April 01, 2010

MAMMA don't let your babies grow up to be drug dealers

In November California voters will decide whether to legalize marijuana. The proponents have cannily, cannibisly labeled the proposition the "Tax Cannabis Initiative," which plays into the state's general paranoia about its massive budget shortfalls. $20 billion in the current fiscal year and, according to the highly stressed-out State Treasurer, John Chiang, $20 billion for each of the next five years. I believe this is what is known as a "structural deficit:" it's there to stay. Taxing cannabis would raise, by some estimates, $2 billion per year. But, of course, that's just the start. A large fraction of the prison population resides in the state's jails because of pot dealing, cops and the courts have to deal with possession and sale cases, and the illegality of marijuana gives rise to "complementary" criminal problems, such as severed heads rolling down the dusty streets of Tijuana.

Currently, a slight majority of California voters favor the measure. Naturally, these preliminary numbers are almost meaningless, because the opinion-shapers have not gone to work yet on forming attitudes with an advertising blitz. That will be huge, of course, so if nothing else, the initiative will be a boon for the advertising industry. I would anticipate that some of the same pressure groups involved in the gay marriage initiative, Prop 8, will be up in arms about this one. The Mormon Church, for example, joined this time by the Mexican Mafia which controls a lot of the action (using brute force) on both sides of the border. As unlikely as it might seem, MAMMA (Mormon and Mexican Mafia Alliance) could form a potent association for the pro-pot people to overcome. The Mormons have already proved that their tax exempt status will not be touched no matter how blatant their political participation, and the Mexican Mafia has not traditionally worried too much about income taxes in the first place.

The "merits" of the issue, of course, will probably never be heard from again once the slogans start appearing on bumpers. Marijuana is illegal, I believe, because of the faulty inferential systems of human minds. It is associated with black jazz musicians and the demimonde of Bohemia, so conservative Republican types, who do not think twice about getting loaded up on double martinis, freak out when the dreaded weed is fired up. Smoking dope does not turn anyone into a black jazz musician; you have to be really cool to pull that off, and ganja won't do it. The actual facts about marijuana use have been summarized in many places, such as http://www.drugpolicy.org/marijuana/factsmyths/. Essentially, the same claims are made over and over by the uptight in an attempt to keep pot illegal, probably for the classical Puritanical motivation: the haunting fear that someone, somewhere, might be having a good time.

The anti-pot people, not wishing to admit to the essentially irrational distinction between the commercial legality of ethanol and the criminality of marijuana, thus use many specious arguments to keep pot illegal. Such as the idea that it is a "gateway" drug tending toward use of heavier, more damaging drugs such as meth, cocaine and heroin. I am sure it is a gateway drug, in the sense that any psychoactive drug tends to lead to other ways of getting out of it. Consciousness alteration is now considered a basic human drive, like sex, thirst and Seinfeld reruns. But in that sense, so is alcohol, and alcohol comes with its own heavy load of violent crime, liver, brain and heart damage, suicide and vehicular homicide. Marijuana really cannot compete with any of those dangers. The physiology of marijuana's effects simply doesn't allow much, if any, damage to the human body. The emergency rooms are not full of people who have OD'ed on grass, nor do users die of DTs or cirrhosis. On the contrary, marijuana is an effective anti-nausea remedy, an ocular pressure-lowering drug and a good anti-anxiety medicine, particularly if you've got some good Jefferson Airplane albums on the turntable.

The Mormons have a credible argument, since they tend to the abstemious, that just because alcohol is legal doesn't mean marijuana should be, because alcohol shouldn't be either. Fair enough, perhaps, but Prohibition was tried, it failed, and the general direction these days is toward liberalization of state laws regarding the sale of booze (all part of the states' rights movement under the 21st Amendment [Repeal]). So the hypocrisy stands, and if we have to choose which to legalize and which to criminalize, it should be a no-brainer (a condition to which potheads have traditionally aspired. As Robin Williams pointed out on Letterman recently, if the initiative passes, work for comedians in California will become infinitely easier).

So that leaves the rest of MAMMA, the illegal traffickers and gangs, who really don't want to see marijuana legalized. The street price would fall dramatically, leaving plenty of room for a heavy state tax while nonetheless offering a steep drop in the per ounce cost. The game would soon be up for the gangs who control the industry because people could cultivate this easy-to-grow weed themselves, or buy what they wanted from the local head shop, as in Amsterdam. The gangs would have to move up the chain to heroin and cocaine, an already crowded industry which would not welcome their intrusion. Meanwhile, the remoter areas in California's state parks would become accessible to the general public again without nearly as much fear of being gunned down by cultivators.

So if the public looks at the issue objectively, rationally and logically, gives up certain stereotypes about marijuana use which have no relevance to modern times, and considers the fiscal advantages of a new income source (and the considerable savings from ceasing the war on this particular drug), they should vote for the initiative. And, of course, since this is America, these will not be the criteria actually deciding the issue, which is why I have absolutely no idea whether the thing will pass or not.

March 31, 2010

The Big Short

I finished Michael Lewis's latest last night, one of those books I was sorry to see end. Lewis is a great storyteller, maybe the best around. It isn't easy to be entertaining when you're writing about something as intrinsically dull as mortgage-backed securities, but he managed. As with his other books, Lewis concentrates on personalities and weaves the technical stuff into an emotional matrix. He described the often harrowing journey of those gutsy investors who saw the craziness of the subprime market and found a way to short it, particularly a small group of three one-time dilettantes operating out of Berkeley who parlayed about $110,000 in a Schwab account into $80 million; a hedge fund manager in Cupertino with one eye and Asperger's syndrome (and at one time a neurology resident at Stanford Hospital); and a group in New York centered around the iconoclastic and acerbic Steve Eisman, who delighted in telling all the big bankers on Wall Street who bet on the enduring quality of a rising housing market that they were completely full of shit.

They all did it essentally the same way, by buying credit default swaps (CDS) which would pay off if the mortgage-backed bonds ("tranched" into Collateralized Debt Obligations by the securitizers) tanked. What they discovered (since they were all "quants" in one way or another) was that a slight disturbance in the integrity of the mortgages making up the bond (on the order of 6-7%) would make the entire tranche of which they were a part essentially worthless. And since a great many of the mortgages were of the interest-only, adjustable, pick-a-payment, no down subprime variety which a Vegas pole dancer could acquire if she could fog a mirror (or the pole she just slid down), the treasure hunt consisted of finding the CDOs which were chock-full of shitty mortgages of this kind and then going down big against them. Which the treasure hunters did.

The funniest part in the book is Lewis's masterful re-creation of his heroes' constant sense of wonder: the money was just too easy. They kept thinking they must have made a fundamental, paradigm-quality error. The Wall Street banks could not all be this incredibly stupid. They roamed the country attending conferences and seminars on CDO investment trying to find people who could convince them they were wrong, that their fundamental approach was just misconceived. But no one ever did. In fact, as they found out, everyone on the long side of the CDO market was in the thrall of the same mass delusion: the housing market would always go up. Thus, since although it was inevitable that more than 6-7% of the subprime mortgages would fail, it would make no difference. Foreclosure would simply pay off everybody participating on the long side. It never occurred to anyone that the entire housing market operated in a 100% correlation once you scaled up the mortgage business to the levels possible with securitization of the whole industry. That is, the production of rows and rows of empty, abandoned houses worth considerably less than the paper written on them meant that all other houses in the market would also suffer loss (including the Alt-A and the prime market); and although Ben Bernanke, in a phrase which will forever haunt him, assured Congress that the "subprime contagion will be contained," it was not contained. It spread everywhere, and brought America to its knees economically.

So Paulson & Bush asked Congress for $700 billion (Troubled Asset Relief Program, TARP) to bail out the banks which held CDOs in mass quantities, then used none of it for that purpose. That was okay with Congress; I mean they held a few hearings about it, but nothing happened. Then the Federal Reserve Bank, under the same Bernanke who had promised that a coordinated, broad-scale decline in the American housing market was unprecedented in American history and would never happen now, began a program whereby the Fed (quite illegally under its charter of 1913) took mortgage-backed securities off the hands of the reeling banks (it "completes" the program today, $1.25 trillion later - we'll see if it can really keep its hands off the market when mortgage rates start inching up again). So that's about $2 trillion worth of damage right there, all transferred from the miscreants who created this colossal fiasco to the U.S. taxpayer and the national debt. And while a few investment banks failed, none was nationalized. There was no program for cleaning house, firing all the executives, cutting off their bonuses, investigating them for criminal fraud prosecution. Obama made a few noises about the bonuses paid after the collapse as being, I don't know, in bad taste or something, but that's about it.

So all the idiots on Wall Street also became rich, just like the intrepid mavericks who bet against them, even though they had been 100% wrong. They became rich in three ways, by selling all this trash to unsuspecting investors; by buying credit default swaps themselves against the very assets they were promoting and selling; and by being bailed out by the federal government for the large CDO positions they somewhat mystifyingly kept on their books. So you could be brilliant or stupid, and either way you got rich simply by being in this strange business.

It's grist for another day, but this subject of mass delusions is fascinating. I think we're in the grip of one right now, again, already, in "waiting" for the economy to turn around. The federal government decided to go all in on the bailouts and stimulus based simply on the theory that time itself will turn the economy around, because that's what always happens in recession cycles. And if it doesn't, what happens to us as a result of all this debt we piled up in the expectation that the market would "reflate" and prosperity would return? What if the economy remains crappy with the only difference being that we're now being crushed by unsustainable debt?

Propaganda can only take you so far. What rude beast slouches toward the District of Columbia to be born this time?

March 28, 2010

Dishonoring Charles Ponzi

One cannot libel the dead, and for this Senator Lindsey Graham (Supercilious, S.C.) should be grateful. Ponzi, in an act of magnificent chutzpah, once sued one of his earlier detractors, who wrote that he was running a, well, Ponzi scheme. Ponzi won in court, a $500,000 judgment for the impertinence of smearing his bad name. In those days tort law required the defendant to prove the truth of his charge (as the English system still does), and Ponzi's detractor, while exactly right, couldn't prove it.

Anyway, Graham criticized the health care bill on the basis of its "Ponzi scheme" characteristics. If I understood his rambling, drawling remarks, he was directing attention to the budget cutting claims of the bill's proponents, and specifically to the $570 billion in "cuts" from Medicare which will offset the cost of the new legislation. Graham said that this half trillion will have to be made up somehow, so that the bill is not "deficit neutral" and will raise the national debt by at least this amount.

Couple of technical points: (1) Who's even going to notice a half tril at this point? I thought we were talking real money. And: (2) This is not really a Ponzi scheme. It's a shell game, which is one of the two gambits used by the federal government to conceal its essential insolvency.

The other game played by the federal government is, in fact, a Ponzi scheme, and that is the basic financing of the entire federal operation. Ponzi pretended to speculate in "postal coupons" (as Bernard Madoff pretended to invest in the stock market) in an early arbitrage scheme of playing the differential between Italian and American prices. In reality, Ponzi was simply using the investments of later investors to pay earlier investors, deploying the word of mouth of the earlier investors about their fabulous "returns" to generate an ever increasing pyramid of suckers. The scam was brilliant in its simplicity and elegance, and Ponzi lived the high life while it lasted (which was not long, not nearly as long as Bernard Madoff, which gives you an idea how lame modern securities enforcement is - the modern SEC had the original Ponzi scheme as a model and still couldn't figure it out). One tends to forget that even the simplest ideas need an original, a genius who comes up with the concept, and Chuck was that man.

The public part of the national debt is $8 trillion, and the United States is completely dependent on later "investors" to keep itself current with existing debt holders. If any sizable fraction of bond and bill holders suddenly demanded their money on maturity, the USA would be revealed as a bankrupt. This insolvency has been exacerbated recently by the pathetic reality that the actual tax revenues received by the U.S. government are not much more than the current budget deficit (about $2.2 trillion in income versus $1.5 trillion in deficit). This is roughly equivalent to an individual making $100,000 per year who increases his debt by $67,000 every year.

This is the reason that the USA likes talking about Greece's problems so much, as noted in a recent mindbelch on these pages. Anything to distract us from the essential absurdity of the situation we are in.

An example of a shell game played by the United States entails the "quantitative easing" employed by the Federal Reserve to tide us over until this little hiccup known as the Great Recession passes. This one is beautifully intricate and dazzling in creating the impression that anything other than money printing is going on. The Fed would like to simply e-mail a million bucks to every American and be done with it, but Weimar/Zimbabwe hyperinflation concerns stay the Chairman's hand. So instead the Fed "limits" itself to about $1.6 trillion in the form of (a) participating in the Treasury market (snake eating tail department) and (b) buying up mortgage-backed securities guaranteed by Fannie & Freddie (that moribund couple).

Cynical observers such as Chris Martenson have noted that these two programs are used in tandem. The Fed's purchase of about $1.3 trillion in dodgy MBS sludge is part of the "cash for trash" program where holders (such as banks in the Primary Dealer category [the Fed's Kool Kids Klub]) are relieved of this worthless stuff in exchange for Treasuries, which the Fed and Treasury conjure out of thin air. The banks then have something they can actually sell at par value and can use to buy, oh let's see, Treasuries at a regular Treasury auction. The Fed, using its "power" (self-granted) to buy Treasuries under QE, then relieves the banks of the very Treasuries they just purchased (Martenson compared the CUSIP numbers of the bonds purchased to prove this thesis). Often the turnaround is just a few days, so no elaborate scheme to conceal is felt necessary by the scammers. The Treasury also now has its "Supplementary Financing Program" (SFP), through which it raises "money" by selling short-term Treasury bills and handing the money over to the Fed to use to buy more MBS from distressed banks, which is a way of extending QE without calling it that.

I get a kind of motion sickness when I try to follow all of this, or try to figure out what just happened. Intuitively you sense that it's all crazy, that all the Fed/Treasury are doing is playing an elaborate game of make-believe. So Lindsey, who is, after all, involved as a Congressperson in the federal budget process, should probably cool it on the Ponzi allegations. He's beyond Charles Ponzi's reach at this point, but China is looking on with a jaundiced eye that is a new form of Yellow Peril.