flagged an architect's concept for a floating city to serve as a refuge for those displaced by rising seas. Looks like it's going to be needed:

The report, commissioned by the U.S. Climate Change Science Program, found that in light of recent ice sheet melting, global sea levels could rise as much as 4 feet (1.2 metres) by 2100.

The IPCC had projected a rise of no more than 1.5 feet by that time, but satellite data over the last two years show the world's major ice sheets are melting much more rapidly than previously thought. The Antarctic and Greenland ice sheets are losing an average of 48 cubic miles of ice a year, equivalent to twice the amount of ice in the Alps. The models used by the IPCC did not factor in the dynamic where warmer ocean water under coastal ice sheets accelerates melting. (About 600 million people currently live in low lying coastal areas.)

According to the Worldwatch Institute, of the 33 cities predicted to have at least eight million residents by 2015, some 21 coastal cities will certainly have to contend with sea rise impacts, however severe they may be. So it may not just be bye-bye to parts of Bangkok, but adieu to bits of Boston, many of Malibu's glamour spots and even sections of lower Manhattan.

Apple's Innovative Keyboard

Apple Introduces Revolutionary New Laptop With No Keyboard


Ready to save humanity from the rising tides of global warming, the French-Belgian architect Vincent Callebaut is floating, so to speak, a proposal for a new habitat for people who will be displaced when their coastal homes become submerged. Called "Lilypad," the concept is for a seabound "écopolis" that would accommodate 50,000 people. It would provide fresh water from recycled rain water and would feature three marinas and three mountains, the latter designed to accommodate offices, stores, and homes. The entire island would produce more energy than it consumes without emitting carbon dioxide, with the entire supply provided by an assortment of renewable sources. Its construction of polyester fiber would feature a layer of titanium dioxide in order to absorb atmospheric pollution by what the architect describes as a "photocatalytic effect."

As far as utopic visions go, it beats earlier concepts of personal aircraft whizzing among skyscrapers on distant planets.

Housing Is Not So Hot In France, Either

A chart from Le Monde showing the sales of existing homes (blue line) and new homes (red line).

Health Care Costs Are High Even for the Insured

I don't remember which news show featured it, but there was a segment on last night that discussed the fact that even people with health insurance often put off health care because of the high deductibles and co-pays. This is certainly true in my own case. I'm fortunate enough to have employer-paid health insurance for my family, but this time of the year when deductibles have to be re-met is always a downer. Although we're all in excellent health, we have our share of expensive prescriptions and the occasional need to run a kid to the doctor for an ailment or a physical or whatever. But I avoid anything even remotely discretionary, such as check-ups for myself. I shudder when I hear of the hardships of others whose medical treatment is not at all discretionary and who suffer financially as a result, whether they have insurance or not.

Interactive World Oil Map

A great map at the Financial Times that shows the major world players in the oil market, including flows of the stuff.

Quantitative and Qualitative Easing

I was introduced to a new economic voice yesterday, that of Willem Buiter of the London School of Economics. As I am not an economist myself and a rather latecoming wallflower at the big party where our time's morbid economic scandals are gossiped about, I depend on the serendipity of the blogosphere to direct my eavesdropping. In this case, it was Yvesdropping, as the tip on Buiter came from Yves Smith at Naked Capitalism.

Yves commented on Buiter's against-the-grain skepticism at the value of a large fiscal stimulus, noting in the process that Buiter is an eminent economist who often bucks orthodoxy. Then Paul Krugman critiqued Buiter's position, while nevertheless acknowledging him as a heavyweight.

In browsing some of Buiter's recent writings on his own blog, I came across one that I found helpful, as it clearly explains what is meant by quantitative and qualitative easing as tools of the central banks.

Quantitative easing is an increase in the size of the balance sheet of the central bank through an increase it is monetary liabilities (base money), holding constant the composition of its assets. Asset composition can be defined as the proportional shares of the different financial instruments held by the central bank in the total value of its assets. An almost equivalent definition would be that quantitative easing is an increase in the size of the balance sheet of the central bank through an increase in its monetary liabilities that holds constant the (average) liquidity and riskiness of its asset portfolio.

Qualitative easing is a shift in the composition of the assets of the central bank towards less liquid and riskier assets, holding constant the size of the balance sheet (and the official policy rate and the rest of the list of usual suspects). The less liquid and more risky assets can be private securities as well as sovereign or sovereign-guaranteed instruments. All forms of risk, including credit risk (default risk) are included.

More On Modeling Risk

My friend Joel has provided this link from Investopedia as a good primer on Value at Risk, the topic of this earlier post.

The discussion of risk modeling continues at Naked Capitalism, with Yves Smith commenting on the contention of Jon Danielsson (a researcher at the London School of Economics) that the ability to mathematically model financial risk is a myth.

Monday, January 5, 2009

Mobilizing Against a Stimulus Package

Economist Dean Baker suggests that the increasing rumblings from Republicans against a stimulus package is motivated by a fear that it will be successful and condemn them to 20 years of powerlessness.

In 2028, Newt Gingrich will be 85 years old; Mitt Romney will be 81; Mike Huckabee will be 73 and Senator McCain will be 98. Even Sarah Palin will be a less than youthful 64. In short, if President-elect Obama is allowed to carry through with his stimulus package and the rest of his ambitious domestic agenda, most of current leadership of the Republican Party can expect to spend the rest of their political career in the political wilderness, far removed from the centers of power.

Sunday, January 4, 2009

Riffing on an Observation by Warren Buffet

Warren Buffet, in his February 2008 letter to Berskhire Hathaway shareholders, points out that in the 20th century, the Dow rose from 66 to 11,497, or 5.3% compounded annually. If the Dow performs identically in the 21st century, it will close at around 2,000,000 on December 31, 2199. (Presumably en route to this sterling number, the "developing world" would literally have become another planet.)

Now, the Dow closed on December 31, 2008 at 8776, down 23.67% from the beginning of the century, or approximately -3.3% compounded annually. If we continue this rate, the Dow will close at 395 at the end of this century.

Which scenario has the higher likelihood?

Tom Geoghegan for Congress

James Fallows strongly endorses Tom Geoghegan in the upcoming special election to replace Rahm Emanuel as Congressman from Illinois's 5th District.

I'm rather embarrassed, as I didn't realize Geoghegan had announced his candidacy for this seat, but I will chime in with my own endorsement. I've been impressed by Geoghegan ever since I read his 1991 book, Which Side Are You On? I was so impressed, in fact, that I wrote a letter to him, the first and only time I ever did such a thing. To my surprise, he responded and invited me to lunch. I accepted his offer and although I'm sure I underwhelmed him with my presence, he was as cordial as he was intelligent and I was thrilled.

You can read a synopsis of Geoghegan's life and career as a labor attorney on the Facebook page that has been created for his Congressional run.

A Relentless Voice

Glenn Greenwald goes where many fear to tread, especially when it comes to his criticism of Israel's actions in Gaza.

Is Natural Gas Peaking in Europe?

The subject of "peaking" gets tiresome, but I want to track these types of analyses for future reference. The following graph is not my own, but is from The Oil Drum.

Risk Management and the Statistical Distribution of Asset Prices

The NY Times Magazine has an article today that discusses the "Value At Risk" (VaR) model of risk used in the financial industry. It's primary benefit for me was to add to my suspicion that if you skim the ego and bombast from Nassim Nicholas Taleb's cup of wisdom, you're left with a pretty weak tea. It purports to question the validity of VaR, but according to Yves Smith's takedown at Naked Capitalism, it completely misses the fact that the fundamental problem with VaR is not the amount of data that it takes into account, but that it assumes that asset prices are normally distributed when everyone knows they are not.

The New York Times Sunday Magazine has a long piece by Joe Nocera on value at risk models, which tries to assess how much they can be held accountable for risk management failures on Wall Street.

The piece so badly misses the basics about VaR that it is hard to take it seriously, although many no doubt will.

The article mentions that VaR models (along with a lot of other risk measurement tools, such as the Black-Scholes options pricing model) assumes that asset prices follow a "normal" distribution, or the classical bell curve. That sort of distribution is also known as Gaussian.

But it is well known that financial assets do not exhibit normal distributions. And NO WHERE, not once, does the article mention this fundamentally important fact.

Yves goes on to quote from this post written by Paul De Grauwe, Leonardo Iania, and Pablo Rovira Kaltwasser.

We selected the six largest daily percentage changes in the Dow Jones Industrial Average during October, and asked the question of how frequent these changes occur assuming that, as is commonly done in finance models, these events are normally distributed. The results are truly astonishing. There were two daily changes of more than 10% during the month. With a standard deviation of daily changes of 1.032% (computed over the period 1971-2008) movements of such a magnitude can occur only once every 73 to 603 trillion billion years. Since our universe, according to most physicists, exists a mere 20 billion years we, finance theorists, would have had to wait for another trillion universes before one such change could be observed. Yet it happened twice during the same month. A truly miraculous event. The other four changes during the same month of October have a somewhat higher frequency, but surely we did not expect these to happen in our lifetimes.

The rather obvious conclusion of these gentlemen?

Our conclusion, therefore, should be not that these events are miraculous but that our finance models are wrong. By assuming that changes in stock prices are normally distributed, these models underestimate risk in a spectacular way. As a result, investors have been misled in a very big way, believing that the risks they were taking were small. The risks were very big. We now know why.

It is time to throw away the models and to go back to the drawing board. In the meantime banks should be forbidden to hold complex assets on their balance sheets that have been priced using one of these models.

Saturday, January 3, 2009

Manufacturing's Decline and Finance's Rise

Oil Found Versus Oil Consumed

I ran across the data that serve as the basis for the graph below in Kevin Phillips' latest book, Bad Money [Penguin, 2008, pp 16-17]. Phillips' own source for the data was an October 2006 interview of Charles Maxwell, an oil analyst, by Barron's. In addition to the graph, I found this interesting quote:

Q: Where are oil prices headed?

A: We are now getting a reaction to the higher oil prices. It is translating into slower economic growth and, of course, it is allied with a rise in interest rates. Don't think that it is just that rising oil prices equal lower economic growth. It is a question of rising oil prices and less liquidity and higher rates that's a triple threat. The bottom could be in the high 40s, though that wouldn't be sustainable. On a yearly average, we will stay in the 60s, but we'll spend a lot of time in the 50s. Then they'll start up again in 2008-2009 and go up for some time. When we get to 130 or 150 there will be another pullback.

A Common European View

This view will be shocking only to those who have not had personal contact with Europeans in the last thirty years.

As a keen amateur car mechanic I have, since the age of 16, been puzzled by something about America. Here was a nation crazy about automobiles and held out to me as the last word in modernity, innovation, capitalist dynamism and go-ahead technology in all that it did. But its cars weren't any good. I say “weren't” - we're talking 1965 here - because some commentary about the current woes of General Motors, Ford and Chrysler has suggested that it is in recent years that the US automotive industry has slipped behind; and it's certainly only quite recently that they've started losing a lot of money.

But the product, though always flashy, has been technologically inferior since the end of Second World War. While European carmakers were pioneering front-wheel drive, independent suspension, small diesel engines and efficient automatic gearboxes, the Americans kept churning out big, thirsty, fast-rusting, primitively engineered behemoths. Partly this was because fuel was cheap, but the oversprung American limo, loose-handling and imprecise, was always a pig to drive, too. At root the problem was lack of competition.

And when I visited America, first as a boy then as a postgraduate student (in the 1970s), what struck me was not the modernity of modern America, but its inefficiency and old-fashionedness. The bureaucracy was Stone Age, the postal service unreliable, medical and dental treatment twice the cost of private treatment in England, and government officials treated you like serfs. People lived richly and worked hard - that was undeniable - but in a parallel universe clumsily and wastefully managed, and beset with internal friction. You couldn't even get a bank account that worked properly outside your state; and, for all the ostentatious vigour of retail competition, there was a curious lack of diversity in product choice. Though infinitely more successful and politically free, it was in some indefinable way more like the Soviet Union than either country would have wished to acknowledge.

Similar critiques of American cars were recited to me many times, especially by the European automotive engineers and technicians I worked with in the 1980s.

Friday, January 2, 2009

Protest Watch #3 - France

When the French embark on "revolution," they do so with their characteristic élan and sense of entitlement. On at least three occasions in three French cities (Paris, Grenoble, Rennes), militants have entered supermarkets, filled grocery carts with food, converged simultaneously in the checkout lanes, and then refused to pay. Other militants working in parallel hand out flyers and carry banners. Management is forced to negotiate and in the interest of getting rid of the protesters and returning to business as normal, capitulates to their demands. The militants then apparently distribute their take to people in need.

The group's distributed tract ends with this (my translation):

Discounts of 100% before the final close-out of capitalism

Energy Return On Investment

Energy Return On Investment (EROI) is an important concept theoretically, but I haven't run across a lot of solid data that show the EROIs for various fossil fuels or how they have changed over time. I created the graph below based on data quoted in this post on the web site of The Oil Drum. If and when I come upon other data, I'll post them for review and comparison.

EROI expresses the amount of energy that is received for a unit of energy invested - the amount of "bang for the buck," so to speak. Obviously, the higher this ratio, the better. One of the unique characteristics of oil as a fuel is that this ratio has historically been quite high. It has apparently been declining, reflective of the fact that the energy costs of extracting the oil have been increasing. (This makes intuitive sense, since one would expect that the easy-to-get oil would be pumped before the harder-to-get oil and that over time, the harder-to-get stuff would make up a greater proportion of the remaining reserves.)

Clearly, if the ratio were to drop below 1, it would make no sense to get the oil, no matter how much of it remained.

Fire Up the Gas Guzzlers

People may not be buying cars at the moment, but if and when they do, those of the energy-efficient type will not spark much interest as long as gas prices are low: estimates that a Prius owner must now wait more than eight years to recoup the extra cost of the vehicle in fuel savings, compared with three and a half years when the petrol price climbed above $4 a gallon last spring. The average price is now about $1.61.

NASA Scientist Warns Obama on Global Warming

James Hansen, head of NASA's Goddard Institute for Space Studies, has appealed to Obama in a letter for quick and decisive action on climate change. His recommendations:

  • Moratorium on and phasing out of coal power stations without carbon capture, what Hansen calls the "sine qua non for solving the climate problem". Coal CO2 emissions are the same as those of other fossil fuels combined.
  • Raising the price of emissions via a "carbon tax and 100% dividend". This is a tax mechanism to "decarbonise" the economy without a net take from taxpayers. Low carbon users are rewarded while high users are punished.
  • Urgent research on "fourth generation" nuclear power with international co-operation. This offers one of the best options for nearly carbon-free power, according to Hansen. It would also help to solve the nuclear waste problem by using that material as fuel.

Thursday, January 1, 2009

Economy as a Subsidiary of the Environment

From an interview originally appearing in Le Monde with Jacqueline McGlade, a British scientist and director of the European Environment Agency (EEA):

The economy must be thought of as a 100 percent subsidiary of the environment and the price we attribute to things re-evaluated. If we take into account the true cost of the water and carburants necessary to the manufacture and transport of goods, we will note that moving them around the world - and even within Europe - as we do, is very expensive.

This view is in keeping with the ecological economics advocated by such thinkers as Wendell Berry and Bill McKibben.

New Watch: Is the Credit Crisis a Myth?

First I've heard of this theory:

For the most part, the press has continued to echo Bush's central assertion that there's a "credit crunch" preventing even qualified borrowers -- that's the key point -- from getting loans, and it's now part of the conventional wisdom.

But a number of economists are questionioning the factual basis of the credit crunch narrative. Columnist David Sirota recently looked at those claims and concluded that Americans "had been punk'd" -- that "the major claims about a credit crisis that justified Congress cutting a trillion-dollar blank check to Wall Street were demonstrably false," and the threat of a systemic banking crash was used by the Bush administration to overcome popular resistance to the "bailout."

Sharp Decline in Chinese Exports

From the NY Times:

Government statistics show that Chinese exports slipped 2.2 percent in November when calculated in dollars, after seven years of rapid growth. But figures in dollars do not come to close to capturing the real depth of the downturn.

Convert the export figures into China’s own currency, a much better measure of the effect on China’s economy, and exports plunged 9.6 percent last month. Factor in inflation over the last year and the plunge was 11.4 percent.

Indications are that the December data will be even worse.

What measures will China take to protect its exports and will they conflict with our own policies?

"Our Bonus Pool is Dramatically Lower"

If it's above zero, it's too high:

“The harsh realities of 2008, primarily our earnings results, mean that our bonus pool is dramatically lower than last year,” Mr. Pandit wrote about a year in which the bank has so far announced more than $10 billion in losses. “The most senior leaders should be affected the most.”

But Mr. Pandit’s remarks may strike some as several weeks late, if not a few million dollars short. Citigroup, one of the biggest recipients of taxpayer money, has taken in $45 billion in capital from the government’s bailout funds.