29 September, 2008

Batten Down The Hatches, People

...there's an economic hurricane just offshore.

If they don't reconsider this bailout and fast...

Dear readers: you need to read this. It's a letter from John Maudlin, an independent financial analyst, to his Congressman.

It's long, for which I apologize. But it explains the interconnectedness of this economy and why the so-called bailout is absolutely essential.

Dear Joe,

I understand your reluctance to vote for a bill that 90% of the people who voted for you are against. That is generally not good politics. They don't understand why taxpayers should spend $700 billion to bail out rich guys on Wall Street who are now in trouble. And if I only got my information from local papers and news sources, I would probably agree. But the media (apart from CNBC) has simply not gotten this story right. It is not just a crisis on Wall Street. Left unchecked, this will morph within a few weeks to a crisis on Main Street. What I want to do is describe the nature of the crisis, how this problem will come home to your district, and what has to be done to avert a true, full-blown depression, where the ultimate cost will be far higher to the taxpayers than $700 billion. And let me say that my mail is not running at 10 to 1 against, but it is really high. I am probably going to make a lot of my regular readers mad, but they need to hear what is really happening on the front lines of the financial world.

First, let's stop calling this a bailout plan. It is not. It is an economic stabilization plan. Run properly, it might even make the taxpayers some money. If it is not enacted very soon (Monday would be fine), the losses to businesses and investors and homeowners all over the US (and the world) will be enormous. Unemployment will jump to rates approaching 10%, at a minimum. How did all this come to pass? Why is it so dire? Let's rewind the tape a bit. 

We all know about the subprime crisis. That's part of the problem, as banks and institutions are now having to write off a lot of bad loans. The second part of the problem is a little more complex. Because we were running a huge trade deficit, countries all over the world were selling us goods and taking our dollars. They in turn invested those excess dollars in US bonds, helping to drive down interest rates. It became easy to borrow money at low rates. Banks, and what Paul McCulley properly called the Shadow Banking System, used that ability to borrow and dramatically leverage up those bad loans (when everyone thought they were good), as it seemed like easy money. They created off-balance-sheet vehicles called Structured Investment Vehicles (SIVs) and put loans and other debt into them. They then borrowed money on the short-term commercial paper market to fund the SIVs and made as profit the difference between the low short-term rates of commercial paper and the highe! r long-term rates on the loans in the SIV. And if a little leverage was good, why not use a lot of leverage and make even more money? Everyone knew these were AAA-rated securities.

And then the music stopped. It became evident that some of these SIVs contained subprime debt and other risky loans. Investors stopped buying the commercial paper of these SIVs. Large banks were basically forced to take the loans and other debt in the SIVs back onto their balance sheets last summer as the credit crisis started. Because of a new accounting rule (called FASB 157), banks had to mark their illiquid investments to the most recent market price of a similar security that actually had a trade. Over $500 billion has been written off so far, with credible estimates that there might be another $500 billion to go. That means these large banks have to get more capital, and it also means they have less to lend. (More on the nature of these investments in a few paragraphs.)

Banks can lend to consumers and investors about 12 times their capital base. If they have to write off 20% of their capital because of losses, that means they either have to sell more equity or reduce their loan portfolios. As an example, for every $1,000 of capital, a bank can loan $12,000 (more or less). If they have to write off 20% ($200), they either have to sell stock to raise their capital back to $1,000 or reduce their loan portfolio by $2,400. Add some zeroes to that number and it gets to be huge.

And that is what is happening. At first, banks were able to raise new capital. But now, many banks are finding it very difficult to raise money, and that means they have to reduce their loan portfolios. We'll come back to this later. But now, let's look at what is happening today. Basically, the credit markets have stopped functioning. Because banks and investors and institutions are having to deleverage, that means they need to sell assets at whatever prices they can get in order to create capital to keep their loan-to-capital ratios within the regulatory limits. 

Remember, part of this started when banks and investors and funds used leverage (borrowed money) to buy more assets. Now, the opposite is happening. They are having to sell assets into a market that does not have the ability to borrow money to buy them. And because the regulators require them to sell whatever they can, the prices for some of these assets are ridiculously low. Let me offer a few examples. 

Today, there are many municipal bonds that were originally sold to expire 10-15 years from now. But projects finished early and the issuers wanted to pay them off. However, the bonds often have a minimum time before they can be called. So, issuers simply buy US Treasuries and put them into the bond, to be used when the bond can be called. Now, for all intents and purposes this is a US government bond which has the added value of being tax-free. I had a friend, John Woolway, send me some of the bid and ask prices for these type of bonds. One is paying two times what a normal US Treasury would pay. Another is paying 291% of a normal US Treasury. And it is tax-free! Why would anyone sell what is essentially a US treasury bond for a discount? Because they are being forced to sell, and no one is buying! The credit markets are frozen.

Last week, I wrote about a formerly AAA-rated residential mortgage-backed security (RMBS) composed of Alt-A loans, better than subprime but less than prime. About 5% of the loans were delinquent, and there are no high-risk option ARMs in the security. It is offered at 70 cents on the dollar. If you bought that security, you would be making well over 12% on your money, and 76% of the loans in the portfolio of that security would have to default and lose over 50% of their value before you would risk even one penny. Yet the bank which is being forced to sell that loan has had to write down its value. As I wrote then, that is pricing in financial Armageddon. 

Let's look at the following graph. It is an index of AAA-rated mortgage bonds, created by http://www.markit.com. It is composed of RMBSs similar to the one I described above. Institutions buy and sell this index as a way to hedge their portfolios. It is also a convenient way for an accounting firm to get a price for a mortgage-backed security in a client bank's portfolio. With the introduction of the new FASB 157 accounting rule, accountants are very aggressive about making banks mark their debt down, as they do not want to be sued if there is a problem. Notice this index shows that bonds that were initially AAA are now trading at 53 cents on the dollar, which is up from 42.5 cents two months ago.

Accountants might look at the bond I described above, look at this index, and decide to tell their clients to mark the bonds down to $.53 on the dollar. The bank is offering the bond at $.70 because it knows there is quality in the security. They are being forced to sell. And guess wha t? There are no buyers. An almost slam-dunk 12% total-return security with loss-coverage provisions that suggest 40% of the loans could default and lose 50% before your interest rate yields even suffered, let alone risk to your principal – and it can't find a buyer.


One of the real reasons these and thousands of other good bonds are not selling now is that there is real panic in the markets. The oldest money market fund "broke the buck" last week, because they had exposure to Lehman Brothers bonds. We are seeing massive flights of capital from money market funds, including by large institutions concerned about their capital. What are they buying? Short-term Treasury bills. Three-month Treasury bills are down to 0.84%.

It gets worse. Last week one-month Treasury bills were paying a negative 1%!!! That means some buyers were so panicked that they were willing to buy a bond for $1 that promised to pay them back only $.99 in just one month. The rate is at 0.16% today. If something is not done this weekend, it could go a lot lower over the next few days. That is panic, Joe.

I don't want to name names, as this letter goes to about 1.5 million people and I don't want to make problems for some fine banking names; but there is a silent bank run going on. There are no lines in the street, but it is a run nevertheless. It is large investment funds and corporations quietly pulling their money from some of the best banks in the country. They can do this simply by pushing a button. We are watching deposit bases fall. It does not take long. Lehman saw $400 billion go in just a few months this sum! mer. Think about that number. Any whiff of a problem and an in! stitutio n that is otherwise sound could be brought low in a matter of weeks. And the FDIC could end up with a large loss that seemed to have come from out of nowhere.

The TED Spread Flashes Trouble

There is something called the TED spread, which is the difference between three-month LIBOR (the London Inter Bank Offered Rate which is in euro dollars, also called The Euro Dollar Spread, thus TED) and three-month US Treasury bills. Three-month LIBOR is basically what banks charge each other to borrow money. Many mortgages and investments are based on various periods of LIBOR. Look at the chart below. Typically the TED spread is 50 basis points (0.50%) or less. When it spikes up, it is evidence of distress in the financial markets. The last time the TED spread was as high as it is now was right before the market crash of 1987. This is a weekly chart, which does not capture tonight's (Friday) change, which would make it look even worse. Quite literally, the TED spread is screaming panic. 

The Fed has lowered rates to 2%. Typically, three-month LIBOR tracks pretty close to whatever the Fed funds rate is. Starting with the credit crisis last year, that began to change. Look at the chart below. 

Remember, LIBOR is what banks charge to each other to make loans. Lower rates are supposed to help b! anks improve their capital and their ability to make loans at lower in terest rates to businesses and consumers. Look at what has happened in the past few weeks, in the chart above. The spread between three-month LIBOR and the Fed funds rate is almost 200 basis points, or 2%! That is something that defies imagination to market observers. On the chart above, it looks like it has not moved that much, but in the trading desks of banks all over the world it is a heart-pounding, scare-you-to-death move. The chart below reflects what traders have seen in the past two weeks, and it moved up more today.

Now let's look at the next chart. This is the amount of Tier 1 commercial paper issued. This is the lifeblood of the business world. This is how many large and medium-sized businesses finance their day-to-day operations. The total amount of commercial paper issued is down about 15% from a year ago, with half of that drop coming in the last few weeks. Quite literally, the economic body is hemorrhaging. Unless something is done, businesses all over the US are going to wake up in a few weeks and find they simply cannot transact business as usual. This is going to put a real crimp in all sorts of business we think of as being very far from Wall Street.

I could go on. Credit spreads on high-yield bonds that many of our best high-growth businesses use to finance their growth ar! e blowing out to levels which make it impossible for the companies to come to the market for new funds. And that is even if they could find investors in this market! There are lots of other examples (solid corporate loans selling at big discounts, asset-backed securities at discounts, etc.), but you get the idea. Suffice it to say that the current climate in the financial market is the worst since the 1930s. But how does a crisis in the financial markets affect businesses and families in Arlington, Texas, where my office and half of your district is?

The Transmission Mechanism

The transmission in a car takes energy from the engine and transfers it to the wheels. Let's talk about how the transmission mechanism of the economy works.

Let's start with our friend Dave Moritz down the street. He needs financing to be able to sell an automobile. To get those loans at good prices, an automaker has to be able to borrow money and make the loans to Dave's customers. But if something does not stop the bleeding, it is going to get very expensive for GM to get money to make loans. That will make his cars more expensive to consumers. Cheap loans with small down payments are the lifeblood of the auto selling business. That is going to change dramatically unless something is done to stabilize the markets.

Credit card debt is typically packaged and sold to investors like pension funds and insurance companies. But in today's environment, that credit card debt is going to have to pay a much higher price in order to find a buyer. That means higher interest rates. Further, because most of the large issuers of credit cards are struggling with their leverage, they are reducing the amount of credit card debt they will give their cardholders. If they continue to have to write down mortgages on their books because of mark-to-market rules which price assets at the last fire-sale price, it will mean even more shrinkage in available credit.

Try and sell a home above the loan limits of Fannie and Freddie today with a nonconforming jumbo loan. Try and find one that! does not have very high rates, because many lenders who normally do them simply cannot afford to keep them on their balance sheets. And a subprime mortgage? Forget about it. This is going to get even worse if the financial markets melt down.

We are in a recession. Unemployment is going to rise to well over 6%. Consumer spending is going to slow. This is an environment which normally means it is tougher for small businesses and consumers to get financing in any event. Congress or the Fed cannot repeal the business cycle. There are always going to be recessions. And we always get through them, because we have a dynamic economy that figures out how to get things moving again.

Recessions are part of the normal business cycle. But it takes a major policy mistake by Congress or the Fed to create a depression. Allowing the credit markets to freeze would count as a major policy mistake.

I have been on record for some time that the economy will go through a normal recession and a slow recovery, what I call a Muddle Through Economy. This week I met with executives of one of the larger hedge funds in the world. They challenged me on my Muddle Through stance. And I had to admit that my Muddle Through scenario is at risk if Congress does not act to stabilize the credit markets.

Let's Make a Deal

Why do we need this Stabilization Plan? Why can't the regular capital markets handle it? The reason is that the problem is simply too big for the market to deal with. It requires massive amounts of patient, long-term money to solve the problem. And the only source for that would be the US government.

There is no reason for the taxpayer to lose money. Warren Buffett, Bill Gross of PIMCO, and my friend Andy Kessler have all said this could be done without the taxpayer losing money, and perhaps could even make a profit. As noted above, these bonds could be bought at market prices that would actually make a long-term buyer a profit.! Put someone like Bill Gross in charge and let him make sure t! he taxpayers are buying value. This would re-liquefy the banks and help get their capital ratios back in line.

Why are banks not lending to each other? Because they don't know what kind of assets are on each other's books. There is simply no trust. The Fed has had to step in and loan out hundreds of billions of dollars in order to keep the financial markets from collapsing. If you allow the banks to sell their impaired assets at a market-clearing fair price (not at the original price), then once the landscape is cleared, banks will decide they can start trusting each other. The commercial paper market will come back. Credit spreads will come down. Banks will be able to stabilize their loan portfolios and start lending again. 

Again, the US government is the only entity with enough size and patience to act. We do not have to bail out Wall Street. They will still take large losses on their securities, just not as large a loss as they are now facing in a credit market that is frozen. As noted above, there are many securities that are being marked down and sold far below a rational price.

If we act now, we will start to see securitization of mortgages, credit cards, auto loans, and business loans so that the economy can begin to function properly.

What happens if we walk away? Within a few weeks at most, financial markets will freeze even more. We will see electronic runs on major banks, and the FDIC will have more problems than you can possibly imagine. The TED spread and LIBOR will get much worse. Businesses which use the short-term commercial paper markets will start having problems rolling over their paper, forcing them to make difficult cuts in spending and employment. Larger businesses will find it more difficult to get loans and credit. That will have effects on down the economic food chain. Jim Cramer estimated today that without a plan of some type, we could see the Dow drop to 8300. That is as good a guess as any. It ! could be worse. Home valuations and sales will drop even furth! er.

The average voter? They will see stock market investments off another 25% at the least. Home prices will go down even more. Consumer spending will drop. What should be a run-of-the-mill recession becomes a deep recession or soft depression. Yes, that may be worst-case scenario. But that is the risk I think we take with inaction. 

A properly constructed Stabilization Plan hopefully avoids the worst-case scenario. It should ultimately not cost the taxpayer much, and maybe even return a profit. The AIG rescue that Paulson arranged is an example of how to do it right. My bet is that the taxpayer is going to make a real profit on this deal. We got 80% of AIG, with what is now a loan paying the taxpayer over 12%, plus almost $2 billion in upfront fees for doing the loan. That is not a bailout. That is a business deal that sounds like it was done by Mack the Knife.

This deal needs to be done by Monday. Every day we wait will see more and more money fly out the doors of the banks, putting the FDIC at ever greater risk. Panic will start to set in, moving to ever smaller banks. Frankly, we are at the point where we need to consider raising the FDIC limits for all deposits for a period of time, until the Stabilization Plan quells the panic.

I understand that this is a really, really bad idea according classical free-market economic theory. You know me; I am as free market as it comes. But I also know that without immediate action a lot of people are really going to be hurt. Unemployment is not a good thing. Losses on your home and investments hurt. It is all nice and well to talk about theories and contend the market should be allowed to sort itself out; and if we have a deep recession, then that is what is needed. But the risk we take is not a deep recession but a soft depression. The consequences of inaction are simply unthinkable.

Joe, I am telling you that the markets are screaming panic. Yes, Senator Richard Shelby has his 200 economists saying this is a bad deal. But they are ivory tower kibitzers who have never sat at a trading desk. They have never tried to put a loan deal together or had to worry about commercial paper markets collapsing. I am talking daily with the people on the desks who are seeing what is really happening. Shelby's economists are armchair generals far from the front lines. I am talking to the foot soldiers who are on the front lines. 

Every sign of potential disaster is there. You and the rest of the House have to act. It has to be bipartisan. This should not be about politics (even though Barney Frank keeps talking bipartisan and then taking partisan shots, but I guess he just can't help himself). It should be about doing the right thing for our country and the world. I know it will not be fun coming back to the district. Talking about TED spreads and LIBOR will not do much to assuage voters who are angry. But it is the right thing to do. And I will be glad to come to the town hall meeting with you and help if you like.

With your help, we will get through this. In a few years, things will be back to normal and we can all have stories to tell our grandkids about how we got through this.






28 September, 2008

Read It And Weep

ClubOrlov: Adieu, Stage 1 Collapse

Geez, a couple more weeks of this turmoil and people might actually start listening to those who have been warning us all for years. 

I'm going to list Dmitry Orlov's stages of collapse here, so that we have a handy checklist:

Stage 1: Financial collapse. Faith in "business as usual" is lost. The future is no longer assumed resemble the past in any way that allows risk to be assessed and financial assets to be guaranteed. Financial institutions become insolvent; savings are wiped out, and access to capital is lost.

Stage 2: Commercial collapse. Faith that "the market shall provide" is lost. Money is devalued and/or becomes scarce, commodities are hoarded, import and retail chains break down, and widespread shortages of survival necessities become the norm.

Stage 3: Political collapse. Faith that "the government will take care of you" is lost. As official attempts to mitigate widespread loss of access to commercial sources of survival necessities fail to make a difference, the political establishment loses legitimacy and relevance.

Stage 4: Social collapse. Faith that "your people will take care of you" is lost, as local social institutions, be they charities or other groups that rush in to fill the power vacuum run out of resources or fail through internal conflict.

Stage 5: Cultural collapse. Faith in the goodness of humanity is lost. People lose their capacity for "kindness, generosity, consideration, affection, honesty, hospitality, compassion, charity" (Turnbull, 
The Mountain People). Families disband and compete as individuals for scarce resources. The new motto becomes "May you die today so that I die tomorrow" (Solzhenitsyn, The Gulag Archipelago). There may even be some cannibalism.

Orlov describes, in one of the most cogent examinations of collapse I've ever
come across, ways in which to arrest the process and reverse it at each stage; he also explains why the United States is unlikely to pursue any of these prudent courses of action, at least in the early stages. He predicts the rapid depreciation of the American dollar, hastening the appearance of Stage Two: Commercial Collapse--which, he says, we'll "get for Christmas" or shortly after. Indeed, we're already seeing gasoline shortages in the southern U.S.

I can hear many of my readers suggesting this guy's out to lunch and things aren't really that bad, are they?

Dmitry Orlov knows what he's talking about, because he lived through the Soviet collapse that got almost into stage four before wiser heads prevailed. He sees a lot of similarities between what befell the former Soviet Union and what's in progress in the United States of America.  The key difference is that Soviet society was considerably more resilient than American society likely is--the Soviets didn't have reality television and so had to subsist on reality. I'm not suggesting we're on a steep slope to family breakdown and cannibalism, and neither is Orlov. Still, it is somewhat sobering to see Stage 1 and early Stage 2 unfolding all around us, wouldn't you say?

Has Anybody Even SEEN a Liberal Ad?

I'm just wondering. I don't think I have.

I've seen Harper the Cold and Aloof coming off all warm and fuzzy, and I've seen Layton's 'New Strong' campaign ("we're so strong we're going to push all the corporations right the hell out of Canada by taxing them to death, and that's how much we care about the working Canadian!")

But no Dion. 

I know the Liberals are damn near broke, but yeesh, you'd think they could at least cobble something together. Then again, if Dion's in it, nobody'd understand it, anyway. Stephane Dion makes Jean Chretien look like Barack Obama.

Oh, how far the mighty are about to fall. Canada's Natural Governing Party is quite likely to be reduced to third party status in the House, with Layton's NDP bearing the standard of the Left. Provided Harper gets his majority, this can only be a good thing. (A Harper minority with NDP opposition and they might as well just call another election--the two parties have, let's see, umm, nothing in common.)

Part of the problem is that Green Shift, or more specifically, Dion's utter failure to explain it. You want a carbon tax primer, you're better off going to Elizabeth May: her Greens practically wrote the damned thing. When it became clear that Canadians just weren't buying what Stephane was selling, he suddenly decided the entire centrepiece of his campaign was no big deal. Wishy-washy, anyone?

He's gonna get crucified in the debate. Palin will come off much better in her debate the same night, mark my words.

Me, I'm voting Green. I'm going to break tradition this election and only present their platform...if you are interested in the other parties, you know where to find them (Google is your friend). Even with May's inclusion in the leaders' debate, I suspect many people will continue to see the Greens as a one-trick pony. If you're willing to check out their policies, you're apt to discover this is no longer the case. They are an intriguing mix of fiscal conservatism and social liberalism, and I support a good chunk of what they're trying to accomplish.
In voting Green, I'm meeting two objectives. One, and most importantly, I'm doing my bit to raise the Green profile. Two, I'm helping to hand Harper that majority.  Yeah, I'll admit that out loud.
Harper is by no means my favorite, but he's probably the best of a bad lot right now. As Catelli notes,

Even with a majority, it's not that easy for Harper to destroy Canada (on purpose or otherwise). He is only one man, he has no special powers...being a divisive figure eventually comes back to haunt you...

I'm from Ontario. We went from Bob Rae's NDP straight to the Harris Tories--which is as violent a political whipsaw as you're ever likely to see--and then recentered ourselves contentedly in the middle where we belong.  I suspect the same sort of dynamic is now playing out on the federal level. Better Harper gets his majority now and we recenter ourselves in five years. Better that than a minority that will just have us voting again next month.

27 September, 2008

FrankenBarbie?

I'm going to have to use that.

The Huffington Post is not known for its objective take on issues. John McCain is not exactly their favorite candidate and they make no bones about telling you this on every screen.
Nevertheless, there's some interesting conjecture in here.

Bear in mind that John McCain is very likely to die in office, so Sarah Palin is truly a heartbeat away from the Presidency. I find the "Evita" comparison quite intriguing. 

Politically, Palin nee Heath and Peron nee Ibaguaren are worlds apart (all the more so since the latter's in the next world). But the two women have much in common. Both came out of nowhere--Palin from tiny Wasilla, Alaska, Eva from the slums of Junin--to assume positions of great power that nobody thought for a second either was qualified for. There's a memorable couplet from the Lloyd-Webber/Rice musical Evita that comes to mind:
Her only good parts are between her thighs
She should stare at the ceiling, not reach for the skies

Both worked in media (Palin in television and as a newspaper reporter; Eva in B-movies and radio). Sarah, like Eva before her, arrives as the protege of a much older man. Sarah, like Eva before her, carries the blessed curse of populism. The Republicans see in Sarah Palin the pioneering spirit of America, much as Argentines of a certain provincial background venerated Eva Peron. And, most interesting to me, Eva Peron is still accused of all manner of evil more than half a century after her death. The lies started early and they were vicious. To this day most people believe, thanks to Evita the play and movie, that Eva Duarte slept her way to the top, that she bankrupted the country, that she was a fascist and a thief who only pretended to care for others. Most, if not all, of this is patently false.
Eva Peron was no saint, but she was not a monster either. Most of us human beings are somewhere in the middle of the continuum. 

You're hearing things about Palin, too--vicious, nasty things. They trotted out infidelity right early (always a killer if it can be proved and you're a woman); there's been a concentrated attack on every remotely controversial thing Palin's ever done as mayor and as governor. Hey, people? Governing anything is going to generate controversy. And nothing they've come up with so far to stick Sarah with has explained away that 80+ percent approval rating. Obviously she's been doing something right.

Republicans have been quick to exploit this. The 80+ percent of people who approved of Palin as governor are, of course, "our kind of people". It's that damned elitist 20% stirring the pot.  This, too, has a ready comparison in the story of Eva Peron. Most Argentines loved her, adored her, almost worshipped her...but the ones who didn't absolutely despised her.

It must be said that Peronism as a political movement certainly had its unsavory aspects, including a silencing of dissenters. A cult of personality sprung up first around Juan Peron, then, much more strongly, around his wife. Such things are hard to control and do not always come about as a result of an act of will. But it's only natural to try to exploit them. If you didn't believe in Peronism, the party line went, you were not a true Argentine. I hear echoes of that in the words of Ed Kains, Palin's pastor, who has said that all criticism of George W. Bush comes "from hell". He's not sure whether Democrats can be "saved", either.  (Where do Republicans find these kooky pastors, anyway? I can fall into Christian patterns quite easily, and I defy the Kains and Hagees of the world to show me in their Bibles where it says salvation depends on one's political views. It terrifiess me that there are millions of so-called Christians in middle America who accept this bullshit.)

I digress.

What can be said without doubt is that Peron was the first woman to fuse celebrity and politics.
Sarah Palin is much in that mold...more than one article I've read has lamented that people are inclined to vote for Palin the way they'd vote for somebody on American Idol. Well, why not? More people vote for every Idol than ever vote for President. It often seems to me in our celebrity obsessed age that people actually think reality shows are more real than reality...sad, but true. Eva Peron can almost be said to have started this whole trend with her pan-European "Rainbow Tour" combining aspects of Amazing Race, The Oprah Winfrey Show, and Queen For A Day

I'm quite interested to see how Palin fares in the debate with Biden. I'm guessing that (a) she'll do better than she's expected to and (b) it won't really matter anyway. 

(A) Palin is a neophyte, but she hasn't gotten where she is by dumb luck alone. She can toe the Republican party line effortlessly--she really believes in this stuff--and I've no doubt she's getting intensive coaching on the finer points. 

(B) Palin can spout lies--like that Obama plans on raising taxes for everybody--without consequence, because everybody does that nowadays and most people don't even bother to check the facts. Also, she's got that hockey mom charisma on her side. Middle America will just eat her up...hey, Martha, that Sarah woman looks just like you! And she could be vice-president! It's that Eva Peron, rags-to-riches story all over again.

Wolf takes great pains in the article linked above to make Palin into a Rove-puppet. While taking her thesis under advisement, I'm not sure I agree. I'm sure that many people, not just Rovians, see in Sarah a tabula rasa on which they can write their wildest ideas. But it should be noted that Sarah Palin has her own beliefs and moral code (not that I agree with much of it). Palin--like the spiritual leader of the Argentine nation--isn't a saint. But she's not a monster either. 

26 September, 2008

We're All On This Ship Together

In a solitude of the sea
Deep from human vanity,
And the Pride of Life that planned her, stilly couches she.

Steel chambers, late the pyres
Of her salamandrine fires,
Cold currents thrid, and turn to rhythmic tidal lyres.

Over the mirrors meant
To glass the opulent
The sea-worm crawls -- grotesque, slimed, dumb, indifferent.

Jewels in joy designed
To ravish the sensuous mind
Lie lightless, all their sparkles bleared and black and blind.

Dim moon-eyed fishes near
Gaze at the gilded gear
And query: "What does this vaingloriousness down here?" ...

Well: while was fashioning
This creature of cleaving wing,
The Immanent Will that stirs and urges everything

Prepared a sinister mate
For her -- so gaily great --
A Shape of Ice, for the time far and dissociate.

And as the smart ship grew
In stature, grace, and hue,
In shadowy silent distance grew the Iceberg too.

Alien they seemed to be;
No mortal eye could see
The intimate welding of their later history,

Or sign that they were bent
By paths coincident 
On being anon twin halves of one august event,

Till the Spinner of the Years
Said "Now!" And each one hears,
And consummation comes, and jars two hemispheres.


--Thomas Hardy, "The Convergence of the Twain"


"Bail! Bail! Bail!" goes the cry from Wall Street.
"Fail! Fail! Fail!" is the response from Main Street.

There's a fundamental disconnect between the fat cats of finance and the average North American citizen. We read of it here, as New York's Finest and Frippiest have to forego the $25 million yacht, the "rite of passage" nosejob, and the $1200/week nanny.
But we plebes down here in the trenches tend to forget that the disconnect runs both ways. The rich, including those same Wall Street fat cats, drive the economy and have a direct effect on our standard of living.

So here we are out in the ocean, three days out from land. Most of us got suckered onto this here cruise ship with slick promises. "Play now, pay later", and all that. "Put it on credit and then forget it." 

"God Himself could not sink this ship."

Where have I heard that before?

Full speed ahead, into a known icefield. No binoculars--they were left behind in Southampton, and who needs 'em? By the same token, screw the lifeboats--half of them are missing, and there were arguments to forget about the other half--more room for the rich to cavort and promenade, you see.

The iceberg reared its ugly, subprime head after nightfall. We tried to port 'round it, but turning a financial system the size of the Titanic is no small task. Ramming the berg dead on would have been smarter, but that's a hard thing to argue when you're staring calamity in the face. If we had hit dead on, we would have damaged the first couple of compartments, but that damage might have been contained, and we could have been towed, ignominously  to be sure, to safe harbor.
Instead we thought we could dodge the pesky berg and continue playing at snootery, while the black gang toiled in darkness and soot seven decks below. 
But that subprime berg exposed a fatal flaw in the ship, and did it slick as you please, letting death into six compartments.

And now we're sinking.

The command was nearly instant: Lower the compartment doors. Confine this mess to Wall Street--they created it, after all. But just like trying to avoid the consequences of hubris by porting 'round the subprime berg, lowering those doors will prove to be a colossal mistake.

I know, I know, we've got these nifty neato watertight compartments specifically designed to keep the economy from going under. But they only extend up as high as E Deck. If we leave those doors open, the ship will sink slowly, on an even keel, giving time for other boats to wend their way through the icefield and rescue us. By closing the doors,  we'll drive the bow down into the water, creating stresses no ship of state was ever designed to withstand...eventually leaving a bunch of people clinging to wreckage in the water. Oh, some of the Astor and Rockefeller class will perish, sure. But vast numbers of the sheep down in steerage are going with them to the bottom. 

That, in a nutshell, is why we have to spread the pain around. You can't confine it to Wall Street, up there on the Promenade Deck, when the water's already flooded the mail room and half the Orlop Deck. We all need to bail together and hope the pumps can keep up with the flow of bad credit we're sailing on. What we need is a slow and steady hand. We need to avoid panic. We need to think this through. The solution might be as counterintuitive as hitting the berg dead on or leaving those compartments open. The last thing we need to do is flare up a class war. Because we're all on this ship together.

It was sad
It was sad (too bad)
It was sad when the great ship went down
to the bottom of the sea 
uncles and aunts, little children lost their pants
It was sad when the great ship went down.

Oh they sailed away from England
and were almost to the shore
when the rich refused
to associate with the poor.
So they put them down below
where they'd be the first to go.
It was sad when the great ship went down.

--"Titanic" jingle, ca. 1916


23 September, 2008

Found in my email today....

Funny, I'm not American. But it still came to me. Whaddaya think, folks? Should I answer Mr. Paulsen? He seems legitimate.

--Ken


SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:
I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 800 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

21 September, 2008

"There are no atheists in foxholes"

Umm, well, that's not true. But I think it's fair to suggest there are no free-marketeers in an economic meltdown.
Paulsen, Bernanke and Bush (oh my) all spouted a variation on the "we had to do it" meme. We had to print off about seven hundred billion dollars to save America and the world from much greater turmoil down the road.

Bull roar.

And roar the bull did, as the Dow slingshotted back up after a couple of days of catastrophic losses. The TSX composite was up 848 points in a single session as investors fell all teary-eyed over their government saviours and gave them sloppy puppy-kisses. These would be the same investors who have been on a Dawkins-esque crusade against government intervention ever since...well, ever since the last time the government had to step in and save the financial system from itself...the savings and loan crisis.

See here, I would have thought a financial system in such grave disarray as to require an infusion of $700,000,000,000.00 would wince at the pain of that injection. There will be pain, make no mistake of that. Inflation  and dollar devaluation will be the first order consequences, with many more down the road.

But the reaction of the stock market wasn't contrition (a halt to the slide) or even relief (a modest uptick); it was euphoria. That bothered me--the psychology seemed wrong, somehow. The more I thought about it, the more I began to suspect that this whole situation had been planned.

Upon reflection, it pretty much had to be. Warren Buffett warned the Street in 2003 that they were playing with financial time bombs and weapons of mass destruction. (You'll recall that latter phrase had some currency at that time.)  When Buffett speaks, wise people listen: he didn't get to be as rich as he is by being stupid.
Did they listen? Hell no, they only redoubled their efforts to stretch the financial system, ignoring all the ominous creaks and cracks, until it was on the verge of collapse. I know humans are shortsighted and greedy, but that kind of takes the cake, doesn't it?
Unless the whole point was to drive the financial system to the brink and dangle it over the edge, then position themselves as the only people who knew how to fix the mess they created.
 
Turns out there are free-marketeers in a meltdown, because that's exactly what's happened. Here's HousingPANIC's take on things, and a very sobering take it is. They're calling this bailout the "Financial Patriot Act":

The Patriot Act of Finance, otherwise known as Paulson's $700 billion bailout bill, if passed in its 
present form, will be the nail in the coffin for an America by, for and of the people. Just like the Patriot Act appeared to be written before 9/11, so does this Patriot Act of Finance appear to be written before the housing crash. And yes, both were rushed through a panicked Congress and complacent media in the middle of the night.

What this Act essentially does is cede control of the American financial system to Hank Paulsen, who will then presumably loot it and distribute it among his banker cronies. Don't believe me? Read the thing. Paulsen's being given virtual carte blanche to buy up all the toxic debt he can, seven hundred billion at a time, then turn around and sell it to whomever for whatever price he chooses.

Meanwhile, this "bailout" only postpones the economic ruin--perhaps by mere weeks, perhaps by as much as a year. Hold on to your hats, folks: the roller-coaster ride isn't finished yet.

19 September, 2008

Happy Birthday Eva


My wife's turning 39.
They say it's the ones with the zeroes at the end that freak you out, but in Eva's experience, the nines are much worse. She's been a tad angst-y about the impending three-niner for a couple of months now. Nothing I say seems to have any effect. Typical man I am, trying to fix things that can't be fixed, right?
Except--and love, I'm talking directly to you here--it's not that it can't be fixed, it's that it isn't broken in the first place. Far from it, in fact. You're in the best shape you've been in since you were a teenager. No, better than that, actually, because you smoked back then. You're losing weight and further developing that awesome pile of muscle. 
Most people having age-related crises think to themslves shit, here I am turning none of your business and I'm old and decrepit and where did my life go and there's so much left to do but I don't know what it IS and 

That ain't you, love. Never has been: never will be. Think about it a minute: you've lived, what, how many lifetimes in that 39 years of yours? If I were to write down all the things you've done, all the things you've seen, and all the people you've touched, I'd have to stop after a thousand pages and label it Volume One. You've been bad, you've been good, you've seen the bad in the good and the good in the bad and you're much wiser than most folks I know for all that experience. 
And just look at the commitment you've made to get in shape, to become an athlete. I know it's daunting at times--hell, it's daunting enough to me, just sitting here looking at it, that I get tuckered out and want to go to bed. But--admit it--you're enjoying yourself pursuing this. You're enjoying life, with all its stresses. To a certain point, the more stress you pile on, the more you love it. 
(You're a freak and I love you...)
You are what most people can't even imagine being: fully engaged in the world. You reached spiritual old age a LONG time ago but you still have the heart and curiosity of a child. And you're  still tapping potential all over the place. 39? Two numbers signifying nothing at all. 

I'll continue to try and teach you the joy of boredom, as you coax me to partake in more and more of life. We make a helluva team, you and I, and as far as I'm concerned, we're more than a match for a puny number like 39.

Happy Birthday, love. You mean more to me than words can say.

Your,

Ken

People are Weird


People are weird.
That's no great shock, of course. But I'm confronted with weirdness everywhere I go. Weirdnesses large and small compete for my attention, while all around me, hordes of people walk right on by, occasionally rubbing their very noses in the weirdness without even catching a whiff of it.
It starts young: parents hustling their kids to activity after activity, gobbling up every minute of their childhoods in an obscene headlong rush to turn them into adults. These are the same parents who complain bitterly about how stressed their lives are, yet they see nothing odd in inflicting that same stress on their children.
There's been an increased number of shootings on the streets of Toronto lately. Predictably, the mayor's calling once again for a ban on handguns. He does this every time there's a handgun murder, and his supporters eat it up, knowing as they do that criminals can be counted on to respect any ban that's put in place.
Teenagers spend huge chunks of their lives surfing what are called "social networking sites". Orwell would have been proud: you can't get much more antisocial that typing alone in a dark room. Mention that to them and they'll look at you as if you're the freak.
Staying with the computer for a minute, practically everything is a model of inefficiency. From the keyboard (QWERTY is an ancient relic of the earliest typewriters, and is vastly inferior to the DVORAK layout), to the mouse (which forces you to abandon your keyboard, find the cursor, and calibrate every time you need to use it), to the Windows operating system itself (MEMORY HOG), nothing is as it should be. But most of us are happy with it all, anyway, and look at those few folks trying to fix what's clearly broken as meddlesome oddballs.
Go out to your car, and check out the accelerator/brake pedal configuration. Try to look at it as if you've never really noticed it before. To apply the brake, you must lift your foot up--quite a bit, actually--move it left a certain distance, and then lower it. From brake to accelerator is ever so much simpler: let your foot fall off that brake pedal.
That's ass-backwards. Suppose you didn't mean to "let" your foot slip. Instead of coming to a quick halt and maybe having some jackass who was following too close damage your back bumper, you'll inadvertently hit the gas and plow into that crowd of pedestrians, quite possibly killing somebody.
That's just fundamentally shitty design. And everyone accepts it, just like they accept the computer.
It goes on and on. We bitch and moan about how Wal-Mart's destroying small towns, but when one opens up, the parking lot's always full. 
Fashion: some guy you've never heard up comes up to you. Psst, hey, buddy. You know, you're lookin' good, there. But I can make you look better. Suppose I let you wear my name on your shirt. Nice big letters, so everyone can see it. You'll become a walking billboard for me. Isn't that great?
Uh, no,  you say. What's in it for me?
Absolutely NOTHING! comes the reply. Except, well, people will like you better. I guarantee it. AND, my shirts cost a fortune! So they must be good. Right? Right?
And you reach for your wallet. Because you're sophisticated. Look up that word sometime...it's just a few pages from "sucker".

In a weird world, it's the mundanes who are strange.




17 September, 2008

Subprime Explained

When I was much younger, my dad took me to a place called Depot Harbour. It's a ghost town on the shores of Georgian Bay. Eighty short years ago, the town was a bustling, thriving home to more than 3000 people. 
Then the Great Depression happened. The grain trade dried up, the railway closed down, and the town withered and died. 

We weren't there long, but the visit made a deep and lasting impression on me. Little wonder: there's something haunting and heart-wrenching to regard former church steps leading nowhere
or the ruins of a Roman-inspired railway roundhouse.

(If you're interested, here's a good site showing what Depot Harbour looked like in its glory days.)

This has certainly been a historic week on Wall Street. The morbid jokes are starting to make the rounds...

What's the difference between Wall Street in 1929 and Wall Street in 2008?
In 2008, you can't open the windows.

I'm reading an article in Forbes that poses the question "Is the U.S. Going Broke?" I think it's safe to conclude the U.S. passed "broke" a long time ago and is now heading for rack and ruin. Looking at this objectively, I don't know how long the Federal Reserve can go on bailing entities out. At some point it's going to need to be bailed out itself...and who's willing to do that? Who is even able to do that?  And at what price? Are Americans willing to be, in effect, indentured servants of a foreign nation?

And all because a bunch of suits dreamed up a way to make themselves phenomenally rich by offering too-good-to-be-true mortgages to people too shortsighted to notice. This is the crossroads where rampant greed and deregulation meet, folks. Look around. Not a pretty area, is it? Deserted--all the houses are abandoned and foreclosed. Odds are they'll be sold for scrap lumber, since there are no buyers at any price: who wants to live in Depot Harbour?

14 September, 2008

Baby steps

It's no great secret that we want to get 'off the grid', certainly by the time we retire. Originally, we envisioned a solar and wind-powered cottage-type place on water. 
The water's important. For Eva, water is primal. She is fully herself in and around water: an accomplished swimmer, she proved to be such a good lifeguard that an entire "Junior Lifeguard" program was created to accommodate her before she was of legal age to be a lifeguard. Water grounds Eva; it relaxes her, rejuvenates her, reconnects her...pick your spiritual term.
 
I derive all the same benefits out of a body of water so long as I don't actually have to immerse myself in it. Swimming is not a strong suit of mine: even a simple front crawl rapidly degenerates into doggy-paddling, and the effort necessary to keep myself afloat is far too much like work to be remotely relaxing. But by all means give me a view of the river. Let me sit on the dock, as I do at my dad's place, and mentally edit out the houses lining the shore until I'm left with wilderness and water gently lapping. Add in the call of a loon and I'm putty.

Getting off the grid is even more important, as far as I'm concerned. It speaks to a real need for independence within me. Never mind the financial savings--by the time we retire, (I hope) money won't be a problem. But I've always been dependant on someone for something. I don't drive, for instance. I have what can only be termed a driving phobia: I'm absolutely certain that if I drive, I'll die, probably taking at least one other person with me. Maybe not immediately, maybe not even within the foreseeable future, but eventually. I've touched on this phobia of mine before, and will do so again, because the lack of a car in this car-obsessed culture has defined me as much as anything else I can think of. 

Independence ranks just below stability in my personal needs hierarchy. So the idea of unplugging from society's go-juice and creating my own is mighty attractive. 

We've come upon a realization over the past couple of years that has slowly matured to the point where action became necessary: There are other grids besides the electrical.

Our civilization is plugged in to all kinds of things besides that socket in the wall. The financial system is a kind of grid. So is consumerist society. Time itself, for many people, is rigidly allotted and defined. Like the light switch, you tend to take these other things for granted until they fail. Most people don't even seem to contemplate their failure or to realize there are alternatives.

I've been seeing the signs of economic collapse everywhere over the past couple of years. At first, when the housing bubble was still being blown up, people laughed at my warnings that we'd seen this sort of thing just prior to the Great Depression. When oil spiked, I thought that would be it: the slide would just get greasier and greasier until we careened off the bottom and broke our economic necks. Now that the price of oil's receded, there are folks heaving huge sighs of relief: whew, Martha, we dodged another one. 
But we haven't, not by a long shot. The credit crisis is still unfolding, and nobody knows just how long the string of bank failures in the U.S is, or what might be at the end of it. Couple that with China looking to unload U.S. dollars in the wake of Fannie Mae and Freddie Mac and it's not hard to imagine a total meltdown. The Fed among others is working feverishly hard to stave that off. Who knows? They might even succeed.

But I doubt it. That doubting has led me to consider what we'd do, what we should do, if economic calamity actually comes to pass. And that in turn led to the epiphany that localization and self-sufficiency has its benefits even in good times.

So we've taken some baby steps, no less important for being so small. I ride a bike to and from work now. It's been fifteen years since I rode, and all the old tricks are coming back to me. Carry a plastic bag to tie around the seat in case of rain. Should that rain materialize, it's not a good idea to ride fast, first, because water will shoot right up your butt, and second because you'll find you have no brakes. A long uphill slog with limited traffic can be vastly preferable to a flat stretch filled with traffic. You know, stuff like that. I've cut my commuting time by a third and still have a ways to go--some Olympian whizzed past me yesterday as I was conquering that long uphill slog. For an instant I felt a stab of totally insane hatred: he was pedalling so effortlessly.  Still, even at my pace, biking is faster than bussing. And it feels undeniably good to be doing this myself, to be getting to work on my own, for free. Eva doesn't have to drive eight miles out of her way. 

We're in the process of abandoning our bank for a credit union, and let me tell you I wish I'd thought of this sooner...we could have saved ourselves untold thousands of dollars by now. Still, better late than never. Giving the finger to the big monolithic bank feels pretty damn good, too. 

And here's the thing we're most excited about: Eva discovered a local conglomerate of farmers that raise and sell all manner of things: Black Angus beef just this side of organic, chickens, milk, preserves, you name it. All at prices much better than you'll find in a grocery store.  We've purchased a quarter of a cow and half a pig, and are working towards getting the bulk of our groceries at similar places. One of the largest farmer's markets in Canada is a stone's throw from our door. As George Monbiot notes here, local fare trumps the supermarket every time. It has to: because grocery stores can't select for taste, not when much of their produce is shipped in from Timbuktu. It sounds self-defeating coming from somebody who works in a grocery store, but that doesn't make it any less true.

Right now, that vision of a retirement place on the water is competing with a small hobby farm and, I think, losing. The idea of raising and growing our own food still seems like a hell of a lot of work...but then, so does pedalling a bike up that long uphill slog. And so I realize I've finally begun to learn one of the biggest lessons my stepfather tried so hard to instill in me: work is often its own reward, and the harder the work, the greater the reward.