October 23, 2008

Famous Mea Culpas of Western History

(Washington-) Facing a firing line of questions from Washington lawmakers, Alan Greenspan, the former Federal Reserve chairman once considered the infallible maestro of the financial system, admitted on Thursday that he “made a mistake” in trusting that free markets could regulate themselves without government oversight.  A fervent proponent of deregulation during his 18-year tenure at the Fed’s helm, Mr. Greenspan has faced mounting criticism this year for having refused to consider cracking down on credit derivatives, an unchecked market whose excesses partly led to the current financial crisis. (New York Times, Oct. 23).

 (Sodom-Gomorrah News Dispatch, 4000 B.C.) – Lot’s wife admitted today in an interview that she made a “huge mistake” in turning for one last look at the Twin Cities.  “It’s not like I wasn’t warned,” she said, speaking with difficulty given her current condition (a crystalline column of sodium chloride).  “God said not to look, but I did.  It’s all there in Genesis 19. It's tough to go from being a pillar of the community to a pillar of salt because of one screw-up.”

(Rome Clarion, 64 A.D.) – Nero, reached today at his villa on the Palatine, candidly admitted that he should have picked a better time to practice the violin than during the Great Fire.  “What was I thinking?” said the Emperor.  “Romans have a right to expect more from their leader than a guy who works on some fiddle tune while the Imperial City goes up in smoke.”

 (Le Monde, Paris – Oct. 16, 1793) – Marie Antoinette, interviewed while riding a wagon on the way to the guillotine, told reporters that “public relations are a lot more important than people sometimes think.  The ‘cake’ thing was a serious gaffe, I can sure see that now.”

 (Big Horn Bugle, June 26, 1876) – General George Custer, head of the U.S. Cavalry’s 7th army, admitted today that he probably “grossly underestimated” opposing forces in the battle against a Cheyenne – Northern Lakota alliance near the Little Big Horn River in southeastern Montana.  “Wow,” said the blond Indian fighter.  “Sitting Bull’s got, what?  Two thousand braves?  I’ve got maybe 300 guys.  You can’t like my chances. I blew this one, big time.”

(Berlin Zeitgeist, April, 1945) – Adolf Hitler, reached by telephone in the besieged capital city of Germany, spoke above the roar of incoming Soviet artillery, plainly discernible even in his deep bunker.  “I screwed up,” Der Fuhrer said.  “I really shouldn’t have started this whole Third Reich thing, or the Second World War, or the genocide. I made some big mistakes, there's no getting around it.”

October 21, 2008

Oscillating Around the Flatline of 9,100: The Dow Considered

The Dow appears to be oscillating around a number close to 9,100, and since I'm not Nostradamus (although I've seen his birth house in St. Remy, South of France), I wonder why this number should be so close to my prediction quite a few months back. First, the Buddhist Question: what is the Dow? (Ugh, lousy pun, as Stan Freberg has Tonto say in his classic send-up, "The Lone Psychiatrist.")

"To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the DJIA divisor. The divisor is adjusted in case of splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. The initial divisor was the number of component companies, so that the DJIA was at first a simple arithmetic average; the present divisor, after many adjustments, is less than one (meaning the index is actually larger than the sum of the prices of the components). That is:

 \text{DJIA} = {\sum p \over d} ."

Deeply satisfying, isn't it, to understand something down to fine-grain detail? Especially when there's a sigma sign and everything. The stocks in the Dow are the powerhouses of the American economy such as Microsoft (which, paradoxically, is traded on the NASDAQ), McDonald's, Bank of America, JP Morgan, United Technologies, Home Depot, Fed Ex, etc. Just think of the advertisers for the Super Bowl and you'll come close. So while there isn't quite the congruence of an index such as the Wilshire 5000, which includes practically all stocks for which a public market exists in the USA, the Dow tends to reflect the fortunes of the overall business world to a fairly accurate degree. It's not really an aggregation of "industrial" companies anymore, since the U.S. isn't an industrial country. But nice for old times sake to include the adjective in the name.

The Dow is famous for "pricing in" future trends; thus, the stock market is way ahead of the general "real" economy. The street-smart guys who know all the angles (viz., Woody Allen: "Manhattan") can see a recession coming from a mile away. So the shills on CNBC, for example, who sit patiently waiting for the big turnaround, wondering if this is the day the Dow will soar back up to 14,000, are just the sidewalk barkers for the girly show inside. They're trying to get you to put your money back in so the street-smart guys can play some more games with your capital. The distasteful alternative is to put their own money in, and they know that's a fool's errand.

So what I think is that the convergence between my guess and what's actually happening is that the Masters of the Universe (viz., Tom Wolfe: "The Bonfire of the Vanities") run much more complicated algorithms and models of the economy, but that the values and variables they use tend to aggregate in the same general direction as my more simplistic approach of saying that an economy which relies on consumer spending for 70% of its action will fall 35% if half the money available for spending is taken out of the market. That is to say, if Americans have to rely on their actual wages and earnings, as opposed to borrowing against appreciating capital (the housing stock), we're in deep trouble.

For that reason, it occurred to me that the so-called "subprime crisis," as an explanatory thesis, was a case of putting the cart before the horse. The economy did not tank because a lot of people were defaulting on subprime mortgages which backed mortgage-bundled securities. The economy tanked because we had reached the point in our colossally over-leveraged lives where the ability to own a shelter or to maintain the lifestyle propping up the frenzied consumer economy could not be sustained. This is a subtle difference, but it shifts the locus of responsibility dramatically. The "subprime crisis" was simply the last gasp of Consumerism, the final gimmick to keep the whole thing going for a while longer.

The chart in the upper left tracks the profligate ways of America over the last 50 years. The Greatest Generation did things somewhat differently; they saved money, bought modest houses, lived within their means. In 1957 (in constant dollars) the per-person load of total U.S. debt was about $30,000. That included the national debt, state and local government debt, business debt, total household debt. This last figure (mortgages, accounts payable, auto loans, credit cards) was a manageable 40% of total national income or GDP. There was excess cash, in other words, providing a pool of capital. Look at that trend line for 2007 for the same metric (blue line): total household debt now soars above 120% of total gross domestic product. We're in hock up to our eyeballs.

There you have the gist of the story. I think what happened over the last thirty years or so is that American political leadership simply got bought off by lobbyists, many hired by industry groups in that same Dow club. They were making good money keeping things as they were. No one proposed any sort of "radical" new paradigm for energy usage, habitation, agriculture, environmental policy, or any alteration in the basic premise of the economy: America as a patchwork of suburban developments situated between strip malls, big box stores and fast food joints, with everything accessed by outlandishly huge private autos. One president, Jimmy Carter, made noises about a serious change in energy usage and got thrown out of office. There were plenty of voices as long ago as three decades who were sounding consistent warnings about where all this would end up. Barry Commoner, for one, and Wendell Berry and David Brower. Yet the levers of power were owned by Big Business reps and oil men, like George W. Bush and Dick Cheney, and even the "populist" president, Clinton, received his economic input from Wall Street mavens like Robert Rubin of Goldman Sachs. Their fortunes were invested in the status quo ante. Gasoline, oil, natural gas, coal, defense spending and gargantuan waste, a nation where 5% of the world's population used 25% of all energy. All of it was a demonstration of the normative tendency of the factual: whatever has come to be seen as the dominant paradigm achieves an inertia that is almost impossible to budge without a crisis that demands adaptation.

And so now we have it. Characterizing our problems as a blip, a brief "discontinuity" caused by the "subprime meltdown" is, to my way of thinking, a ridiculously off-tune diddy we whistle as we pass the graveyard. Naturally, Chairman Bush, as he nervously stands at the podium for another in an endless series of hortatory sermons about the crisis, tells his little morality tale about how there were loans once that got put into bonds and the bonds went bad and the economy went splat. In his uncomprehending eyes and scared little boy face you can see he doesn't know whether he should believe it or not. He shouldn't and neither should you. Remember there was a long spell between the Crash of 1929 and the bank runs of 1932, which really brought on the depths of the Depression. The Dow, then as now, priced in the future. The future, as Chairman Bush would remind us in one of his fortune cookie moments, is still ahead of us.

The Ungrateful Nouri: Rope-A-Dope

I was startled last Wednesday night when John McCain stated confidently, at one moment in the debate, that the United States was “close to” a Status of Forces Agreement with Iraq.  Further, Barack Obama said nothing to the contrary.  Now don’t get me wrong, of course.  Pride in my “reading” of Nouri’s game-playing must take a back seat to the diplomatic advantage of…keeping our military in Iraq for another three years?  Okay, it’s not clear whether we should be rooting for the “sovereign” government of Iraq or for our own feckless ambassadors, who appear to be in over their heads.  I was virtually certain that John McCain’s opinion meant nothing, whatever else might be said.  He’s still wondering whether that Prague Spring thing has worked in Czechoslovakia.

Then this news last weekend:

BAGHDAD — Hopes that a security agreement between Iraq and the United States could be concluded swiftly receded Sunday as several of the leading Iraqi political parties, including some that had negotiated the agreement, appeared to back away from quick approval.

In a public statement posted on semiofficial government Web sites, the United Iraqi Alliance, which represents several powerful Shiite parties that back the government, said it could not endorse the pact as written and wanted amendments. It formed a committee on Saturday to survey alliance member opinions.

More details emerged on Tuesday, October 21:

BAGHDAD (Reuters) - Iraq demanded changes to a draft security pact with the United States Tuesday after it failed to win the support of its political leaders despite months of painstaking negotiations with Washington.

The announcement effectively reopens negotiations which had led last week to the unveiling of a draft that would require U.S. forces to leave Iraq by the end of 2011. The objections appear to be about details rather than the broad thrust of the pact.

Those details?  Well, it’s that jurisdictional thing: can the Iraqis try American soldiers for “serious crimes” committed in off-duty hours?  I’m sorry that I didn’t add the word “brave” as an adjective in the last sentence, as is always done in the House of Memes & Tropes, so let me amend that: can the Iraqis try our Brave American Soldiers® in Iraqi courts?

How significant a provision is this?  Very, as it turns out.  While American news outlets go light on the coverage, we’ve been having a helluva time in Okinawa over the last decade or so.  Take this story from February, 2008, concerning another SOFA agreement covering that Japanese island which does provide for local jurisdiction:

“Condoleezza Rice, the US secretary of state, apologised yesterday for a string of crimes involving American troops based in Japan, amid warnings that failure to improve discipline risked damaging relations between Washington and one of its closest allies.

"Resentment towards the US military presence erupted this month following the arrest of a marine for the alleged rape of a 14-year-old girl on the island of Okinawa, home to more than half of the 50,000 US troops in Japan.

"Since then, US soldiers on the island have been arrested for trespassing and drink driving, and another is being questioned about the alleged rape of a Filipino woman in a hotel room.

"The rape allegation has echoes of the 1995 gang rape of a 12-year-old girl by three US servicemen, which brought 85,000 people on to the streets in protest and international attention to the US base…The Japanese prime minister, Yasuo Fukuda, called the alleged rape "unforgivable" and Shigeru Ishiba, the defence minister, warned that it could "shake the foundations" of the Japan-US alliance just as the two countries were cooperating to try to end North Korea's nuclear weapons programme.

"In an attempt to limit the diplomatic fallout, US military authorities imposed a 24-hour, indefinite curfew on 45,000 military personnel and their families, including the 10,000 who live off-base. They also agreed to review anti-sexual assault guidelines and improve education programmes for newly arrived service personnel…Critics said previous attempts to improve conduct had failed.”

That story was carried by the London-based Telegraph last February.  You may have missed it.  In Okinawa, the presence of the U.S. garrison is an ongoing crisis; yet compared to Iraq, the situation for the Brave American Soldiers® is considerably more “normal;” note the quarantine of the military and confinement to bases along with their “families.”  In Iraq, by contrast, the situation for the troops is a great deal weirder, with soldiers stranded for years on end in repeated deployments, away from home, away from normal female companionship.  We must add to this toxic mix the fact that the U.S., in order to meet recruitment goals for a worn-out army, has lowered its standards to include a small but significant fraction of soldiers with criminal records.

Thus, all the pieces are in place for a true international nightmare: a sociopathic Brave American Soldier®, with a violent history of assault, rapes and kills an Iraqi woman in Baghdad after getting roaring drunk in a local bar.  He’s arrested by Iraqi police under the SOFA provision for “serious crimes” committed intentionally.  Now what?  The fate of this soldier would be seen as the final, intolerable indignity visited upon the American “liberating” force.  This story would make the nightly news and inundate the Internet.  In general, the American public, recalling the kangaroo proceedings for Saddam Hussein, would be absolutely outraged and up in arms.  Mitigating factors (the sex was consensual, it was a trap, etc.) would be discovered or manufactured.  The idea of an armed invasion of the prison or court to free the soldier would be debated and maybe set in motion.

My guess is that the Ungrateful Nouri has already “priced in” all these considerations, as they say about the stock market.  It’s a No Go Zone for the Department of Defense; not even Bush’s delicate ego justifies running this kind of risk.  A Japanese court seems sort of civilized and Western; a court run by mullahs reminds Americans too much of “Midnight Express.” And so Nouri, keenly discerning the discomfort level of the American negotiatiors about conceding this jurisdictional point (routinely done in other SOFA arrangements) when dealing with this partiuclar Muslim nation, lets the clock keep running toward December 31, when our "legal cover," as he calls it, is blown.  A ragged, fitting denouement to a misbegotten war.


October 20, 2008

Congress of Memes & Tropes Takes On Mathematics of Economics

Personally, I think it's one of my better titles.  I think, in fact, that Memes & Tropes would make good new names for the two major political parties.  Somehow "Memes" sounds friendlier, so I would assign that to the Democrats.  McCain is the nominee of the Tropes.  Sounds right, don't you think?

Anyway, the inability of the political system to admit the truth or to adopt real solutions to real problems has become a fascinating subspecialty of mine.  I wish some major university would offer it as a course of study.  Maybe one has.  It's clear that the Depression we're heading into will be made significantly worse by the collective denial we experience at the hands of our elected representatives, who can only respond to grave national crises in certain ways that (a) always affirm the very economic system which has led to the current disaster and (b) always propose to solve the problem with solutions that make the problem worse.

The essential dilemma is that, as a consumer society, America is toast.  This can be demonstrated any number of ways, but perhaps none does it so elegantly as Jeremy Grantham (even his name is elegant).  Here's how Jeremy explains how we arrived at this Point of No Return: 
"We were all spending... as if we were much richer than is in fact the case. Particularly here in the U.S., increasing household debt temporarily masked some of the pain from little or no increase in real hourly wages for 20 to 30 years. Household debt since 1982 has added over 1% a year to consumer spending. Unfortunately, this net benefit does not go on forever.

"In the first year in which you borrow 1% of your income, the interest payment barely makes a dent and your spending is close to 101% of your disposable income. But each year you borrow an incremental 1%, your interest load grows. After 15 years or so in a world of an average 7% interest rate, the interest on the accumulating debt fully offsets the new borrowing when one looks at consumers collectively."

It takes a while, of course, to comprehend precisely what Mr. Grantham is saying, or at least it does if your grasp of mathematics is on a par with mine.  But the essential idea is pretty simple. America's prosperity over the last 30 years or so has been financed by increases in household debt which fuel consumer spending.  What we "forgot" was the effect of compounding interest: money borrowed must be paid back with interest, and if you borrow more money to pay the principal and interest, you increase the total interest paid until the interest being paid collectively by the society offsets any "prosperity" from new borrowing.  If you go a little past this point, you crash:  you finally reach that entropic impasse where your collateral is exhausted, your wages are tapped out, and you can't borrow any more money at all to pay even the interest. 

The "leadership," instead of touting the wonders of the "Ownership Society," should have been pointing out this problem for a very long time.  That's not what the Ms & Ts do, however.  What we're now stuck with is an economy which functions, to the tune of 70%, on consumer spending. The Memes blame the oligopoly, of course, the Fat Cats who have gotten rich at the apex of the Ponzi Pyramid, and indeed these miscreants deserve all the opprobrium we can glare their way.  The Tropes blame, I don't know, the cycical vissicitudes of the economy: kind of nobody's fault.  The truth is that it was a dumb system with no future other than the one we're beginning to experience.  However, this is not acknowledged at all in M&T Congress.  The Memes argue for another "stimulus package," which takes the form of sending the taxpayers their own money with precatory pleading that they resume going to Home Repo and Bed Bath & Bankruptcy.  The Tropes favor a top down approach which keeps their CEO friends in their 4th and 5th homes on Jupiter Island and the Bahamas.  Neither side wants to admit the awful truth: this thing just doesn't work anymore.  There's going to be a world of pain and misery while we struggle through to something else.

Whoever is elected in a couple of weeks will inherit this crashing system.  It will bring about major changes in America's foreign policy, for one thing.  We will be glad, for example, that Nouri al-Maliki played as many games as he did about an agreement to keep the U.S. in Iraq - that can be our exit line.  The UN's disenchantment with Afghanistan will give us another way out of a wasteful extravagance.  I suspect that the government will undertake a massive public works program here at home to replace the millions of jobs that are going to be lost in the service economy: rebuilding schools, roads, overpasses, railroads, airports as the "labor force" bails out of all the Starbucks franchises and tanning salons.  But it's going to be very rough for a long time, and the rebound, whenever that happens, will not be the result of a "cyclical" resumption of Casino Capitalism but through fundamental changes.  Something which the Memes & Tropes seem organically ill-suited to oversee.

October 19, 2008

The Insane Campaign of John McCain

So who's right, the progressive optimists who claim Barack Obama will win in a landslide?  Or those "realists" who contend the race will tighten over the next two weeks and produce a squeaker?

I don't really know, of course.  My own "cohort," American white males, are a profoundly conservative bunch who tend, more than any other group, to vote according to a knee-jerk conservatism. They're almost embarrassed to think too much.  This was George W. Bush's great source of support; that, and the corrupt "base" of the ultra-rich who simply liked his flat tax ideas and complete indifference to regulation.  American militarism sells because it harks back to the robust days when we solved all problems by sending in the Marines.  That's still what we do, it's just now a lot of us (the "Europeanized" among us) recognize it doesn't work.  The wars in Afghanistan and Iraq were both supremely misguided, knee-jerk reactions to the national paranoia concerning Muslim extremists.  Neither war will do anything, ever, to tamp down the problem of terrorism, and the CIA suggests the wars, in fact, have made things demonstrably worse. Those are what we quaintly call the facts. Yet the wars served their purpose, a great catharsis for a declining power.  Our military attacked vastly overmatched countries with large Muslim populations, killed a lot of people and installed governments which may or may not be to our liking in the long run.  It doesn't really matter that these "wars" bear no resemblance to the principles underlying the John Wayne movies about World War II, where we were legitimately using our military to defend the world from Fascist tyranny.  The "optics" are sort of the same, and in the TV age, and with a non-discerning, increasingly poorly-educated populace (33% of the kids no longer graduate from high school, Colin Powell told us today on "Meet the Press"), that's more than enough.

John McCain knows all this.  The one thing this mediocre guy has figured out is that American politics is, first and foremost, about imagery.  You don't win with "ideas."  If you did, George W. Bush would never have come within a thousand miles of the White House.  Half the people will vote for you in this country if you seem like a tough father figure who will beat up the bad guys. Then you need a few thousand more votes and you win.  The other half of the country (disproportionately represented by women, who are less swayed by the John Wayne and Chuck Norris stuff) are more divided among themselves, as one might expect among the "cerebral" part of the country.  In this demographic you find all the people who think the whole system is rotten, that one party is as bad as another, who have unique and idiosyncratic takes on American democracy, who belong to a very narrow group of special pleaders.  Organizing this part of the country, as Barack is trying to do, is like herding cats and shoveling smoke. 

The Daily Kos tracking poll paints the picture.  Among all males, McCain leads 48-44.  Among all white males, McCain leads 54-38.  Look at that second number: it's not even close.  It's a blowout.  When we picture America, we see a white male because the President is always, always a white male.  So when McCain, who's not a "maverick" but more a standard issue John Birch Society avatar, and as generally insincere and corrupt as most members of his profession at the national level, rails on about "William Ayers" and questions who Obama "really" is, he is, of course, playing to that jingoistic optic.  How can a President, a Commander-in-Chief, be John Wayne if we're not even sure he's on our side?

The pundits, citing dubious polls, argue that this approach "backfires."  Bullshit.  It works and always has worked.  Most of the American electorate do not compare and integrate the incoming media images with reference to a fixed inner position arrived at by a careful consideration of "issues" and America's economic and political situation.  There is no such locus of definite judgment for most people.  Don't pretend you don't know what I mean.  When you head down to Home Depot and watch all those elephantine Americans waddling down the aisles with blank faces, keep in mind that many of them will be voting in a couple of weeks, and consider how many of them understand the difference between Obama's medical insurance program and McCain's $5,000 tax credit idea.  

The country has been in economic decline since the early 1970s.  One way of reacting, what we snobby "elites" think of as "enlightened," is to think about ways to change things, to reconfigure the economy, to "redistribute" wealth by employing ourselves in money-making pursuits with a broader democratic base.  Another way to react is the one which Hitler galvanized into the basis of his short career.  When McCain & Palin barnstorm the country whipping the masses into a frenzy about "Country First" and being in places which are "more Pro-America," they are, of course, playing to this nationalistic angle. Ein Volk, ein Land, ein Reich!  A depressed and demoralized populace can turn to anger and resentment as one way out of the frustration.  We've still got the world's mightiest army, we can still blow the hell out of anyone who gets in our way with our nuclear arsenal.  Maybe we shouldn't be electing some epicene, slender black/white guy who seems sort of like an intellectual from French Equatorial Africa.  Maybe this other guy -- scarred, angry, broken, pasty all-white from his hair to his pallid skin -- one thing we know about McCain, if he gets to the Oval Office, he'll use all those bombs and weapons.  There'll be more war!  No one will push us around!

Alas, his campaign is not insane.  It's American, same as it ever was.  How tight will it be?  I don't even want to guess.