February 07, 2009

American Economy and Other Entropic Processes

Graphically illustrated here, we have the history of the top marginal tax rate in the United States of America from the inception of the income tax in 1913, brought to you by the Sixteenth Amendment, through 2003, when the top rate was reduced from the Clinton era rate of 39.6% to the present 35%.  

It's all there, if you look closely.  As with any new toy, the income tax was taken out for a spin by the central government as soon as the law was enacted, the top rate zooming to nearly 80%. The rate was just as precipitously reduced at the outset of the Roaring Twenties to 25%, under the leadership of three consecutiItalicve Republican presidents, Harding, Coolidge and Hoover. These three,  in cahoots with Congress, were the original "supply siders," believing that low taxes on the rich would foster growth and prosperity through trickle down mechanisms.  And so it did, for awhile, and America's economic fortunes improved along with the rest of the world following the catastrophic destruction of World War I.  And also, as the low tax rates were maintained and the financial sector was allowed to run wild with unlimited margins and unsupervised stock markets, the pro-fatcat regime led to the kind of unbalanced wealth distribution not seen again until...now.   Sic semper gloria mundi.

It all crashed in 1929.  Roosevelt, the original creator of the Mother of All Stimulus Packages, the New Deal, had one enormous advantage, visible in the chart above, not available (in any practical sense) to President O.  He could draw upon the accumulated wealth of the country, and that of the plutocrats still earning big money, through the income tax, pushing the top marginal rate from 25% to 80% in his first two terms in office. As World War II reached America's shores, the populace tolerated a confiscatory top rate of over 90%; you see, in those days Americans thought that if the country was at war, it must be something pretty important.  Something worth sacrificing and paying for.

Such quaint ideas.  So World War Twoish. Under George W. Bush, no sacrifice whatsoever was asked of America's disaffected, indifferent masses, the ignorant armies watching TiVo by night. The tax burden was lightened during the Afghanistan and Iraq wars even though these conflicts were ruinously expensive.  But W, after all, was simply a child of his times.  That's how we do things now.  America is not really a nation anymore; it's a market, a demographic, a place to network and make your money,  keeping as much as you can.

That's why the modern "Recovery Act" cuts taxes as part of its program of spending $1 trillion to stimulate the economy.  No one is suggesting that the top rate of 35%, applicable to incomes over $300,000, be increased at all.  No one is suggesting that the FICA tax apply to incomes over its present maximum of $100,000.  Why isn't Congress suggesting something so obvious, so fundamental, particularly with Roosevelt's example to light the way?

Because Congress works for the people whose taxes would be increased.  See how obvious all this becomes with a few simple charts and graphs?  Congress members now tell us, Democrats & Republicans alike, that raising taxes damages economic growth -- this is not something the government does during a downturn.  Huh?  What exactly then was Roosevelt doing in the 1930's?  Suppose we raised the top tax rate to 50% for all incomes over $1 million per year. It would raise a lot of money; is anyone seriously suggesting that the increase of 15% would cause those big earners to stop making money?  Lebron James and A-Rod would hang it up?  Those Fortune 500 CEO's whose incomes average $400 million per year - not worth it anymore?

Yet it's politically unthinkable, isn't it?  So here's something else that is unthinkable: that this "stimulus" plan is going to work.  It can't.  It violates some fundamental thermodynamic rule of money.  If the citizens of this country are not willing to pull together collectively and put each other to work by paying for the government projects contemplated by the Recovery Act, then it's hopeless.  We have to do our own internal redistribution of income and wealth in order for the country to avert catastrophe.  If we are not willing to do that, then the plan will fail.  You cannot borrow your way out of a problem caused in the first instance by excessive borrowing and income inequality.  And beyond that, do we honestly believe that all the foreign creditors who will be asked to finance this enormous outlay at essentially zero return on their investment will not notice that we're not paying for any of it?  That we're reducing our own burdens as our "contribution?"

I'm afraid this one takes the idea of American Exceptionalism way past the breaking point. This is a looming disaster.  We're the ones we've been waiting for?  Will there be another bus along in a minute?

February 06, 2009

Marco Polo In the Court of Congress

That was some riveting theater the other day before the House Subcommittee on SomethingorOther when Harry Markopolos, the avenging angel of the Re-Regulation Forces, appeared to describe to the Committee his futile efforts to get the New York office of the SEC to do something about Bernard Madoff's massive fraud scheme.  For fans of Schadenfreude, it was like Weinachten in February.

The comfy bureaucrats at the SEC had it made during the Bush years, of course, reveling in their sinecures as friends of the High and Mighty. The whole idea was to leave the securities industry alone and let the "invisible hand" of the market work its magic. You might say that certain miscreants took advantage of this libertine situation, and no one more than Bernie Madoff.  Harry Markopolos was himself in the investment game, a self-described expert on derivatives with long experience on Wall Street, and he simply refused to believe that Madoff's "split-strike" strategy for returning about 12% to his investors, in good years and bad, was humanly possible.  So, using a "Mosaic" technique, he spent years investigating Madoff with the assistance of his "team."  He summed it all up in a long letter dated November, 2005, to the SEC, stating bluntly that it was his conclusion that it was "most likely" that Madoff was running the biggest Ponzi scheme in world history.

Markopolos never met Madoff, never interviewed anyone who worked in his organization.  In some ways, what Markopolos did in that letter (which you can find in pdf by Googling "Markopolos letter to SEC") is reminiscent of the work of the legendary Polish cryptologist Marian Rejewski, who deduced the internal wiring and basic structure of the Nazi Enigma machine without ever seeing one, by using permutational mathematical analysis of German encrypted messages.  Truly one of the astounding feats of mental deduction of all time.  I wouldn't put Marko Polo's work in that category, but it's pretty good.  He figured out that (a) Madoff was running a Ponzi scheme, (b) that the amount involved was somewhere between $20 and $50 billion, and (c) that Madoff had been a crook since at least 1991.  All from studying the "performance" of the Madoff fund, Madoff's relationship with the places where he got his money, and Madoff's obsession with secrecy.  A virtuoso demonstration of logical analysis.

Watching Markopolos testify, you couldn't help but think that he probably has a screw loose somewhere.  For one thing, both testifying and in his Nov. 2005 letter, Harry is a little, how to say it, egotistical.  A tendency toward the grandiose, describing himself (with his business degree from Boston College) as one of the few people in the world with the mathematical background to understand derivatives well enough to do the analysis he did. Actually, I read his letter, and on the basis of my own very limited experience with securities litigation, I was able to follow it pretty easily.  You just need to know a few basic concepts, such as what an option is, what a put versus a call is, what "out-of-the-money" means as applied to options, and a few other things, and you've got the basic hedging strategy that Madoff claimed to be running. You don't really need to have a PhD in mathematics as so many of those brainiacs who devised the algorithms for Long Term Capital Management possessed, who might even go a little deeper in math than Harry Markopolos.

That, I think, was sort of the problem with Harry for the SEC.  In addition to his borderline megalomaniac tendencies, Marko kind of presented himself as a Wall Street Maxwell Smart, offering to go undercover, to disguise himself, and warning of the grisly fate that awaited him if his cover was blown.  I don't doubt that physical danger was a serious threat when you're dealing with that much money and with a crook as bent as Bernie Madoff.  But if Harry Markopolos presented about 30 "red flags" in his letter re: Madoff, then the SEC probably found as many red flags about Harry in Harry's letter to them.  Which is what the SEC really wanted to find, because the last thing they wanted to do was to take on Bernie Madoff.

So natually, just as Harry predicted, the SEC sided with Madoff, because Bernie was a Wall Street maven, a Mensch, a power player who was in on the ground floor of the establishment of NASDAQ.  The New York office decided that Markopolos was a jealous whistleblowhard (to coin my own term), maybe a little nuts, and not someone they should allow to tell them what to do.

Man, did they pay for that dismissive attitude.  What's worth YouTubing and playing is Rep. Gary Ackerman's smackdown of the entire top brass (minus the weasly Christopher Cox) of the SEC on national TV.  This New York Democrat absolutely tore the counsel staff a new one in unsparing, scathing terms, telling them they couldn't find their ass with both hands in a room with the lights on. They're all going to get canned, they know that, and anyway they're all mostly holdovers from the Bush Roaring Aughts Era.

The problem for the SEC is that Harry Markopolos, one citizen working with an ad hoc "team," figured the whole thing out right down to the ground.  He was right about everything, astonishingly so, and he was right over three years ago.  How much additional money was lost because the SEC sat on their hands?  Billions and billions and billions.  Markopolos predicted the cascading failures in other hedge funds as the High Net Worths all scrambled to liquidate and cover their Madoff losses, the collapse of the "feeder funds," of private banks in Europe which were heavy into Madoff. Harry saw it all coming, laid it all out for the SEC, and the SEC did nothing.  And then had to sit silently and listen as Harry Markopolos described, in excruciating detail, their incompetence, their corruption and their utter worthlessness.

One of those days where it just feels good to be alive.  Thanks, Marko Polo.

February 05, 2009

Why Are We Still in Afghanistan?

One thing you learn by writing down your thoughts on a semi-regular basis, as Ralph Waldo suggested might happen in "Self Reliance," is that you find what appears to you as the apparent lack of logical answers to questions about public matters reflects the real absence of logical answers to those same questions.  Which is to say, if you trust your own instincts about matters of poltiical concern, you often find that what parades as "conventional wisdom" is simply the repeated formulations of "opinion makers" who want to sound very Serious and who wish to speak the language of other Serious People who shape public debate.

I think this tendency grew exponentially worse during the Bush years because The Decider ushered in an agenda of Mass Stupidity that distorted rational discourse beyond all recognition.  The war in Afghanistan is an excellent, perhaps the prime, example of this destructive effect.  Afghanistan is widely regarded as the "good war," the one we definitely had to fight after the terrorist attacks of 9/11.  No dissent from this view was allowed, on the Right (certainly) or even on America's "Left."  Everyone from James Inhofe (Troglodyte,-OK) to Al Franken agreed that Afghanistan must be invaded.  An opinion in favor of invading Afghanistan was the one true sign of an American Patriot.  No ifs, ands, buts, cavils or misgivings allowed.  It had to be done.

"It" is still going on.  It's now 2009 and the invasion began in the fall of 2001.  This war has now been going on (a) twice as long as our involvement in World War II and (b) somewhat longer than the main part of the Vietnam War.  The theory was that Afghanistan provided a "breeding ground" for terrorists, or a "swamp" that must be drained, a reference, I guess, to anti-malarial measures taken in tropical countries.  Osama, Zayman, Atef, all the bad guys were there. Plus, the Taliban were mean to women, unlike, say, the Saudis.

The 19 guys who flew planes into the World Trade Center and the Pentagon were not from Afghanistan.  Had they ever been to Afghanistan?  I would like to see the federal government prove it with testimony other than that of the Gurgling Confessor, Khallid Sheikh Mohammed, who is quoted extensively, not to say exclusively, in the Report of the 9-11 Commission as the source of this evidence.  Now that we know what we know about torture during the Bush years, is there any reason to rely definitively on this testimony?

What we do know is that the 19 Arabs were Egyptian, Saudi, Lebanese, UAE and Yemeni.  The main plotters formed their cell in Hamburg, Germany, as members of the same mosque, and did their flight training in the United States, as well as most of their logistical planning.  Hey, don't take my word for it; read the Commission Report.

A whole war against Afghanistan seems pretty dumb in such a context, but then George W. Bush was a very dumb guy.  The urge to do something about 9/11 was definitely on his side, however, no matter how dumb. So we invaded the hated Taliban, who may have provided sanctuary to a guy who may have met with some of the guys who actually attacked us in September, 2001, and we came with the full force of the U.S. military, and it was a sterling victory until it fell completely apart.

However, then the Afghanistan War caught its big break.  Bush outdid his own stupidity by launching another war against another irrelevant country, this time Iraq.  Now the war in Afghanistan acquired the cachet of being the smart war that "Liberals" could favor, that should have been "finished," and the comparison, no matter how inane, allowed Democrats to appear "tough" and "belligerent" while at the same time exhibiting superior judgment and leadership.  It also allowed Barack Obama to promise a "surge" in Afghanistan once he was elected, the dumb war he favored over the war in Iraq which he had famously called "dumb" when Bush was running it.

It's as if a guy starts a grease fire in his kitchen and then while casually and desultorily fighting it with an extinguisher, decides to start another fire in his bedroom.  The kitchen becomes the "smart fire" which must be put out even though the dumb fire in the bedroom will also burn his house down if it keeps burning.  "It was dumb to start that fire in the bedroom while I was still dealing with that grease fire," Joe, the distraught homeowner said to reporters in front of the charred ruins of his house.  "I thought Joe was dumb to start that bedroom fire.  I thought the grease fire in the kitchen was the smart fire, the one I would have fought," said Dirk, his neighbor, who's a pain in the ass.

The theory in both Afghanistan and Iraq is that there is some magical, unknown point, if we just stay long enough (forever, even), where both of these Muslim countries, thoroughly unpracticed in the tradition of Western democracy, will become stable, enduring, reliable strongholds of liberty.  This is completely crazy.  Once we leave both places, absolutely anything may happen in our absence.  It is likely that both Afghanistan and Iraq will degenerate along tribal lines or devolve into dictatorships or military juntas, and go through the cyclical periods of unstable democracy and despotism found in modern Pakistan or Iran, just as two, highly relevant examples.

Meanwhile, bin Laden and Zawahiri are still at large.  They could still get messages to another group of 20 Arabs, I suppose, and come up with something else.  What do these wars have to do with that?  Were those jungle gyms actually essential to hijacking American airplanes?

February 04, 2009

Last Train for the Coast

I heard Don McLean's full-length version of "American Pie" on the oldies station yesterday and realized that exactly 50 years had passed since a small plane carrying Buddy Holly, Ritchie Valens and The Big Bopper crashed in a storm in Iowa.  February 3, 1959, the day the music died.  The three men Don McLean admired most Went West on that fateful day.  Buddy Holly would have appreciated the subtle irony of McLean's lyrics: that'll be the day that this'll be the day that I die.

The imagery of the song conveys a loss of innocence in the decade that passed between the plane crash and McLean's great breakout hit.  Asked what all the references were, what the song meant, Don just said the song meant that "I'll never have to work again."  McLean was born a year before I was, and I know what he was writing about.  It's all there, James Dean, Bob Dylan, The Beatles, The Rolling Stones, the last Candlestick concert, Altamont, Janis Joplin ("I saw a girl who sang the blues, and I asked her for some happy news, but she just smiled and turned away...").  All the formative icons of my own youth.  We had that one somnolent decade, the Fifties, the era one Beat called "The Air Conditioned Nightmare," and then America started happening at warp speed. Race riots, Vietnam, four dead in Ohio, the breakdown in trust between rulers and ruled.

I kind of felt for James Howard Kunstler, the Clusterf**k Man linked to the right, as I read through his latest paean to a Gone America a couple of days ago.  He always writes as if he's trying to summon some idealized future into existence, but I think what he's doing (as another almost exact contemporary of mine) is trying to invoke a vanished past.  He wrote about his recent trip to Montgomery, Alabama and the "asteroid belt" of chain stores, strip malls, "muffler shops," fast food joints.  He was even a little hard on the old town center around the Capitol, depicted in my own photo of Dexter Avenue up above, taken from the street in front of Dr. King's Baptist Church.  It's not all that bad around the state house, I didn't think, but I do know what he means about the asteroid belt and the faded green and ocher color of the land around Montgomery. It was approaching Montgomery from the east on old U.S. 80 five years ago that I first realized that my sketchy recollections of the Old South had no counterpart in contemporary reality.

I owe to Mr. Kunstler the data bit that about 70% of all manmade structures around us in America were built (or thrown up) since about 1950, so the America that Buddy, Ritchie and the Bopper said goodbye to a long time ago has been fundamentally altered in the decades since.  Not just the music and the simplicity, but the basic look of the place is very different.  I grew up in a subdivision built right at the beginning of the post-War boom, so in some ways I never knew anything else.  I understand what the Celebrated Mr. K is writing (and grousing) about, completely, this uglified look of the American Crapscape. Still, I don't think it does much good to live in a fugue of constant revulsion, to exist in an emotional war with your senses as you drive around America and take it all in.  James is just one of those exquisitely aware souls who reacts (violently, almost) to the depredations of modernity, to the abolition of beauty. For better or worse (and it's decidedly worse), this is what we came up with when we decided to "develop" the suburban areas of America. It's hideous. Almost all of it is an unrelieved horror, punctuated only by the enclaves of the wealthy, where Nature is allowed a tenuous continuity. (You see, it's not that we don't know what's pleasing to the senses; we just don't think it's important for anyone who can't afford it.)  

You have to take from that what you can.  The aesthetics are intellectual, that's for sure.  You can glean something of an understanding about how humans relate to one another, the kinds of habitations they will build for one another to live in (to wit: a maximized return on investment achieved by building dwellings at the lowest possible level of acceptability), and how we relate to Nature, that is, by completely obliterating all sign of it.  That is something to know, however.  Something you pick up during your journey of life.  As Thoreau said, a single Truth is enough for the seeker.

Not strange, then, that we look always for that transcendent moment of grace. Even when February makes you shiver, you're glad for the great ones who made the journey with you, and made it all a little easier to take.

February 03, 2009

The Quiet Presidency of Barack Obama

I have to admit that I find President O's governance of the country a little boring.  I wonder if he does.  I imagine the early thrill of all the job perks is beginning to ebb a little.  Has he been to Camp David yet?  He doesn't have a ranch, or a seaside compound to escape to, the way the Republican presidents did.  No Drama Obama, his campaign staff called him.  He just works hard, isn't given to histrionics or nervous fits or Freudian acting-out, like his predecessor.

A big problem is that the main subject matter of his presidency is intensely boring.  How much can we talk about this stimulus thing without our eyes glazing over?  It's dull.  It's a big, messy, incomprehensible hodge-podge of farm subsidies, financial aid to states, FICA tax reductions, medical insurance extensions, blah blah blah.  I tried reading some of the Senate version.  It's over 750 pages long.  I think that's one of the ways the solons protect themselves. No one, not even the legislators themselves, could be forced at gunpoint to read one of those things all the way through.  No one at a major newspaper is ever going to read it.  A cable news anchor would never waste his time reading so much as the preamble.  So no one can tell, in advance, if it's going to work because no one is ever going to have a handle on the thing.  It's a simultaneous equation with 750 unknown variables.  It's hopeless.

So all O can do is go from conference to conference and talk about the "urgent need" for this perplexing enactment, that is, when he's not deflecting questions about why his latest Cabinet appointee failed to pay $140,000 in taxes.  That's what his presidency has been about so far, Cabinet heads who amend their tax returns and this gargantuan spending bill.  The glamorous stuff all has to wait, I guess, the brilliant moments when Hamas and the Likud dance the hora, America signs the successor protocol to Kyoto, Guantanamo closes, the solar and wind electricity grid is up and running, everything is all green all the time.

That is, after we raise $4 trillion to recapitalize the banks, get all the troops out of Iraq and Afghanistan, and find the bottom of the real estate market and the top of the unemployment rate.  Being realistic about things, just the clean-up operations are going to consume Obama's first four years.  This is what happens when a huge, powerful country with many negative trendlines, many financial and economic and environmental disasters waiting to happen, decides to hire someone as President, back in 2000, who is completely incompetent, and whose every initiative tends to exacerbate the degenerative processes underway.  And then that country doubles down on its bad choice by rehiring the clown in 2004 so he can finish us off.

No doubt a person as comprehensively perspicacious as the present incumbent is quite aware now of the true depths of the disaster Bush has left him.  It is such a clusterf**k that there is simply no time for politics.  The blogsters and the conspiracy theorists and the Alexander Cockburn and Ralph Nader types who absolutely must see that all parties and all politicians are essentially alike must read into every little Obama nuance confirmatory proof of their underlying thesis.  In fact (and despite my own indulgences in this tendency), there are major differences between the Democrats, the party of the Enlightenment, secularism, science and due process, and the Republicans, the party of theocracy, obscurantism, intolerance and a priori reasoning.  The Republican President and that awful Republican Congress between 2001 and 2007 absolutely, totally, and ruinously ran this country into a ditch from which it may not be able to extricate itself.  

Obama simply could not be more different from Bush, in every way imaginable.
It's the difference between a person who thinks and a person who spastically twitches instead of thinking.  It's the difference between a smart and deliberative person who uses his mind in a systematic way to comprehend complex problems and a brain-damaged clown who lurches from one stupid move to the next.  I only wish I could hear what Barack actually says, in private to his advisors or to Michelle at the end of another interminable day, about the true depth of the piles of steaming crap left by Bush for O to handle.  And I think I know what that "note" was that Bush left for Obama in the Oval Office:  "You're screwed. Hehhehheh."

Little by little President Obama is leaking out the horrible news to us.  Such as that $4 trillion number to stabilize the American banking system.  To put things in perspective, when America was in comparatively better shape, say in 2004, we were nonetheless borrowing about 65% of all money borrowed by any country in the world.  That's how much we ask the world to subsidize our irresponsibility, so we can play GloboCop.  If half a trillion represented 65% of all borrowing, how much will $2 trillion, this year's likely deficit, represent?

It doesn't even compute. Prez O is in unchartered territory, a potentially disastrous problem where the solution may not be possible.  Well, here's a direction we might look:  

"Militarization does not help resolve the problem but only pushes it back, taking from the economy vast financial and material resources that could be used much better elsewhere. I'm confident that reasonable constraints on military spending along with the strengthening of global security will ultimately yield economic dividends."

I think the guy who said that might be on to something.  It was Vladimir Putin of Russia, a few days ago at Davos.  Maybe he's sincere.  Maybe what he's been looking for, like so many other people in the world, is someone leading the United States who doesn't spend his time peering into souls or hearing voices telling him to "attack!" but just wants to have an intelligent conversation about real solutions.  When things are this bad, maybe even something that crazy could work.