"Y'all get paid way too much"

This post is actually about 45's proposed tax code changes.  I'll explain the title in a little bit.

I started this morning listening to Michael Krasny and his guests on KQED Forum discussing the "largest tax overhaul in decades."  I listened for several minutes to Chris Edwards of the Cato Institute spouting every Republican talking point I've been listening to since the early 1980s about the way tax cuts will free up capital and spur growth and lots of American jobs.

This is bullshit.  Living through the last 4 decades, I've seen the country grow when taxes were up and slump when taxes were down.  Over my lifetime, the most prosperous period in our history was the late 50s and early 60s, when the top individual tax rate was 90%.  Mr. Bruce Bartlett, who worked on the Reagan tax code reform with Jack Kemp in the early 80s, has just written a thorough and detailed explanation, in the Washington Post, of why the Republican "line" is ridiculous, doesn't work, and never has worked.  I recommend the article to the interested.

Based on my own life experience, though, I believe there are other reasons lowering taxes will not lead to investment, new jobs, and growth.  Here's where the title comes in.  I heard that comment, from a senior executive of Bank of America, in the early oughts, shortly after the merger with Nationsbank.  The executive was from Charlotte, part of "new management."  I don't recall his name. 

Why Didn't Bankers Go to Jail?

I heard this again this morning:  President Obama is a failure because no bankers went to jail after the financial meltdown.

I worked in the financial industry.  I wasn't a banker but I worked with bankers, and I understood banking.  I think it's possible that no bankers went to jail because what they did wasn't actually illegal.  It was immoral; no question.  But in order to jail somebody, there has to be a law against what they did; and you have to be able to pin the violation on them.

Most of the financial meltdown happened because of a bunch of financial tricks and ploys, mostly called derivatives, which were invented over the preceding decade or so.  Some of those tricks and ploys were explicitly not covered by the securities laws - because the finance industry's men in Congress had written the laws to exclude them from regulation.  I refer you to the late Phil Gramm of Texas; a summary of his career is in this article in from the NY Times in 2008.

Further, most of the men we'd all like to see in jail are senior executives.  Believe me, the way big banks operate, the men in the executive office can legitimately claim that they didn't know what the guys on the trading floor, or the loan platform, were doing.  So there weren't any laws; and if there were, you couldn't pin them on the men who set the general policy that allowed the actions.

So quit blaming Obama because nobody went to jail.

Postscript:  if you're interested in derivatives, you can Google them; or you can look at the blog entries I posted, back in the day, under the tag Subprime Mortgages.  I wrote them up while I was watching my 401K dwindle (it came back, thank God).

For that matter, I've said all this before; see my post Finally the Truth, from October 2011.

What is the worth of a man?

I wrote the following draft in 2006, and then set it aside, because I couldn't reach a conclusion, except that this is wrong:

This has bothered me for some time now. When I was young, and more, when my dad was young, a man could do a day's physical work, and earn enough money to buy himself food, and a place to sleep. This is what Roger Miller sang about in "King of the Road": "two hours of pushin' broom Buys an eight-by-twelve four-bit room." And if you had a skill, or a college education, you could earn more than that, maybe enough to buy a house and start a family.

Sometime between then and now, it's gotten too expensive to be a working American. Now, a man doing a day's physical work doesn't make enough money to pay the rent, and if he has a family, he and his wife both have to work two jobs just to get from one end of the month to another. And the kids stay home alone after school because there's no money for child care.

What happened? I'm afraid globalization is what happened. Factory jobs went from a place where people want safe working conditions, and a break for lunch, and a pension, and maybe to buy a house - to places where people are happy to work for $5 a day or less, and don't complain about working conditions or lunch breaks. This is why the stuff at Wal-Mart is so cheap, and not just Wal-Mart.

In the case of jobs that can't be exported, like fruit and vegetable picking, we imported the people instead: that's what the illegal immigrants everyone's talking about are doing. And because they're illegal, they're doing it for less than minimum wage - how can they complain? So to keep the produce we eat cheap enough for us to buy it, we pay the pickers so little that Americans can't afford to do the work. The immigrants live four or six to a room, and send money home. And a job that Americans did seventy years ago (what do you think the Okies came to California to do, during the Dust Bowl?) is no longer an option, even if Americans wanted to do it. Some people say Americans "won't take those jobs." Well, they certainly won't at those wages.

It's not just factory jobs anymore. Eighteen years ago I became a computer programmer, because it was a good career path. Now, there are damn few entry level computer jobs; they've gone to India where they can get a kid with a college degree in computer science for $20,000 a year. I've read complaints that American kids aren't studying engineering, especially computer engineering, in college. Why should they? The jobs are in India. And senior people with long careers are told they're "not measuring up", and then replaced by a college grad for a quarter of the salary.

That was in 2006.  It's now 2014.  The intervening 8 years have made it brutally clear that the America I grew up in no longer exists.  We've reverted to the America my grandparents grew up in - historians call it "The Gilded Age."  The age where all employment was "at will," there were no work rules and no safety requirements, and if you got sick you went home to recover or die, without pay, because there was no "sick leave" and only the rich could afford doctors.  Check it out on Wikipedia - the first pre-paid health care arrangements coalesced into Blue Cross in the 1930s, and employer insurance came in during World War II because wartime regulations didn't allow salary raises (see the Wikipedia article cited above).

Income in America today is appallingly unequal.  I'd usually cite the research, but we've all read it.  The rich now own Congress - hell, the rich now are Congress.  And the Supreme Court supports them.  Justice Scalia goes duck hunting with them.  Sure the judiciary is independent.  
How can we be proud of an America where you're either Mark Zuckerberg, with more money than he knows what to do with at age 30, or you're working two jobs at $8 an hour and still can't pay the rent, like far too many people in the San Francisco Bay Area?  When did we decide that $2,500 a month was a reasonable rent for a 1 bedroom apartment?  When did it become "reasonable" to pay a few bankers millions of dollars a year for bankrupting our economy through fraud?  

What do we do about this, and how?  I wish to God I had answers.  I hope to God that the money we've saved up will last us the rest of our lives; it seems like a lot to me, who grew up with my mother making all my clothes, and canning fruit every fall; but we're still comparatively young, and we have no kids to "help us out."  Not that anybody's kids can help them out when the kids are also making $8 an hour, if they have a job at all.  

Whatever the solution is, if there is one, we have to work together to do it.  The rich have gotten where they are by scratching each other's backs, and setting less wealthy people against each other.  In case you wondered, that's where all the rhetoric about "welfare queens" and the "lazy poor" comes from.  Until the rest of us realize that we have more in common with each other than we do with "the 1%", and start collaborating on solutions, things will stay exactly as they are.  There are more of us than there are of them; but they're really good at the old "divide and conquer" routine.

Is This Normal?

The U.S. is back in business for the moment, paying its debts as usual.  At least in the S.F. Bay Area, public attention is now focused on the BART strike, which began conveniently the day after the government shutdown ended.  Wouldn't want to confuse our crises, now, would we?  But the government funding mess isn't over.

The bargain that everyone in Washington was so relieved to achieve only lasts until February.  According to AlJazeera, the government is funded until January 15 (and still at the ridiculous, arbitrary sequester levels), and the debt ceiling has been raised until February 7.  How appropriate.  We get Thanksgiving, Christmas, and New Year's off, then Groundhog Day will come around on February 2, and we'll go through the whole brouhaha again.  Just like the movie.

Convince me it's not true.  Why wouldn't it happen again?  The people who created this snafu are all still in office.  Sen. Ted Cruz still thinks he's God's gift to someone (I'm not sure whom), and certainly still thinks he can parlay this into a run at the presidency in 2016.  I was relieved to see that, pushed to the wall, Speaker Boehner was capable of calling an open vote on a straight bill to put the government back in business.  My confidence that he'll do it again is limited.

The Senate and the House, as they now appear, seem to be ungovernable, and unable to govern.  Their hallowed rules allow a single senator to put any action on hold, indefinitely, and without even revealing a name.  I do know that the structure of the Senate was designed to amplify the power of smaller states against larger states, but this is ridiculous.  The surreptitious last minute rule change in the House, which allowed only the Majority Leader to ask to bring a "clean bill" to a vote - which is normal procedure in the House for any member - was a blatant abandonment, not only of normal House procedure, but of democracy itself.  Without this rule the government would not have shut down.  This was just sleazy.

I heard one promising item among all the mess, and I'm still not sure I believe it.  The chairmen of the House and Senate budget committees (Rep. Paul Ryan and Sen. Patty Murray) met for breakfast and will convene a committee to develop - wait for this - an Actual Budget.  Congress hasn't passed an Actual Budget since 2009 (or maybe since 1997 depending on the definition).  My confidence that they will actually negotiate and agree on something that would be good for the country is very small.  But they're saying all the right things.  They've given themselves a deadline of December 13.  If they can come up with an actual, bipartisan budget and get it through both houses of Congress, maybe we can relax and just run the country - at least until next October 1...

We can't keep doing this.  We made fools of ourselves in front of the entire world. Is this really what we want to become?

What really infuriated me is the way Congress callously threw tens of thousands of federal workers out of a job, for an unspecified period that lasted (in fact) for three weeks, while being paid themselves the entire time.  The days of the solid middle class are gone.  Very few working families can go for 3 weeks on their financial reserves these days (if they have any), especially when the safety net programs (welfare, food stamps) were also shut down.  Sure, they'll get back pay; but how does that help if they've already been evicted?  Not to mention all the unfortunate small businesses, in small towns around the national parks, whose entire livelihood depends on tourist traffic which was shut down on a moment's notice.  Congress has totally lost contact with the people they are collectively supposed to serve, and it is a national disgrace.

How Bad Is the Fiscal Cliff?

First of all, the term "fiscal cliff" is pure scare-mongering.  When you fall off a cliff, you die.  Usually.  If we "fall off" this cliff, we'll be uncomfortable.  We won't be dead; countries rarely die, although we might lose some less-well-off citizens.  We almost certainly will be back in recession, and who knows when we'll pull out again.  Everyone's taxes will go up; a lot of people will lose jobs when government departments are cut.

Second, the U.S. debt burden isn't that bad, and the Republicans are the only ones who think it is.  Or say they do.  If the financial markets thought the U.S. debt burden was a problem, we wouldn't be paying .65% on 5-year Treasury bonds.  (Yes, we are.)  Our real problem right now is that we haven't yet emerged from the worst fiscal downturn since the Great Depression (which took 10 years and a war to pull out of, remember).  We're spending money (yes, borrowed) on things like extended unemployment insurance, welfare, and food stamps.  Take a look at this graph:

United States Debt as a Percentage of GDP (1940-2012)

The estimated U.S. debt at the end of 2012 will be about 100% of GDP.  Before you freak, look where it was in 1946 (121.7%) and remember what happened to the U.S. economy in the next 15 years.  When, I might add, the top marginal tax rate was 90%.  Compared to the European countries in trouble (on the same graph), our debt isn't unreasonable;  Ireland's debt is 1300% of GDP; the UK's is 413%.  Greece's debt is 168% of its GDP (but Greece's tax collection rate is only 10%).  Japan's debt is 233% of GDP.  Even at 100% of GDP, we're in better shape than any of them, which is why our credit rating was downgraded in 2011 not because of our fiscal position, but because Congress wouldn't agree to raise the debt limit, normally a routine item that doesn't even make the news.

You might also note that the budget deficit has been consistently lower since President Obama took office in 2008.

I recently got an email from the White House which suggested that, if we go over the "fiscal cliff," it would cost a "typical middle class family of four" about $2,000.  If you're paid twice a month, the way I was, that's $83 less per paycheck (or about $6 a working day), which anyone would notice; but it wouldn't all come out of the paycheck; some of it would show up the next year when you paid income tax.  The White House didn't mention the income level of this family of four; the 2011 Census Bureau estimates range from $54,500 in New Mexico to $102,127 in Connecticut.  So the impact will vary wildly depending on where you are.

Still, if you're one of the many families living paycheck to paycheck, the fiscal cliff changes could tip you over a very unpleasant edge.  Which is why it would be much better if we didn't do it.  I wish I thought our elected representatives were capable of negotiating an alternative.

I'm not trying to argue that we should keep spending at the rate we have.  We shouldn't.  We need to think about what we're spending, and what we want to accomplish with the money for the nation, and not just for the various Congressional districts. And we all need to remember that taxes are the price of living in a civilized society (to paraphrase Oliver Wendell Holmes).  They buy amenities like roads, schools, libraries, clean water, clean air, and police and fire protection.  In Princeton, NJ you can still see buildings with the medallions on them that told the 18th century private fire companies which houses they were being paid to put out, if they caught fire.  Do we really want to go back to that??

We have time to stop, think, and make rational decisions - or we would have if we didn't have this idiotic "fiscal cliff" staring at us.

It still infuriates me that we have the fiscal cliff because the Republicans didn't want to raise the debt limit, and wanted to get spending under control; but now that we're looking at it, they don't want it because it would raise taxes on the rich and cut the Defense budget in irrational ways, even though it would reduce the deficit.  And these people were elected to national office, and in many cases re-elected.

Fiscal Cliffery

The subtitle of this post should be my favorite adage, "Be careful what you ask for."  In August or so of last year, the rampant Republicans in Congress thought they were on a roll.  Having created a monster out of the country's debt burden, based on what was happening in Europe, they:

• Insisted that getting rid of the deficit and paying down the debt was more important than getting out of the recession we were still in 
• Blocked approval of the report of the Simpson-Bowles commission for fixing  the country's spending plans, I think because it didn't eliminate Social Security
• Refused to consider any action in Congress that involved raising any taxes on anything or anyone
• Caused the country's credit rating to be downgraded by jumping up and down and yelling instead of increasing the legal debt limit.

That last maneuver came close to causing the country to miss routine debt payments.  To soothe their troubled souls from having to raise the debt limit, they insisted on a backup plan:  if Congress couldn't come up with real spending reform by the end of 2012, we would have what we now call the "fiscal cliff":  all existing tax tweaks would expire (mainly the Bush tax cuts and the Social Security payroll holiday President Obama set up to take the edge off the Great Recession), and every government department and spending program would take an across the board, meat-axe 10% cut.  Including Defense.

I assume they all figured that by 2013, they'd be able to think of something to prevent this. I'm morally certain that a big part of "something" was to win the 2012 presidential election, after which they'd have a whole two months to set things up the way they wanted.  The bipartisan Congressional committee they put together to solve it certainly didn't produce anything.

So here we are.  The Republicans actually lost a little ground in the Senate, and President Obama has a mandate to raise taxes on the rich. We have 19 days, 10 hours and 21 minutes (as I write this) to January 1, 2013, when all this will ensue.  Are we any closer to a solution?  Not from what I hear.  I'm hearing all the same posturing as I did then, except that this year President Obama has given up on attempts to be bipartisan, since they never worked.

I have a bet with my financial adviser that they won't agree on a solution.  If they actually come up with something, anything, I take her out for a drink.  If they sit and scream at each other until January 1, she takes me out for a drink.

Several things infuriate me about this.  First, the country is about to be bombed out of a position it should never have occupied in the first place.  Deadlines like this are stupid.  Congress is playing chicken with itself.

Second, it's clear now that the Republicans don't give a rat's ass about the deficit.  If they did, they would be negotiating - and in fairness I've heard some very senior Republicans starting to sound like rational human beings on the subject, since they really don't want those random Defense cuts.  The trouble is, John Boehner isn't one of them.  If the Republicans really cared more about the deficit than anything, they would raise taxes on the rich, since all serious analysis of the situation says you can't raise enough money through budget cuts and eliminating deductions.  For that matter, if the deficit was the real and only issue, they would let the fiscal cliff happen, because it would punch a whacking hole in the deficit.

It's probably unfair to suggest that they won't raise taxes on the rich because the rich would then stop giving them money to get re-elected.  It's almost certainly untrue.  That money buys access to power, even if the taxes are higher.

The other reason it's clear the Republicans don't care about the deficit is that they created the deficit.  Over the last 32 years (since 1980) we have had 12 years of Democratic presidents and 20 years of Republican presidents.  The only time during that span that the budget was balanced (and with a surplus, no less) was under Bill Clinton.    Ronald Reagan tripled the national debt.  George W. Bush, the next president after Clinton, immediately instituted the Bush Tax Cuts to "give the surplus back to the people," then started two wars that he ran entirely on borrowed money.  How are you doing spending that surplus he returned to you, folks?

It pains me to say this, but I get the impression that what the Republicans really want is to stop spending money on poor people.  Grover Norquist's government "small enough to drown in a bathtub" is roughly what we had back in the Gay Nineties (1890s, that is):  no safety net; no services to speak of; certainly no regulation of food, water, or business practices; no health care; no pensions.  If something goes wrong, you're on your own.  The only happy people were the rich, who could pay for anything they needed. That's the impression I get from the spokesmen.  I'm willing to be convinced I'm wrong, but nobody's trying.

They Never Learn

In the fall of 2008, I wrote a couple of posts (The Sorceror's Apprentice, What a Week) about the joys of credit-default swaps (CDSs), a wonderful financial instrument which lets you take out insurance against the issuer of a bond going broke and failing to redeem the bond.  The amusing thing about CDSs was and is that you don't have to own the bond to buy the CDS - in effect you can bet on a bankruptcy that you have no other stake in.  This instrument was part of what brought down the world financial system over the next two years.

I'm therefor Not Amused to discover that JP Morgan Chase has just lost $2 billion through the actions of a rogue trader (nicknamed "The London Whale") who was betting on - guess what! - right, CDSs. 

This isn't the first time a large bank has lost a huge amount of money due to the actions of a single inadequately supervised idiot, or does anyone else remember the name Nick Leeson?  Nick Leeson's bets brought down Baring's Bank, which had successfully done business as a merchant bank since 1765.  The bank was broken up and no longer exists.  I'll be interested to see what happens to JP Morgan Chase, especially since it is one of the 4 or 5 "too big to fail" companies that the U.S. Government has evidently decided they'll have to subsidize.

It is true that Nick Leeson was trading currency futures, while the London Whale, whose name is Bruno Iksil, was trading CDSs.  But they both made the same mistake.  They told themselves they were "hedging," which is supposed to be a respectable activity for a bank.  As Wikipedia puts it, "A hedge is an investment position intended to offset potential losses that may be incurred by a companion investment. In simple language, Hedge (Hedging Technique) is used to reduce any substantial losses suffered by an individual or an organization."  Sorry, as practiced by these loosest of cannons, hedging is just another word for gambling:  you have investment A, which may go down, so you also buy investment B, which you expect to go up.  Do you know it will go up?  No, you don't.  This is gambling.  The house always wins in gambling; I suspect Mr. Iksil forgot that JP Morgan Chase is not the house.  The market as a whole is the house.  And ultimately, nobody wins.

The other issue here is, why did nobody at JP Morgan Chase know what this wildcard was up to?  Questions are popping up all over the press; I linked Yahoo Finance, but just Google "jp morgan loss" to see the scope of this.  I hope we'll see an answer to that in days to come.

In March 2009, I wrote an article called Evaluating Risk, which summarized a much longer article in Wired Magazine on "the formula that killed Wall Street" (except, of course, Wall Street isn't dead).  Bankers and investors have been plagued by risk for centuries.  In recent decades, brilliant mathematicians have thought that they could measure risk mathematically, and they developed this formula which was supposed to measure risk and reduce it to a single, simple number.  Thereafter, the financial industry assumed they had control of risk.  And the whole subprime mortgage crash happened because bankers thought they could divide risk up and pass it off to others so it wouldn't hurt them. 

This was a lie.  The formula didn't cover all the possible assumptions.  We will continue to be plagued by this sort of crash until "Wall Street" finally admits that what they do is gambling, and that the risks ultmately cannot be controlled.  That means crashes will be around for a long, long time.  Because they do not learn, as this mess shows yet again.

A Good Deal

Today being Thanksgiving, tomorrow is Black Friday - the day the Christmas sales officially start.

Personally, I hate to shop, and shop only to replace things I need.  I rarely buy anything on impulse (and often regret it when I do); and I certainly never go near a store on Black Friday, because I dislike crowds.  Boy, am I in the minority.  This year some stores (yes, Target, I mean you) are actually opening on Thanksgiving Day itself, in hopes of squeezing a few more dollars out of the ravening hordes.  Someone wrote an appalling "be grateful you have a job, punk" editorial in the Twin Cities StarTribune (Target's home town), after a part-time Target employee put up an online petition asking Target not to open quite so early, please, so he could have a Thanksgiving with his family.

People are camping out in front of stores, hoping to be first in line for the deal.  A friend of mine posted a shot on Facebook of a bunch of people in tents, lined up outside a Best Buy - which was still open...

Why are we so fixated on getting things cheaply?  What ever happened to paying a little more to get good quality?

I concede that a lot of people have to count pennies these days.  In their cases, standing in line for sales is a reasonable choice.  But most of the people I hear quoted in the news seem to be focused, not on getting something they normally couldn't afford, but on buying anything at all - as long as it's on sale.  As long as it's cheap.  It's a game - how much can I get away with?

If you don't need it, it isn't cheap, now matter how much it's marked down.

And it's a self-reinforcing downward spiral.  The lower the price of an item, the less the workers who make it generally get paid, labor being a major cost.  When the price goes low enough, the amount the workers can get paid is less than the amount you can live on.  The factory closes and reopens in China, or Vietnam, or Mexico, paying local wages.

When you're competing on labor price with people who think $50 a week is a lot of money, you have to be able to live on $50 a week yourself.  Yes, I'm over-generalizing, but not by much.  I'm not the only one who thinks that's why so many manufacturing jobs are now in China, or Vietnam.  In fact, some of the manufacturing jobs are moving out of China - Chinese workers are starting to ask for higher wages!  Wages for Indian computer programmers started rising a decade ago.

The same principle applies to buying from small local merchants, as opposed to stores like Walmart and Target.  The merchandise from the little guy will never be as cheap as the big chain can price it, because he can't buy in that volume.  But you almost always get better service from the little guy - isn't that worth a little more?

If you refuse to buy things except at the lowest possible price, you will eventually destroy your own ability to make a living.  Henry Ford understood that his factory floor workers were also his customers; many firms these days have forgotten that. (It wasn't widely understand it then, either - a lot of people thought Ford was raving crazy to pay those wages.)  And then they cry that the American Consumer isn't spending enough.  The American Consumer has either been out of work for awhile or is wondering how long she'll have a job.

Shop the local stores.  Pay a little extra for "Made in America," if you can find it.  And Happy Thanksgiving.

Debt and Ratings

I've been reading a number of really good analyses of this situation, and I'm fascinated to find that the questions in my mind are being asked by people with much more experience and subject mastery than I have.  So here are the points that annoy me:

Standard & Poor's has now downgraded U.S. Treasury Debt to AA+ (which is still pretty good).  Their argument that the deal signed this week didn't reduce the debt enough is clearly invalidated by the two trillion dollar arithmetic error in the original analysis they delivered to Treasury on Friday. 

Which brings us to the real point:  this was not an economic decision.  I have to admit I can't argue with their premise that they are downgrading U.S. debt, not because the U.S. is unable to pay, but because the U.S. appears (in the person of its Congress) to be unwilling to pay.  Felix Salmon made this point in his blog at Reuters:  

"... there’s a serious constituency of powerful people in Congress who are perfectly willing and even eager to drive the US into default. The Tea Party is fully cognizant that it has been given a bazooka, and it’s just itching to pull the trigger. There’s no good reason to believe that won’t happen at some point."

Given the brilliant analytical skills Standard & Poor's displayed over the last decade or more, I don't understand why anybody pays any attention to them.  Leaving aside their stellar performance during the subprime mess, these were the people who rated Enron AAA, right up to the day the whole pyramid collapsed.  On that basis, the U.S. should still have its rating.  We're certainly in better shape than Enron was; and we haven't defaulted yet.

So why does anyone pay attention to them?  Because the U.S. Government says they must.  The Treasury Department chooses not to be in the business of rating the securities that banks can invest in, so they've outsourced that business to the three rating agencies.  Who have just downgraded the debt they issue.  Does anyone else find this weird??  Move over, Mad Hatter, I want a clean cup.

The Debt Limit

As my fellow blogger Linkmeister just pointed out (check out the site, by the way, the new format is cool), all this debt the Republicans are complaining about represents expenditures that Congress appropriated.  Yes, that Congress - the one whose Republican members are whining that we can't raise the debt ceiling without cutting huge amounts of spending at the same time.  They approved all this spending.  Now they say we can't pay the bills because it will exceed the debt limit which (they insist) we can't raise.  What?  Where were all these fiscal hawks when those expenditures were up for a vote?

In addition, I saw a Reuters article recently in which the Tea Party faithful are about to draw and quarter John Boehner because he told them we're going to have to raise the debt limit.  The good thing is that Boehner actually recognizes that.  But I want to know where all these Tea Party types were for the last 10 years or so, when George W. Bush was running two wars off the books and pouring our money into Iraq like water - and then losing track of it.  Remember, Bill Clinton left office with a budget surplus.  Dubya promptly blew it away with tax cuts, and that was before the wars.  From the Tea Party, or the people who are now the Tea Party?  Not a peep.

It seems unkind to conclude that the Tea Party activists don't care about anything - the state of the country, the welfare of their less fortunate fellow citizens, public health, the education of the next generation, the repairs needed in our infrastructure - as long as their taxes aren't raised.  But I don't see an alternative position; that's what they say, that's how they act.  Their tax burden is more important than anything else in the country.  As long as it stays the same, or goes down, they don't care what happens to anything or anyone else.

Really?

Credit Ratings

I have just one thing to say about Standard & Poor's recent announcement about the U.S. debt rating:

You guys have a lotta damn gall.

This is the same Standard & Poor's whose AAA ratings of questionable mortgage-backed securities, a couple of years ago, encouraged buyers to invest in debt instruments based on home mortgages issued to anyone with a pulse.  The high ratings stayed in place right up to the time the foreclosures began to hit the news and the markets began to disintegrate.

And they now increase the possibility of a run on U.S. debt, by threatening to downgrade it "in a couple of years" if the politicians don't "do something.

I'm less concerned about the deficit than I am about other things.  We have a deficit right now because - surprise! - we have a recession, with unemployment just beginning to level off.  Many people have no jobs, many people who have jobs are feeling pinched; nobody's spending money.  And if you don't have a job, guess what?  You won't be paying as much in taxes!  A couple of years of full employment and a truly recovering economy, and the deficit would look much less scary; but we aren't going to get that, because the Tea Party is determined to cut spending until we all bleed.

If the S & P announcement will get Congress' attention and make them all sit down and negotiate, it could - maybe - have a long-term positive effect.  I don't claim that the deficit isn't a problem; just that it's being blown into more of a problem than it really is.  The real problem is the economy, which isn't recovering anything like as well as the news reports imply.  But the constant screaming I hear from the Republicans (for which read, from the Tea Party, since there is now no visible difference) makes me fear that we're about to revisit 1937, when the Federal government reduced spending because of deficit fears, and a slow recovery slid back into more depression.

I wouldn't trust anybody in Washington to manage the financial affairs of a sidewalk hotdog stand; how do these people get elected?

Where are the Jobs, Mr. Boehner?

Back in December, when John Boehner was merely waiting to become Speaker of the House, he got a lot of press by asking, "Where are the jobs, Mr. Obama?" at virtually every interview.  Jobs, said the Republicans - the Democrats haven't been Putting This Country Back to Work.

OK, Mr. Boehner, you're Speaker of the House now, your party has been in the majority for a little over a month.  Where are the jobs?

The Republican House has spent most of its time whining about deficits (which their party helped create), and using that as an excuse to shred the safety net for the poor and unemployed.  They've also opened an all-out attack on women's rights, redefining rape, defunding Planned Parenthood - and the WIC program!  For shame! - and so on.  I regularly read the news accounts of what Congress is working on.  I see a lot of federal spending cuts that will eliminate federal jobs.  I haven't seen one single bill considered that would actually help put anybody back to work.

I'm willing to admit I may have missed something.  I don't read Congressional Quarterly.  I appeal to my readers:  what has the current Congress done that will help increase employment??

Where are the jobs, Mr. Boehner??

Goldman Sachs

I've been wondering for several years how Goldman Sachs got to be so influential in Washington.  Marcus Baram documented this at HuffPo in 2009:  Goldman alumni are all over the capital, especially on the financial side.  It's the money, of course; politicians love people with lots of money, because politicians need lots of money, all the time (which is another post, about campaign finance reform; but I digress).  And there's the general assumption that if you have a lot of money, you must be really smart.  You'd think the case of Bernie Madoff would alert people to the alternative explanation that, if you have a lot of money, you may actually be really crooked.

Goldman Sachs pissed off a lot of people during the bailout; here they are, the richest firm on Wall Street, and we the U.S. taxpayers, who are losing our jobs by the gross, have to come up with billions of dollars to bail out the banks so Goldman can keep paying its people multi-million dollar bonuses.  They paid the money back to the government; but it's the principle of the thing.  As far as I'm concerned, no man is worth the kind of money Goldman pays out in bonuses, I don't care if he's spinning straw into gold.

You've probably seen the latest development in this, but if not, here's a nice analysis from the Washington Post:  "Goldman executives cheered housing market's decline."   When the subprime mortgage security crash was taking down the economy, Goldman Sachs was betting both sides of the table.  They were selling tottering CDOs based on subprime mortgages with one hand, and shorting the housing market (that is, betting that it would fall) with the other.  The 9-year-old version of this is, "Heads I win, tails you lose."  And Goldman won, really big.  They're about to appear before the SEC, to discuss how closely they really did work with the hedge fund manager who was cherry picking mortgage pools he was sure would fail, so he could bet against them after Goldman sold them to their institutional customers - like, your pension fund.

Goldman Sachs used to be a private partnership.  They went public in 1999, which allowed them to raise big money by selling shares in the stock market, without losing very much control over the firm.  This also did two things for the men who ran the firm:  it made them a barge-load of money, and it made them employees instead of partners.  Partners are personally liable if a partnership fails.  Employees just take the money and run.  I wonder if any of the old-line Goldman partners are regretting that IPO now.

I worked in the financial industry (not for Goldman, ever) most of my professional life.  It's a very strange world, and it's gotten much stranger over the last 20 years, as the lobbyists and the Republicans colluded to remove the restraints on financial firms that FDR put in, for damn good reasons, in the '30s.  I want that financial regulatory bill to pass, but it isn't good enough.  I want the Glass-Steagall Act back.

Executive Pay

How did we collectively let it come about that a small group of powerful men, corporate senior executives, is allowed to set its own pay scales?  These people decide among themselves how much they should be paid, and (subject to the vagaries of the tax code) how the pay should be structured (cash, stock, options, etc.).

It shouldn't surprise us that they've quietly agreed, over the last few decades, to wring every drop of blood they could out of the turnip.  If the corporations they run had done this, for the prices of the goods and services they sell, it would be an antitrust violation; but somehow it's OK if the executives are all on each other's boards (they are) and they all agree on what each other should be paid (they do).

Nobody else in this world is allowed to determine unilaterally how much money he makes.  Not you, not I, not the President of the United States.  Congress comes close, in that they can vote themselves a raise; but they're restrained by outrage among their constituents which could prevent them from being reelected.  Only corporate executives (and mainly American corporate executives, although the practice is starting to spread to Europe) can decide, the value of my job is, oh, $750,000 a year base, but it also deserves annual bonuses of (say) $15 million dollars.

Nobody is "worth" that much money, not even if he (it almost always is he) can spin gold from straw, like Rapunzel.  The practice is sheer, unadulterated greed.  In the middle ages, these men would have been vilified as mortal sinners for their greed.  Now they are "the masters of the universe."  Which is right?

So I'm not weeping that the Treasury Department is cracking down on senior executive pay at the banks that have taken TARP money.  Believe me, you'll never see any of these men standing on a street corner with a cardboard sign reading, "Hungry, please help."

Abbreviations

I often glance at the Google News "Top stories" to see if anything important has happened; since I have a pretty full iGoogle page, I see a lot of abbreviations (which of course you can expand by mousing over the link, you know this).

This morning I saw one that made me stop, from Bloomberg:

Existing Home Sales In U.S. Jump to Two...

Mousing over the story, I find that "Two..." translates to "Two-Year High," which is more reassuring; but for a minute there I wondered if Bloomberg was just being unusually honest.

Where Are The Locusts?

Every time a new strain of influenza appears, everyone thinks, "1918!" and goes into overdrive. But from what I can see, even in Mexico where things seem worst, this isn't all that bad. Yet. According to the AP today, there are fewer than 3,000 cases worldwide, and fewer than 160 deaths. The U.S. kills more people than that in traffic every week, and we don't even twitch. And we even have a drug that cures the stuff (so far); in 1918 they didn't know what a virus was.

The world situation is getting so bad you wonder - is someone trying to send us a message? Global warming is changing the climate; the global economy has tanked; millions of people are out of jobs; international trade is in the sewer; and now we have the swine flu.

We need to start worrying when we see the plague of locusts. Or the rain of frogs.

Standing in Line

As part of my volunteer efforts at the local food bank, I'm doing interviews for the National Hunger Survey, organized by Feeding America (you probably remember it as America's Second Harvest, they recently changed the name). They do these every 5 years, to assess what's going on at America's food banks, soup kitchens, and homeless shelters, in getting food to people who can't afford to buy all the food they need.

So every few days, a small team of us, wearing our Food Bank T-shirts, shows up by appointment at a church, or a volunteer center, or somewhere similar (usually a church); and we use statistical techniques to randomly choose a small number of people from the group standing in line; and then we ask them questions. Some of the questions are standard census data: how old are you? Who else lives with you? Do you own or rent? Do you have a job? Then there are the questions that break your heart: How often in the last month have you gone hungry so the kids could eat full meals? How often have the kids gone hungry? Can you afford to eat balanced meals? Have you had to choose between buying food and paying rent? Buying food and paying for medicine? Buying food and paying for heat?

I've asked these questions in a tent on a sunny day, in a cold church in the rain (with buckets on the stairs to catch the drips from the leaking roof), in offices walled with unpainted pressboard, and standing with people in line, out of doors on a cold rainy morning. I don't know what mental image you have of the people who get free groceries; but I'm talking to Everyman. The landscaper with four kids, whose salary isn't quite enough to cover the groceries. The couple in their 70's, retired working man, own their house free and clear; their pensions and Social Security just aren't enough any more. The women with children in tow. Everyman's complexion tends to be darker than the American "norm", and he doesn't always speak English; but there are white people in those lines too, and only one of the people I've interviewed wasn't a citizen. (Sure, they tell us; we aren't ICE, we're the food bank.)

What are we doing to ourselves? To each other? We are the richest country on earth and we let people starve? We let children starve?

I don't have an answer for this, but when I was growing up, a family could live on one man's wages. How did we blow that away? How do we get it back?

Evaluating Risk

Wired magazine had a really interesting article on Feb. 23, which I just saw today, called Recipe for Disaster: The Formula That Killed Wall Street. It's the story of how a Chinese mathematician (or quant) called David Li developed a formula for modeling risk, which was so brilliantly simple that it came to be used all over the financial industry - until the assumptions it was based on fell apart. For the mathematically inclined, the formula (called a Gaussian copula function) is reproduced and analyzed (at a very high level).

The article describes the curious reactions in the financial industry to Mr. Li's formula. The principal response seems to have been, "This is so easy, it must be right." Here's a quote from Wired:

At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.

Why was it so simple and beautiful? For one thing, it didn't bother to use real data on mortgage defaults behind the securities to make the estimation; that would have taken too much time to gather. It used the historical prices of credit default swaps on the mortgage-backed securities as the measure of risk, assuming that the financial markets had priced those risks correctly. Of course, all those prices were based on a world in which housing prices went ever onward and upward. Unfortunately, the people who used it to make investment decisions weren't mathematically adept enough to understand the distinction between correlation and causation.

The whole episode reminds me of a famous quote from Lewis Carroll's The Hunting of the Snark:

He had bought a large map representing the sea,
Without the least vestige of land:
And the crew were much pleased when they found it to be
A map they could all understand.

Dead Banks

So Citi wants yet more money, and AIG needs another huge infusion. None of the Treasury's efforts so far have had any effect on all those toxic assets. The really disturbing assumption on all this was quoted by Paul Krugman today, from a blog called Tim Duy's Fed Watch. The Tim Duy article is interesting if dense, but here's what you really need to know (emphasis mine):

Policymakers are assuming that restoring proper functioning in credit markets - and confidence in general - is equivalent to a housing price rebound. They seem incapable of envisioning a world in which this is not the case. This tunnel vision prevents policymakers of trying to devise policy which assumes that the many of the assets in the banking system are simply “bad.” For Bernanke and Geithner, there are no bad assets. Only misunderstood assets.

Think about this. We are in this mess because too many people borrowed more money than they could pay back on overpriced houses. The houses were overpriced. House prices have been falling for awhile; they have farther to fall to reach their "true" price, which is the price paid to a willing seller by a willing buyer, who will be paying an acceptable fraction of his total verified income to a willing lender. With people losing jobs left and right, willing buyers haven't got the money to throw around that they did a few years ago.

Meanwhile, many of the oversized mortgages taken out on overpriced houses are in default. In a real world, this would mean that the securities built around those mortgages are worthless. The security owners bought them, assuming they would get a specified income stream; not gonna happen. But if we all admit these securities are worthless, then the banks that own them have to write down their asset value; they should be doing it anyway, it's called "marking to market," and the banking industry is desperately, maniacally fighting doing it. And given the amount of dud securities that were sold, it's odds on that the banks doing the writedowns will have to admit publicly that they are - insolvent. Broke. Stony. They owe more than they own.

The government - two administrations now - has been trying for 6 months to figure out what to do about these "toxic assets" because they "can't establish a value for them." What they really mean is that they need to figure out a way to put a value on them that will allow the banks holding them to maintain the illusion of solvency. You know and I know that the value on the basic mortgage-backed securities is maybe 15 cents on the dollar (I made that up; but it won't be high, whatever it is); the value of the derivatives on them, like CDOs and CDO-squared (see the glossary on Planet Money), is effectively zero. Zilch. Since they're electronic, they won't even make good wallpaper. The latest government scheme, also quoted by Krugman from a blog called Calculated Risk, is to involve "public-private partnerships". Once again, here's the gist:

By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets (since there is no downside risk). This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they've tried to recycle the same bad idea.

This is yet another effort to avoid admitting that one or more "major" banks, "too big to fail" banks, are - insolvent. Broke. Their capital and assets won't cover their liabilities.

I'm sorry - I think we need to admit that some of these institutions are dead, and bury the carcasses. Will there be fallout? Yes. Do I know how bad it'll be? No. But if we continue to try to prop these dead institutions up, in the hope that some day the economy will recover and housing prices will return to where they were in 2006, and all the mortgage-backed securities will miraculously have value again, we will fail; and we will bankrupt ourselves and our descendants in the process. We all need to get used to the fact that housing prices may never return to where they were in 2006.

TANSTAAFL

For those of you not familiar with this classic acronym of the mid-twentieth century, it stands for There Ain't No Such Thing As A Free Lunch. According to Wikipedia, it originated in the 1940's, and was popularized in the 1960's (when I heard it) by Robert Heinlein's classic novel, The Moon is a Harsh Mistress. (I'm not going to give you a link to the novel synapsis. It's good enought that you should go get it - the library has it if you've been laid off - and read it.)

TANSTAAFL came to my mind when I read the Washington Post's article listing the victims of Bernie Madoff's Ponzi scheme. All of these people bought into Bernie Madoff's story because they thought they could get something for nothing. They thought they could get a free lunch - endless returns, higher than the market normally gave, with no risk. Madoff's fund never had a down year, even when the market did.

The list, which was made public in a court filing, is 162 pages long, with about 80 names per page! (There's a lot of duplication for people with multiple accounts.) For the many charitable foundations, I just shake my head; their investment advisors exercised poor judgment. I'm involved with 2 non-profits, and funding is always an issue, and the one that has an invested endowment has lost serious dollars this year. (But not to Madoff!) The same applies to the individuals (I was really sorry to see Sandy Koufax's name); they were very badly advised. But the names that really pissed me off were in this paragraph:

Several investment advisory firms, including Argent Wealth Management, Bank of America Private Bank, Citi Smith Barney, Citigroup Private Banking, Fairfield Greenwich, Fleet Bank and Ivy Asset Management, made the list, ...

It gives me cold chills. I used to work for Bank of America, and at one point I actually investigated whether I should move all my investments to the Private Bank. The answer was no (I think we weren't rich enough). These people are supposed to be investment experts. And they swallowed Madoff's scam hook, line, and sinker.

Did nobody at any of those firms have the brains God gave bastard geese in Ireland? Did nobody have a "too good to be true" alarm that went off in his head? It wasn't impossible; Harry Markopolis spent 9 years trying to convince the SEC that, on the basis of his published returns, Madoff had to be cooking the books. NPR's Planet Money blog has put up several stories about Markopolis' quest; and he was before Congress this week saying that he's got a "mini-Madoff" (only about $1 billion) to give the SEC again. I've seen the document they ignored; Planet Money linked it a couple of months ago. If the SEC ignored that, they were either giving Madoff a pass or they can't add.

We may get out of this economic mess, I don't know. But I know this: until we as a country learn that There Ain't No Such Thing As A Free Lunch, we'll be in constant danger of getting back into another one. Unless we can cure ourselves of the conviction that we can make it big, quick and easy, with no risk - that we can get something for nothing - we'll be wide open to the next Bernie Madoff.

The late great Leslie Charteris wrote a number of his Saint short stories about various forms of bunco games; the Saint made a hobby of beating the bunco artists at their own games. This was in the 1920's, but all the games Charteris wrote about are all still out there; and they all still work, because everybody believes that he can get something for nothing; and none of the bunco schemes ever work on people who understand that there ain't no such thing as a free lunch.