Saturday, November 29, 2008


Swiss bankers are not known as paragons of transparency and moral accountability, so it’s a nice surprise to read that the top officials of UBS, the foundering financial institution recently bailed out by the Swiss government, will forgo twenty-seven million dollars in compensation and bonuses. It appears that these Swiss bankers have a faint pulse of shame.

It has not gone remarked upon enough that their American counterparts apparently have none
. Having brought the American and global economy to its knees through their reckless, short-sighted, downright stupid investments, and then looked to the government for a very expensive lifeline, the leaders of Citigroup, A.I.G., Goldman Sachs, Morgan Stanley, Lehman, and other financial giants are maintaining a carefully nonchalant public posture. Andrew Cuomo, New York’s Attorney General, had to hold a threatening press conference on Wall Street in order to frighten A.I.G. into announcing that raises, bonuses, and lavish retreats will be suspended.
But fear is not the same thing as shame. Morally speaking, it’s inferior.

Radical Solutions for A Crazy Crisis

A lucid explanation from Dr. Doom (Nouriel Roubini) on the deflationary spiral...
The U.S. economy is confronting a toxic mixture: deflation, a liquidity trap and debt deflation, as well as rising household and corporate defaults. Put plainly, the signs of a "stag-deflation"--a deadly combination of stagnation/recession and deflation--are now clear.
The problem with many of these "extreme" policy actions is that they were tried in Japan in the 1990s and the last few years, and they failed miserably. Once you are in a liquidity trap and there are fundamental deflationary forces in the economy as the excess aggregate supply of goods faces a falling aggregate demand, it is very hard--even with extreme policy actions--to prevent deflations from emerging.

Some very aggressive policy actions--such as letting the dollar weaken sharply--may do the job, but they may also be beggar-thy-neighbor policies that would export even more deflation to other countries. The world economy has been massively imbalanced for the last decade with the U.S. being the consumer of first and last resort, spending more than its income and running ever larger current account deficits while creating a massive excess productive capacity via over-investment.

All the while, China and other emerging markets have been the producers of first and last resort, spending less than their income and running ever larger current account surpluses. With U.S. spending now faltering, a global glut of unsold goods may lead to persistent and perverse deflationary forces that may last for a longer time unless proper policy actions--mostly non-necessary monetary--are undertaken.

Thus, dealing with this deadly combination of deflation, liquidity traps, debt deflation and defaults that I termed a global stag-deflation may be the biggest challenge that U.S. and global policy makers have to face in 2009.

It will not be easy to prevent this toxic vicious circle unless (1) the process of recapitalizing financial institutions via temporary partial nationalization is accelerated and performed in a consistent and credible way; (2) such actions are combined with massive fiscal stimulus to prop up aggregate demand while private demand is in free fall; (3) the debt burden of insolvent households is sharply reduced via outright large debt reduction (not cosmetic and ineffective "loan modifications"); and (4) even more unorthodox and radical monetary policy actions are undertaken to prevent pervasive deflation from setting in.

Dying of Consumption

From the Chairman of Morgan Stanley Asia...

IT’S game over for the American consumer. Inflation-adjusted personal consumption expenditures are on track for rare back-to-back quarterly declines in the second half of 2008 at a 3.5 percent average annual rate. There are only four other instances since 1950 when real consumer demand has fallen for two quarters in a row. This is the first occasion when declines in both quarters will have exceeded 3 percent. The current consumption plunge is without precedent in the modern era.
Americans need to save. They don’t need another flat-screen TV made in China.

Can She Save Our Schools?

Read this profile of Michelle Rhee, the new Chancellor of Education for the D.C. School System.
I like her style!-
"Teachers hate her. Principals are scared of her. How Michelle Rhee became the most revolutionary — and polarizing — force in American education."

The U.S. spends more per pupil on elementary and high school education than most developed nations. Yet it is behind most of them in the math and science abilities of its children. Young Americans today are less likely than their parents were to finish high school. This is an issue that is warping the nation's economy and security, and the causes are not as mysterious as they seem. The biggest problem with U.S. public schools is ineffective teaching, according to decades of research.

An Uneasy Peace Plan For Congo's Gorillas

The Democratic Republic of Congo is home to some of the world's last remaining mountain gorillas. But for more than a year, that gorilla sector in the nation's east has been mostly off-limits — and in the hands of a rebel army. But a new agreement between Congo's leaders and the rebels calls for official, government monitoring of the gorillas to resume.

Thursday, November 27, 2008

Giving Thanks to Heroes

It is worth reading this entire column by Nicholas Kristof...

This is a column to give thanks to you, the reader. You don’t know it, but some of you are keeping women like Sajida Bibi alive here in this remote Pakistani village. And that is a far grander reason to celebrate Thanksgiving than even the plumpest turkey.

Sajida is a 29-year-old college-educated woman from a Christian family here (and a reminder that oppressive values in Pakistan are not rooted just in Islam). She scandalized her family by marrying a man she chose herself — and then becoming pregnant.

The next step was brutal: Several women held Sajida down as a midwife conducted an abortion, while she struggled and wept.

Then her brothers weighed what to do next. Sajida’s eldest brother wanted to sell her to a trafficker who offered $1,200, presumably intending to imprison her inside a brothel. Two other brothers just wanted to kill her.

The brothers fought for days over this question. So Sajida ground up sleeping tablets and baked the powder into chapati bread that she fed her brothers for dinner — and then sneaked out as they slept.

Sajida made her way to Mukhtar Mai, one of my heroes, and that is why this is a Thanksgiving column. For years, I’ve written about Mukhtar, an illiterate woman who used compensation money after being gang-raped to build a small school in which she herself enrolled.

Undergoing Heart Bypass Surgery

From the BBC--an interesting video of cardiac bypass surgery

Advertisement Jeffrey Fairlamb from County Durham has allowed the BBC to film him having a double heart bypass operation at Middlesbrough's James Cook University Hospital.

Wednesday, November 26, 2008

Desperate Measures by Desperate Policy Makers in Desperate Times: the Fed Moves to Radically Unorthodox Policies as Economy Is in Free Fall and Stag-D

The latest from Professor Roubini..

Another batch of worse than awful news greeted today Americans getting ready for the Thanksgiving holiday: free falling consumption spending, collapsing new homes sales, falling consumer confidence, very high initial claims for unemployment benefits, collapsing orders for durable goods. It is hard to get any worse than this but the next few months will serve even worse macro news. At this rate of contraction as revealed by the latest data it would not be surprising if fourth quarter GDP were to fall at an annualized rate of 5-6%.

Let us discuss next the financial consequences of such desperate news and the desperate policy actions undertaken to stem this nasty stag-deflation…

The Paulson Plan: ‘Truly Idiotic’

Charles Calomiris is angry. Hank Paulson’s plan to save the economy? “Truly idiotic,” says Calomiris, who is the Henry Kaufman Professor of Financial Institutions at Columbia University’s business school. “This whole thing has been complete nonsense. We did it in the 1930s ten times better than this. This isn’t complicated.”

The US Treasury Market Reaches Breaking Point

The Settlement System for the US Bond market has broken down

says it all

Bailouts May Scare U.S. Economy to Death

From the Cato Institute...
I find it astonishing that so many keep referring to Obama as a socialist in the light of this Bush/Paulson 7.7 TRILLION DOLLAR legacy(as of today) he gets to inherit two months from now...I really worry about the future of our children as these "bailouts" are now basically beyond belief.

A Pew Research poll conducted more than a week ago found that 57 percent of Americans are terrified by Bailout Mania 2008. That was several days, and many billions of dollars, before Bloomberg reported that U.S. taxpayers are now on the hook for $7.7 trillion in bailout bucks — half of the nation’s entire GDP for the past year. At this point, not even Carl Sagan could get a handle on the numbers we’re talking about.
What do people do when they’re scared about the state of the economy? They stop spending. With each new government “investment” announced by our new overlord Hank Paulson, Americans are going to clutch ever more fiercely at their wallets. They will eat out even less than they’ve been doing. They will rediscover the true spirit of Christmas and give each other hugs instead of Blue-Ray disc players. They will forgo that new coat or pair of winter boots. And they will bring the U.S. economy to a halt.

Scientists Find Clues to Aging in a Red Wine Ingredient’s Role in Activating a Protein

A new insight into the reason for aging has been gained by scientists trying to understand how resveratrol, a minor ingredient of red wine, improves the health and lifespan of laboratory mice. They believe that the integrity of chromosomes is compromised as people age, and that resveratrol works by activating a protein known as sirtuin that restores the chromosomes to health.

Eat, Exercise and Be Merry

Research shows that people who write down what they are grateful for may exercise more. Rachel Mahan reports.

Study Cites Toll of AIDS Policy in South Africa

JOHANNESBURG — A new study by Harvard researchers estimates that the South African government would have prevented the premature deaths of 365,000 people earlier this decade if it had provided antiretroviral drugs to AIDS patients and widely administered drugs to help prevent pregnant women from infecting their babies.

Lack of Exercise Explains Depression-Heart Link

For years cardiologists and mental health experts have known that depression raises risk for heart attack by 50 percent or more.

But what hasn’t been clear is why depressed people have more heart problems. Does depression cause some biological change that increases risk? Does the inflammatory process that leads to heart disease also trigger depression?

The answer may be far simpler. A new study suggests that people who are depressed are simply less likely to exercise, a finding that explains their dramatically higher risk for heart problems.

Citi's Taxpayer Parachute

Why are Robert Rubin and other directors still employed?
Another Sunday night, another ad hoc bank rescue rooted in no discernible principle. U.S. taxpayers, who invested $25 billion in Citigroup last month, will now pour in another $20 billion in exchange for preferred shares paying an 8% dividend.

Taxpayers will also help insure $306 billion of Citi's mortgage-backed securities. Citi will cover the first $29 billion in losses on these toxic assets, and then taxpayers will cover 90% of the rest, in exchange for another $7 billion in preferred. Dilution for Citigroup investors? Yesterday's 58% pop in the bank's share price suggests the bailout is a good deal for equity holders. For taxpayers, it is another large exposure for uncertain benefits.

More than a year into the financial crisis and decades into the perception that Citi is too big to fail, we once again have three tired guys making it up as they go. We wish Treasury Secretary Henry Paulson, New York Federal Reserve President Tim Geithner and Fed Chairman Ben Bernanke cared as much about their obligations to U.S. taxpayers as they do about the expectations of Asian investors. Few would argue that a bank with Citi's size and scope wasn't too big to fail, but is it too much to ask Washington to develop a policy that isn't crafted in a scramble of private phone calls?
When taxpayers are being asked to provide the equivalent of $1,000 each in guarantees on Citi's dubious investments, how can these men possibly say they deserve to remain on the board? All the more so given that Citi's board has lately been airing dirty laundry about Mr. Bischoff's role and leaking petty grievances. The directors all but started a run on the bank themselves, even as the bank assured the world it was sturdy enough to withstand any losses.

Oh, and to get the FDIC on board, Citi has agreed to implement the agency's proposal to modify delinquent mortgages to avoid foreclosures. The White House believes the program will cost almost three times FDIC estimates. And even though more than half of modified mortgages go delinquent again, Citi will modify mortgages to create lower payments now, in the hope that escalating payments later will avoid more delinquencies down the road.

While other banks can claim to be victims of the current panic, Citi is at least a three-time loser. The same directors were at the helm in 2005 when the Fed suspended Citi's ability to make acquisitions because of the bank's failure to adhere to regulatory and ethical standards. Citi also needed resuscitation after the sovereign debt disaster of the 1980s, and it required an orchestrated private rescue in the 1990s.

Such a record of persistent failure suggests a larger -- you might even call it "systemic" -- management problem: If taxpayers have to risk so much to save Citigroup, then regulators should at least exert the discipline to break up this behemoth so it is never again too big to succeed, much less to fail.

The Citigroup Bailout

A nice summation of various economist's views on citigroup's masaive bailouts..

The Citigroup Bailout

Monday, November 24, 2008

Studies Say Private Medicare Plans Have Added Costs, for Little Gain

WASHINGTON — Private health insurance plans, which serve nearly a fourth of all Medicare beneficiaries, have increased the cost and complexity of the program without any evidence of improving care, researchers say in studies to be published Monday.

Nose cells may heal spine

People paralysed by spinal cord injuries could soon be "repaired" using cells from their own noses, say Otago University researchers.

As Taboos Ease, Saudi Girl Group Dares to Rock

This is great!! There are some very talented musicians in Saudi Arabia. We used to have extended jam sessions and concerts together with many Saudi musicians in the Diplomatic Quarter, housing the embassies, in Riyadh. More power to these young ladies!

JIDDA, Saudi Arabia — They cannot perform in public. They cannot pose for album cover photographs. Even their jam sessions are secret, for fear of offending the religious authorities in this ultraconservative kingdom.

But the members of Saudi Arabia’s first all-girl rock band, the Accolade, are clearly not afraid of taboos.

Yet rock and roll itself is suspect in Saudi Arabia in part because of its association with decadent lifestyles. Most of the bands here play heavy metal, which has only added to the stigma because of the way some Western heavy metal bands use images linked to satanism or witchcraft. In Saudi Arabia, people are sometimes imprisoned and even executed on charges of practicing witchcraft.

The first rock bands appeared here about 20 years ago, according to Hassan Hatrash, 34, a journalist and bass player who was one of the pioneers, and their numbers gradually grew. Then in 1995, the police raided a performance in the basement of a restaurant in Jidda, hauling about 300 young men off to jail, including Mr. Hatrash. They were released a few days later without being charged. There is no actual law against playing rock music or performing publicly.

“After that, the scene kind of died,” he said.

Sunday, November 23, 2008

Bailout Talks Accelerate for Ailing Citigroup

The federal government was nearing an agreement Sunday night to rescue Citigroup Inc. by helping to remove billions of dollars in toxic assets from its balance sheet, people familiar with the talks say.

The agreement, which was still under discussion and could fall apart, would mark a new phase in government efforts to stabilize U.S. banks and securities firms. After injecting nearly $300 billion of capital into financial institutions, federal officials now appear to be willing to absorb bad assets, on a targeted basis, from specific institutions.

The talks Sunday centered on the creation of what is sometimes called a "bad bank" -- an outside entity designed to hold some of a financial firm's worst assets. That structure would help Citigroup cleanse itself of billions of dollars in potentially toxic assets, these people said.

Under the terms being discussed with top Treasury Department and Federal Reserve officials, Citigroup would agree to absorb losses on assets covered by the agreement up to a certain threshold, people familiar with the matter said. The U.S. government would then absorb any additional losses, these people said. One person said the new entity is expected to hold about $50 billion of assets.

That would mean taxpayers could be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour.

Citigroup Saw No Red Flags Even as It Made Bolder Bets

Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.

Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.

Burdened by the losses and a crisis of confidence, Citigroup’s future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.

And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup’s woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.

While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.
Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.

When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.

And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.

Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.

For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.

But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.

India Calling

Which raises a heart-stirring question: If our parents left India and trudged westward for us, if they manufactured from scratch a new life there for us, if they slogged, saved, sacrificed to make our lives lighter than theirs, then what does it mean when we choose to migrate to the place they forsook?

If we are here, what are they doing there?

Pessimism crept into the sunniest nation. A vast majority saw America going astray. Books heralded a “Post-American World.” Even in the wake of a historic presidential election, culminating in a dramatic change in direction, it remained unclear whether the United States could be delivered from its woes any time soon.

“In the U.S., there’s a crisis of confidence,” said Nandan Nilekani, co-chairman of Infosys Technologies, the Indian software giant. “In India,” he added, “for the first time after decades or centuries, there is a sense of optimism about the future, a sense that our children’s futures can be better than ours if we try hard enough.”
Exact data on émigrés working in India or spending more time here are scarce. But this is one indicator: India unveiled an Overseas Citizen of India card in 2006, offering foreign citizens of Indian origin visa-free entry for life and making it easier to work in the country. By this July, more than 280,000 émigrés had signed up, according to The Economic Times, a business daily, including 120,000 from the United States.

Saturday, November 22, 2008

Daewoo leases African plantation


South Korean firm Daewoo has unveiled plans to plant corn on one million acres of land in Madagascar, to sharply cut its reliance on US imports.

The Twin Curves

Look at the US Treasury Yield curve and the Oil Futures curve. They are both so steep you’d need a rope and a pair of sharp crampons to climb them. While we know there are no pat answers for the shape of any curve, and while one does not want to be overly simplistic, these two curves tell me that much more inflation and much more growth are coming than you will gleen from reading today’s newspaper.

The Road to Financial Ruin: We Have to Spend Money Now

Axel Merk, November 19, 2008

When just about all economists agree, should we rejoice or be scared? During the Weimar Republic, economists at the Reichsbank argued that printing money to finance a war was “exogenous” to the economy and thus not inflationary. Hyperinflation in the ensuing years proved them wrong. We tend to think we are so much smarter today. Economists know how to run regression models; in the absence of a historic precedent, some economists know how to draw shifting supply and demand curves. But common sense seems to be missing in the toolbox of all but a few.

This past Sunday, President-elect Obama was asked by 60 Minutes where the money would come from for the ambitious projects and stimulus plans:

Question: Where is all the money going to come from to do all of these things; and is there a point where just going to the Treasury Department and printing more of it ceases to be an option?

Obama: Look. I think what's interesting about the time that we are in right now is that you actually have a consensus among conservative, Republican leaning economists and liberal, left leaning economists. And the consensus is this: that we have to do whatever it takes to get this economy moving again that we have to, we're going to have to spend money now to stimulate the economy and that we shouldn't worry about the deficit next year or even the year after. That short-term, the most important thing is that we avoid a deepening recession.

Just about every living soul has advice for our president-elect on where to spend money. Had McCain won the election, things would have been no different; indeed, McCain seemed to enjoy the race to bailouts even more than Obama. Economists are worried about deflation, about imploding asset prices, about demand destruction. They argue that the government must step in where the private sector is falling short. The goal is to prop up demand and preserve jobs. Political considerations on how to spend the money will come into play; it will be interesting to see whether healthcare and education will receive injections as spending in these areas doesn't translate to immediate boosts to employment, spending or investments.

Many economists (Keynesians) believe that government spending ought to be countercyclical to dampen the impact of boom-bust cycles. In practice, everyone wants to be a Keynesian during bad times, boosting government spending, but there is no mechanism in place to force restraint, say through increased taxes, during boom times. This ‘restraint' existed when the gold standard was in place as money was backed by a limited supply of gold. But such restraints were inconvenient and central bankers are now in charge.

There are cushions built into the system already; take unemployment benefits as an example: unemployment benefits reduce the impact of lost wages and stimulate demand during tough times. Note that European countries tend to have more generous unemployment benefits than the U.S.; further in the U.S., most states need to balance their budgets. As a result, when state revenues decline, the downturn in the U.S. economy is particularly exacerbated as government services are cut. There are some that argue that such spending cuts are healthy because the faster we weed out the excesses of the boom, the faster one finds a bottom upon which to have sustainable growth. Further, risk takers might be more cautious if they know that the government won't bail them out, reducing the risks of systemic failures in the first place. Some may even recall that there used to be a breed called fiscal conservatives in Congress, an almost extinct species. Democrats and Republicans alike are all Keynesians these days.

There are two major reasons why we may be setting ourselves up for financial ruin: first, spending is unlikely to lead to a sustainable recovery; second, we cannot afford it.

Friday, November 21, 2008

Whitehead sees slump worse than Depression

NEW YORK (Reuters) - The economy faces a slump deeper than the Great Depression and a growing deficit threatens the credit of the United States itself, former Goldman Sachs chairman John Whitehead, said at the Reuters Global Finance Summit on Wednesday.

Whitehead, 86, said the prospect of worsening consumer credit woes combined with an overtaxed federal government make him fear that the current slump is far from over.

News Keeps Getting Worse for Vitamins

The best efforts of the scientific community to prove the health benefits of vitamins keep falling short.

From Russia With Loathing

SHORTLY before the presidential election, at a discussion about Russian-American relations I attended in Cambridge, Mass., speakers from both countries voiced the hope that the election of Barack Obama would signal the renewal of a beautiful friendship. These hopes were chilled the day after Mr. Obama won. In an address to the Russian Parliament, President Dmitri Medvedev welcomed President-elect Obama with a threat to deploy Russian missiles on the Polish border if the United States put anti-missile systems in Eastern Europe. While some conciliatory signals followed, it seems clear that the Kremlin intends to keep the “new cold war” going.

Just three days before Mr. Medvedev’s speech, the state-subsidized youth movement Nashi staged a Halloween-themed rally in front of the American Embassy in Moscow. Nearly 20,000 young people held pumpkins marked with the names of “America’s victims,” among them the casualties in South Ossetia. In an amateur film shown at the rally, an actor portraying a drunken George W. Bush bragged that the United States had engineered both world wars and the rise of Hitler to expand its power.

Thursday, November 20, 2008

The Rise and Fall and Rise of the “G”-Word

It’s the “g”-word. It’s the word that everyone almost says, and then doesn’t, because saying it can make you sound like a little like a loon, or maybe more like a combination of a train spotter and a conspiracy theorist, with an Austrian economics overlay for luck. It’s “gold”, of course.

Of late, however, gold has actually provoked some thoughtful discussion, at least insofar as imagining what might be different in the current crisis if modern currencies, especially the dollar, were tied to gold (or something like it) in a fixed ratio. For a thoughtful example, check the following sent to me today by the folks at QB Partners. Agree or disagree, at least the case will have been made.


Consider donating to this worthy cause..

Survivor Corps is offering an alternative “treatment” that can be made readily available in all communities, regardless of proximity to traditional military or govern¬ment centers of support. Our approach is nimble enough to address the needs of individual survivors, while still broad enough to build a coalition of survivors and service providers working to effect long-term positive change.

This new program will help the recovery and reintegration of hundreds of thousands of returning U.S. service members at a critical time for them and their country.

Wednesday, November 19, 2008

Evil Wall Street Exports Boomed With `Fools' Born to Buy Debt

Bosh's premonition, a month before two of Cioffi's funds blew up, struck a death knell for structured finance, the system Wall Street banks devised to fuel more than two decades of unprecedented borrowing. The system allowed financial companies to lend beyond their capacity and outside the reach of regulators -- until it crashed this year.

While the collapse was most visible in the stock markets, the cause was the loss of confidence in the world's biggest bond market, structured finance. So far, it has led to the worst financial crisis since the Great Depression, the disappearance or takeover of more than a dozen banks, including three storied Wall Street firms, and almost $3 trillion in government expenditures and guarantees to contain the contagion.

Biggest U.S. Export

The bundling of consumer loans and home mortgages into packages of securities -- a process known as securitization -- was the biggest U.S. export business of the 21st century. More than $27 trillion of these securities have been sold since 2001, according to the Securities Industry Financial Markets Association, an industry trade group. That's almost twice last year's U.S. gross domestic product of $13.8 trillion.

The growth over the past decade was made possible by overseas banks, which saw the profits U.S. financial institutions were making and coveted the made-in-America technology, much as consumers around the world craved other emblems of American ingenuity from Coca-Cola to Hollywood movies. Wall Street obliged, with disastrous results: two-thirds of a trillion dollars in bank losses, about 40 percent of them outside the U.S.

``Securitization was based on the premise that a fool was born every minute,'' Joseph Stiglitz, a professor of economics at Columbia University in New York, told a congressional committee on Oct. 21. ``Globalization meant that there was a global landscape on which they could search for those fools -- and they found them everywhere.''

Eager Adopters

European banks, in particular, were eager adopters.

Securitizations in Europe increased almost sixfold between 2000 and 2007, from 78 billion euros ($98 billion) to 453 billion euros, according to the European Securitization Forum, a trade organization.

Three Icelandic banks borrowed enough to buy $228 billion of assets, most of them securitizations, turning the country's financial system into a hedge fund. All three banks have been nationalized by the government, leading Prime Minister Geir Haarde to advise citizens to switch from finance to fishing.
Securitization's biggest innovation was the use of off-balance-sheet accounting. If a bank couldn't sell a bond or didn't want to, the asset could be sold to a trust within a so-called special-purpose entity, incorporated in a place such as the Cayman Islands or Dublin, and shifted off the books. Lending expanded, and banks still booked profits.

With this new technology, a bank could originate $100 million in loans, sell off some to investors, transfer the rest to a special-purpose entity and not have to hold any capital. The profit could be as much as 1.25 percentage points of the amount loaned, or $1.25 million for every $100 million issued.

``The banks could turn a low return-on-equity business into one that doesn't use any equity, which was the motivation for this,'' said Brad Hintz, a Sanford C. Bernstein & Co. analyst and former chief financial officer at Lehman. ``It becomes almost like a fee business because it requires no capital.''

Give me a break

Adam Feuerstein
It's hard out here for a pimp, er, I mean automotive CEO
11/19/2008 3:43 PM EST

The CEOs of Ford, GM and Chrysler all flew to D.C. on their own corporate private jets to beg for a government handout.

You can't make this stuff up!

Position: Throw the bums out.

Tuesday, November 18, 2008

Wellpoint soon will offer some medical travel benefits

Would you get on a plane to India for surgery? What if your employer made it worthwhile?.

Now the nation's second-biggest health insurer, Indianapolis-based Wellpoint Inc., is dipping a toe in the medical tourism marketplace.

Starting in January, Wellpoint will offer employees of Wisconsin-based Serigraph Inc. the option of traveling to India for nonemergency procedures such as joint replacement surgery. Serigraph will waive the insurance deductible and coinsurance for employees who agree to go, paying all medical costs as well as travel expenses for the patient and a companion.

"This is a leap of faith, obviously, to say if you go to India, we'll pay for the whole shebang," said Linda Buntrock, Serigraph's senior vice president of human resources.

"But the cost difference is so monumental."

Knee replacement surgery that costs between $60,000 and $70,000 in the United States can be done in India for $8,000 to $10,000, said Jill Becher, a Wellpoint spokeswoman.

Monday, November 17, 2008

Epic Fail

As investors all around the world ran scared this past month, their panic was about the only thing easy to understand. The global financial system was collapsing and almost nobody could say—in plain English—what exactly was fueling such a gigantic crisis. Not the president, who offered insipid generalities; nor the presidential candidates, who stuck to old themes like earmarks, taxes, and deregulation. Not even Treasury Secretary Henry Paulson, who delivered abstract lessons about liquidity and interest-rate spreads but whose plan for the government to buy "toxic assets"—loans that have little or no market value because of their lack of transparency—misfired and had to be recast as a plan to buy stakes in banks. This has been the Great Incomprehensible Recession of 2008. Incomprehensibility was at the root of the problem, and it is at the root of our difficulty getting out of it.

As the United States struggles to get past the turmoil, the challenge will be to understand its most basic causes. Did the trouble start with the Reagan agenda of deregulation? The Bush era's passive Securities and Exchange Commission and Alan Greenspan's Federal Reserve, with their loose rules governing off-the-books investments and the ratio of capital to lending by financial institutions? The flood of capital into the United States from China and the Persian Gulf? The Federal Reserve's easy money and the failure to regulate complex new derivatives? Or was it the liberal political pressure on Congress and the administration to keep interest rates low and expand homeownership recklessly through Fannie Mae and Freddie Mac? The truth probably includes some role for all these explanations. But the truth has also been radically unclear because of the difficulty in understanding the machinations and statements of the financial wizards handling our money.

Jim Chanos on Healthcare

Jim Chanos, a respected hedge fund manager, opines on U.S. Healthcare.
He makes the important point that unlike the era when Hilary Clinton tried to reform healthcare, corporate America is now on not only on the side, but is in fact the driving force pushing for healthcare reform.

Sunday, November 16, 2008

Greenspan Slept as Off-Books Debt Escaped Scrutiny

It is worth reading this Bloomberg news overview of financial mess in its entirety...

Oct. 30 (Bloomberg) -- As George Miller welcomed 60 bankers to the chandeliered Charlotte City Club one evening in September, the focus was on more than the recent bankruptcy of Lehman Brothers Holdings Inc. From their 31st-floor perch, members of the American Securitization Forum, which Miller leads, fretted about the future of their $10.7 trillion industry.

The bankers were warned that a Financial Accounting Standards Board plan would force trillions of dollars back onto balance sheets, requiring cash reserves to soar. Their business of pooling and reselling assets had dropped 47 percent in the first six months of the year, and the industry couldn't afford another setback.

The next day, Miller, 39, the forum's executive director, took that message from North Carolina to a Senate hearing in Washington examining the buildup of off-balance-sheet assets. ``There are great risks to the financial markets and to the economy of moving forward quickly with bad rules,'' he said of FASB's proposal.

Miller was trying to preserve an accounting rule for off- the-books assets that helped U.S. banks export toxic debt around the world. It is a loophole that Jack Reed, the Rhode Island Democrat who chairs the Senate securities subcommittee, said had contributed ``to the severity of the current crisis.''

The damage to date: more than $680 billion dollars in losses and writedowns, about one-third of that by European banks.

Unregulated Derivatives

Efforts by lobbyists have delayed FASB decisions and kept key parts of the American financial system beyond the reach of regulators. Their victories included ensuring that over-the- counter derivatives stayed unregulated and persuading the Securities and Exchange Commission to let investment banks' broker-dealer units reduce capital requirements. That allowed them to increase borrowing and magnify profits. Bank watchdogs also didn't move to tighten mortgage-industry standards until after the collapse of the subprime market.

Ten years ago, Wall Street was enjoying a bull market fed by a booming dot-com industry, a Fed chairman, Alan Greenspan, who trusted the market to correct its own ills, and a Congress amenable to lightening the touch of regulators.

In 1998, the imminent collapse of hedge fund Long-Term Capital Management forced the Fed to organize a bailout by Wall Street. Investment banks had loaned the fund billions and were among counterparties in more than $1 trillion in derivative contracts used to hedge investment risks.

That same year Greenspan, Treasury Secretary Robert Rubin and SEC Chairman Arthur Levitt opposed an attempt by Brooksley Born, head of the Commodity Futures Trading Commission, to study regulating over-the-counter derivatives. In 2000, Congress passed a law keeping them unregulated.
3 Percent Rule

FASB had issued off-balance-sheet accounting standards in June 1996 to deal with the growth in securitizations. They were replaced in 2000 by FAS 140, which required more disclosures and rules for dealing with collateral.

Companies were allowed to push an entity off their books if an outside party put up as little as 3 percent of the capital. Houston-based Enron Corp. declared bankruptcy in late 2001 when it was forced to put trusts back on its balance sheet because it hadn't met the 3 percent rule.

The Enron scandal put pressure on FASB to make it harder for companies to keep assets hidden. In January 2003, it proposed a new rule, known as FIN 46, which increased the outside-party requirement to 10 percent.

`Bill of Goods'

Banks went on the offensive. The rule ``was developed in a rush,'' the American Bankers Association wrote in a letter to FASB that July. That same month Robert Traficanti, deputy controller of Citigroup, wrote that the proposed change would have a ``significant impact,'' forcing the lender to move the entities to the balance sheet and raise more capital.

In December 2003, FASB published FIN 46R, a revision that gave the banks more flexibility to keep off the books investment vehicles they managed for a fee.

Banks have lobbied on the issue since at least the early 1980s, said Timothy Lucas, who was at the FASB for more than two decades starting in 1979.

``I think we were sold a bill of goods'' by banks on some off-the-books structures, Lucas said.

In 2004, the SEC allowed the biggest securities firms -- Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co., Lehman and Bear Stearns Cos. -- to set up a system giving the commission oversight of the investment banks' holding companies, rather than just their brokerage units, as had been the case.

Increased Leverage

With the change, approved in April that year, the Wall Street firms avoided having their operations in Europe regulated by the European Union. They were also able to reduce the amount of cash their broker-dealer units had to set aside as a cushion against unexpected losses by as much as 30 percent, Annette Nazareth, then head of the SEC's market-regulation staff, said in an interview. Nazareth, who later became an SEC commissioner, is now a partner at New York law firm Davis Polk & Wardwell.

That allowed the banks to increase their leverage, the ratio of borrowed funds to each dollar of equity capital held, and to invest even more heavily in subprime-related securities. Bear Stearns increased its leverage to 33.5-to-1 after the rule change from 26.4-to-1.

The continued delays and revisions of FASB's off-balance- sheet rules let financial institutions keep the scope of their assets from public view.

In May 2007, after the subprime mortgage crisis began to unfold, the accounting board proposed abolishing QSPEs altogether. It approved the move this April.

Credit Markets Stalled While Waiting Game Played

Secretary Paulson might be the only person in America who worries that consumers haven't borrowed enough money. He says the consumer credit market has "ground to a halt." He wants to get it going again — maybe if we all just buy enough cars and use our credit cards, the economy will come back to life.

Paulson is also upset that banks aren't doing enough. He's given them all this money and they're sitting on it.

He doesn't seem to realize that these two phenomena are really one and the same.

He can inject all the money he wants into the consumer credit market and it isn't going to make us want to buy cars or use our credit cards.

We did enough of that for a while. More than enough. Too much. And right now, before we spend, spend, spend, we're going to wait and see if we keep our jobs.

But we're also going to wait and see what the government's going to do next. Nobody knows, and that evidently includes the secretary of the treasury.

When no one knows how the rules of the game are going to change — and they seem to change from week to week — who wants to take a risk? Who wants to borrow money? Who wants to invest? Business and consumers are hunkering down, waiting for the storm of change to pass.

The problem isn't liquidity.

It's uncertainty.

Paulson doesn't realize that his erratic attempts at creating liquidity are creating the uncertainty that makes liquidity meaningless.

Doctors’ Salaries and the Cost of Health Care

From famed Princeton economist, Uwe Reinhart, who specializes in healthcare issues...

Besides, cutting doctors’ take-home pay would not really solve the American cost crisis. The total amount Americans pay their physicians collectively represents only about 20 percent of total national health spending. Of this total, close to half is absorbed by the physicians’ practice expenses, including malpractice premiums, but excluding the amortization of college and medical-school debt.

This makes the physicians’ collective take-home pay only about 10 percent of total national health spending. If we somehow managed to cut that take-home pay by, say, 20 percent, we would reduce total national health spending by only 2 percent, in return for a wholly demoralized medical profession to which we so often look to save our lives. It strikes me as a poor strategy.

Physicians are the central decision makers in health care. A superior strategy might be to pay them very well for helping us reduce unwarranted health spending elsewhere.

Uwe E. Reinhardt
Princeton, N.J., July 30, 2007

Geek Pop Star

A review of Malcolm Gladwell's new book: "Outliers." I would also recommend his previous books, "Blink" and "The Tipping Point."
Malcolm Gladwell’s elegant and wildly popular theories about modern life have turned his name into an adjective—Gladwellian! But in his new book, he seeks to undercut the cult of success, including his own, by explaining how little control we have over it.
Or take the case of Bill Gates. Gladwell cites a body of research finding that the “magic number for true expertise” is 10,000 hours of practice. “Practice isn’t the thing you do once you’re good,” Gladwell writes. “It’s the thing you do that makes you good.” Gladwell shows how Gates accumulated his 10,000 hours while in middle and high school in Seattle thanks to a series of nine incredibly fortunate opportunities—ranging from the fact that his private school had a computer club with access to (and money for) a sophisticated computer, to his childhood home’s proximity to the University of Washington, where he had access to an even more sophisticated computer. “By the time Gates dropped out of Harvard after his sophomore year to try his hand at his own computer software company,” Gladwell writes, “he’d been programming practically nonstop for seven consecutive years. He was way past 10,000 hours.” Yes, Gates is obviously brilliant, Gladwell concludes, but without the lucky breaks he had as a kid, he never could have had the opportunity to fulfill the true potential of that brilliance. How many similarly brilliant people never get that opportunity?

And then there are the math geniuses who, as anyone can’t help noticing, are disproportionately Asian. Citing the work of an educational researcher at the University of Pennsylvania, Gladwell attributes this phenomenon not to some innate mathematical ability that Asians possess but to the fact that children in Asian countries are willing to work longer and harder than their Western counterparts. That willingness, Gladwell continues, is due to a cultural legacy of hard work that stems from the cultivation of rice. Turning to a historian who studies ancient Chinese peasant proverbs, Gladwell marvels at what Chinese rice farmers used to tell one another: “No one who can rise before dawn 360 days a year fails to make his family rich.” Contrast that legacy with the one derived from Western agriculture—which holds that some fields be left fallow rather than be cultivated 360 days a year and which, by extension, led to the creation of an education system that allowed students to be left fallow for periods, like summer vacation. For American students from wealthy homes, summer vacation isn’t a problem; but, citing the research of a Johns Hopkins sociologist, Gladwell shows that it’s a profound handicap for students from poor homes, who actually outlearn their rich counterparts during the school year but then fall behind them when school lets out. “For its poorest students, America doesn’t have a school problem,” Gladwell concludes. “It has a summer-vacation problem.” So how to close the gap between rich and poor students? Get rid of summer vacation in inner-city schools.
This time, he’s talking about a very serious academic concept, devised by the psychologist James Flynn (“One of my heroes,” Gladwell says, swooning), called the human capitalization rate, or “cap rate,” which, Gladwell explains, “refers to the rate at which a given community capitalizes on the human potential of those in its midst.” In the United States, Gladwell is sad to report, “cap rates are really low” owing to poverty, stupidity, and culture. He tells the story of an inner-city neighborhood in Los Angeles where the boys must cross gang lines to go to high school, so none of them go to high school. “We have a cap rate for that community in Los Angeles, one of the richest cities in the world, that is zero,” Gladwell says, disgust creeping into his normally tranquil voice, “because if you don’t go to high school, you basically can’t achieve anything in our particular society.” For about eighteen minutes, Gladwell goes on in this vein, thoroughly depressing an audience that was already feeling pretty glum after the stock market had taken another nosedive.

But then, with a light flashing yellow to let him know his allotted twenty minutes are almost up, he suddenly pivots. It’s time to let the gloom and doom give way to some Gladwellian optimism. “We have a scarcity of achievement in this country, not because we have a scarcity of talent,” Gladwell says, his voice taking on an urgent tone. “We have a scarcity of achievement because we’re squandering that talent. And that’s not bad news, that’s good news, because it says this scarcity is not something we have to live with. It’s something we can do something about.” Gladwell’s new idea may not be profound, it may not even be big, but it’s certainly welcome.

Talia for President

From Nicholas Kristof of the NY Times...

If your image of a philanthropist is a stout, gray geezer, then meet Talia Leman, an eighth grader in Iowa who loves soccer and swimming, and whose favorite subject is science. I’m supporting her for president in 2044.

When Talia was 10 years old, she saw television clips of New Orleans after Hurricane Katrina and decided to help. She galvanized other kids and started a movement to trick-or-treat at Halloween for coins for hurricane victims.

The movement caught the public imagination, Talia made it on the “Today” show, and the campaign raised more than $10 million. With that success behind her, Talia organized a program called RandomKid to help other young social entrepreneurs organize and raise money.

At, young people can link up with others to participate in various philanthropic ventures. On the Web site, Talia has organized a campaign to build a school in rural Cambodia, backed by children in 48 states and 19 countries. Likewise, she’s working with schools in seven states to provide clean water for rural African villages. She is a frequent guest speaker at other schools, although she acknowledges she’s just a bit intimidated when she visits a high school.

Jim Grant's Security Analysis 75th Anniversary Edition Speech

From the "Can Turtles Fly" blog...

I have a video treat for Jim Grant fans; and Benjamin Graham fans; and value investing fans; and well, you get the point. I haven't seen anyone linking to this video anywhere so it's as exclusive and insightful as anything you'll find on this blog. I'm happy with this find.
Even if you are not a fan of Jim Grant and could care less about Benjamin Graham, you should check it out for Grant's historical perspective. I like Grant but don't agree with many of his views. For what it's worth I think Grant is wrong when it comes to the current credit implosion and would definitely put him in the 'liquidationist' camp of Hoover/Mellon/Jim Rogers/Marc Faber. Jim Grant is definitely one of the most knowledgeable people I have encountered in investing.
Here is an example of what I mean by a little nugget. Jim Grant, in the Q&A, points out how rapidly the Federal Reserve's balance sheet has expanded lately. Roughly, it took around 75 years (roughly 1989) since its founding in 1914 for the Federal Reserve to hit a balance sheet value of $100 billion. Then it took 10 years (roughly 1999) to hit $500 billion. After that it only took 8 years to hit $1 trillion. And now, in two weeks the FedRes balance sheet went from $1 trillion to $2 trillion. You can see why Jim Grant is concerned about the US$.

History Is Clear

It is often said “there are no atheists in a foxhole.” The other week, as world financial markets melted down, CNBC go-to wise man Art Cashen put a market spin on that familiar line drolly saying, “there are no libertarians in a market crash.”

The crusty Cashen is certainly right for the most part. Plenty of financial talking heads who argue for free markets and smaller government on a daily basis suddenly screamed that government must intervene to “save capitalism.” Of course, the idea that government must print multiple blizzards worth of money to save a system where individuals and businesses trade with each other unfettered makes as much sense as presidents who claim that war must be waged to “protect the peace.”

The fact is that what we’ve been enjoying since the Federal Reserve was created is anything but free-market capitalism. The value of the dollar has been pushed down 99 percent and the economy has been a series of booms, followed by busts, ad nausea since J.P. Morgan partner Harry Davidson and other big bank chieftains secretly took a train to go duck hunting on Jekyll Island in 1910. Of course, the ducks were safe, but Americans since have paid the price for the Federal Reserve System idea that was hatched that weekend. As historian Gabriel Kolko wrote: “The entire banking reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally, with one another ... the major function, inspiration and direction of the measure [the Federal Reserve Act] was to serve the banking community in general, and large bankers specifically.”

The TV pragmatists probably forget that Karl Marx and Frederick Engels wrote in The Communist Manifesto that creating “a centralization of credit in the hands of the state, by means of a national bank with state capital and an exclusive monopoly” should be near the top of any communist’s agenda.
Is it any wonder that Treasury Secretary Henry Paulson’s plan has morphed into the federal government taking equity stakes in banks, mortgage companies and at least one insurance company? As Oscar B. Johannsen wrote: “A socialized banking system is the precursor of socialism in all business.” (By the time you read this, airlines and car manufacturers may be partially owned by the government).
As if all this past monetary expansion wasn’t enough, the Fed is now working overtime, in concert with the world’s other central banks, to create what investor Jim Rogers told a foreign CNBC audience will be “a monetary holocaust.

How Many Lashes Can One Man Take?

Thousands, if they're performed correctly.

There were protests in Egypt this week after an Egyptian doctor was sentenced to 15 years in prison and 1,500 lashes by the Saudi Arabian government for prescribing medicine to a princess that "drove her to addiction." The wife of the convicted doctor worried publicly that the sentence would kill him. How many lashes can one man stand?

It depends on how you're lashed. It's very unlikely that the doctor will die from his sentence if it is administered in the usual Saudi Arabian way—i.e., broken up into weekly bouts of 50 lashings each. (Women are given 20 to 30 at a time.) But a string of regular punishments administered over a span of seven months could still be dangerous. After just one round of lashings, he could suffer lacerated or bruised skin. More serious problems are likely to arise after repeated, weekly abuse—including nerve damage and infection.

A Gift or Hard Graft?

We look at outrageously talented and successful people - the Beatles, Mozart, Rockefeller, Bill Gates - and assume there is such a thing as pure genius. Not necessarily, argues Malcolm Gladwell...

Saturday, November 15, 2008

The Economic Mess and Financial Disaster that Obama Will Inherit

The Latest from Nouriel Roubini...

The good news is that America has just elected a president with leadership, vision and great intelligence. President Obama will also choose a first rate economic team: individuals such as Larry Summers and Tim Geithner would be excellent choices for the position of Treasury Secretary. Obama and his team are fully aware of the very difficult economic and financial challenges that the country is facing and will work hard to resolve them.

However, Obama will inherit and economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollar in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed Funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise given price deflation while the value of financial assets is still plunging. This is the bitter gift that the Bush administration has bequeathed to Obama and the Democrats.

Given this dismal background, let us consider next in more detail the macro outlook for the U.S. and global economy and its implications for financial markets…

So let us not delude each other: the U.S. and global recession train has left the station; the financial and banking crisis train has left the station. This will be a long and severe and protracted two year recession regardless of the best intentions and good policies of the new U.S. administration. It will take a lot of hard work and sound policies to clean up this mess and reduce the length and severity of this economic contraction.
So the brief sucker’s rally is over and a reality check is now dawning on markets and investors. Expect this financial crisis and economic recession to get much worse in the next 12 months before it gets any better. We are nowhere near a bottom for housing, the U.S, economy, the global economy and financial markets. The worst is ahead of us rather than behind us.

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3 great thoughts from 3 great people

In the past week, 2 dear friends and my daughter have uttered simple yet profound truths, which continue to resonate in my head and in my heart...

"Everything matters"
Everything we do...everything we say...every interaction...

A. Vitale

"We are all connected"

The problem is that we don't all see our connection as a common humanity

T. Dufur

"I love you Daddy.....and love is everything"

I. Dhindsa

Link the above thoughts together for an exponential increase in sublimity.

Monetary Freedom and Its Opposite

We are now at a point in time when the US government is bankrupt. It cannot pay its bills, it cannot pay off its debt, and it has future unfunded liabilities with a current value in excess of $60 trillion dollars—and that was before all the current bailout packages!

Given that the political parties have done nothing to solve the government's financial mess or to even reduce its magnitude, and given that everything they have done including the prescription drug benefit, the war in Iraq, and the bailouts of Wall Street only makes the problem worse, I can only conclude one of two things. Either they "plan" to resort to hyperinflation to pay for this mess, or they are collectively dumb as a sack of horse manure. Remember, hyperinflation is not just very high prices; it is social chaos and the breakdown of social order. At a basic level our lives are built on a structure of prices that we ourselves co-determine, but in a hyperinflation there is no solid basis for prices and therefore our lives are thrown into chaos. Society becomes more violent and criminal. Government, too, becomes more violent and criminal towards its own citizens.

'Socialism'? It's Already Here.

From the conservative columnist George Will...

Conservatism's current intellectual chaos reverberated in the Republican ticket's end-of-campaign crescendo of surreal warnings that big government -- verily, "socialism" -- would impend were Democrats elected. John McCain and Sarah Palin experienced this epiphany when Barack Obama told a Toledo plumber that he would "spread the wealth around."

America can't have that, exclaimed the Republican ticket while Republicans -- whose prescription drug entitlement is the largest expansion of the welfare state since President Lyndon Johnson's Great Society gave birth to Medicare in 1965; and a majority of whom in Congress supported a lavish farm bill at a time of record profits for the less than 2 percent of the American people-cum-corporations who farm -- and their administration were partially nationalizing the banking system, putting Detroit on the dole and looking around to see if some bit of what is smilingly called "the private sector" has been inadvertently left off the ever-expanding list of entities eligible for a bailout from the $1 trillion or so that is to be "spread around."

The seepage of government into everywhere is, we are assured, to be temporary and nonpolitical. Well.

Conservatives rightly think, or once did, that much, indeed most, government spreading of wealth is economically destructive and morally dubious -- destructive because, by directing capital to suboptimum uses, it slows wealth creation; morally dubious because the wealth being spread belongs to those who created it, not government. But if conservatives call all such spreading by government "socialism," that becomes a classification that no longer classifies: It includes almost everything, including the refundable tax credit on which McCain's health-care plan depended.

Hyperbole is not harmless; careless language bewitches the speaker's intelligence. And falsely shouting "socialism!" in a crowded theater such as Washington causes an epidemic of yawning. This is the only major industrial society that has never had a large socialist party ideologically, meaning candidly, committed to redistribution of wealth. This is partly because Americans are an aspirational, not an envious, people. It is also because the socialism we do have is the surreptitious socialism of the strong, e.g., sugar producers represented by their Washington hirelings.

In America, socialism is un-American. Instead, Americans merely do rent-seeking -- bending government for the benefit of private factions. The difference is in degree, including the degree of candor. The rehabilitation of conservatism cannot begin until conservatives are candid about their complicity in what government has become.

As for the president-elect, he promises to change Washington. He will, by making matters worse. He will intensify rent-seeking by finding new ways -- this will not be easy -- to expand, even more than the current administration has, government's influence on spreading the wealth around.

More quotes


"A transformational leader stands on the shoulders of his followers, expressing coherently those ideas which lie inchoate in the hearts of the followers -- and in the process makes his followers into new leaders."

-- James MacGregor Burns

"You must not expect anything from others. It's you, of yourself, of whom you must ask a lot. Only from oneself has one the right to ask everything and anything. This way it's up to you - your own choices - what you get from others remains a present, a gift."

-- Albert Schweitzer

Trillions down and still bailing

Mr. Fleckenstein nails it again...

Unfortunately, despite some 12 financing facilities created by the Treasury and the Fed, massive interest rate cuts and various bailouts, the government has little to show for its attempts to dictate where markets should trade.

The Fed's own balance sheet has exploded from roughly $900 billion worth of debt in August to around $2 trillion as of last week. Knowledgeable sources expect that to reach $3 trillion by the end of the year.

That means that it will have grown from approximately 6% of gross domestic product to more than 20% in the space of four months. (For perspective, Japan's balance sheet grew from roughly 9% of GDP to 29% over the 10-year period from 1994 to 2004, as it pursued "quantitative easing," which basically involves the central bank making more cash available to banks to ease lending.)

These numbers and rates of growth are so enormous (and unprecedented) as to be utterly incomprehensible. Does anybody actually think the government has any idea what it's doing?

Thursday, November 13, 2008

Financial Quotes of the Day

"We had just come through a decade-plus where the Fed intervened "successfully" enough so that folks came to look upon the stock market (and then the real-estate market) as pet kittens that spit out hundred-thousand-dollar bills. Markets are not like that at all. They are more like savage beasts looking to rip your head off."

...Bill Fleckenstein

"So, another Secretary of the Treasury goes down in the history books as getting it all wrong, although Paulson will get extra paragraphs describing how he sensed he was going to botch things by inserting at the very outset a clause saying he couldn’t be criticized or accused or whatever his language was. The language now is bailing out the previous bail which bailed out the initial bail, while bringing out a multi-colored Tarp to cover over the previously 'wrong' black-and-white Tarp.
"Is there something in the Kool-Aid at GS that produces such 'leaders' who have trouble in the real world (Paulson, Corzine, Thain)? The market obviously didn't take fondly to his what-should-we-call-it? back-handed admission. . . . There is no sense . . .. of how the climate will feed on itself -- out of work, can't buy anything, store becomes empty, has to lay off employees, and so on."

...Justin Mamis

(via Fleckenstein capital)

Doctors say marrow transplant may have cured AIDS

BERLIN – An American man who suffered from AIDS appears to have been cured of the disease 20 months after receiving a targeted bone marrow transplant normally used to fight leukemia, his doctors said.

While researchers — and the doctors themselves — caution that the case might be no more than a fluke, others say it may inspire a greater interest in gene therapy to fight the disease that claims 2 million lives each year. The virus has infected 33 million people worldwide.

Wednesday, November 12, 2008

Uncle Sam's Credit Line Running Out?

The yield curve and credit-default swaps tell the same story: The U.S. can't borrow trillions without paying a price.

WHAT ONCE WAS UNTHINKABLE has come to pass this year: massive bailouts by the Treasury and the Federal Reserve, with the extension of billions of the taxpayers' and the central bank's credit in so many new and untested schemes that you can't tell your acronyms or abbreviations without a scorecard.

Even more unbelievable is that some of the recipients of staggering sums are coming back for a second round. Or that the queue of petitioners grows by the day.

But what happens if the requests begin to strain the credit line of the world's most creditworthy borrower, the U.S. government itself? Unthinkable?

Trillions are no hyperbole. The Treasury is set to borrow $550 billion in the current quarter alone and $368 billion in the first quarter of 2009. "Near-term pressures on Treasury finances are much more intense than we had thought," Goldman Sachs economists commented when the government announced its borrowing projections last week.

It may finally be catching up with Uncle Sam. That's what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.
The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit-default swaps on the U.S. government and they have become more expensive -- in tandem with an increase in the spread between two- and 10-year notes.

This link has been brought to light by Tim Backshall, the chief analyst of Credit Derivatives Research. The attraction of investors to the short end of the Treasury market is "juxtaposed with the massive oversupply and inflationary expectations of the longer end," he writes.
Cutting through the technical jargon, the yield curve and the credit-default swaps market both indicate the markets are exacting a greater cost to lend to Uncle Sam. And it's not because of anticipated recovery, which would reduce, not increase, the cost of insuring Treasury debt against default.

All of which suggests America's credit line has its limits.

Tuesday, November 11, 2008

Cholesterol-Fighting Drugs Show Wider Benefit

A large new study suggests that millions more people could benefit from taking the cholesterol-lowering drugs known as statins, even if they have low cholesterol, because the drugs can significantly lower their risk of heart attacks, strokes and death.


The study, presented Sunday at an American Heart Association convention in New Orleans and published online in The New England Journal of Medicine, found that the risk of heart attack was more than cut in half for people who took statins.

Those people were also almost 50 percent less likely to suffer a stroke or need angioplasty or bypass surgery, and they were 20 percent less likely to die during the study. The statin was considered so beneficial that an independent safety monitoring board stopped what was supposed to be a five-year trial last March after less than two years.

Scientists said the research could provide clues on how to address a long-confounding statistic: that half of heart attacks and strokes occur in people without high cholesterol.

Sunday, November 09, 2008

Stunned Icelanders Struggle After Economy’s Fall

It is not as if Reykjavik, where about two-thirds of the country’s 300,000 people live, is filled with bread lines or homeless shanties or looters smashing store windows. But this city, until recently the center of one of the world’s fastest economic booms, is now the unhappy site of one of its great crashes. It is impossible to meet anyone here who has not been profoundly affected by the financial crisis.

Overnight, people lost their savings. Prices are soaring. Once-crowded restaurants are almost empty. Banks are rationing foreign currency, and companies are finding it dauntingly difficult to do business abroad. Inflation is at 16 percent and rising. People have stopped traveling overseas. The local currency, the krona, was 65 to the dollar a year ago; now it is 130. Companies are slashing salaries, reducing workers’ hours and, in some instances, embarking on mass layoffs.

“No country has ever crashed as quickly and as badly in peacetime,” said Jon Danielsson, an economist with the London School of Economics.

The loss goes beyond the personal, shattering a proud country’s sense of itself.

Thursday, November 06, 2008

A credit crater too big to fill?

As the movement of money across borders comes to a grinding halt, governments can only manage the decline. Don't be surprised to see markets roll back to 1995 levels -- or lower.

It's as if a set of asteroids hit Manhattan, London and Tokyo, carving a massive hole in the architecture of finance. The initial buildings in the impact crater, Lehman Bros. (LEHMQ, news, msgs), Bear Stearns and Northern Rock, were quickly incinerated. But now the toxic rain and tsunamis that were kicked up are rolling onto the survivors in waves and cutting off their air supply.
New data from world money centers suggest the movement of money around the globe has simply ground to a halt, as institutions in the United States, Europe and Asia that are receiving taxpayer dollars from governments are socking it away to shore up their balance sheets, reserve against liabilities expected in the near future and sustain their unprofitable operations.

Wednesday, November 05, 2008

A Sweeping Rejection of President Bush

From the Cato Institute...

Left-liberal groups are quick to declare Barack Obama’s win a broad endorsement of the “progressive” agenda, their highly inaccurate name for more taxes, more spending, more entitlements, and more regulation. After a trillion-dollar increase in federal spending during the Bush administration and the biggest expansion of entitlements since Lyndon Johnson, it hardly seems likely that what’s troubling the American economy or the American people is an insufficieny of government.

The big problem for John McCain and the rest of the Republicans last night was George W. Bush and his big-government conservatism. Bush had a 25 percent approval rating, and Congress’s was even lower. Republicans hoped up until election day that voters would notice that the unpopular Congress was run by Democrats. But after 8 years of Bush and 12 years of a Republican Congress, just recently ended, voters saw the Republicans as the incumbents who were responsible for the mess in Washington. Concerns about Obama were sufficient to allow McCain to run 20 points ahead of Bush’s approval rating in a time of economic crisis. But the hole was too deep.

Bush and the Republicans promised choice, freedom, reform, and a restrained federal government. They delivered massive overspending, the biggest expansion of entitlements in 40 years, centralization of education, a floundering war, an imperial presidency, civil liberties abuses, the intrusion of the federal government into social issues and personal freedoms, and finally a $700 billion bailout of Wall Street that just kept on growing in the last month of the campaign. Voters who believed in limited government had every reason to reject that record.


When Nassim Taleb talks about the limits of statistics, he becomes outraged. "My outrage," he says, "is aimed at the scientist-charlatan putting society at risk using statistical methods. This is similar to iatrogenics, the study of the doctor putting the patient at risk." As a researcher in probability, he has some credibility. In 2006, using FNMA and bank risk managers as his prime perpetrators, he wrote the following:

In the following Edge original essay, Taleb continues his examination of Black Swans, the highly improbable and unpredictable events that have massive impact. He claims that those who are putting society at risk are "no true statisticians", merely people using statistics either without understanding them, or in a self-serving manner. "The current subprime crisis did wonders to help me drill my point about the limits of statistically driven claims," he says.

Taleb, looking at the cataclysmic situation facing financial institutions today, points out that "the banking system, betting against Black Swans, has lost over 1 Trillion dollars (so far), more than was ever made in the history of banking".

What’s in a Number?

Donald MacKenzie on the Importance of Libor

The calculation of Libor is co-ordinated by just two people, who work in an unremarkable open-plan office in London’s Docklands.

For Many Abroad, an Ideal Renewed

The sentiments expressed in this article echo emails I have received from friends all over the globe the past few weeks...

GAZA — From far away, this is how it looks: There is a country out there where tens of millions of white Christians, voting freely, select as their leader a black man of modest origin, the son of a Muslim. There is a place on Earth — call it America — where such a thing happens.

Even where the United States is held in special contempt, like here in this benighted Palestinian coastal strip, the “glorious epic of Barack Obama,” as the leftist French editor Jean Daniel calls it, makes America — the idea as much as the actual place — stand again, perhaps only fleetingly, for limitless possibility.

“It allows us all to dream a little,” said Oswaldo Calvo, 58, a Venezuelan political activist in Caracas, in a comment echoed to correspondents of The New York Times on four continents in the days leading up to the election.

Tristram Hunt, a British historian, put it this way: Mr. Obama “brings the narrative that everyone wants to return to — that America is the land of extraordinary opportunity and possibility, where miracles happen.”

Effects Of Global Financial Crisis Emerge In Senegal

Not much has been heard from Africa about the impact of the global financial crisis that has sent markets tumbling, banks collapsing and homeowners fearing foreclosure. But there is concern on the world's poorest continent that the financial fever and fallout will be contagious.

In dusty downtown Dakar, the bustling capital of Senegal, many residents may not fully follow the complexities of the recent financial turmoil on Wall Street and beyond. But the Senegalese are no strangers to the word "crisis." They face a crisis of survival daily.

Sunday, November 02, 2008

Harnessing The Power Of The Brain

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The Cruelest Month

Alex Abelson, notable Barron's columnist, on the financial wreck...

Besides the chilling prospect of a global economic Ice Age that would cripple demand for metals of every description as well as oil and natural gas, commodities were savaged by the great unwinding of insanely leveraged speculation. Following the lead of housing and credit, commodities have been prime casualties of the financial collapse, whose effects are likely to linger on long after the fierce hemorrhaging has been stanched.

There's always a silver lining, or what are tried and true maxims for? And, sure enough, the dark clouds that envelop the current global landscape contain one: We seemingly don't have to worry about inflation for the nonce. Hold the sigh of relief, please, because that could mean we have to start worrying about deflation.

And, in any case, you needn't be in any rush to put away your inflation worry-beads. For if not immediately, you'll certainly need them in the not-too-distant future. That's guaranteed by the government's unbridled resort to its magical money machine.

Those trillions -- by one count, as much as $3 trillion that Washington has thrown helter-skelter at just about anything and anybody that wails loudly enough -- will come back to haunt us. Call it reflation, call it inflation, but you can't in good times as well as bad relentlessly debauch the currency without paying the price.

How Credit Default Swaps Spread Financial Rot

If bad mortgages got the financial system sick, credit default swaps helped spread the illness worldwide.

Like many parts of the financial system these days, credit default swaps are so complicated, simple bankers couldn't have created them. They were invented by people like Gregg Berman.

"My formal training is in physics," he says. "I studied experimental physics and nuclear physics before joining finance in 1993."
"I think Mae West said it very, very well when she said, 'I used to be Snow White, but I drifted,' " says Satyajit Das, a risk consultant who was around when credit default swaps first appeared.

For 30 years, he has worked with hedge funds and bankers all over the world as a sort of a financial hired gun. He saw first hand how what started as insurance morphed into something else entirely. In the 1990s, he says, he was a fan of credit default swaps.

"But by about 2003-2004, I was starting to get nervous," Das says. "I could see the market had gone from a very legitimate purpose to something which was much more racy and interesting but also much more dangerous."

He says along the way, it stopped being insurance.

"The line between investing and speculation or gambling in financial markets is always a pretty gray one," he says. "And speculation is always a motive."

Challenging the Crowd in Whispers, Not Shouts

Robert Schiller on the Economic Crisis...

But why weren’t the experts at the Fed saying such things? And why didn’t a consensus of economists at universities and other institutions warn that a crisis was on the way?

The field of social psychology provides a possible answer. In his classic 1972 book, “Groupthink,” Irving L. Janis, the Yale psychologist, explained how panels of experts could make colossal mistakes. People on these panels, he said, are forever worrying about their personal relevance and effectiveness, and feel that if they deviate too far from the consensus, they will not be given a serious role. They self-censor personal doubts about the emerging group consensus if they cannot express these doubts in a formal way that conforms with apparent assumptions held by the group.

The Populist

James K. Galbraith on the Economic Crisis

It can be worse than the Great Depression

In the 1930s, states did not go bankrupt, fearful of the consequences of those who had done so in the wake of the first world war.

Now, major states, such as Italy, have more than 100 percent of GDP in public debt even before the crisis, rendering major state bankruptcies a real danger. Fiscal and monetary stimulation are needed and deflation must be avoided, but currently fiscal considerations are disregarded altogether, which is a recipe for disaster. State default can easily lead to hyperinflation, which is far worse than deflation.

The global financial system is so much deeper and more sophisticated than in the 1920s, but that is a problem. The 1920s had its version of subprime loans, but it did not have non-transparent collateralized debt obligations. The many derivatives have created the mother of all bubbles. The deeper the financial system, the harder we may fall.

Although the Great Depression had worldwide reach, it largely emanated from two countries, the US and Germany. Never before has the world seen such a monstrous and truly global bubble. The real estate bubble is probably worst in the Persian Gulf and Moscow, while also extreme in Britain, Spain and Ireland.

Never have big financial institutions been as overleveraged as Fannie Mae and Freddie Mac or the former US investment banks, not to mention the hedge funds. The excessive leverage is now being unwound by financial panic, apart from what is countered with re-capitalization.

The 1930s protectionism must not be repeated, but frozen finances have already left countries such as Iceland and Ukraine temporarily outside of the world financial system. Such exclusion must not be allowed to become permanent.

Preventing a Global Slump Must Be the Priority

Give credit where credit is due: Nouriel Roubini of New York University’s Stern School of Business was right. On February 20 2008, I wrote a column entitled “America’s economy risks the mother of all meltdowns”, based on his analysis of the 12 steps to disaster. Alas, not only has the US taken those steps, but it has also – with help from others, including the UK – dragged the world behind it.

In a more recent note, Professor Roubini predicts a combination of stagnation and deflation*. In doing so he points, with some glee, to the most recent analysis of the global outlook from JPMorgan Chase, once among the most bullish of analysts. Now, under the rubric “A bad week in hell”, JPMorgan states that: “Once again, we have taken an axe to near-term growth forecasts for the developed world and will likely follow up with additional downward revisions for emerging economies in the coming weeks. Already, our forecasts suggest that global gross domestic product will contract at a near 1 per cent annual rate” in the fourth quarter of 2008 and the first quarter of 2009.

Given the near-disintegration of the western world’s banking system, the flight to safe assets, the tightening of credit to the real economy, collapsing equity prices, turmoil on currency markets, continued steep declines in house prices, rapid withdrawal of funds from hedge funds and ongoing collapse of the so-called “shadow banking system”, these forecasts even look quite optimistic. The outcome next year could be far worse.

If western governments had not intervened to guarantee and recapitalise banking systems, it would surely have been worse. Yet, as the charts show, even this has not halted the turmoil. Consider just two statistics: the capitalisation of world stock markets has halved; and, according to the Bank of England’s latest Financial Stability Report, mark-to-market losses on vulnerable debt instruments now amount to a massive $2,800bn (€2,240bn, £1,790bn)**.

So what should be done? Some would argue: nothing at all. The view is widely held, particularly in the US, that the world needs a big purge of past excesses. Recessions, on this line of argument, are good. People who hold this view also argue that governments caused all the mistakes. The market would, they insist, be incapable of the errors we have seen. To them, Alan Greenspan’s confession last week that “I made a mistake in presuming that the self-interest of organisations, specifically banks and others, was such that they were best capable of protecting their own shareholders” was about as welcome as Brutus’s knife was to Caesar.


Yet the idea that a quick recession would purge the world of past excesses is ludicrous. The danger is, instead, of a slump, as a mountain of private debt – in the US, equal to three times GDP – topples over into mass bankruptcy. The downward spiral would begin with further decay of financial systems and proceed via pervasive mistrust, the vanishing of credit, closure of vast numbers of businesses, soaring unemployment, tumbling commodity prices, cascading declines in asset prices and soaring repossessions. Globalisation would spread the catastrophe everywhere.

Many of the victims would be innocent of past excesses, while many of the most guilty would retain their ill-gotten gains. This would be a recipe not for a revival of 19th-century laisser faire, but for xenophobia, nationalism and revolution. As it is, such outcomes are conceivable. Choosing to risk such an outcome would be like deciding to let a city burn in order to punish someone who smoked in bed. Risking huge damage now in the hope of lowering moral hazard later is mad.

Everything possible must be done to prevent the inescapable recession from turning into something worse. Many of the needed actions were laid out in an article on the FT’s Comment page this week by Columbia University’s Jeffrey Sachs. I would stress five points.
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