Thank Ghu It’s Freitag

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‘Quantitative Easing’: The Hidden Government Subsidy for Banks

This video went up on Zero Hedge yesterday, I believe. In the first minute you will want to throw both of these little bears in a sack and drown them, but by the end they win you over. There are so many things about QE that are crazy, but there’s one thing that I’d like to point out in particular. Yes, this is a huge money-printing program with potentially disastrous inflationary consequences. And yes, the influx of all this money could easily distort markets and prices far beyond the extreme distortions we’ve already been dealing with (commodities prices shot through the roof after this latest QE round was announced). But the thing I want to focus on is the subsidy aspect of QE, pointed out in the video. QE is designed to buy Treasuries and other assets, but the Fed does not simply go out and buy Treasuries itself; it does it through its primary dealers, who include of course banks like Goldman, Sachs. The Fed all but announces when it’s going to be doing this buying and in what quantity, which allows the banks to buy up this stuff at lower prices ahead of time and then sell it to the Fed at inflated cost.

Even forgetting about the obvious insider trading aspect to all of this, the official middleman status of the banks is a direct government subsidy and it is little remarked upon, even by the Tea Party crowd, which is otherwise so opposed to “welfare.” But these sorts of subsidies exist all throughout the financial services industry.

You want to take out a mortgage or a credit card; you obviously can’t get your credit from the government at 0% interest. What you do instead is you get a mortgage from a private bank at 4.7% or 5%, and that bank in turn has borrowed from the Fed at 0%. This would almost make sense if indeed these banks were legitimately providing a service for that 5% cut, i.e. if they were carefully and judiciously weighing the credit risk of applicants. But if anything these banks have been even more irresponsible (more irresponsible by far, actually) with their money than the masses of people who are now in trouble with their credit cards, mortgages, student loans, etc. They not only don’t deserve this subsidy any more than ordinary people do, they’re actually the worst possible destination for an appropriation of emergency funding, which is what this Fed money is supposed to be.

Take seven minutes and watch the video. Plan on being irate afterward. Seriously.

After you watch it, read this:

In Defense of Ben Bernanke

All in all, it looks like the nation and the world need an Economics 101 refresher. So let’s start with the basics.

The Fed’s plan is to purchase about $600 billion of additional U.S. government securities over about eight months, creating more bank reserves (“printing money”) to do so. This policy is one version of quantitative easing, or “QE” for short. And since the Fed has done QE before, this episode has been branded “QE2.”

Here’s the first Economics 101 question: When central banks seek to stimulate their economies, how do they normally do it? If you answered, “by lowering short-term interest rates,” you get half credit. For full credit, you must explain how: They create new bank reserves to purchase short-term government securities (in the U.S., that’s mostly Treasury bills). Yes, they print money.

But short-term rates are practically zero in the U.S. now, so the Fed wants to push down medium- and long-term interest rates instead. How? You guessed it: by creating new bank reserves to purchase medium- and long-term government securities.

That sounds pretty similar to garden-variety monetary policy. Yet critics are branding QE2 a radical departure from past practices and a dangerous experiment.

A Pleasure in Work

The late John Huston once said, “Choose your career as you would choose your spouse- for love and money.”

The money part has been dogging us for a couple of decades.  We’re so worried all of the time over whether we can pay the bills that we tend to forget about the love of work.  Your job is a place where you spend 1/3 or more of your day.  You should enjoy it, look forward to going to work in the morning, be excited about solving new problems, deliver service to your customers to make their lives a little better, put quality into craftsmanship.

I consider myself very lucky to have a job I love.  Recently, it has gotten much more interesting and I look forward to going to work each day to collaborate.  This is a serendipitous revelation for me and makes me realize that learning new things can keep your mind flexible and young. For people like me who have wanted to do science since they were children, to have a place to go to discover the wonder and delight of nature is a thing divinely to be thankful for.

So, I was deeply saddened to see the following labor statistics:

Pharma Layoffs per Month, 2010

Month	Layoffs
January	8,170
February	17,687
March	308
April	1,049
May	6,943
June	830
July	2,023
August	255
September	6,069
TOTAL	43,334

Even more disturbing is what the layoff picture in R&D looks like over the past two years:

Industry	2010	2009
Government/Non-Profit	123,469	109,433
Pharmaceutical	43,334	52,683
Retail	31,246	88,352
Computer	22,609	61,578
Telecommunications	22,609	53,145

Source: Challenger, Gray and Christmas

Regardless of how you may feel about Big Pharma, the loss of almost 100,000 jobs in the past year should set off alarm bells.  Although a number of the layoffs have been related to reduction in pharmaceutical sales staff, an increasing number have been to scientific staff, specifically medicinal chemists, whose jobs are going to China and India, possibly permanently.   Other layoffs in R&D are a consequence of mergers and acquisitions where salaries of scientists, frequently located in very high cost of living states, are considered a drag on the bottom line at a time when patents are expiring and new drugs can’t be approved by the FDA.

That’s thousands of well trained, dedicated scientists whose knowledge base is gone from the American workplace landscape.  It is destruction of American scientific infrastructure on an unprecedented scale.  But more than that, it is the loss of eager minds with almost childlike enthusiasm for science that will doom us as the greatest nation on earth.  In order to keep discovering new breakthroughs in physics, biology, chemistry and medicine, we need a place to go and the means to keep a roof over our heads.  Even scientists have base level caloric requirements and families and children.

I hope that lawmakers  and businessmen wake up before it’s too late.  There’s more to life than making obscene gobs of money.

To close out this post, here’s a video of crystallographers from the University of Michigan riding tricycles around the Advance Photon Source Syncrotron at the Argonne National Labs.  May we all stay forever young, as learners, employees and American citizens.

Happy Labor Day: Outstanding in the Field

A couple of days ago, the BFF and I decided to blow a wad of cash, shaking our tiny fists in defiance at the vindictive economy gods.  And for the better part of a lovely day, we ate, drank and were merry at an Outstandinginthefield event.  The idea of Outstandinginthefield is to reunite the diner with the earth and to give thanks to the people who bring you food- the farmers.  The Outstanding crew travel the country in an old bus and set up feasts in fields and by streams and next to the ocean.  Anywhere there is a connection to the land.

Our dinner was held at Mosefund Farm in Branchville, NJ.  The farm is an experiment of sorts in raising Mangelitsa pigs.  These are pigs only a mother could love.  Dark, hairy and chock full of high quality pig lard, lovingly infused with fennel and black pepper….

Here, piggy, piggy! (Bwahahahahahahhhh!)

Er, where was I?

Z-Food Farm in Lawrenceville also participated, contributing delicate tomatoes, tender beets and eggplants. The chef, Scott Andersen, was from Elements in Princeton.  The wines that were paired with the dishes were from Alba Vineyards here in NJ.  New Jersey makes good wines?  Who knew?

The guy who started it all, Jim Deneven, a farmer hat wearing (and incredibly hot) chef from California said the idea grew from his encounters with farmers at local farmers’ markets he visited to shop for his restaurant.  He got to know them, visited their farms and had a few dinners around the Bay area.  Then he bought an old bus and voile!  Restaurant on the Road!

Jim and Leah give thanks to the farmer before dinner

Just before dinner, he talked about farming and food to the approximately 200 of us foodies and people with too much money.  Someone asked him about other companies who have followed in his footsteps and have hosted dinner in the fields.  What makes Outstandinginthefield different?  Now that I think of it, it sounds like something an investor would ask, which wouldn’t be inconsistent with the clientele.  Jim explained:

“We’re different because you can’t do this kind of event well without paying your people well”

Jim hires chefs and cooks from around the country and the world.  For months at a time, the eight of them live on a tiny bus.  And these well trained cooks do this to serve the diners, not to cook for them.  And he pays them well because they are good at what they do and it is obvious that they are enjoying themselves learning from the farmers they meet, the various chefs they work with and the service they perform.  Jim explains that many of the other companies who do farmer dinners rely on cooks and servers to volunteer their time.  But paying well does show in the final details.  The farmer who hosted told us that the Outstandinginthefield crew were very well organized and prepared.  They came at 10:30am to set up and the farmer didn’t have to lift a finger.

Bring your own plate

The food was delicious.  The farmer, Michael, a full time personal chef who raises pigs on the side, was interesting and inspiring.  Jim and his sidekick Leah, the organizer, were wonderful, highly efficient and had really done their homework.  And the servers, who put their cooking careers on hold to travel the country by cramped bus to wait on spoiled foodies, were outstanding.

Take a day off, guys.  You earned it.

Not liberal, not even progressive

So says Jay Ackroyd at Atrios regarding Christina Romer’s farewell note, which recognizes the severity of the crisis we’re in but recommends very, very weak tea as a remedy:

The pressing question, then, is what can be done to increase demand and bring unemployment down more quickly. Failing to do so would cause millions of workers to suffer unnecessarily. It also runs the risk of making high unemployment permanent as workers’ skills deteriorate with lack of use and their labor force attachment weakens as hope of another job fades.

….

Policymakers should also take sensible actions to increase confidence. While some in the business community talk about regulatory uncertainty as one reason they are cautious about hiring and investing, I suspect that uncertainty about future sales is a much larger determinant of firms’ actions. We can, however, do more to highlight and codify our pragmatic approach to regulation. As OIRA Administrator Cass Sunstein detailed in his recent Congressional testimony, the estimated net benefits (that is, the benefits minus the costs) of the Obama Administration’s regulatory actions during its first year far surpass those of the first year of the two previous administrations. For the health of the economy, we should continue and trumpet this prudent regulatory approach.

While we would all love to find the inexpensive magic bullet to our economic troubles, the truth is, it almost surely doesn’t exist. The only surefire ways for policymakers to substantially increase aggregate demand in the short run are for the government to spend more and tax less. In my view, we should be moving forward on both fronts.

I was talking to a French expat yesterday and I don’t think the idiots in charge have the slightest clue what is really wrong with the economy from the ground floor.  The expat told me that she felt robbed when she came to this country.  Everything comes with a fee slapped on it.  Her salary is higher than her French colleagues, this is true.  But everything here costs more.  And her taxes here in the US are very high.  She didn’t feel that she was getting the same bang for her taxpayer buck.

Now, it’s true that in France, you have to put up with a lot of striking workers.  But they have a mass transit system that we can only dream about.  Here, college is unaffordable for most people.  There, college is nearly free.  In France, maternity leaves are long and the government gives you a stipend for each child.  Tax deductions are generous.  Here, if you’re not employed, good luck with health insurance.  There, the unemployed are covered and there are no Glenn Becks making the unfortunate feel guilty about collecting on the money they have paid into the system all their working lives.

The French are now complaining about their version of social security.  The transit workers are going on strike to protest a proposed raise in the retirement age- to 62.

If that’s socialism, I’d take it.  Yeah, they have problems but you don’t have to worry about becoming destitute over there. Here, you can be pretty sure that every sufficiently developed company has a sophisticated Metropolis algorithm optimization program designed to deprive you of the last disposable dollar in your wallet.  There are fees on top of hidden costs on top of private free market taxes everywhere you turn.  It has gotten a lot worse since Bush took office in 2000.

But we must be prudent with regulation.  We must not hire a champion like Elizabeth Warren to look out for the consumer, who can’t pinch pennies any longer and pay both governmental and capitalist taxes.  Heaven forfend we ask people who benefitted most from the Bush tax cuts to give them back.  No, let’s just starve state and local governments, lay more people off and scratch our heads when businesses can’t seem to sell anything to anyone. And I am beyond appalled that Obama would appoint the Catfood Commission to find ways to cut social security, just about the only thing we have left between old age and poverty.  He would do this on the backs of working people who have paid into social security all of their working lives and are now seeing pensions and 401Ks drying up.   He would have us all starving in order to prevent him from going to the very rich and ask them to give back and act like they care about their fellow Americans.  And to think that Alan Simpson has the ability to cut the military benefits of my brother and widowed mother enrages me beyond belief.

I want him gone.  I want him out of the White House in 2012.  No, I am not negotiable on this.  There is nothing Democrats can say or do to make me want to have him running things for four additional years.  Dont.  Even.  Ask.  He is everything I feared he would be: self-centered, inexperienced and cowardly.  He doesn’t have a clue how to get us out of this mess and he’s trying to please the wrong people.  He’s got to go.

Was Obama Wall Street’s BIGGEST Short?

Blankfein (left) and Jamie Dimon (center) at the White House, March 2009

You gotta love Lloyd Blankfein for finally telling it like it is.  Wall Street thinks we’re all suckers.  If you don’t specifically ask whether a security or CDO is crap, shitty or junk, they have no obligation to tell you.  That’s not their job.  They just sell the stuff.  It’s the 2010 version of “I just take orders”.  There’s got to be another Milgram experiment just waiting for a post doc in yesterday’s hearings.

Here are some gems from Lloyd:

Levin asked Blankfein if Goldman has to disclose to investors in securities it sells that the firm plans to take and keep the short side of the transaction.

“I don’t think we have to tell them,” the chief executive replied. In addition, he said that when underwriting a securities offering, Goldman has an obligation to conduct thorough due diligence and provide full disclosure of the assets and risks involved in the deal.

Mortgage-related securities that Goldman underwrote and sold delivered the specific exposure that clients wanted, Blankfein explained. “There are a lot of opinions about how a security will perform against the market it’s in.

“Investors we’re dealing with on the long or the short side know what they want,” he continued. “If they ask the salesperson their opinion, they have a duty of honesty. But we’re selling securities all the time that are weak. The same securities that were the subject of those comments can probably be bought today for pennies on the dollar.”

and this from the NY Times:

Mr. Blankfein was asked repeatedly whether Goldman sold securities that it also bet against, and whether Goldman treated those clients properly.

“You say betting against,” Mr. Blankfein said in a lengthy exchange. But he said the people who were coming to Goldman for risk in the housing market got just that: exposure to the housing market. “The unfortunate thing,” he said, “is that the housing market went south very quickly.”

Senator Levin pressed Mr. Blankfein again on whether the his customers should know what Goldman workers think of deals they are selling, and Mr. Blankfein reiterated his position that sophisticated investors should be allowed to buy what they want.

Mr. Blankfein was also pressed on the deal at the center of the S.E.C. case. He said the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.”

Risk.  That’s what Goldman Sachs was selling.  It was all wrapped up in a pretty fiction of established Wall Street investment houses, where bankers arrive at their offices in chauffered limos and eat in luxurious dining facilities and work out in gold plated gyms.  It all looks very clubby.  But the reality was that these people were running a giant Monte Carlo casino using the hard earned retirement funds of carpenters and other working class people.

Behind the plush digs and $600 suits and cottages on The Pond are a bunch of guys with serious gambling addictions.

Sometime back in 2006 as housing prices peaked and started to decline some of them must have started to get a little concerned.  In fact, Michael Lewis, who wrote The Big Short, says that outsiders looking in had the bankers’ number in 2003-2004.  It was March 2007 when the money started to drain away in earnest.

So, when did Wall Street decide to short the presidential election?

Think about it:  Many of the people on Wall Street should be at Gambler’s Anonymous.  in 2007, they were about to lose everything if they couldn’t find suckers to play their games and cover their bets.  Politics could have had a big influence on how much of a hit they actually had to take.  Charlie Ledley, the garage-band head fund guy with a conscience who actually tried to explain the bets to the SEC, was concerned with his own short positions.  He naively thought that if the federal government came to the rescue of homeowners, his CDS’s would be worthless.  As it turned out, the government bailed out the banks instead so Charlie made out big.  The CDO’s are still crap.

But if you are a Wall Street banker, you have to account for all kinds of possibilities.  Picture the following three scenarios:

1.) A Republican wins.  His party saw what happened during the last financial meltdown 80 years ago.  That New Deal thing was a disaster for his party.  He’s not going to make that mistake.  Screw Keynes, enter The Great Depression 2.0.  Oddly, Wall Street is probably not too keen on this idea.  You can’t play the game if you don’t have easy marks on the other side of the bet.  Depressions severely depress the number of easy marks.

2.) Democrat #1 wins.  But she’s too much of a New Dealer type.  She’s got mortgage bailout written all over her.  That would mean regulation and mortgages will be adjusted and bankers will have to take a loss.  That’s too much reality.  She’s like frickin’ rehab.  And besides, there’s always that remote possibility that the people who took out “liar’s loans” will suddenly have stupendous wage increases just in the nick of time when their 2 year teaser rate is up.  It could happen.  So, no, Democrat #1 is out.

3.) Democrat #2 is narcissistic one-trick pony with a pregnant mistress.  Nominating him means the Republican wins.  Moving on.

4.) Democrat #3.  Ooooo, this one is intriguing.  Did Wall Street court him or did he court Wall Street?  Recklessly ambitious type.  Muy simpatico.  He certainly looks like he could fit into Wall Street.  He wants to “form multi-disciplinary task forces to re-engineer our core processes so that we’re a world class organization”.  He speaks their language.  It’s meaningless, of course, and they all know that way down deep inside.  It’s code.  He’ll scratch their backs if they scratch his, to the tune of $900K in campaign contributions from Goldman Sachs employees alone.  With Dem #3, it will be an exciting spin of the wheel.  They’ll get close to the edge, probably a little too close for comfort, but in the end, they’ll be able to walk away with big profits, big bonuses and they can keep on playing.  This guy is an enabler.  Double down.

Obama sure made a lot of campaign money from Wall Street.  His small donors accounted for something like 30% of his campaign stash.  You don’t get a cool billion to run for president without making a lot of banker friends.  It was their biggest short.

In light of that very real possibility, can we on the left finally dispense with the idea that Obama was the Change! agent?  Lots of money will get you a very good PR firm with all of the marketing, astroturfing and social engineering you can eat.  Maybe he’s not the civil rights hero, politically brilliant, 11 dimensional chess playing, post partisan Messiah everyone thought he was.  Maybe he was just the best hedge Wall Street ever made and nothing more than that.  You can stop pinning your hopes and dreams on him.

As Lloyd would say, “the investment was not meant to fail, as the S.E.C. claims, and in fact, that the deal was a success, in that it conveyed “risk that people wanted to have, and in a market that’s not a failure.””

The Obots bought it and made suckers of us all.

Extra: Michael Lewis has a lengthy piece in Slate where he plays his tiny violin for the bond market traders who are suddenly getting blamed for everything they do.

Simon Johnson at BaselineScenario.com has a piece about how some parts of Europe have slipped into “emerging market” status overnight and how the rest of the world is turning their eyes to Obama for comfort and guidance to stem the ensuing panic.  Good luck with that.

And now for something radical and extreme: Get rid of the 401K

Last weekend, I got polled.  Er, by Harris, the polling company.  I’ve been getting a lot of that lately.  Maybe being a middle class suburbanite independent Democrat-in-exile in NJ means I have finally arrived but it’s unlikely I fit their notions of the typical polling subject.  Well, not after this poll anyway.

The first question was about my attitudes towards the military.  Would I suggest the military to a young person?  As it happens, I’m a military brat, my family has a long tradition of joining up and I have current family members who are career military.  So, while a military career is not for everyone and it’s certainly more dangerous than it was 10 years ago, I wouldn’t rule it out for someone who doesn’t know what they want to do as a career.

That first answer seemed to have put me, a lifelong liberal, on the Tea Party branch of the decision tree.  Many of the other questions after that point were kind of insulting to the intelligence.  For instance, is someone arrested for a crime entitled to speak to an attorney?  Jeez, all those years of Dragnet should have sunk in by now.  Of course they are.  What about if the crime is serious or particularly heinous?  Um, yeah, that’s when you are most in need of one to defend you.  What about if it’s a TERRORIST???  Do they get to speak to an attorney on the government’s dime if they are accused of TERRORISM?  Well, Timothy McVeigh went through the process, was represented, had a fair trial and got what was coming to him.  I think the system can work.  Let’s not start making exceptions for alleged terrorists.

Anyway, that wasn’t the section that tripped my trigger.  No, the one that got to me was about 401Ks.  I don’t know what our brilliant braintrusts in the Democratic party are up to but if they are the ones who are suggesting that it would be a nifty keen idea to expand the 401K system, we might as well all just get used to an America whose salad days are over.  The poll question was something like, “Would you approve or disapprove of expanding the 401k system to workers whose employers would not be required to make a matching contribution?”

That’s a weird question for so many reasons.  The first one is, if you allow *some* employers to opt out of making contributions, wouldn’t you just give the rest of them justification for also opting out?  And what about the Enron-esque employers who match with stock?  But I digress.  Because the real employment trend is to make everyone contractors, freeing the corporation from actually employing and being responsible for the lives of the people who work for them.  So, maybe that’s where this question is coming from.  Say you are now a contractor, forced to go through some rent collecting middle man who acts as an intermediary between the corporate entity and your paycheck.  Now YOU are responsible for your retirement accounts, not the corporate entity.  So, does the old corporation have to match your 401k contributions?  Something to think about as the traditional bonds between employer and employee are redefined.

But that’s not why the 401K needs to go.  Now, I am not a financial wizard.  Far from it.  If you want that kind of expertise, check out Dakinikat’s posts, or Baseline Scenario or Naked Capitalism.  No, I am just Jane Bagodonuts from the burbs.  Nevertheless, blogging allows me to expound on any subject I like or don’t like.  And I have particular dislike for my 401k, may it grow and prosper.  Here are my reasons from a liberal perspective:

1.) It’s a Ponzi scheme.  Yep.  Unlike Social Security, which we are all required to participate in and which has actuarial expertise built into it and is a fall back retirement insurance policy, the 401k is for suckers.  It relies on lots of people dumping their investment dollars into pumping up the price of stocks.  When the baby boom generation starts to retire in earnest, it’s going to want to cash in, leaving us with funds with diminishing value.  UNLESS we get some other poor schmos who don’t have employer contributions to send their money to our 401Ks in return.

2.) Wall Street thinks the money in your 401K is there for them to use as gambling chips in some global game of roulette.   We saw this happen in 2008 when the subprime mortgage market collapsed but it’s not limited to the bond market.  Oh, sure, the stock market is more highly regulated but when the bottom fell out of the mezzanine subprime tranche CDO’s it took everything else with it.  Besides, who has time to monitor their 401K’s at every minute of the day?  Most of us follow the Ron Popeill method of financial investment: set it and forget it. Turning a bunch of naive amateurs into financial planners of their old age lifestyles has turned into a windfall for the predators on Wall Street.  What we don’t know can hurt us and we don’t know what they’re up to.

3.) Wall Street and the financial sector in general is like the Wild West right now.  Until there is more oversight and regulation, you just can’t trust them.  The constant infusion of cash to these testosterone poisoned, self centered, highly overrated gamblers who manage our money only encourages more risk taking and future financial collapses.

4.) 401Ks lead to employees betting against themselves.  The shareholder is the emperor.  The money we put into these funds increase when employers see staff as unattractive drags on the bottom line.  I’ve always preferred the word Personnel to Human Resources because it acknowledges that there are persons actually doing the work and that we are not just variable costs to be minimized for the benefit of the bonus class.  Nevertheless, when corporations cut staff, the stock goes up and everyone starts dreaming of their new retirement condo in Mexico.  That is, iff they have the privilege of actually retiring.

5.) 401ks lead to less innovation.  Well, if you have to cut staff to assuage the quarterly panic attacks of the shareholders, you don’t have people innovating for you.  It’s true.  People who no longer work for you are not required to do your thinking for you.  The people who are left are too busy preparing for their own “displacement” to do any real work.

6.) 401ks invite the bonus class to invest in emerging markets, not the American market.  They’re always chasing profits.  For themselves.  For you?  Ehhhhh, not so much.  Shareholders, that is the BIG shareholders, not you and me, have to be satisfied so the money must go somewhere.  Why not India?  Oh, sure, it means that the capital will be invested in a place that means more Americans will lose their jobs and potential American entrepreneurs will go begging for startup money. But that’s the nature of capitalism.  Suck it up.

5.) In order to get a break on taxes, which in my case are pretty ugly, you can’t take the money out until you retire.  You can borrow from your 401K but then, you have to make sure you stay employed so you can pay yourself back.  It’s not very liquid and most of us can’t afford to fund multiple retirement/savings/college funds.  In emergencies, it’s useless.

Now, I am glad that I have a 401K, for the short term forseeable future, and that my employer is rather generous in funding it.  But it’s all on paper as far as I’m concerned.  By the time I am ready to retire, it might be worthless.  Getting rid of them wouldn’t exclude investing in the stock market.  It would just not institutionalize it and make it an all-but-mandatory retirement strategy.  Maybe the financial sector would be a little bit more attentive to our needs if they didn’t have a steady stream of easy money flowing into their gargantuan gullets.  Maybe customer service would improve.  There might be incentives offered to attract your business.  Maybe the risky gambling addiction behavior would cease.

I dunno.  I can only speculate with my money averse mind. But the more I hear about the financial meltdown, the more I keep coming back to the 401K “instrument” as the root of all evil.

Get

Rid

Of

It

Book Review: The Big Short

In the last couple of months, I have started to receive mail from “Wealth Management” financial advisors like Merrill-Lynch.  This is funny for two reasons: 1. I have no wealth to manage and 2. after reading the book, The Big Short: Inside the Doomsday Machine, by Michael Lewis, the last people in the world I would give my money to is Merrill-Lynch.  They were one of the last companies to figure out how to make money during the subprime housing bubble.

The Big Short is about those esoteric “instruments” that Wall Street developed to suck money out of America, the rampant fraud that signified a bubble and some ragtag outsiders who accurately predicted the bursting of that bubble and made a lot of money in the process.  Our cast of characters, the good guys, if this tale has any heros at all, includes Michael Burry, a one-eyed neurologist with Aspberger’s syndrome who liked to read prospectuses for fun, Steve Eisman, an iconclastic hedge fund manager at Frontpoint, and a “garage band” hedge fund called Cornwall Capital consisting of Charlie Ledley, Jaimie May and Ben Hockett.  With the exception of Eisman and Hockett, the rest were amateurs, just dabbling in money markets and placing bets on unlikely events.

For each of these three groups of people, there was something unique about their approach to the financial market.  Michael Burry was discovered by investors who read some of his blog posts about where to put their money in the stock market.  He was persuaded to manage other people’s money and started Scion Capital.  But unlike other financial managers, Burry told his investors that they had to be in it for the long haul.  The Cornwall Capital guys started with $100,000 and the crazy idea that if you want to make money in the financial world, you have to bet against conventional wisdom.  Steve Eisman was raised on Wall Street.  He came from a family of analysts that seemed to think the Wall Street investment companies had a fiduciary responsibility towards their investors.

The Big Short follows our outliers throughout the last decade as they discover the subprime housing market and start to wrap their heads around the concept of collateralized debt obligations and credit default swaps.  As they wander their way through the complexity and deliberate opacity of the bond market, they start to realize that it is fueling a bubble.  Eisman quickly sees that the subrpime mortgage business is encouraging fraud when his Jamaican baby nurse tells him she is over her head in debt from the 5 townhouses she’s bought in Brooklyn.  Wall Street firms were writing teaser rate loans for people who didn’t have the income to pay when the balloon rate would kick in.  Then they bundled the loans, sliced them up and sold them to unwitting investors who didn’t read the prospectuses.  Michael Burry was one of the few who did read them.  With his sharp analytical mind, he calculated when the bubble would burst and was one of the first people to place a bet on the losses when he asked for custom credit default swaps from Morgan-Stanley and Goldman-Sachs.  Charlie Ledley and Jamie May thought the subprime market was too good to be true so they bet against it too.

The book takes us through the complicated maze of the financial world from Wall Street to Las Vegas and Berkeley and introduces us to a bunch of colorful characters.  There’s the almost allegorical investment fund manager who just passes his investors money through the CDO market, the salesman from Deutsche Bank who lays out how the whole Ponzi scheme works and the Morgan Stanley guy who loses more money for his accounts in the meltdown than anyone  in history.

Our good guys start to get more alarmed as the enormity of the coming armageddon starts to take shape.  Well before the crash, they challenge the ratings firms and bankers in public, write letters to their investors describing what’s happening and even have a social conscience when they make a trip to the SEC and try to explain it to a clueless government official.  When the proverbial $hit starts hitting the fan, they’re as anxious and distressed as everyone else even though they each made a ton of money.  In Burry’s and Cornwall’s case, the events were so unsettling that they gave up managing money.

There were a couple of take home messages for me.  For one thing, I absolutely do not trust Wall Street after reading this book.  There may be some honest brokers out there but not nearly enough to handle the trillions of retirement dollars that pass through their Bloomberg terminals every day.  Another disturbing thing is how disconnected Wall Street bankers and brokers seem to be with the lives of average Americans.  They don’t take care of the money they’ve been entrusted with.  It’s almost like it’s not real to them.  They might as well be manipulating poker chips or Monopoly scrip.  And it didn’t seem to occur to them that the vast number of Americans who got trapped into teaser rate loans were not going to be able to pay their mortgages when the loan readjusted.  Just where did these geniuses think the money was going to come from in a decade when wages were essentially flat and made more difficult to come by due the short term thinking of the institutional investors?  One curious thing is the timing of the bubble burst.  It started in March of 2007, well before the primaries of 2008.  The guys at Cornwall Capital started to get concerned that they were going to be exposed financially when the government came to the rescue of strapped mortgage holders.  But that never happened.  As we all know, Hillary was the one in favor of a homeowners bailout; Obama was not.  It makes Obama’s “win” even more suspect.

As you guys might know, I listen to books on my iPhone and rate my them by sponge count.  That is, the book has to be engrossing enough that I won’t even notice that I’m cleaning the kitchen.  I give this one 4.5 sponges.  It was easy to get engrossed in the book, so much so that I was laughing out loud while I was walking around Ikea.  But I was about 2/3’s of the way through the book before sentences like “And so it was that Ben Hockett found himself sitting in a pub called the Powder Monkey in the city of Exmouth in the county of Devon England, seeking a buyer of $205 million dollars of credit default swaps on the AA tranches of mezzanine sub-prime CDO’s” didn’t make me stop the audio and rewind.  So, if you’re new to mezzanine subprime tranches, expect some confusion at first.  Lewis does an excellent job of parsing it for the uninitiated but it’s still dense material.

I recommend the audible version in particular because it includes a 10 minute interview with the author at the end.  Lewis is pretty tough on the Obama administration.  He says it has made financial reform harder by hiring the guys who were most responsible for letting it the subprime bubble happen in the first place.  He has no respect for Geithner.  Lewis also thinks that Obama blew it when he took office.  He could have used the momentum and mandate he had in early 2009 to clean up the mess.  He’s now wasted his political capital on a lousy health care reform bill and has let the financial mess simmer, ready to boil over in another meltdown.  From what I can tell, it ain’t over yet, folks.

Highly recommended.

Note: I bought this book on my own and wasn’t asked to review it.

Banquo’s Ghosts

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I’ve always been a loner.  Growing up I was not one of the kewl kidz but it never bothered me because I never felt the need to be part of any group.  I prefer jobs that let me work independently without co-workers getting in my way or bosses looking over my shoulder.  I live alone, but I’m not lonely.

Maybe that’s why peer pressure has never had much effect on me.  I’m always behind on fashions and the latest pop trends.  I usually discover the fashion changes when I go to buy something and the clerk informs me that “they don’t make those anymore.”

It’s not that I’m afraid to try new things.  But if I try it and I don’t like it then I don’t keep doing/wearing/eating whatever it is, even if everyone else believes (or claims to believe) that it’s the greatest/coolest/most wonderful thing ever.  I make up my own mind and I trust my own judgment.

But even though I’m a loner and don’t need anyone’s approval to validate my existence I was never treated like an outcast before (or if I was I didn’t notice.)

Ironically, I now find myself art of a group – of pariahs.  If you’re reading this there’s a pretty good chance you’re in that group with me. If you’re not in our group then you’re probably a deranged blogstalker who needs to get a life.

You can divide lefty bloggers into three main groups – the ones who supported Obama enthusiastically and uncritically, the ones who would have preferred someone else but went ahead and voted for him anyway and those of us that saw through him and refused to support him just because he had a “D” after his name.

Among the many weird phenomena that swept Left Blogistan beginning in 2007 was the Obama supporters’ rabid intolerance for differing/dissenting views.  Not that long ago nonconformity was considered a highly-prized virtue by liberals and progressives and freedom of speech was a holy principle that the Flying Spaghetti Monster gave to Founding Fathers.

Suddenly everyone on the left side of the blogosphere was expected to conform and stop exercising independent thought – as if we were right-wing authoritarian followers.

To question the One-derfulness of Obama was heresy, and supporting Hillary Clinton was blasphemy.  The cult-like behavior of the Obots was never more evident than in the way they persecuted anyone who dared to disagree with them. At many blogs moderation was non-existent or one-sided.  Anyone who refused to support Teh Precious had two choices: STFU or GTFO.  So we left, and they tried to follow us so they could keep harassing us.

We had committed a mortal sin – we rejected the divinity and most awesome gloriousity of Barack Obama, made worse by the fact that we were very vocal about it.  But the worst part is that we were liberal Democrats, which made us apostates to the true believers.

They told us we weren’t wanted in “their” party.  They said we were old, ugly and stupid and no one wanted us.  Then after all that they went ballistic when we announced after the RBC meeting that we didn’t give a fuck about party unity and we were not going to vote for Obama no matter how many of Hillary’s delegates they gave him.  For that we got called traitors.

The Culture of Cannibalism in US Politics: The Triumph of The Cyclop’s Values Over Democratic Citizenship

{The first essay in this series introduced a model I created to explain the cycle of corruption that plagues US politics. This essay looks into the roots of this corruption. It takes a long time to get to the payoff. Further, the conclusion is somewhat ex nihilo if you have not read the first essay. This said, for those who dare, I hope you find it worth the read.}

Polyphemos the cyclops would have eaten Odysseus, if his survival was dependent on the moral virtues of Silenus’s satyrs. Fortunately for Odysseus, and Silenus and his lot, Odysseus could depend on his fellow citizens. If Polyphemos had the majority of America’s elected representatives depending on him for their survival in his cave, the way that they are presently beholden to lobbyists’ money for their electoral survival, he could have had a ready supply of citizens for his daily meals.

Cyclopean virtues regularly triumph over the virtues of democratic citizenship in the political landscape of the United States. Given that the Declaration of Independence embodies the spirit and principles that ground the virtues of democratic citizenship, why is it that cyclopes, who eat humans, win the day in America? Answering this question requires that we journey back to Attic Greece and her proto-democratic foundations.

Common Sense and the sensus communis: anatomy of an American pressure cooker

Gay-Lussac

The pressure of a fixed mass and fixed volume of a gas is directly proportional to the gas’s temperature.

This relationship is known as the Gay-Lussac’s Law and a pressure cooker is an example of the law in practice. Cooking under pressure creates the possibility of cooking with high temperature liquids because the boiling point of a liquid increases as its pressure increases. High pressure and high heat can result in delectable dishes.

Cooking under pressure can be also dangerous because as liquids change phase into gases their volume expands greatly. For example, at atmospheric pressure the volume of steam is about 1700 times greater than the volume of water. To prevent pressure cookers from becoming bombs, relief devices (pop safety valves) are employed that are capable of relieving all of the steam the vessel is capable of producing.

America the Beautiful Pressure Cooker

The political pressure cooker is beginning to heat up. The power brokers and institutions that drive the nation have arrived unannounced on the doorsteps of America like a gaggle of unwanted, high maintenance relatives that demand hospitality for an unforeseeable time and that won’t take no for answer. Furthermore, they’ve announced that more relatives are on the way. Whatever plans America’s householders had, they’ve just gone out the window, with their household budgie and the relatives’ cat in hot pursuit.

People are justifiably angry with this incursion. Their budgie might not have been much, but it was “their budgie”, nurtured from birth into what it had become. Justifiably angry householders are trying to work out why the relatives arrived on their doorsteps and why they brought their fucking cat.