The sun also rises

Just a little something to remind us all of the symbiosis between hope, spirit, and music.

Bonfire of the Vain and Stupid

The Dow is up for the third consecutive day. No doubt some are thinking the bottom was reached last week and we have a long slow recovery ahead of us... but I'm not one of them.

I am reminded of 1929: The stock market crashed and came back then too. It wasn't until 1932 that the impact of a mangled manufacturing base hit with full force. It's easy to look back at Harry Hopkins and FDR as heroes for getting the nation out of the Great Depression, but it took a full ten years of fiscal tweeking and a wartime economy to get millions of people back to work. It was hardly a miracle.

In the end it was greed that got us. For once in recent history, the market was allowed to operate without intervention or regulation. The past decade has been the story of manifest entitlement by the privileged few. The creation of new investment facilities that enabled investment bankers to multiply their profits by selling MBS's to second tier entities that later repackaged and sold the risk to trusts and corporations in the form of CDO's and Credit Default Swaps. Complicit, and critical to all of this were the bond and rating agencies - like Moody's, that assigned AAA ratings to these trusts and corporations - the "shadow bankers" a requirement before shares of these products could be sold to thousands of pension funds, hedge funds, and municipal and state fund managers.

That any third party - completely unrelated to any of these transactions, could later take out insurance policies that paid off in the case of a default of these trusts and corporations is clearly bordering on, if not outright criminal. These derivatives paid massive returns to holders of the paper so long as people kept borrowing and buying houses. They paid even more when the bottom dropped out of the housing market and millions of new homeowners defaulted on their mortgages. Those betting on a collapse could then cash in their default swaps for insurance remissions from companies like AIG.

Perhaps the best first-person account of Wall Street culture, written to date, is a story written by Michael Lewis in Portfolio.com, entitled "The End of Wall Street's Boom".

The solution is far from a done deal. There is an old saying, "use a thief to catch a thief." If there is any truth to that then President-elect Obama has assembled a first class team to lead the nation through the crisis, because most of them had a hand in creating it. As for me, I am growing weary of reporting on the ups and downs of it all. I'd like to get back to writing about the sorts of things that contribute to the growth of the human spirit. But, I'm an addict, and as such will no doubt be drawn back to what is the biggest story of my mature years. In the meantime, I am going to get on to some other subjects.... if I can.

"Too big to fail."

Citigroup should be getting split apart today, but it didn't because it was deemed too big to fail.

The $25b taxpayer handout proved insufficient to stem confidence among shareholders who tripped over each other to unload their stock last week. When Lehman Brothers were allowed to crumple, the damage gained force the further it spread from the host - such was the tangle of debt. But Citi crossed every country's border, dominating financial markets in everything; from student loans to credit cards, Mortgage Backed Securities, Collateral Debt Obligations, Hedge Funds and placed massive bets on Credit Default Swaps.

If Citi had gone down then more than $3 trillion dollars in paper assets would have been exposed as worthless, affecting every country in the G20. Too big for anyone but the Chinese to buy it out, it would have taken years to sell off the individual tentacles that made up this giant.

Of course it helped to have Robert E. Rubin on your Board of Directors. Rubin was Treasury Secretary under Clinton and has acted as the principal advisor to Barack Obama through his election campaign and with the transition team. His proteges will run the Treasury and Federal Reserve in the next administration. Rubin also chairs the Council on Foreign Relations.

TARP, Market chaos, Automakers and Hedge Fund Managers in front of Congressional committees, and Cabinet appointments have all captured our attention while a much bigger, more dangerous game is taking place behind closed doors in Washington and New York. The Federal Reserve and Federal Deposit Insurance Corporation have pledged a further $7.76 trillion dollars to guarantee corporate short-term paper and deposits. Not in the headlines is the $139 billion in loan guarantees for General Electric (no wonder their stock went up) . Not in the headlines is a further $200 billion for Freddie Mac and Fannie Mae.

The total amount of bailouts from all Agencies would run New Zealand for 100 years or pay off half the mortgages in the United States. Incredible.

So as the United States commits the equivalent of half its GDP to saving the finance industry, the question has to be asked: Is the United States too big to fail?

Housing Co-operative Model

If it were left to me, I would take the bailout money and form a new secretariat and call it Public Housing. I would find someone, like Ralph Nader, to set up local bodies in each area affected by high foreclosures. Homeowners would have the option of joining up or not. The mandate would be this:

1. Re-value houses in foreclosure, or in danger of foreclosure, to establish their real worth.
2. Purchase them using TARP monies.
3. Establish a monthly housing charge, based on the cost of renting those properties in their respective marketplaces. (ie. draw a 10 mile radius around the house and average out the rent for a similar property)
4. Offer the previous owners right of tenure in those homes based on a contract requiring upkeep, taxes, and regular payments. (In some communities, say Detroit, these housing charges could be geared to income)
5. These neighborhoods could be organized into corporate bodies, where members would have an equal vote, elect officers, and conduct their business.
6. When the housing charge contribution reaches a 20% percent equity with respect to each home, then members can purchase their homes at 0% down and take back possession.

Something like this makes sense to me. What do you think?

The Currency of Trust

It seems that every Monday morning, before the stock market opens, either the Fed or SecTres makes an announcement to encourage people to keep pouring money into stocks. This morning the Fed announced manufacturing had risen 1.3% in October; describing it as a "return to normal" after the Boeing strike and hurricanes. This despite record job losses, bankruptcies, and foreclosures. Does anyone believe anything coming out of the mouths of Bernanke and Paulson these days? If you had cancer wouldn't you want to know? But if the doctors say you are fine; when every day you are getting weaker and losing weight, what do you do? If you can't trust what public officials are saying anymore then maybe all we have left is to pray... and trust God.

Paulson to be next Chairman of Citigroup

At the same time Henry Paulson announced he was making TARP funds available to financials holding credit card and student loan debt, reports started filtering out that the Citigroup board was maneuvering to get rid of Citigroup Chairman, Win Bischoff. Perhaps it is only a coincidence that Henry Paulson will be looking for a new job in two months.

Fraud of Historical Proportions

Treasury Secretary Henry Paulson should be placed behind bars. He is bailing out of the bailout, yesterday announcing his intention to provide funds to financial institutions holding credit card and student loan debt obligations. (See New York Times ) Congress is not in session and the lame-duck President is... well, ducking; and not one single step has been taken to put in place audit and oversight for the first half of the $700b bailout package. (See Washington Post )

Citigroup shares will soar on the news that they'll be getting more billions on top of the $25b they received in the first of the handouts to banks. You may remember from previous posts that it was Citigroup lobbyists who pushed for the Gramm-Leach-Bliley Act of 1999, removing regulations and restrictions that set the stage for the derivative market in the first place. Citi lobbyists steerheaded the more than $100 million in incentives to congressmen and senators to get the bill passed; thus enabling Citibank to merge with Travellers Insurance to form Citigroup. This same Citigroup issued 40% of America's credit cards and 60% of American student loans.

If this isn't the biggest fraud in history, then what is? There is little hope that Obama and the Democrats in the House will be able to do anything to get the economy on anything like an even keel. The only hope for sanity in all this is for the G20 to play America's game and begin cashing in their US Treasury bills and dumping their US dollars. After all, America can't go to war against everybody.

Taking the Piss

Treasury Secretary Henry Paulson continues to spend T.A.R.P. bailout money, announcing additional loans to A.I.G. today. Was it just a couple of weeks ago that the giant insurer pronounced themselves secure? It seems that $85 billion, the entire GDP for New Zealand last year, was not enough. So its been doubled.

The amount of taxpayer money given to A.I.G. alone would provide health insurance for every child in America, rebuild every school in America and provide 120,000 teachers, with enough left over to build 2 million affordable housing units. God only knows how far this money would have gone providing health care, water, and housing in the Third World.

Is anyone out there doing the math? Does it not seem strange that this $700b (oops, $850b) never seems to shrink. Every day tens of billions are earmarked for this, or that, but somehow the original figure stays at $700b. The first tranch of $250b has only $60b left. The next lot of $100b needs the President's signature. The $300b left over requires Congressional oversight.

Wells Fargo Chairman Dick Kovacevich was rewarded for his purchase of Wachovia by being kept on, past the company's manditory retirement age. And why not. TARP money paid for half of the purchase price. More importantly, a recent story in the Washington Post indicate that Wells Fargo's recent $25b quarterly losses will be absorbed by the taxpayer too. While everyone was looking at the bailout package, Henry Paulson announced changes to the IRS tax code (Section 382) that would permit companies to write off tax obligations against losses in companies absorbed in mergers and acquisitions. Effectively, this doubles the taxpayer bill for those Investment banks that were bought out.

In the end these numbers boggle the mind. It seemed absurd when the Fed bailed out Chrysler for $5b in 1979. Today's figures are surreal.

Economic Recovery - Begin with the Foundation

President-elect Obama is taking the wheel of a ship of state in danger of sinking. From a global perspective, the world outside the United States will no doubt suffer an economic depression that may last the rest of this decade. Rightly, comparisons are being made between The Great Depression and the current meltdown. I expect historians will use our current calamity as the benchmark to compare future downturns.

The World hitched their stars to the US economy and if America is to recovery its predominance in world economic affairs, they will have to lead the way out of the mess - and lead by example. This means that the world will need evidence that the USA is suffering worse than the rest of them. Bubbles and recessions are a part of life, much like the seasons, they provide opportunities for fresh vegetation to grow. It would be easy to blame Alan Greenspan for the mess we are in: He judged people to be adult enough to not eat too much ice cream; and instead, watched as hitherto responsible people gorged their way to obesity and diabetes. But in truth, the problem probably started when the United States and the G7 abandoned the Gold Standard and tied their currency to a US dollar valued by their Gross Domestic Product. This may have made sense when American factories powered the economy, during and after WWII, but made little sense after America stopped producing and became a consumer-based economy.

When the G20 meet in Washington, I expect quite a lot of the discussion will be about the failure of Bretton-Woods II. I doubt whether decisions will be made, this year, concerning a return to the gold standard, or a re-valuing of world currencies based on precious metals, but such discussions will become more prolific as the Global Depression deepens. Interesting, that even after 70 years, economists cannot agree on why the last Great Depression happened. Troubling, that bailouts and other solutions currently being instituted, are exactly what Hoover did in the 1930's.

If Obama is going to rebuild America, "brick by brick", as he said in his acceptance speech, he best make sure the foundation is firm enough to hold more than a ranch style bungalow. The foundation needs to be strong enough to support a skyscraper. This means immediate work at finding a base value for the US dollar, one not based on the greed of a nation, but one based on something tangible. Only then can the real asset value of banks and financial institutions be ascertained and measured against each other. And only then will the world's economies have a solid basis from which to trade with each other and measure their progress.

Limited use of Nuclear Weapons

Rogue states need to be policed somehow. One decries the use of limited strikes using nuclear weapons, but there is no disputing their effectiveness. Hiroshima and Nagasaki were regrettable in the loss of life to innocent people, but there is little doubting the effect they had in bringing a quick end to the war in the Pacific. Today, Japan is the second strongest economy in the world after the US. Their trading relationship with Japan is a strong bilateral tie that binds the two nations. The use of nuclear weapons there did not affect the future potential for economic and cultural ties.
North Korea is a country that is holding the rest of the world hostage with their on-again, off-again goal of producing nuclear weapons. Indeed, the state of war between North Korea and the Alliance that fought against them is still in effect. Should North Korea persist in developing a nuclear capability while their people starve, then their military and atomic infrastructure should be eliminated with a requisite number of low-yield nuclear strikes.
And can there be any doubt that nuclear weapons produced by Iran would not find themselves in the hands of fundamentalist Islamic factions that are in a state of war against Israel and the West? In the case of Iran the decision to use nuclear weapons is strategically easier. No doubt their case-hardened manufacturing and processing facilities are located in the desert, away from population centers. With a reported 3,000 centrifuges producing fissionable isotopes this should be a watershed moment for the argument of diplomacy over force as a way to solve disputes. I believe talks should be held and serious efforts to sway the Iranians from developing a nuclear capability. No effort should be spared: However, if talks should not bear fruit, then their capability to produce weapons should be stopped with nuclear strikes on production sites. The residual radiation alone would ensure they could never be used again. This would also serve to l'encourage les outres'.

The Dark Continent

If there is a Hell on earth it is Africa. Rwanda, Somalia, The Sudan, The Congo, Zimbabwe, and South Africa - to a lesser intent, are diseased, starving, and awash in tribal conflict. When the final story about the United Nations is published, its failure to bring peace and prosperity to a continent rich in culture and mineral wealth will be the context of the story.
Those without a soul might advocate cutting foreign aid completely and letting nature take its course. But the world cannot continue to turn a blind eye to a corner of the world where men and women are trying to keep their families safe. The recent case of a 13 year old girl in Somalia touched my heart. After being raped by three men she was proclaimed an adulterer and stoned to death in a sports stadium.
If there is a moral case for war anywhere in the world it is Africa.

Moral Hazard

As US trade and debt deficits mount the day will come when the only thing left to trade will be geo-political allies isolated in cash-rich parts of the world. China owns an increasingly large amount of American consumer debt. Can the day be far away when they forgive that debt for a free shot at getting back Taiwan? If it were to happen, then how much would it be worth middle America to stop aid and arms shipments to Israel in return for Middle East wealth? If oil is indeed the reason for war these days, it makes more sense for the US to carry the fight to Central and South America.
Abandoning the Middle Eastern oil markets will eliminate the need for ever sending troops there and surely a war in the Americas would be cheaper to run. The supply lines would be shorter and there are enough hispanic Americans to make communicating with people easier. Surely there would be a hue and cry from Jewish Americans, especially in Florida, but this is easily offset by engaging Cuba in battle and repatriating those lands for the massive Cubano population in the Sunshine State. With peak-oil past the threshhold, especially in the Arabian Penninsula where oil fields are fast approaching the used by date, the time to cut and run seems ripe.