Saturday, January 31, 2009

The reality of sexual orientation and human gender has a "Liberal Bias."

More has come out on Reverend Ted Haggart, the evangelical Pastor of the fundamentalist Christian New Life Church who had to resign in 2006 because he was having an affair with a male prostitute. Apparently he was also involved in a relationship with a young male member of his church, and the church is now paying compensation to the young man.

Haggard is describes his current status thus:
In an interview with The Associated Press this month, Mr. Haggard said he was selling insurance and debt-reduction software and that his sexual identity was hard to pin down. “The stereotypical boxes don’t work for me,” he said. “My story’s got some gray areas in it. And, of course, I’m sad about that, but it’s the reality.”
A person I know who has gender identity issues and has investigated the situation with therapists says Haggard's case is pretty clear. Ted Haggart is a homosexual male - a male person who is sexually attracted to other males. His confusion comes from the extreme religious pressure and his won beliefs that say homosexuality is a total sin.

Haggard not only bought the line that homosexuality is a total sin, but he also preached it, was surrounded by others who preached it and enforced it. One of the best social techniques for instilling a belief system in someone else is to have them go out and evangelize for it. Haggard has done that in spades. Yet his own body is telling him that the sex objects he is attracted to are male, not female. His apparent confusion is from cognitive dissonance between public recognition of his sexual nature and his strong beliefs about how unacceptable it is. He has found that he is himself - by birth - attracted to other members of his own gender.

He has been forced to accept the truth of his own attraction to others of his own gender, but the utter repression of that truth by extremist conservative fundamentalist religion and his own society has left him, as he says, with his sexual orientation "hard to pin down." Of course it has.

Society has a very simplified idea of gender identity and sexual orientation. There is a general very fundamental belief that a person is born either male or female, and that if your body is one or the other your personal identity and your sexual orientation must fit the stereotypical male - female images. Then, using that assumption, the doctor can look at a child at the moment of birth and determine if that child is male or female, and the assumption is that the child's sexual identity and the sex objects to whom that child will be attracted MUST fit the stereotype. That's fine for most of us because most of us DO fit the stereotype. That's why it is a persistent stereotype.

But the body is much more complicated than that. Gender is more behavior than anatomy, and learning which gender a person is sexually attracted to is a process that does not display itself clearly (except perhaps to a few experts) until puberty. All the social repression in the world is not going to deter the body from forming the sexual orientation it demands. That is also true, by the way, of the gender identity of the personality. That, too, is more variable than is commonly believed, and gender identity may not conform to the anatomy OR to the sexual identity, either. Gender identity may also be fixed before birth the way sexual orientation is, but since there is no clearly overt behavior (that is, not clear to others) that results from it, it is even less identified that sexual orientation differences. The fact that this also forms a strong personal drive is demonstrated by the number of individuals who have had gender reassignment surgery.

The difficulty is that people with such out-of-the-mainstream difficulties matching society's stereotyped sexual behaviors are different from the rest of us in ways that appear quite fundamental to the outsider. Most people are frightened by such apparent basic differences which have no obviously discernible cause. So traditionally they have been shunned. Religions are inherently organizations designed to maintain an accepted, traditional set of rules to make society function safely in easy-to-understand ways. They have always been responsible for organizing the practice of shunning outsiders and malcontents. If your idea of creating the ideal society is to find the traditions that have persisted and training everyone to follow them, then you are going to be attracted to religions that do that.[*]

I would speculate that Ted Haggart is a person with an attraction - that is, a sexual orientation - towards other men, and that his family and friends find his desired sexual orientation unacceptable. To keep that family and those friends, he joined a fundamentalist religion that taught "the rules. No Exceptions. Keep it simple." He is clearly also a person, probably with a male self-identity, who has a strong sex drive. A strong sex-drive is one of the factors that drives many men into leadership positions.

In order to become a leader and rise in leadership roles, a person has to identify with those he or she leads and direct them in those directions. Otherwise, they will reject him. So he had to not only learn among other things) the gender and sexual mores of his fundamentalist Christian Church and impress their importance on other people. His success at doing this is obvious from his position as Pastor of the New Life Church and his wider reputation in the evangelical community.

His internal conflict between what he had been taught and then taught to others about sexual identity and sexual orientation drove him to great success. The energy he had from repressing his sexual orientation so strongly was displayed in his behavior, but that very energy from that conflict also reached out and destroyed his behavioral repression mechanisms.

Now he is left,exposed to his former parishioners, as a hypocrite and one of those very homosexual individuals that he spent years decrying and repressing. He is also (and again I speculate) an individual who focuses on behavior as the method of control of himself. If he thinks something should not be done, he doesn't do it, and in fact will ostentatiously attempt to do the very opposite in public to help get public assistance in controlling himself. If he believes that the behavior is wrong, he does not want to analyze it and (horror) find some core rationality in that behavior.

So that has left him with no mental and emotional tools to help him adjust to his newly publicly exposed "weakness." The concepts of gender identity and sexual orientation are not found in the Bible except to decry those who are out of the mainstream. Even if now the concepts are presented to him, the personal barriers he has set against accepting them must be tremendous.

It should be no surprise, then, that the closest he has been able to come to understanding why his coreligionists are now shunning him is his quoted statement "The stereotypical boxes don’t work for me," he said. “My story’s got some gray areas in it. And, of course, I’m sad about that, but it’s the reality.” He accepts that he was "weak" (meaning that his self-repression methods could not hold down his built-in sexual orientation permanently) and is now disgraced. He is that close to comprehension, but he literally can't accept his own personal reality yet.

[*] Another type of religion is less focused on controlling the behavior of others and more on understanding what the inherent social situation is and adapting the best practices from tradition to what works. These denominations are also rooted in tradition, but apply research and logic to the social effects of that tradition. The behavior they enforce is more closely related to social reality than is that of fundamentalist rule-givers. This is harder work, and most people just want clear, simple rules and to not have to bother talking about them.

Friday, January 30, 2009

These I find interesting

Just a few interesting items for your information

Evaluating the Reagan era

It's been a while since St. Ronny was elected in 1980 and the conservatives used that opportunity to really begin what they called "the Reagan Revolution." It was revolutionary, and it has had a long run dominating American national politics, but the banking crisis last Fall led Forbes magazine to declare "R.I.P. the Reagan Revolution. The announcement that the Recession started in December 2006 was the final nail in the Reagan Revolution's coffin.

Now it is time to evaluate the effects of the Reagan Revolution. Sam Pizzigati at">Campaign for America's Future has done a good job at doing that.

Go read it at the link.

If you want to become a terrorist, just disagree with the government and tell them you do.

Here's how one man became a terrorist. J. Edgar Hoover, Joe McCarthy, Michele Bachmann, Bill O'Reilly and Jonah Goldberg would all be very proud.

This is frankly Unamerican.

Thursday, January 29, 2009

The NY Times needs an economics text

The NY Times gets the analysis of Obam's stimulus wrong. What did they get wrong? All of it.

Rod Blagojevich is out as Ill. governor

The Senate voted today to remove Rod Blagojevich as governor of Illinois. They also voted to bar him from ever holding public office in Illinois again.

The vote to convict was 59 to 0. The minimum vote to convict him was 40 or more. It wasn't even close.

Why is Obama caving to the Republicans so much?

I think that Obama is playing a subtle PR game on the Republican Congressional leaders and their followers and on the American public at the same time. He is attempting to differentiate himself positively from the Bush technique of writing a totally partisan bill, even larding it up with poison pills that the Democrats are forced to vote against and then cramming it through Congress in brute force (Rovian) style. The Obama's game includes caving on some issues that don't effect his poll standing, but holding relatively firm on the core of what he needs. The fact that so many liberals are clearly upset by his surrenders helps him achieve this by suckering in the conservatively biased media. The result is that he is getting the most publicly popular things he needs while the Republicans in Congress are painting themselves into a corner and looking ridiculous doing it. That it is a long-term game. It's a long term strategy.

Obama has the polls in his favor and he has just been elected as a direct rejection of George Bush. The estimated 1.8 million crowd that went to Washington for the inauguration sent a signal that the Republicans could not have missed, although the media appears to have missed it. The media has had to put Obama's inauguration crowds into the memory hole. But he also has to get health care through, and I seriously doubt that Obama has given up on his promise to do that this year. He needs to husband his power to accomplish that.

The Congressional Republicans are coming out of this stimulus vote looking very bad, while Limbaugh and the right wing talk jocks are coming off looking desperate. The talk show host's control of the Republican Congressional party is also being laid bare to the public. Again, this is something the media has to bury in the memory hole.

I don't think Obama ever thought the Republicans in Congress were going to be reasonable. They can't. While they are from red states and congressional districts and seem to have life time sinecures, that is only as long as they toe the line with their constituencies in the Republican Party. If any of them actually start cooperating with Obama, they will face the wrath of Limbaugh, et al. now and a primary challenge next year. As for the next general election, Obama's Internet-based social and political organizations (which have become part of the DNC) are going to be putting pressure on them from their home districts and states. If the Republicans who are targeted that way survive a primary challenge, they will face much stronger Democratic opposition in the next general election. They don't dare cooperate with Obama and breal with their leadership and the Talk Show hosts, or they becoem more vulnerable to losing their seat in Congress. It'd s s two-pronged attack that depends on Obama's base of supporters.

I'm pretty sure that team Obama has taken lessons from what happened to Bill Clinton in 1994. Obama really doesn't want to lose his Democratic Party majorities in Congress. The team is going to need those majorities when the depression gets much worse. It is quite clear now that it will, a fact that the Congressional Republicans and talk show hosts are depending on to rebuild Republican Congressional power.

Through all this, of course, we can expect the media to continue to attack the Obama administration because that's what they are trained and organized to do. Obama is going to also have to avoid the media sniping while letting them look so partisan that they cease to be as effective as they were against Gore and Kerry. Generally the media conservative bias will be an even longer term problem for Obama, but he got elected without them. He can deal with them.

That's my best guess regarding "What Obama thinks." He is still holding his cards close to his chest, and we'll have to discern his thinking from his behavior and his results. So far he has done well.

Sunday, January 25, 2009

Who was Bernie Madoff?

Julie Creswell and Landon Thomas Jr. at the New York Times attempted to answer that question. Here is an excerpt from the article:
So who was the real Bernie Madoff? And what could have driven him to choreograph a $50 billion Ponzi scheme, to which he is said to have confessed?

An easy answer is that Mr. Madoff was a charlatan of epic proportions, a greedy manipulator so hungry to accumulate wealth that he did not care whom he hurt to get what he wanted.

But some analysts say that a more complex and layered observation of his actions involves linking the world of white-collar finance to the world of serial criminals.

They wonder whether good old Bernie Madoff might have stolen simply for the fun of it, exploiting every relationship in his life for decades while studiously manipulating financial regulators.

“Some of the characteristics you see in psychopaths are lying, manipulation, the ability to deceive, feelings of grandiosity and callousness toward their victims,” says Gregg O. McCrary, a former special agent with the F.B.I. who spent years constructing criminal behavioral profiles.

Mr. McCrary cautions that he has never met Mr. Madoff, so he can’t make a diagnosis, but he says Mr. Madoff appears to share many of the destructive traits typically seen in a psychopath. That is why, he says, so many who came into contact with Mr. Madoff have been left reeling and in confusion about his motives.

“People like him become sort of like chameleons. They are very good at impression management,” Mr. McCrary says. “They manage the impression you receive of them. They know what people want, and they give it to them.”

As investigators plow through decades of documents, trying to decipher whether Mr. Madoff was engaged in anything other than an elaborate financial ruse, his friends remain dumbfounded — and feel deeply violated.

“He was a hero to us. The head of Nasdaq. We were proud of everything he had accomplished,” says Diana Goldberg, who once shared the 27-minute train ride with Mr. Madoff from their homes in Laurelton, Queens, to classes at Far Rockaway High School. “Now, the hero has vanished.”

If, in the end, Mr. Madoff is found to have been engaging in fraud for most of his career, then the hero never really existed. Authorities say Mr. Madoff himself has confessed that he was the author of a longstanding and wide-ranging financial charade. His lawyer, Ira Lee Sorkin, declined to comment.

During the decades that Mr. Madoff built his business, he cast himself as a crusader, protecting the interests of smaller investors and bent on changing the way securities trading was done on Wall Street. To that end, like a burglar who knows the patrol routes of the police and can listen in on their radio scanners, he also actively wooed regulators who monitored his business.
This seems to be the view that is coming out from the investigations into Bernie Madoff's scheme. In a nutshell, Madoff is a psychopath with a real sense of grandiosity and a well practiced ability to lie, a pleasure in deception, no sense of shame and no sense of regret at what he does to the people he manipulates and steals from.

That seems likely to me to be a set of personality traits that are well-rewarded on Wall Street, and similarly rewarded in politics.

For more information on who Bernie Madoff is and his history, here is a link to the Wikipedia article on Bernie Madoff. It contains an interesting technical description of his alleged investment strategy (it helps to know that ITM means In The Money, ATM means At The Money, and OTM meants Out of The Money. For good, brief explanation of those term, see this wikipedia article.)

It is now coming to light that Madoff probably used the strategy described in the wikipedia article, known as collar trades to bamboozle people who wondered how he was making his profits. It is not clear if he started using it and it failed, leading him to move into the ponzi scheme or he simply didn't use it except as a bamboozlement tool. In addition, he had a sophisticated marketing plan that targeted charitable foundations that are required to pay out 5% of their capital every year. By doing that he had a stable set of buyers who could not withdraw everything at once, and only had to offer that 5% return. This avoided the short term problems that normally cause a ponzi scheme to collapse quickly. Then he sold the investments through his country club connections in an affiliation swindle. The article also goes into how the so-called sophisticated investors and the regulatory agencies were bamboozled. For the latter, the general attitude of laissez faire deregulation that has been predominant both on Wall Street and in Washington helped a great deal.

It has been a Hell of a scheme conducted by a an immoral master schemer, and if the entire structure of unregulated banking on Wall Street had not collapsed, it probably would have continued until Madoff died.

Thursday, January 22, 2009

There's nothing wrong with stimulus projects that don't start immediately.

The Wall street Journal today has a breathless article bemoaning the fact that the stimulus bill may not stimulate jobs right away.

So What? The fact that it may take a while for the highway projects and such to kick in is a feature, not a bug. That's not to say that shovel-ready projects that can start very quickly are not needed, but they mustn't be the only projects considered, and even those will have some delay as they get ramped up to start.

This recession is going to last a while, at least two more years and I am betting even longer. The stimulus won't prevent the recession and bring us back to the status quo ante. It can't. There is too much damage that has already been done to the economy. But a lot of the stimulus is already targeted at social safety net projects through existing agencies anyway and other short term expenditures. Perhaps not enough, but those will hit the economy quickly. The thing is, the stimulus has to also keep on providing stimulus over time because the market is not going to be back - no matter what the government does - to where it supports itself for quite a while. Two years from now would be a highly optimistic projection.

That means that there has to be long term stimulus built in, and not just for individuals. Jobs have to be created and maintained. That's what the highway and infrastructure investments will do. By the way, the problem for businesses is demand for what they produce, not money to meet that demand. Any tax cuts given to businesses that aren't making a profit anyway are wasted. They won't get anything. Similarly, tax cuts and grants to businesses that are making a profit will not help them. They still need increased demand. That demand will largely be government contracts. The assistance to business has to be provided by creating a demand for their products. And for it to start in the future gives them time to ramp up, arrange financing and capital and get contracts.

Remember, no business is going to see that there is a one-time stimulus hitting the economy and ramp up to hire employees and go to work on that basis. They know that the one-time stimulus like last May hits, has a short term effect, and then dies out. If nothing else, no sensible bank will loan money for a business that cannot assure a long term stream of revenue. That's what the infrastructure expenditures will do.

The fact that they will not kick in soon means they can be planned for and businesses can be built based on those plans. Fast, short-term stimulus by itself is close to useless.

Obama has reversed much of Bush/Cheney's secrecy effort

This is pretty neat, if it works as Zack Roth at TPM suggests it might. Watch the video.

I seem to recall that Bush's previous Presidential Order on keeping documents from being released went at least as far back as Bush 41's Presidency, and perhaps included Reagan's. If so, then the Freedom of Information requests from journalists and historians are going to be flying thick and fast.

I'll leave the legal implications to the lawyers and to people like the TPM crew and Emptywheel at Firedoglake. But it seems obvious even to me that stonewalling is going to get a lot harder.

The Marc Rich pardon: some background

When Eric Holder was nominated to become Obama's new Attorney General, the question of his involvement in President Clinton's last minute pardon of the fugitive financier Marc Rich was raised by the Republicans in the Senate. This post is about Marc Rich and the alleged crime for which he was pardoned, and does not consider Eric Holder's involvement.

Marc Rich was an extremely successful (according to Forbes magazine he was the 242d richest man in America in 2006) commodities trader who, with his partner Pincus Green bought and sold international commodities, including Iranian oil. Rich and Green were indicted for tax evasion and illegal trading with Iran in 1983 by then U.S. Attorney Rudolph Giuliani. At the time of the indictment both Rich and Green were located in Switzerland, and they never returned to America to answer the charges. The charges were brought under the RICO statutes. The Justice Department stopped using the RICO statutes for tax cases of this type in 1989.

Interestingly, "Scooter" Libby, the aide to Vice President Dick Cheney who was convicted of giving the CIA undercover Officer Valerie Plame's name and affiliation with the CIA to the media for political purposes. Libby told Congress during hearings after the pardon that in his legal opinion, Marc Rich had not violated U.S. tax law, but could be criticized for trading with Iran even while the Iranians were holding the American hostages.

So Rich's guilt was never tested in court before the Clinton pardon, the RICO law under which the charges were made have ceased to be a basis for such charges, and a case can be made for his innocence even if it had gone to court.

But why did Clinton make the pardon at all? Bill Clinton wrote a New York Times OpEd published 02/18/2001in which he explained his reasoning.
(1) I understood that the other oil companies that had structured transactions like those on which Mr. Rich and Mr. Green were indicted were instead sued civilly by the government; (2) I was informed that, in 1985, in a related case against a trading partner of Mr. Rich and Mr. Green, the Energy Department, which was responsible for enforcing the governing law, found that the manner in which the Rich/Green companies had accounted for these transactions was proper; (3) two highly regarded tax experts, Bernard Wolfman of Harvard Law School and Martin Ginsburg of Georgetown University Law Center, reviewed the transactions in question and concluded that the companies "were correct in their U.S. income tax treatment of all the items in question, and [that] there was no unreported federal income or additional tax liability attributable to any of the [challenged] transactions"; (4) in order to settle the government's case against them, the two men's companies had paid approximately $200 million in fines, penalties and taxes, most of which might not even have been warranted under the Wolfman/Ginsburg analysis that the companies had followed the law and correctly reported their income; (5) the Justice Department in 1989 rejected the use of racketeering statutes in tax cases like this one, a position that The Wall Street Journal editorial page, among others, agreed with at the time; (6) it was my understanding that Deputy Attorney General Eric Holder's position on the pardon application was "neutral, leaning for"; (7) the case for the pardons was reviewed and advocated not only by my former White House counsel Jack Quinn but also by three distinguished Republican attorneys: Leonard Garment, a former Nixon White House official; William Bradford Reynolds, a former high-ranking official in the Reagan Justice Department; and Lewis Libby, now Vice President Cheney's chief of staff; (8) finally, and importantly, many present and former high-ranking Israeli officials of both major political parties and leaders of Jewish communities in America and Europe urged the pardon of Mr. Rich because of his contributions and services to Israeli charitable causes, to the Mossad's efforts to rescue and evacuate Jews from hostile countries, and to the peace process through sponsorship of education and health programs in Gaza and the West Bank.
Later in 1981 Bush 43 released transcripts of a phone call between Bill Clinton and then Israeli Prime Minister Ehud Barak that demonstrates a lot of the pressure that Clinton was receiving. Remember that Bill Clinton ended his Presidency with an all-out push to achieve Peace in the Israeli - Palestinian conflict. On August 18, 2001 Josh Marshall discussed the transcripts in his then very new Talking Points Memo blog. This timing is interesting. The Rich pardon was big news at the time, and totally disappeared from the news less than a month later when it was eclipsed by 9/11. There is no working link I have found to the original Newsweek article by Isikoff which Marshall quotes.
Isikoff editorializes thus:
The transcripts offer no “smoking gun” showing that the former president was motivated by large donations to his presidential library or by generous campaign contributions. But the conversations do show that, in sharp contrast to the picture painted by some of his former aides, Clinton was keenly aware of details of the Rich case, and appeared determined to grant the highly questionable pardon even though, as he admitted to Barak, there was “almost no precedent in American history.”

No smoking gun? I'll say. The transcripts don't seem to contain anything even touching on this point.

Say whatever you will about the wisdom of the Marc Rich pardon, but the transcripts themselves seem to confirm a key component of Clinton's story -- that Ehud Barak, then Prime Minister of Israel, was lobbying heavily on Rich's behalf because, as he says in the transcripts, the fugitive financier had “[made] a lot of philanthropic contributions to Israeli institutions and activities like education" and because "it could be important (gap) not just financially, but [because] he helped Mossad [the Israeli intelligence agency] on more than one case."
As I look at this history two things jump out at me. First, the pardon itself had many factors that could easily justify it. Second, it is extremely doubtful with all the high level outside pressures on Clinton that anything that Eric Holder might have done except perhaps the criminal act of destroying the paperwork at the last minute might have changed Clinton's decision to pardon Marc Rich. Today this is nothing but a Senate Republican ploy to throw red meat to the extreme Clinton-hating elements in the Republican right-wing and to tar the Obama administration with elements of that irrational Clinton-hate that remains so active the much of the extremist elements of the Republican party. I doubt we'll be hearing more about it from now on. It's now just yesterday's news.

Tuesday, January 20, 2009

A new era for America begins

Today at 12:00 pm noon Eastern time, Barack Hussein Obama was sworn in as President of the United States of America. Here is a video of the swearing in.

This is only symbolic. Obama earned the right to become President, and we as Americans have given him the office through the procedures set down in the U.S. Constitution. But for being "only" symbolic, it still is a powerful symbol of what America is.

We have given him the office in trying times. We can only wish him the very best in the ways each of us sends out such wishes and prayers.

Monday, January 19, 2009

No more Bush pardons coming? What about Scooter Libby?

Bush has commuted the sentences of ex-Border Patrol agents Ignacio Ramos and Jose Compean according to Yahoo News. This is not a big surprise. He has been repeatedly asked to do so, and finally did it today. It is interesting that he merely commuted the sentences to time served but did not pardon them. They will get out withing about two months after having served over two years on the original sentences of more than 10 years each. The convictions remain.

There was one paragraph in the story that really surprised me, though.
Bush technically has until noon on Tuesday when President-elect Barack Obama is sworn into office to exercise his executive pardon authority, but presidential advisers said no more were forthcoming.
That would mean, if true, that the widely anticipated pardon for Scooter Libby is not going to happen.

For background on the Scooter Libby crime, see Jurors convict Libby on four of five charges and Bush commutes Libby's prison sentence.

Here is the Google search on "Scooter Libby" if you have further curiosity.

Sunday, January 18, 2009

Obama's moving right along.

It looks like the days of a White House that can only focus on one major effort at a time is over. Besides getting his bill passed through Congress even before being inaugurated so that it will be waiting for him to sign on inauguration day, Barack Obama has just announce the conversion of the political outreach machine that got him elected into a permanent organization.

The LA Times wrote about the effort Wednesday, and yesterday the Washington Post wrote that the name of the new organization has been announced.

The organization will be called "Organizing for America" and will be operated by a handful of political operatives out of the Democratic National Committee. It is expected to allow the President to reach out to supporters in each state and congressional district and provide grassroots support for the President's initiatives.

I can see the Republicans already salivating at the possibility of creating a similar conservative organization, but the comparatively poor performance of McCain in attempting to raise funds through the Internet suggest that they will have a much harder time making it work as long as they try to push the conservative agenda from and through conservative think tanks and organized groups of Evangelical pastors down to the conservative foot soldiers. Obama's biggest advantage is that he is the man who speaks for the beliefs held by most Americans. He has become President in large part because he reflected the views held by his organized grassroots constituencies. Because of that, he can use a bottom-up model of organizing which is incompatible with the top-down organizing methods used by the Republicans.

The right-wing conservative agenda is simply not compatible with that kind of bottom-up grassroots organization. Without the free flow of information from the grassroots to the President along with Barack Obama's clear ability to enact the beliefs and attitudes expressed, the system will not work as well for the conservatives as it has for him. If you don't think so, watch what is already happening as the Republican Congressional Leadership takes far right extremist positions to oppose Obama and the Democrats. It cost them in the 2006 election, again in the 2008 election, and it will cost them in the 2010 election.

In any case, this is going to be a fascinating enterprise. I think it has the capability of greatly changing American national politics as we have known it.

Thursday, January 15, 2009

Can Citigroup and Bank of America survive?

The question of what Barack Obama is going to do about the financial sector of the economy appears to have come back with a vengeance today. Both have dropped significantly in the market because of the trouble they are in, so now Felix Salmon recommends that they be nationalize instead of bailed out.
Both Citigroup and Bank of America are down more than 20% in early trade today, and I imagine that Hank Paulson and Tim Geithner are starting work on yet another weekend deal of some description, since at this rate it seems that neither institution is capable of surviving in its present form much longer. They should embrace the inevitable and just nationalize the two banks.

Any deal will be necessarily complicated by the fact that Paulson dragged his heels when it came to requesting the second tranche of TARP funds, even after he blew through the first $350 billion in no time. As a result, it's far from clear what money Treasury can use to shore up two of America's most systemically-important financial institutions.

On the other hand, this isn't a bank run: Citi and BofA aren't suffering from liquidity problems. They have all the liquidity they need, thanks to the Fed. The problem is one of solvency: the equity markets simply don't believe that the banks' assets are worth more than their liabilities.
Citigroup's severe problems with mortgage-based investments are well known at present, but Bank of America is the bank the feds have gone to in order to takeover other failed banks. That appears to be BoA's problems. They bought Countrywide, the nations largest mortgage broker, last Spring when it was effectively bankrupt, paying the $4 billion price in BoA stock. Then when the financial crisis hit last Fall and wiped out the big Wall Street investment banks, BoA took over Merrill Lynch. They got a $25 billion subsidy from the Secretary of the Treasury to take Merrill Lynch on, but it wasn't enough. TPM reprts that BoA is getting ready to ask for an additional $100 to $200 billion.

The problem with the great deal BoA got on Countrywide is the sloppy and very frequently dishonest methods they used to sell mortgages. At the time BoA took Countrywide over, it looked like a good deal by one of the few remaining very large banks that was still solvent. Let's not forget, though, how deep Countrywide was in causing the entire Wall Street Credit crisis.
Countrywide Home Loans was a division of Countrywide Financial Corp., which in 2007 was the nation’s largest mortgage lender and serviced $1.4 trillion in loans. It was labeled “the company perhaps most responsible for the mortgage crisis” by Rep. Henry Waxman, D-Calif., chairman of the House Committee on Oversight and Government Reform. Waxman last year blasted the company’s executives for taking astronomical salaries and bonuses as Countrywide’s stock plummeted amid staggering losses from an orgy of subprime lending. The losses ultimately led to Countrywide’s sale last year to BofA. Meanwhile, attorneys general from states across the nation sued Countrywide over deceptive lending practices before 15 of them negotiated an $8.4 billion settlement on behalf of borrowers in the fall.
Both deals depended a lot on what BoA thought the books said the companies were worth. But that was in part before the economic problems had been determined to be so bad that the economy was declared to be in Recession since December 2007, and before the criminal ponzi scheme of Bernie Madoff was exposed. The latter has demonstrated both that Wall Street is rife with fraud and criminality. Taken together it also shows that the audit firms doing the auditing are completely inadequate.

The fact is that nothing today is going to do more than simply allow further digging to find more problems, and the history is that the problem will continue to be of staggering cost. The real question is how much longer the banks will be bailed out using taxpayer money.

It should be clear by now that the banks cannot be trusted to run their own business. The management is complicit in the criminality, fraud and incompetence even if they did not instigate it. The entire American financial structure needs to be rebuilt, with the current managers generally replaced (and the replacements should get paid a lot less.)

So can Citigroup and Bank of America survive? Good question. It looks less and less like they can.

Monday, January 12, 2009

The only likely alternative to Hamas running Gaza is much worse

I really wonder what the top politicians in Israel are smoking. It must be the really good stuff. Why else would they start a war they are certain to lose, and lose big? Maybe it was just the fear of the upcoming Israeli election, with the government still having the festering sore of a Hamas dominated Gaze randomly lobbing missiles into Israel that the government had found themselves unable to stop. But it is getting clear now that the attack into Gaza is likely to leave Israel in even worse shape than they were before. In the absence of a complete reoccupation of Gaza by the Israelis (a concept previously tried and failed) the only alternative to a Hamas dominated Gaza is an al Qaeda dominated Gaza, and that's much, much worse.

M.J. Rosenberg has laid out the real players and the logic of the attack on Gaza quite well.

The takeover of Gaza by Hamass was set up in large part by several key missteps made by the Bush administration. First was the decision of the Bush administration to oust Yassar Arafat, who had successfully almost completely stopped terrorism after 1997. This was compounded by providing minimal support to the replacement Palestinian government of Mahmoud Abbas, apparently to try to make him more compliant. The worst though, was then Bush forced an election in Gaza, one which both the Israelis and the Palestinians argued against. It looks like only Bush was surprised when Hamas won that election, and it is clear that the residents of Gaza would reelect Hamas again if they needed to. Even if Hamas is destroyed, the residents of Gaza will not accept the government of Fatah back. They would consider it the puppet of the U.S. and Israel. So if the invasion of Gaza can succeed in destroying Hamas, who will replace them? M. J. Rosenberg lays it out clearly.
Hamas' likely successors would be Al Qaeda--and its allies--which already have cells in Gaza. Hamas and Al Qaeda hate each other for many reasons, most of which are of interest only to students of Islam. The one that matters to us is that Hamas is willing to compromise with its enemies.

Al Qaeda and its ilk are at permanent war with the West, a war which cannot end until either AQ or the infidels are destroyed. Al Qaeda is not fighting for political goals but to create a pan-national Islamic State that would supplant not only Israel but all the Arab states.

Hamas, an offshoot of the Muslim brotherhood, limits its ambitions to achieving a state in Palestine. It believes in compromise, if only as a stop gap. That is why it could sign a ceasefire agreement with Israel and, according to even Israeli sources, observe it until it decided that Israel was not living up to its end of the deal. It has even raised the idea of a 15 or 20 year ceasefire with the Jewish state.

All this is anathema to groups like Al Qaeda, for whom the destruction of the World Trade Center was a triumph--although it advanced no political goals. AQ has none, just as the terrorists in Mumbai killed for killing's sake.

And these are the people who could make Gaza--a few miles miles from Tel Aviv--its ultimate base of operations.

Writing in the London Jewish Chronicle, reporter Jonathan Freedland predicts, "Gaza could become a vacuum, rapidly descending into Somalia, a lawless badland of warlords and clans. . . . And from the rubble of Gaza, the attacks on Israel will surely resume."
So what is the strategic goal the Israelis wanted to accomplish by invading Gaza? If they aren't going to stay and occupy Gaza, the likely alternative to Hamas is much, much worse. And now that the Israelis have invaded, the situation is not going to return to the relative simplicity that characterized relations between Israel and Gaza before the invasion. The best that can be hoped for is a return to the government of Hamas.

If so, it seems very unlikely that Hamas is going to be amenable to making agreements with Israel for quite a while, since Israel does not keep them. Hamas will not make the mistake, though, of thinking that Israel will not make the mistake of self-defeating measures.

M.J Rosenberg has laid out some of the key errors made by the U.S. and Israel. I haven't found a similarly good and concise article on the errors made by the Palestinians. Nor have I found any good articles that offered Israel an alternative solution (that would have been likely to be effective) to invading Gaza.

As for what happens next, clearly a cease fire is critical. What can follow that is another mystery. Did the Israeli political leadership have a strategic plan for the invasion of Gaza? Anthony Cordesman makes that point.
What is the strategic purpose behind the present fighting? After two weeks of combat Olmert, Livni, and Barak have still not said a word that indicates that Israel will gain any grand strategic benefits, or tactical benefits much larger than the gains it made from selectively striking key Hamas facilities early in the war. In fact, their silence raises haunting questions about whether they will repeat the same massive failures made by Israel’s top political leadership during the Israeli-Hezbollah War in 2006. Has Israel somehow blundered into a steadily escalating war without a clear strategic goal or at least one it can credibly achieve? Will Israel end in empowering an enemy in political terms that it defeated in tactical terms? Will Israel’s actions seriously damage the US position in the region, any hope of peace, as well as moderate Arab regimes and voices in the process?

To be blunt, the answer so far seems to be yes. To paraphrase a comment about the British government’s management of the British Army in World War I, lions seem to be led by donkeys. If Israel has a credible ceasefire plan that could really secure Gaza, it is not apparent. If Israel has a plan that could credibly destroy and replace Hamas, it is not apparent. If Israel has any plan to help the Gazans and move them back towards peace, it is not apparent. If Israel has any plan to use US or other friendly influence productively, it is not apparent.

As we have seen all too clearly from US mistakes, any leader can take a tough stand and claim that tactical gains are a meaningful victory. If this is all that Olmert, Livni, and Barak have for an answer, then they have disgraced themselves and damaged their country and their friends. If there is more, it is time to make such goals public and demonstrate how they can be achieved. The question is not whether the IDF learned the tactical lessons of the fighting in 2006. It is whether Israel’s top political leadership has even minimal competence to lead them.
Whatever the strategic plan might have been (if there was one) the after effects of the invasion will require efforts that go way beyond use of military force. Tough talk and military actions to back it up have created this current disaster. And the government of Israel is still the same one that invaded Southern Lebanon at Israel's political great cost, and had to be restrained by (of all people) George W. Bush from attacking Iraq and trying to take out Iran's nuclear installations.

When Bill Clinton left office he left the critical Middle Eastern problems of terrorism and the Palestinian - Israeli situations to George Bush and the beginnings of a mild recession. Clinton had stabilized the Palestinian - Israeli situation and appeared to be making progress, and his entire White House was working on the terrorism problem and tried to pass on their urgency to the incoming Bush administration. George Bush dropped both Middle Eastern balls as the attack on 9/11 almost immediately demonstrated, and discussion of the causes of the current economic situation have yet to determine what happened. Bush has now left Barack Obama with an active and escalating war in Afghanistan, an occupation/war still simmering in Iraq, an economy already in the worst recession since the Great Depression, and a seriously deteriorating Palestinian - Israeli situation. And Bush actually was reported as going on vacation in December.

Bush is going to be a hard act For Obama to follow. And I really wonder what the Israeli elections are going to bring.

Disclaimer. I am not an expert on the middle east, and clearly not on the Palestinian - Israeli problems. I have, however, studied corporate strategy and management decision making extensively, and I can recognize when an effective strategy is being implemented. This is not one of those times when an effective strategy is apparent.

Saturday, January 10, 2009

Yet even more Blagojevich face time. Enough, already!

Here's the video of Rod Blagojevich's latest over-the-top press conference in his own defense after the Illinois state House impeached him by a vote of 114 to 1.

It looks to me like Rod Blagojevich is another of those people who love being in the limelight and having power. He is working extremely hard to do well personally by doing (some) good publicly.

He has already convinced himself everyone else is wrong besides himself. He also has no understanding of the concept "Over the top." In his grandiosity he thinks everyone will see him as the great man he sees himself. Altogether he is quite narcissistic and also obsessional. I'd bet that his entire political career is based on those traits. Unfortunately it has led him to completely disregard the limitations a democracy places on politicians. He knows that he is right, and that he is uniquely important, so trivialities like the law and the separation of powers does not - should not - apply to him. all he has to do is explain that to the public and he will be saved from his enemies, in this case the Illinois Legislature as a whole.

He is being opposed by US Attorney Patrick Fitzgerald, a man who is clearly obsessional about applying the law and rooting out wrong-doing. Those are obsessional characteristics the public approves of.

Fitzgerald and Blagojevich are the principle individual characters in this very public drama. The Illinois legislature is a problem for Blagojevich, but it is a faceless group. The drama is missing, unless you are a political junkie.

The conflict between Fitzgerald and Blagojevich could be the basis for a very good novel. Probably has been.

Wednesday, January 07, 2009

Harry Reid is out of touch with reality

Harry Reid doesn't think Ted Stevens deserves to go to jail.
"My personal feeling, you guys, I don't know what good that [would do]... He was a real war hero too, you know. He's been punished enough."
That's because Reid and Stevens belong(ed) to the Senate, making them two of the most powerful men in America.

In America the rich and powerful do not generally go to prison. But for those in the lower classes:
The United States has less than 5 percent of the world's population. But it has almost a quarter of the world's prisoners.

Indeed, the United States leads the world in producing prisoners, a reflection of a relatively recent and now entirely distinctive American approach to crime and punishment. Americans are locked up for crimes — from writing bad checks to using drugs — that would rarely produce prison sentences in other countries. And in particular they are kept incarcerated far longer than prisoners in other nations.

Criminologists and legal scholars in other industrialized nations say they are mystified and appalled by the number and length of American prison sentences.

The United States has, for instance, 2.3 million criminals behind bars, more than any other nation, according to data maintained by the International Center for Prison Studies at King's College London.

China, which is four times more populous than the United States, is a distant second, with 1.6 million people in prison. (That number excludes hundreds of thousands of people held in administrative detention, most of them in China's extrajudicial system of re-education through labor, which often singles out political activists who have not committed crimes.)
And who passes the laws that imprison so many Americans for so many crimes not similarly punished anywhere else in the world? The powerful men in America, that's who. The same ones who don't themselves go to prison very often even when convicted of crimes others would spend long prison terms for.

Consider, for comparison, Martha Stewart.
(...)the homemaking diva was sentenced to five months in prison and two years' probation Friday for lying to investigators about her sale of ImClone Systems stock in late 2001.

Federal Judge Miriam Goldman Cedarbaum also ordered Stewart to serve five months of home confinement after her release and fined the lifestyle expert $30,000.

The sentence was the minimum the judge could impose under federal sentencing guidelines. The fine, while relatively small given Stewart's wealth, was the maximum allowed under federal rules.

Hours later, Peter Bacanovic, Stewart's former broker at Merrill Lynch, also was sentenced to five months in prison and two years' probation; he was fined $4,000.
Martha Stewart was rich enough so that her prison sentence made the news, (most cases don't) but since she was not a powerful Senator, she couldn't avoid the minimum sentence mandated by law. That law was passed by the House, the Senate, and signed by the President.

Oh, and Martha is not a veteran, either. Maybe she could have avoided prison time had she been a "war hero." If, of course, she had a Senator to speak up for her.

I used to defend Harry Reid as a man doing the bet he could in a difficult situation, but this statement and his refusal to act against his fellow Senator Joe Lieberman after Joe worked so hard, lied so much and attacked the Democratic Party in order to elect John McCain as President shows me who Harry Reid has become.

Reid is simply not going to push to investigate the corruption and idiocies out of Wall Street which have led to the current and worsening Recession because the wealthy Wall Street bankers are his friends. He'll sweep the failure of Hank Paulson's handling of TARP as he has handed out free money to his only Wall Street friends. Paulson is rich and powerful. And Reid represents the Democratic Party Senate culture.

Now I realize that the power of the Senate has gone to Reid's head and he has gone "Washington native." He is now reduced to representing his fellow Senators instead of the American people. It's time for Harry Reid to go.

Tuesday, January 06, 2009

On Panetta as CIA Director

TPM is all over the designation by the Obama transition team of Leon Panetta as CIA Director. It is surprising. He is NOT an intelligence professional. However, he is well known as a guy who gets things done, having been Bill Clinton's White House Chief of Staff after being a successful California congressman.

The choice came out of left field to almost everyone. Interestingly, the incoming Senate Intel Committee Chairwoman, Diane Feinstein, and the outgoing SSCI Chairman, Jay Rockefeller, both stated that they had not been informed of Panetta's selection. Feinstein has hinted that she might oppose Panetta for the CIA job. This failure to contact the current and prior chairs of the Senate Intel Committee has led to speculation that the Obama transition team made a uncharacteristic protocol error.

However, the Senator from Oregon, Ron Wyden, a less senior member of the committee, states that he WAS informed of the selection in advance. This strongly suggests that not informing Feinstein and Rockerfeller in advance was not a simple oversight. If not, then what could have motivated the transition team to skip a simple phone call?

Don't you just love inside politics?

A retired Intelligence professional took the time to write Josh Marshall an email that gave his opinion of what is going on. Josh published it here. His opinion is that Feinstein did not want the CIA Director to be someone who had his own wide network of independent power base of political supporters as Panetta clearly does. She would have a great deal of control over an intel professional who had risen to become CIA Director, but a lot less control over someone with broad outside support like Panetta. This would explain both the failure to call her and her sour comments on his designation as Obama's choice.

The emailer goes on to state that the big issue for the incoming CIA Director was going to be whether the CIA was focused on providing immediate tactical intelligence to the troops on the ground, or if it was going to be refocused to provide strategic intelligence to the President as the agency was originally designed to do. In the last decade and a half many agencies in the Intelligence Community have greatly expanded their ability to provide tactical intelligence, but the funds at CIA have been prioritized to support that effort, leaving strategic Intel for the President lacking.

There is also the issue that with General Jones as National Security Advisor and Blair as Director of National Intelligence, the entire Intelligence Community is being focused on the Military. He calls it "the [continuing] militarization of intelligence." Panetta will bring a civilian orientation in at the top.

I find the emailer's comments rather persuasive. The ex-White House Chief of Staff was certainly in a position to know what Intelligence the President needed and at the same time what he was getting. If that's the direction the CIA is to be reoriented towards, Panetta is an inspired choice. It doesn't appear that the CIA has yet fully broken the blinders of being totally focused on the USSR, and now America's problems are found in many other parts of the world.

The CIA has suffered a lot of blame for what the Bush administration has done, and its reputation is definitely down at this time. (While I don't think the CIA was blameless, an awful lot was the Bush administration blaming the CIA for Bush's failure to manage the government well.) Panetta's appointment, with his broad political base, should also help the agency to recover a lot of its reputation.

Still, the Panetta hearings in the Senate are going to be interesting.

Addendum 11:04 am -- Just a thought.

Rockefeller is leaving the SSCI. Why is he upset about the proposed appointment of Panetta to the CIA? He's not losing any power.

My first reaction is that Rockefeller got the nickname of "Jello Jay" for so frequently caving to the right wing on important issues. What if Panetta surfaces evidence that Rockefeller was in the Administration's pocket and was directly responsible for encouraging, permitting or approving war crimes? With an intel professional with no outside-the-agency base of power as Director, Diane Feinstein could rather easily cover up such problems for Rockefeller. As the Senate Democrat's treatment of Joe Lieberman shows, the Senate Democrats do that a lot. She'll have a lot less such control over Panetta.

Or Panetta may just want to cut or redirect some of Rockefeller's pet programs, and again will be less subject to control.

With Panetta in that office it might just come out why Rockefeller so rarely supported Democratic positions when he was Chairman or Ranking Member. That has always been a puzzle.

Monday, January 05, 2009

Will Jeb Bush run for President?

George H. W. Bush himself brought up the possibility.

I'm just thinking about a Republican Presidential Primary in 2012 that pits Jeb Bush against Sarah Palin. Wow!

Why the right can't win in the blogosphere

I've been reading several places where the guys over at RedState think that the Liberals have the effective on-line infrastructure and for some reason the Conservatives don't. Atrios reported it again today. So I thought I'd offer my explanation.

The right wing is inherently authoritarian. Their media exists to get the message out to the faithful That what their kind of political ideology is. So they tell the readers what to believe and provide vignettes to support those beliefs. It's clearly a top down model. (In fact it is very much like a significant part of organized religion.) If someone questions the message, then their questions are to be suppressed as dissident and rebellious. It really doesn't matter if others see facts that don't match the pronouncements from the authority. Both TV and talk radio are well suited to this model. You can say whatever you want, and if someone questions it, then they are either screened out before getting on the are or they are easily cut off before going very far, after which they are ridiculed by the host. The ridicule enforces the appropriate socially expected behavior of people who want to belong to that group. This is especially effective in groups that also portray their members as an embattled minority constantly under attack. Such individuals do not have another group to join other than the oppressors, who they expect will reject them.

The left wing consists of people who want to know "Why?" But then they go beyond that and search for exceptions, generally to poke holes in what is being said. The intent is to improve the explanation given.

In short, the conservatives have a model in which "The Answers" are broadcast and in which questioning is repressed. The liberals have a model in which an identified situation or problem is identified and tentative solutions are thrown out for discussion. Then if the original message is not adequate, it is expected to be improved on - assuming it was not just wrong in the first place. The conservatives see all the various questions and objections as being dissident, rebellious and disrespectful of the authority.

When conservatives attempt to question a message or idea on a liberal blog, they resort to the ideology which they know to be true. If it runs counter to well-discussed liberal ideas which have been proven in both discussion and in tests against reality to be true, then the conservatives catch a lot of flack for what they present. They generally view this as being rejected. If someone attempts to offer explanations of why the conservative dogma does not work, if the individual will analyze the explanation and respond to it in a analytical manner and identify where the flaws are in their own ideas as well as those presented, then they can fit in on liberal blogs and such. But if as is most usual, they simply respond by repeating conservative dogma with no effort compare and contrast realistically, then they actually will be rejected. The term for that is usually "troll."

The liberal blogosphere is set up to encourage debate and to reject time-wasters who are there simply to sell their dogma. For people who are looking for workable solutions to novel problems, the ideas and debate are necessary. The trolls are time wasters.

My previous post about the reaction to the 2005 presentation by Economist Raghuram Rajan is a case in point. He was rather roundly rejected for not being sufficiently deferential to the economic genius to whom the meeting at the Kansas City Fed’s Jackson Hole symposium was dedicated - Alan Greenspan. The economy was chugging along and growing reasonably well and Wall Street was making a mint because of the brilliant leadership of the free market guru Allan Greenspan. There was no room for dissent to the prevailing wisdom.

Yeah, right. And here were are now in the Recession that officially started in December 2007, and Alan Greenspan has admitted that his views on the self-correcting nature of the unrestricted and unregulated financial markets were wrong.

So what brought the economic party to a screeching halt? And more important, what do we do about it now? It's clear from the chaotic decisions made by Henry Paulson, Sec. of Treasury, and the less chaotic but no better informed decisions of Federal Reserve Chairman Ben Bernanke, no one really knows right now. One thing is clear, though. The answers to those questions will not be first filtered through the free market fundamentalist ideology and work. Those ideologically pure "answers" are largely what caused the current mess.

What I haven't seen on the right wing is any effort to actually dig into the problem and to propose solutions that might work. At best they offer prepackaged ideologically approved "solutions" with no convincing reasoning behind them. The liberal blogosphere doesn't have the answer yet, either, but they are getting to explanations of what caused the problem. From that workable (not perfect) solutions will ultimately be developed.

This is just one example. The top down authoritarian Internet media will give canned ideological responses and attack anyone who does not conform to the ideology. The liberal groups are searching for explanations and solutions and are open to things that are new because the current economic situation is quite unusually and according to the orthodox and free market fundamentalist ideas simply could not happen.

Is it any wonder that the left wing blogosphere is a lot more lively and active than the propaganda strewn right wing blogosphere? It offers puzzles with the possibility of real solutions that can be applied in real situations, not just frequently repeated canned and unquestioned conservative dogma, attacks on liberals and whining about how victimized conservatives are.

Economist Raghuram Rajan warned in 2005 that the financial markets were in trouble

Economist Raghuram Rajan (a well-respected free-market economist) warned the Fed, bankers and economists that the financial system was headed for trouble, and much of what he specified has come to pass. Why was he ignored?

The Wall Street Journal has an article with one explanation and with links to other helpful articles. Here's part of the explanation from the Wall Street Journal:
The episode suggests one reason that the crisis went unchecked: A dangerous all-or-nothing orthodoxy had come to dominate the policy debate, where one was either for free markets or against them.

Another reason that many policymakers may have missed the risks is that macroeconomists didn’t have a good understanding of the changes that were occurring within financial markets and the banking system.

There has long been a marked distinction between economists who study finance and economists who study the broader economy, with limited communication between the groups. As a young Harvard University economist, Mr. Summers argued this was a dangerous shortcoming in a now famous screed, where he unfavorably compared finance specialists to “ketchup economists” who are too narrowly focused on their field of study, while also complaining about general economists tendency to continually rediscover conclusions that the finance specialists had come to long ago.

Finally, many academic economists privately worried that a housing bubble was building, and that it’s bursting would cause severe problems, but didn’t publicize their concerns. An exception is New York University’s Nouriel Roubini, who in 2006 said that the U.S. was almost certainly heading into a recession. Mr. Roubini is often characterized as a grand stander, but Mr. Rajan says that he deserves credit for acting on his convictions.

“Most academics are really reluctant to take part in the public dialog, because the public dialog requires you to have an opinion about things you can’t really be sure about,” says Mr. Rajan. “They fear talking about things where everything is not neatly nailed in a model. They stay away and let the charlatans occupy the high ground.” – Justin Lahart
While it is clear that the free market systems provide better overall results when compared to government run financial systems, it assumes the existence of free markets. That doesn't just mean no government interference. It means that information needs to flow freely and not be suppressed.

A free flow of information is opposed by bankers, often for good operational reasons over and above just the additional cost of collecting it. But a lot of data has to be available about the overall system, and to get that will require government collection and publication. That means regulation, such as that supposedly provided by the SEC. That's why the SEC is ultimately responsible for supervising, collecting and reporting financial information in corporate financial reports, for example. Without that regulation, each company would collect and report what it wanted to in whatever way it desired. Comparison between companies would be impossible. Standardization and enforcement of honest reporting are a clear government function. That's not government interference with the free market. It's government support for it by keeping data available so that it can do what it is supposed to do - flexibly provide the goods and services demanded by consumers and businesses and properly asses the risk that the bankers are taking making loans.

There are good arguments for getting government involved in the financial system other than just being there to try to pick up the pieces when it fails. It certainly has not been there enough for the last thirty years.

A better way to bail out companies "too big to fail"

A major problem with the Bush/Paulson bailout plan for Wall Street is that after Paulson let Lehman Bros. go bankrupt it frightened the rest of Wall Street and most of the world's investors. Since finance is the most globalized industry in the world, this had world-wide chilling effect on lending. That was a significant factor that led Paulson to go in and hand AIG tons of money instead of letting them go bankrupt, and on Paulson's use of the bailout money to recapitalize failing banks instead of letting them go bankrupt. Unfortunately, recapitalizing the banks hasn't given them any incentive to lend, leading to the current economic downturn that goes far beyond the financial industry. If you don't think so, just go look at the car companies.

Hilzoy, riffing off a two-part New York Times article, discusses the problems that have been created, including moral hazard and propping up failed banking institutions in ways that cause well-managed companies who are not on the government teat to fail.
I've always thought that one way to deal with this would be to find a way of bailing out firms while sacking their managers and wiping out their shareholders. Bankruptcy does this, of course, but when for some reason letting a firm just go bankrupt looks like a bad option, we ought to preserve the basic principle that even if a firm is saved, the individuals -- investors and managers alike -- who either took or profited from those risks should be slammed.

The point here is not punishment. It's creating incentives not to do stupid things. You might think of it as a way of turning the divergence of interests between principals and agents to good account. That divergence creates problems when an agent (e.g., a manager) who is supposed to be working for a principal (e.g., a firm) finds it in his interests to do things that damage the firm -- for instance, taking risks that produce short-term profits, and thus large bonuses for him, but that place the firm itself at unconscionable risk. But I think it can also be used for good.

In the case at hand, we want a firm (or significant parts of it) to survive, and we think that bankruptcy is, for some reason, not an option. We thereby risk moral hazard. But if we ensure that even though bad things do not happen to the firm, they absolutely do happen to its senior management and its investors, we might be able to create a set of incentives that work against taking unconscionable risks. After all, if managers know that if things go badly wrong, they will abruptly lose their jobs and their bonuses, they will not be nearly as likely to take those risks. And if shareholders know that they will not be made whole, they will be more likely to ask just how much risk a company is taking, and not to accept blithe assurances in place of real evidence.

But we haven't done this. We have not asked managers to resign. We have not tried to separate sound from unsound banks, or parts of banks. We have not tried to purge our financial system of the parts that got everyone into trouble. Instead, we have tried to prop up everyone, and to inflict as little pain on the financial wizards who created this mess as possible.

I think this is a profound mistake.
I thought from the beginning that the best solution was to nationalize the bank, wipe out the shareholders and replace the management, but keep the essential operations going. This was the solution used by the Bank of England with Northern Rock Bank failed because of problems with subprime mortgages. Northern Rock bank was nationalized in February 2008.

In my opinion the main reason this was not done was the belief in free market fundamentalism that permeates the Bush administration, the Republican Party, and some misguided Democrats. True it is an extreme decision, but it would put the good of the financial system and the American people as greater priority than the good of the bank managers and shareholders who are currently the ones being bailed out as the economy collapses around them.

Socialism? No. It's not. It's a form of bankruptcy that allows the financial system-critical portions of the failed organization to continue operating as the rest of the organization gets sold off as would happen is Chapter 7 bankruptcy. Face it. AIG was and remains bankrupt, as to most of Wall Street's investment banks. (I haven't heard of one that is still operating successfully on its own. The business model has failed.) AIG is not a going business. It is on life support because it has too many operations that are needed to keep the rest of financial system operating. In the long term the government does not want to be in the bank operating business, but in the short term it has to step in in some way to keep the financial system operating and help it come back to health.

But the health of the financial system is important to the government only because it is necessary to keep the economy operating. The government should not be bailing out failed managers and investors, which is what the current Bush/Paulson bailout operation is doing.

The Bush/Paulson market fundamentalism bailout is both not working, and too damned expensive. It is also rewarding the exact same people who caused the problem with taxpayer money. It's time for a complete rethink of the financial bailout without ideological blinders on.

What's wrong with "Value at Risk" as a risk measure?

A big part of the current financial crisis is a failure of Risk Management. How could professional bankers fail at risk management? That's been the essence of successful banking since the earliest history of banking!

If you have been trained in modern finance theory, then you know that financial experts use some highly sophisticated mathematical techniques to measure risk. Banks have traditionally been institutions in which expert risk managers look at investments, measure the possible return, then evaluate how much risk there is that the return will not cover the cost of the investment and provide a profit.

Financial Quants have been leading the charge in measuring risk since some academics developed the theory of Value at Risk since the early 1990's. Joe Nacera at the New York Times has an excellent article on what the weaknesses of Value at Risk are and how the various Wall Street banks, regulatory agencies, and investors have misused Value at Risk and how that has contributed to the current Wall Street crisis.

Hilzoy discusses Value at Risk and links to additional criticisms of the concept by some bloggers.

Friday, January 02, 2009

Why is the Washington media establishment predominantly Republican?

When you look at the news judgment of the media centered in Washington, D.C. it is obvious from what they consider to be important news that their judgment is essentially Republican. Josh Marshall points that out this morning.

I wonder why?

Is it just that the owners, managers, pundits, columnists and editors are all paid like Republicans want to be? Or is it that the set of Washington, D.C. news sources they have wanted inside leaks from over the last thirty years have been almost all Republican?