Discovered Wild Fruit

Leonard Cohen Playlist

2009-05-04T20:42:00.002-05:00

The Rooster Crows Again

2009-01-30T10:40:00.004-06:00

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.

Status Quo Ante

2009-01-25T09:56:00.003-06:00

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.

Denial

2009-01-23T21:56:00.002-06:00

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

2009-01-23T17:27:00.002-06:00

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.

The French Are Responsible for Obama's Presidency

2009-01-20T07:22:00.003-06:00

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.

The Big Bummer for Tom Friedman

2009-01-17T11:14:00.003-06:00

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]

Alas.

From this Month's Harper's Index

2009-01-17T11:03:00.001-06:00

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

2009-01-17T08:01:00.000-06:00

Israel's ready for a cease-fire.

Protest Watch #4 - Latvia

2009-01-14T11:45:00.000-06:00

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?

2009-01-14T10:23:00.002-06:00

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

2009-01-14T07:31:00.004-06:00

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

Time for a National Bank?

2009-01-14T06:14:00.003-06:00

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?

The Questionable Practice of Subsidizing Homeownership

2009-01-12T12:26:00.003-06:00

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

2009-01-12T09:37:00.001-06:00

Telling graph from Paul Krugman.

Loathsome People

2009-01-12T08:17:00.003-06:00

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 joke...social 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.

[snip]

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

2009-01-12T07:50:00.005-06:00

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.

Unshakable American Faith

2009-01-10T18:38:00.001-06:00

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.

Gaza

2009-01-10T16:36:00.003-06:00

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

2009-01-10T15:06:00.001-06:00

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

A Soldier's Declaration

2009-01-10T05:45:00.002-06:00

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

2009-01-10T04:40:00.007-06:00

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:

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.
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.
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.
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?

More and More People Are Sounding Like James Howard Kunstler

2009-01-09T16:31:00.003-06:00

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

2009-01-09T10:33:00.002-06:00

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."

Geoghegan on the Unconstitutionality of Gubernatorial Senate Appointments

2009-01-07T13:54:00.003-06:00

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

2009-01-07T13:37:00.001-06:00

Republicans are working hard to stay in the minority.

With Friends Like These...

2009-01-07T13:26:00.002-06:00

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

2009-01-07T12:54:00.002-06:00

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.

[snip]

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

2009-01-07T06:40:00.002-06:00

This site provides provides dramatic photographic documentation.

A Prediction for the Future of the Family

2009-01-07T06:12:00.002-06:00

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

2009-01-07T05:43:00.002-06:00

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."

[snip]

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

2009-01-07T05:17:00.003-06:00

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

2009-01-07T04:53:00.003-06:00

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.

More on Tom Geoghegan for Congress

2009-01-06T20:55:00.003-06:00

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

2009-01-06T19:22:00.006-06:00

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.

[snip]

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

2009-01-06T16:48:00.003-06:00

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

2009-01-06T13:39:00.001-06:00

Apple Introduces Revolutionary New Laptop With No Keyboard

Lilypad

2009-01-06T07:45:00.002-06:00

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

2009-01-06T06:09:00.001-06:00

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

2009-01-06T05:43:00.003-06:00

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

2009-01-06T05:36:00.001-06:00

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

2009-01-06T04:21:00.002-06:00

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

2009-01-06T04:08:00.003-06:00

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.

Mobilizing Against a Stimulus Package

2009-01-05T17:43:00.002-06:00

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.

Riffing on an Observation by Warren Buffet

2009-01-04T17:08:00.003-06:00

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

2009-01-04T15:22:00.004-06:00

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

2009-01-04T08:30:00.001-06:00

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?

2009-01-04T08:18:00.003-06:00

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

2009-01-04T07:41:00.005-06:00

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.

Manufacturing's Decline and Finance's Rise

2009-01-03T21:27:00.002-06:00

Oil Found Versus Oil Consumed

2009-01-03T20:32:00.004-06:00

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

2009-01-03T19:28:00.002-06:00

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.

Protest Watch #3 - France

2009-01-02T21:03:00.003-06:00

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

2009-01-02T11:09:00.004-06:00

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

2009-01-02T09:56:00.002-06:00

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:

Edmunds.com 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

2009-01-02T09:47:00.002-06:00

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.

Economy as a Subsidiary of the Environment

2009-01-01T11:51:00.005-06:00

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?

2009-01-01T11:46:00.002-06:00

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

2009-01-01T07:56:00.003-06:00

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"

2009-01-01T07:25:00.001-06:00

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.

Gunpowder and Airport Security

2008-12-30T11:00:00.004-06:00

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

2008-12-30T08:41:00.003-06:00

The AIG Debacle

2008-12-30T07:27:00.003-06:00

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."

The Downturn: Cyclical or Structural?

2008-12-29T12:30:00.001-06:00

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?

2008-12-29T08:53:00.004-06:00

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.

[snip]

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

2008-12-29T08:37:00.003-06:00

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.

U.S. Oil Production

2008-12-28T18:00:00.006-06:00

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

2008-12-28T17:15:00.004-06:00

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

2008-12-28T12:27:00.005-06:00

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

2008-12-28T10:51:00.002-06:00

Will the Coming Infrastructure Stimulus Be Squandered?

2008-12-28T10:08:00.004-06:00

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

2008-12-28T00:06:00.002-06:00

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.

Signs of the End Times in Chicago

2008-12-27T17:45:00.003-06:00

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

2008-12-27T17:27:00.007-06:00

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

Financial Egg Laying

2008-12-27T17:02:00.007-06:00

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

2008-12-27T16:17:00.002-06:00

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.

[snip]

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.

[snip]

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

2008-12-27T16:07:00.002-06:00

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.]

Unions and the Middle Class

2008-12-26T10:54:00.002-06:00

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

2008-12-26T10:05:00.002-06:00

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

2008-12-26T10:00:00.002-06:00

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.

Quants

2008-12-23T05:59:00.003-06:00

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.

On Tom Cruise at 46

2008-12-22T17:43:00.002-06:00

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

2008-12-22T05:37:00.002-06:00

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).

Gas Prices

2008-12-21T23:06:00.004-06:00

Their amazing drop, courtesy of Calculated Risk:

Voices of Genius #2 - Nabokov

2008-12-21T18:09:00.002-06:00

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

2008-12-21T17:24:00.003-06:00

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

2008-12-21T16:59:00.002-06:00

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

2008-12-21T09:19:00.005-06:00

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.

[snip]

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.

Annual Cycling Results

2008-12-20T17:17:00.005-06:00

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

2008-12-20T08:08:00.001-06:00

Busted Ponzis

2008-12-19T22:02:00.002-06:00

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

2008-12-19T21:08:00.002-06:00

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

2008-12-19T12:37:00.005-06:00

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

2008-12-19T11:02:00.002-06:00

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?

2008-12-19T07:12:00.003-06:00

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.
[snip]
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.

Bonus Payments or Looting?

2008-12-18T16:46:00.003-06:00

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.

[snip]

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

2008-12-18T10:08:00.001-06:00

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

Metrosexuals

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

From One Suzanne to Another

2008-12-17T21:56:00.002-06:00

Marlene on the Wall

2008-12-17T21:50:00.002-06:00

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

2008-12-17T21:31:00.002-06:00

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?