September 26, 2008

Wall Street, Main Street, All Around the Town

...the Brooklyn Bridge is falling dow-owwwn!

About five years ago, I read a book by Frank Partnoy, who teaches law at the University of San Diego and knows a lot about financial derivatives, called Infectious Greed.  A very interesting book. I would use that currently popular ten-dollar word "prescient" but at the time he wrote it, in 2003, the meltdown of Long-Term Capital Management was already five years in the past.  LTCM was leveraged at about 100 to 1 on its various market plays, and its market strategies were designed by a couple of Nobel Prize winners (Scholes & Black).  The algorithms were worked out by enthusiastic math PhDs from places like MIT and Yale, just down the road from LTCM's suburban Connecticut headquarters.  LTCM was maybe the first of the Ferrari hedge funds, hypermodern and built on the premise that computers could take advantage of tiny inefficiencies in the market by high-speed transactions that capitalized on arbitrage deltas multiplied millions of times.

Of course, one might ask: other than enabling the investors to buy one of those pretty white Colonials in Greenwich and a beach house in the Hamptons and a chalet in Gstaad, what is the social utility of this kind of bullshit?  The answer, in modern America, is that you're asking the wrong question.  No one cares about that morality crap anymore.  You can make money at it, so shut up and go hug a tree.  

Partnoy warned darkly that the web of derivatives in which LTCM and other hedge funds (and increasingly, investment banks) placed their bets had become so complex and interrelated that "systemic collapse" was always a looming catastrophe waiting to happen.  Credit default swaps, the option plays of puts and calls, short selling, collateralized debt obligations, all these fancy financial contraptions which are not the equity thing itself but related to or derived from it made a tremor in the market reverberate through the whole system. So that the 100-year Black Swan, that improbable event ruled statistically nonexistent for all practical purposes by the geniuses at LTCM, that thing that just can't happen, happens anyhow in a way that no one, not even a math PhD from Yale, expects, because the system is just too damn complex and exotic for anyone to make 100% accurate predictions, especially when its functioning is influenced by factors like human emotions.  Like panic.  So LTCM, which could not fail, failed anyway when margin calls because of events happening in Russia and elsewhere exposed its ridiculously thin real capitalization.  And the Feds rode to the rescue, led by Bill Clinton and Robert Rubin, because LTCM was "too big to fail."

Now if any of this sounds vaguely familiar that is not surprising.  And did the federal government tighten up its regulation as the result of this massive failure and huge government outlay of "taxpayer" money?  Indeed, led by scalliwags like Phil Gramm, the feds went exactly the other way and enabled even more risk taking by banks and hedge funds of all shapes and sizes, and leaving the huge market in credit default swaps, which by some estimates have a "notional value" of several hundred trillion dollars, totally unregulated by anyone except the Invisible Hand of the Market.  And it was a bipartisan effort all the way, because Wall Street, not Main Street, is where the real money is, and Congress represents money. Christopher Dodd of Connecticut (no coincidence) helped Fannie Mae and Freddie Mac crash and burn, Chuck Schumer of New York is the hedge fund manager's best friend on taxation, Joe Biden helped roll the American consumer when bankruptcy "reform" was passed.  One should have no illusions about any of this latter-day heroism by any of these guys, and when Dodd, with his surfer 'do and Pacino voice (huuu-AHH!), leads the charge to "save America," you can rest assured it ain't you he's saving, not unless you're holding on by your fingernails to your desk at Goldman Sachs or JP Morgan Chase.

Some ancient philosophers saw the right way to deal with what we have here.  One of them, a Jewish Rabbi (so Judas called him), teacher, precocious Talmudic scholar and eponymous head of a famous religion borrowing his name, took a whip and scourge to the rabble infesting the people's temple.  We don't have anyone representing our interests in Washington, D.C. at the present time, so the tables of filthy lucre are not going to be overturned by any righteous vindicator.  The Democrats, whose prostration before Bush's demands seems so paradoxical, are not responding to The Decider at all, but to their true constituents on Wall Street.  Only the "House Republicans" are balking at the deal, and how they got to that position is anyone's guess.  Could they even be...sincere?  

You might take heart in this realization.  Partnoy was writing his book in 2003 about a bailout in 1998.  That bailout simply set the stage for later bailouts, as the S&L bailout had set the stage for the LTCM bailout.  Each one gets much, much larger than the last, as the potentiating effects of the derivatives connections force the market to the extremes.  I think you can safely say that if Bush is right and all we have between us and Depression is this bailout, the system is not going to be saved.  That Joker at the base of the house of cards is trembling right now.  The Temples of Wall Street don't have to fear a new Jesus arising from the foreclosed precincts of Main Street, but Reality itself is going to exact its revenge.

September 25, 2008

The Weirdest Speech I've Ever Heard

George W. Bush does not have a shred of credibility left, but that does not silence him.  The only person in the country who doesn't realize how ridiculous his role as titular leader of the country has become is George W. Bush.  That is the secret of his deep, inner happiness, the happiness that drives so many of us crazy.  He keeps talking, still seeking to persuade, his narrow forehead crinkled, his dead eyes staring blankly, his immobile upper lip opening and closing like a tropical bird's beak, in the dim recesses of some hallway in the White House, where, improbably, surrealistically, he continues to reside.

Bush also resides in the Eternal Now.  There is no history for Bush; not even yesterday exists in his mind.  Only this moment, this moment where he is right once again.  The economy is going to collapse and we're going to go into a deep, painful recession, a Depression really, unless some financial legerdemain is played by borrowing a huge sum of money from foreign purchasers of Treasury bonds and giving the take to a group of Wall Street loan sharks.  That's where we are. And none of it, absolutely none of it, is his fault.  He didn't have anything to do with it.  He did what a government is supposed to do about business, nothing, and it didn't work out because business did not behave itself.  Now he is going to clean it up because he sees the way forward and everyone should simply do what he says or the Depression will be on your head.

I've never in my life seen anyone like him and I doubt that you have either.  

I think, after these eight years have gone by, with fewer than 120 days to go in this bizarre interregnum of idiocy, I finally see what Bush's gift for screwing up is made of.  It is no small talent. It is the lethal mix of intellectual limitations mixed with psychological and personality dysfunctions.  It works this way, and has probably always worked this way throughout his calamitous business and political career.  First, he makes a terrible decision, a really bonehead call, such as ordering a full-scale invasion of Iraq on nonexistent evidence that Iraq is any sort of threat to the U.S.  Next, all hell breaks loose as the consequences of his bad decision become apparent.  Bush is unperturbed.  It is not in his psychological makeup to discern any responsibility for a screw-up, ever.  While one might think that strong personalities around Bush could nudge him toward a saner path, to get the car out of the ditch, they cannot, not even Cheney.  Rather, Bush uses two other techniques to insulate himself from criticism that he sees, in any case, as completely gratuitous.  Number one is to fire all dissenters.  Goodbye Colin Powell, Treasury Secretary O'Neill, Terrorism Czar Richard Clarke.  The second technique is to use his abrasive and caustic personality to intimidate critics.  This defense is augmented by his control of the terrain.  He sets the ground rules for any encounter.  It is never free-flowing and unstructured.  It is one minute in the Oval Office where he demands an abrupt, 30-second summary of the critic's position.  It is easy for Bush to be dominant in such a situation because (a) he never thinks for a moment that he could be wrong, lacking all curiosity about the ideas of others and (b) Bush never allows the sort of logical discourse, the back and forth, which could pin him down and prove him in error.

So we have a profoundly limited man, bolstered by the sense of entitlement which his dynastic background makes second nature, exacerbated by an innate megalomania and density to criticism, and crystallized by his fundamentally lonely and isolated nature.  Thus we have the strange vision of this odd creature standing behind a lectern and telling us the American Dream is now over with just a few weeks left in his eight-year reign of incompetence, and never a single word acknowledging that he was President when it all died on us.  Such phenomenal obtuseness doesn't seem real in some fundamental way.  

I don't quite understand how it is that he's the President of the country.  It makes me think I don't actually grasp how images are created and idealized in the mass electronic age. How the consciousnesses of my fellow citizens are formed in such an environment. Whether the data overload of mass media has succeeded, in some fundamental way, in actually replacing the contents of consciousness with ephemeral imagery and prefabricated strips of language and slogans, so that rationality is not possible for vast segments of the populace.  Somewhere in the realm of my own ignorance lies the answer to the riddle of how such an unlikely cipher could actually ascend to the top of our government.  Yet there he is, yesterday, today and tomorrow. It's quite possible, perhaps almost certain, that we are living in a system that can no longer work.

September 24, 2008

Gentle Ben Suffers the Fools, Not Gladly

I confess that I like Ben Bernanke and refuse to believe that he's actually "in on" the Conspiracy to Fleece America.  I don't see him as a crypto-member of the Illuminati or co-author of the Protocols of the Elders of Zion.  He's an academic, a very smart and reasonable guy, and in some ways he's our last best hope to emerge from the financial crisis more or less intact, that is, with most of us still living indoors.  Henry Paulson, on the other hand, is a former Goldman Sachs operative who no doubt sought unfettered latitude to administer the Big Bailout precisely because he could guarantee that his colleagues and future partners on Wall Street could maintain their gilt-edged lifestyle undiminished by any of these crazy, Socialist ideas of lowering their annual take to a measly minimum wage of $400,000 per year or something.  Just because the federal government is saving their fat white asses does not mean the G-Men can bring them down to their level. What next?  Do you expect them to drive Fords?

It is an unedifying, not to say nauseating, spectacle to watch the Congress "at work" grilling Ben Bernanke, who has forgotten more about economic history and policy than any of these fancily-dressed Popinjays will ever know.  Naturally, this tiresome tribe, like "Chuckie" Schumer of New York, attempt to draw Ben into the political arena, asking why Congress should appropriate $700 billion for a bank bailout when, for one of millions of examples, Bush found it impossible to add a pittance to the children's health insurance fund.  And so the Solons thunder on, suddenly the outraged guardians of the commonweal, the staunch defenders of "Main Street" and the "taxpayers."

What a load of bullshit.  Schumer's the guy who can't stand the thought that hedge fund managers, who at times have counted their annual compensation in the billions, should have to pay ordinary income tax rates instead of capital gains.  How do these guys manage the cognitive dissonance in their heads?  Have they actually managed to compartmentalize the public persona who fulminates on television from the backroom pol who does favors for friends so completely that they are, in effect, a Congress of Sybils at this point, whose various selves are unaware of each other?   

I'll say this for Bernanke: he's trying to put together a bailout mechanism which minimizes the federal outlay on a net basis.  The "toxic" assets (what an overused term that's become) can be purchased by this new federal bureaucracy at a figure representing their long-term worth, or even less, which may be higher than the distress sale, mark-to-market dumping that ruined Merrill Lynch, for example, which received about 22 cents on the dollar.  So perhaps (and there is some precedent for this in the actions of the Resolution Trust Fund which bought assets from failed savings and loan banks) the eventual cost will not add nearly so much to the national debt as the face amount of the appropriation would suggest, while at the same time strengthening the banking system.  And if this happens, it will owe much to the rigorous hard work of Ben Bernanke and his staff.  

Which is a helluva lot more than you can say for Congress.  Because Congress, you see, ultimately appropriates all the money for federal operations, not just bailouts.  And what these frauds and fakes never ever talk about when they're putting the screws to Gentle Ben is about the rest of the budget.  The United States, under W the Idiot, has been adding about $500 billion to the national debt each year.  The math is simple; look at that figure to the right that's clocking upward toward its new "ceiling."  If I tell you the debt was around $5 trillion when Bush took office, and you divide the difference between today's number and that by 8, what do you get?  So never mind these phony calculations of the deficit by the Bureau of Official Lies.  And the reason we keep running these humongous deficits, and getting deeper and deeper into the hole, and trying the patience of our foreign lenders to the breaking point, is because we won't cut back on military spending or on waging unnecessary wars of foreign aggression.

The analysis is getting very stark and very simple.  The world at large is actually very tired of the bellicose United States and its gratuitous invasions of convenience and resource-grabbing. We add insult to injury because we can't even afford to fight them.  We have to borrow money from the rest of the world to finance our militancy.  Then unstable madmen like John McCain up the ante by demanding aggression against one of our lenders, Russia.  You have to like the sweet paradox of that one. Let's kick Russia out of the G-8, then borrow money from our creditors, oh like Russia, to take on this new Red Menace that we just hallucinated.  What McCain and Congress in general don't want to come to terms with is that American Hegemony cannot be financed by the very same world you're trying to dominate.  The continued attempt to borrow our way to the top is destroying the country.  The next step is the reduction of U.S. Treasury debt to junk status, and when that happens we won't be the world's reserve currency anymore. And then Congress can appropriate all the suitcases full of worthless green paper it wants and nothing is going to help.

Throw all these bums out, every last one of them.  The 535 Plan.  Reduce military spending to the levels necessary to defend the country and no more.  Raise taxes to balance the budget. Resume the practice of regulating systematic fraud instead of enshrining it as the national ethos. And you stuffed shirts in Congress - leave Ben Bernanke the hell alone.  He's the only guy in that town working for a living.

September 22, 2008

Monopoly, the End Game

So this analogy seemed to work for some of my fellow American peasants over the weekend, as we ate breakfast and kicked around the extraordinary specter of America's financial collapse. Indeed, these particular serfs are related to me by blood, brothers not of another mother but of the same mother.  Beyond that, I will retreat into the mysteriousness which seems so much in vogue these days, such as when Henry Paulson describes, in dark and somber tones, the reason we need an immediate infusion of a sum representing about 25% of the entire annual federal budget in a mass give-away exercise. And he needs it this week.  Odd, considering how often, and how recently, Bush has mentioned that the "fundamentals of the economy are sound," except, I guess, for all the fundamental parts.  You'd think, when you're talking about that kind of money, and raising the debt ceiling over $11 trillion while you're at it, that you could risk a little candor.  Just spell it out.  Not a five-minute, vague overview full of the same cliches we keep hearing.  "Liquidity," "credit crisis," "financial markets."  Just tell us, Colonel Klink: what gives? Ist Amerika kaput oder nicht?  Without $700 billion, or $1 trillion, sprayed around Wall Street, is the system really going to collapse?  So far you've put American "taxpayer" money (as if any of it is ever going to be repaid!) behind the Bear Stearns buyout for $30 billion, AIG for $85 billion and backed up Fannie Mae and Freddie Mac's obligations in the American mortgage market to the tune of about $5 trillion.  Now you want to throw another trillion at the problem, whatever it is.  Do you see a pattern here?  I think I do.  The palpable sense of complete failure is so great that it's driving a desperate need to believe the United States has the wherewithal to keep the game going, that we have not bankrupted the financial system while at the very same moment experiencing the first gut-clutching premonitions that our foreign creditors have had it with us. And without them, there is no money, there is no ability to do any of this. Isn't there some rational upper limit to the capacity of the United States government to bail out private enterprise, and haven't we already passed it?  Is George W. Bush's emotional security so important that we all have to pretend that his deregulatory madness and his insistence on grotesque military spending is not part and parcel of this calamity and that we can't allow Great Depression II, The Sequel to begin during his final four months in office?

It seems we won't get any greater clarity, in part because our learned solons are no better than Paulson at explaining any of this.  I loved that moment yesterday when the Democrats gathered around the microphone in the halls of Congress, in that Standard Photo-Op, and after Barney Frank talked tough for a moment, Nancy Pelosi leaned in and said, "We're not signing a blank check."  No, Madama Diva, you would never do that, not again, not after all the blank checks you've signed for that crazy war over in Iraq.  Maybe we could get Nouri al-Maliki to fund this bail-out.

Back to the metaphor.  You played Monopoly as a kid, I'm sure.  My boyhood friends and I never played strictly by the rules, of course.  When Parker Brothers invented this game during the Great Depression as fantasy relief from hard times, they designed the rules so the game would, in fact, end at some point.  Not one of those two-day marathons more typical of a bunch of kids playing with their improvised rule book.  In the early stages you acquired deeds to property. You collected rent, maybe you passed Go without going to jail, maybe you hit a couple of scores on Chance and Community Chest.  You were clever and made some good trades for monopolies, maybe on some of those squares where real estate wasn't too expensive but people coming out of jail had to run your gamut.  You know, like the orange properties, or the dreaded reds.  You bought plastic green houses, then traded them in for the monolithic terror of a Hotel.  Later in the game, when Marvin Gardens, the greens and the awe-inspiring Park Place and Boardwalk were developed, you knew it was crunch time.  It was just a matter of one bad roll of the dice.

If you ran out of cash because of some unlucky rolls, because of misjudgment in staying at hotels on Pennsylvania Avenue you couldn't really afford, you could resort to placing your properties in hock.  This had a double whammy effect.  If you really played by the rules, you were entitled only to half the value of a hotel, house or deed mortgaged to the bank.  Plus, when a deed was mortgaged and turned face down, rent was no longer collectible.  You could not borrow money from other players, at least by the rules.  You could, of course, sell your properties, but you were up against a group of 9-year old boys (like vulture funds) with no real interest in your survival.

We're in the End Game of the Great American Game of Monopoly.  That was the true meaning of the "mortgage-backed security" phase of the national meltdown.  It's true that high rollers on Wall Street seized on a scheme of turning huge bundles of ordinary home mortgages into bonds that could be sliced, diced, tranched and parted out in a secondary market, and this was a great boon to the investment banks, like the aggressively sleazy Bear Stearns.  They had a new bubble to inflate to maximum surface tension.  The air blown into the bubble was cheap money, and that was pumped in from recycled dollars around the world.  Greenspan & Co. kept domestic interest rates unrealistically low, so that from the viewpoint of foreign sovereign wealth funds, the return was less than nothing when devaluation of the dollar was considered.  China, Saudi Arabia, many other countries sat still for that, because the run-up in real estate prices permitted an orgy of borrow and spend consumerism during the early years of the 21st century, and we shipped a lot of that money overseas for oil, cars, plasma TVs and poison dog food.

So for a while there we owned everything from Baltic to Boardwalk.  Mortgaged to the hilt, it's true, but it looked good on paper.  And then the mortgages began to fail.  The problem was that, in America, real wages, the standard of living for the majority of the population, have not really progressed since about 1973.  Lots of Americans couldn't afford those overpriced houses; they were trying to develop Park Place on a Mediterranean Avenue budget.  Once the foreclosed houses flooded the market, prices nosedived, and the housing stock hemorraghed equity.  Thus, no more lines of credit or re-fi to prime the consumer pump.  The Chinese, the Saudis, so many others began to wonder: if they don't buy our crap, what's in it for us?  

Partial failure of a tranched bond tended to drastically reduce the face value of a mortgage-backed security.  The underwriters and purchasers of these exotic instruments were reinsured against failure by a complex and completely unregulated web of derivatives such as credit default swaps, so that mass failures of the bonds reverberated through the whole financial community, entailing investment banks, commercial banks, insurance companies and government sponsored enterprises.  All hell broke loose and the big investment houses were burned to the ground.  

The federal government would like to believe, at this point, that it is the guarantor and banker of last resort.  This is not quite accurate.  There have been some other observers watching our immature President and his gang of childish enablers play this silly, fatuous and fatal game of Monopoly.  Some of these observers wear burnooses as their daily attire, others business suits of a Western style, although the wearers speak Mandarin or Japanese.  The standards of living of many of the citizens in the countries ruled by these observers are not quite as lavish or self-indulgent as their American counterparts, to say the least.  As they watch the American lifestyle implode, they do so with equanimity and not a little satisfaction.  While America, at least for a while yet, might fancy itself as the financial capital of the world, that kid who lived up the street from you who always wanted to be the Banker in the Monopoly game has been replaced by Chou and Faisal, who are not nearly so easygoing.  They sit a little back from the card table, watching. One can detect the faintest hint of a smirk as they watch the last two players fight it out.  Should they dole out any more money or not?  The kids are begging for a bailout but maybe this game has gone on too long.  Oops, Sonny just hit Park Place with a hotel and he's busted.  Now Rusty has the dice and he tosses them on to the board...oh no.  Did he just throw a nine?

It's Probably Time to Face the Music

I believe it was a distant relative of mine, Aristotle, who observed that it was the fate of democracy to devolve into oligarchy.  It certainly happened here.  The final push was the abandonment by the United States of even the trappings of social democracy in favor of a devil-take-the-hindmost capitalism without restraints of any kind.  Human nature being the immutable thing it is, a greedy competitiveness became the ethos of the Hollow Men of the Bush Era.  They ran scams, Ponzi schemes, swindles, the whole gamut, settling on the securitization of America's last great asset, its actual land, as the final play.

It all crashed and burned and now America's days as the great hegemonic capitalist are coming to an abrupt end.  The "bail-out" is not actually to restore America to functionality.  Its sole purpose is to reimburse the financial swindlers who call the shots for the Bush Administration.  On their way out the door, they're going to pull a Brinks job of historic proportions.  Empty the Treasury of its last shreds of notional value, its "dollar reserves."  Hey, if it proves legal tender in countries with hard currencies, so much the better.  There is no real harm in taking a hand-out arranged by your friends in high places, even if it proves worth less than it seems.

A moment's reflection should convince you that the "bail-out" is preposterous.  It violates what you might think of as the First Law of Financial Thermodynamics: if the United States is actually $10 trillion in debt, if we run yearly trade deficits of $800 billion, if the American banking system is overleveraged and broke, how do we conjure, out of thin air, another $1 trillion to give to large financial institutions?  If we can actually do that simply by "appropriating" the money, then why do we say we have any national debt at all?  Why don't we immediately "appropriate" enough money to pay off the national debt?  It's only one order of magnitude removed.  There, now we're solvent.  We print the world's fiat currency, don't we?  Then we decide how rich we are and how rich everyone else can be.

The "bail-out" is a hallucination which might work long enough for Bush and his financial cronies to transmute Paulson's unsupervised, unreviewable largesse into something of actual value.  If you read the actual language of this ridiculous piece of "legislation," you will see things that sound simply and fundamentally un-American, as we used to think of that term.  Why would a cabinet member be given dictatorial powers to decide who receives public money, and why would all courts be deprived of jurisdiction to challenge his use regardless of cronyism, bribery, favoritism, graft?  It's simple: the bail-out is theft, pure and simple, and no one in the Bush Administration wants to answer for what they do with that $700 billion.  If the Congress is stupid enough to give Paulson this kind of power, then I think we can safely say at that point - that's all she wrote, there is no one in Washington who actually represents the American people.

No amount of legerdemain is going to really create money where there is none.  The world has caught on to this act.  It's better to face insolvency sooner rather than later, particularly when the efforts to delay the inevitable simply add to the problem.  The last of the bubbles has burst and the bills have come due.  It's time to start powering down the American economy, and if "crises" of illiquidity occur and the "financial markets" freeze up, so be it. We'll have to get used to a standard of living based on our actual productivity and income.  Adding a crushing burden of debt as the economy goes down anyway makes no sense.

Like most observers, I have no confidence that the Democratic Party will do anything other than whimper a few objections to Chairman Bush's latest Socialist foray, and then line up behind his "plan."  Let's face it: they're in on it.  They're on the payroll of the same lobbying groups.  And they certainly don't want to shoulder any blame if the Crash comes with no legislation in place.  They would prefer a larger Crash sometime in the future, when a President who doesn't scare them so much won't give them dirty looks and call them names.