April 24, 2013

Book Report: David Stockman's "The Great Deformation"

This is a very satisfying book.  What makes it compelling is the sense of utter "knowingness" and objectivity that pervades the analysis.  Stockman, after all, was Ronald Reagan's Budget Director before he entered the private sector (still quite young) as a Wall Street trader with Salomon Brothers, then perhaps the most respected investment house in Manhattan.  So he's seen the financial shenaningans from both sides - the Wall Street grifters, the power players in Washington, D.C. who are on the receiving end of all that corporate lobbying money (he served in the House of Representatives). He does not come at his commentary on the American economy from a partisan viewpoing; no one is spared, not even Reagan.  The book is politically agnostic.

The writing, in fact, seems to emerge from one other persona on his c.v., his years as a divinity student at Harvard.  Its tone is moralistic, and American in an old-fashioned way.  What he decries, what lies at the base of the Great Deformation, was the decision in 1971 to take the dollar completely off the gold standard, the Camp David agreement that is often called Bretton Woods II. After that, the nations of the world operated under the "floating currency contraption" that we now use. 

I don't really know what I think about the gold standard as the basis for issuing money.  There is nothing particularly "natural" about calibrating the issuance of markers for wealth (money) in terms of the amount of a metallic element with the atomic number 79 which has been found so far.  That gold is comparatively rare was the big point in its favor, I suppose.  If paper money must be "backed by gold," then an upper limit on the amount of currency that can be printed is established.  Without it, we wind up with what we have now, "currency wars" among the various central banks internationally, with the spectacle of nations seeking actively to create inflation in their economies and to devalue their currencies so that their exports are cheaper on the world market.  Japan is presently set on this course, with turbo-charged quantitative easing that makes Bernanke's money printing seem tame by comparison.

And, of course, as Stockman points out, there will always be the temptation at central banks to make up for lost growth and prosperity in a country by just printing the money that we can't "earn" otherwise.  The American housing bubble is his Exhibit A, that fantastic run-up in prices between 1998 and 2006, where the booboisie went on a mad rampage of MEW (mortgage equity withdrawals) through refinance, lines of credit and flipping of houses that went ever upward in price.  Stockman estimates that between about 2001 and 2006, about one trillion dollars per year were spilled into consumer spending by means of the house-as-piggybank. It was the era of flatscreen TVs, granite countertops, weekend buying sprees at Home Depot to plush out all that home improvement, new cars in the driveway paid for with 30-year financing on the house.  What wasn't to like?  We were rich! For a while.

 All of it was enabled by a compliant Federal Reserve (which kept benchmark interest rates in the sub-basement), the "GSE" twins, Fannie and Freddie, and Wall Street's packagers of mortgage-backed securities, along with the "ownership society" craze begun by Clinton and taken to delirious heights by Bush.

While all of this was going on, in those halcyon days of the first half of that long-gone decade, the American commoner made very little real progress on the employment front.  Wages were stagnant, the job market was moribund, and there was no actual economic reason, other than bubble finance, that the housing market should have appreciated in value (on average, 15% per year) at such an insane pace.  It wasn't as if Americans could actually afford these houses on their paychecks.  It all depended on gimmicks: low or no down payment, sketchy documentation, negative amortization, adjustable rate loans, and a central bank willing to keep interest rates at a level amenable to the Wall Street and GSE trash compactors, who smashed together all these garbage loans into tranched exotica.  No more brick & mortar banks with a loan officer (a friendly guy who looks and sounds like Jimmy Stewart) perusing your loan app in a kind and sympathetic way, appraising the likelihood that his bank, which will originate and hold the loan on its own books, will get paid.  No, now the mortgage business was turned over to coked-out grifters at Bear Stearns who needed "inventory," loans by the thousands so they could make their bonus and stay current on the Hamptons house and the prostitute/girlfriend's Manhattan apartment.

Modern America, in other words.

It was fun while it lasted.  It replaced the dot.com bubble, which tended to favor a narrower group of investors and tech entrepreneurs.  The housing bubble was far more democratic - almost everyone felt the "wealth effect."  Stockman is at pains to point out that it was all a chimera, a case of borrowing from the future and blowing the moolah now.  Now we're back to the same dead-ass job market, the same flatlining wages, and the same dismal prospects as would have existed in 2004, say, save for the distended housing bubble stretching to its gossamer thinness over the McMansion-strewn hills of America.

Bernanke, that plucky and indefatigable counterfeiter, is doing what he can to reinflate the bubble, on Wall Street and in the housing market.  He wants America to have those good feelings of being rich again, but all he seems to be doing is comforting the comfortable and leaving the afflicted as he found them.  Since he started printing money at warp speed in 2009, the top 7% of America's aristocracy have increased their net worth by 28%, while the bottom 93% have gotten nowhere at all. 

Stockman's idea is that we should probably try to do something real for a change instead of just playing financial games with interest rates and money printing.  Yeah, I guess.  That sure sounds like a lot of work, though.

April 22, 2013

It's Time to Move On (Again)



April is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain. - See more at: http://www.poets.org/viewmedia.php/prmMID/18993#sthash.3x6GMdHH.dpuf
April is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain. - See more at: http://www.poets.org/viewmedia.php/prmMID/18993#sthash.3x6GMdHH.dpuf
April is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull roots with spring rain. - See more at: http://www.poets.org/viewmedia.php/prmMID/18993#sthash.3x6GMdHH.dpufAApril is the cruellest month, breeding 
April is the cruellest month, breeding
Lilacs out of the dead land, mixing
Memory and desire, stirring
Dull rocks with spring rain.

T. S. Eliot, "The Waste Land."

As I understand matters, we are not to be intimidated anymore by terrorists.  Speaking for all of us, President Obama has declared on national television that we are no longer afraid.  The incomparable (and often incomprehensible) Tom Friedman of the New York Times concurs: 

"And while we are at it [not being afraid], let’s schedule another Boston Marathon as soon as possible. Cave dwelling is for terrorists. Americans? We run in the open on our streets — men and women, young and old, new immigrants and foreigners, in shorts not armor, with abandon and never fear, eyes always on the prize, never on all those “suspicious” bundles on the curb. In today’s world, sometimes we pay for that quintessentially American naïveté, but the benefits — living in an open society — always outweigh the costs."

Just a quick memo to Tom: I'm virtually certain that organizing the Boston Marathon is a year-round activity, and as soon as the current one is finished, plans begin for next year.  In fact, let me look that up for you.  Okay, that wasn't too tough.  Here you go:  http://216.235.243.43/races/boston-marathon.aspx The Boston Marathon is organized and run by the Boston Athletic Association, and plans are underway for the 2014 running of this annual event.  My idea would be to wait until the third Monday in April of next year, just like always, although in theory I'm sure a second Boston Marathon could be organized in a couple of weeks if you think it's necessary to demonstrate our steely resolve. 

As for our obliviousness to "suspicious bundles," I'm pretty sure, if memory serves, that at airports and stadiums, aboard public transit, on train platforms, signs are everywhere now that urge everyone to report "suspicious bundles," and the U.S. Post Office has definite policies on how big a package can be jammed in the corner mailbox, just as another example.  We're also told that if we "see something" we should "say something."  My local CVS Pharmacy has half an aisle devoted to "travel size" everything: eye drops, tooth paste, anything else that can be reduced to four ounces. 

Also, our nonchalance in the face of danger would probably come as something of a surprise to the families of about one million Iraqi dead, or the 5 million or so displaced refugees in that country.  We should also mention the 5,000 or so American dead, and the wounded, maimed, amputated, blinded and insane soldiers in numbers probably at least ten times that amount who served the country by fighting essentially symbolic wars in Afghanistan and Iraq, the latter war to protect us from weapons that did not exist, and the former so that Osama bin Laden, who was living in Pakistan, could not use Afghanistan as a base of operations, that is, if he felt like going back to Afghanistan.

Not that I consider myself uncommonly courageous (not at all, in fact), but I was pretty much with the new program as of September 12, 2001.  As I recall, it was actually the country's leadership (Bush & Cheney) who hyped the bejesus out of the threat of terrorists, as they warned us of mushroom clouds and, in Bush's words, "an enemy who lerks."  Every time we felt like relaxing, they would stir up hysteria again by warning us of the crazed legions of Muslim terrists who spent all day dreaming up ways to mess with us, envious, as they were, of our freedom.  A freedom which Tom Friedman now openly urges us to flaunt, as we run around in our underwear with our eye on the prize, although he notes that among those running around on the streets were "foreigners and new immigrants," which was certainly the case in Boston, and that just shows you what can happen when you're trying to write some pulpy paean to American fearlessness before the news cycle has gone all the way around.  You know?

Well, I got that wrong, too.  It turns out the culprits were a couple of Chechen whack-jobs that we more or less imported for reasons best known...to nobody, but if you survey the pre-history to the entry of the 9-11 hijackers into the United States (available in the Report of the 9-11 Commission), you will see that there is nothing particularly new about this circumstance.  The Underwear Bomber, after all, was on Janet Napolitano's no-fly list, but he was all but given access to the Red Carpet Lounge in the course of flying to the United States.  We freely admitted the 9-11 hijackers into the country even when their visas were expired, then housed them and trained them to fly our planes into our buildings.

I guess what I'm saying, Tom, is that you don't really have to worry about Americans getting all uptight and vigilant and shit, and by next week this thing will have blown completely over. Who's got the time to focus on the Boston massacre?  Next week, or maybe the week after that, someone will open up on a crowd with one of the freely-available automatic weapons infesting the countryside, probably someone in withdrawal from a neurotransmitter drug, and then we can obsess about that for a couple of "Hardball" sessions, and then move on again, eye on the prize, with abandon and never fear, although at a certain point you have to wonder whether all this obliviousness is a mark of moral fiber or a symptom of complete societal madness.