Archive for May, 2009

Can’t Win for Losing

May 29, 2009

I had planned to start the Obama version of our projected great crash novel, “Follow the Money” – the tragedy –  with a look at the new president’s first moves to correct the problem, but a far better analyst than myself has posted a detailed list of the administration’s initial failures. It can be found on Tom Dispatch at and on at

That leaves me with the option of either repeating what Andy Kroll says or taking a slightly different tack. I’ll choose the latter.

Most media sources recently have become cheering sections for bailout plans and have taken the present upward swings of stock markets (a bear rally, remember) as a sign that the disaster is at an end. For those of us who have noticed that all the millions thrown out of work are still unemployed, that a great many debts in residential and commercial real estate have not yet come up for rate re-setting, that many people are borrowing off their credit cards to pay their rent and buy their groceries, that companies and banks are still declaring bankruptcy, and that many of the most qualified economists are warning that the worst is yet to come, I think it may be in order to look at the administration’s actions in terms of popular but mistaken beliefs.

Firstly, the stock market is not a good indicator of the health of society. It is not filled with the best and brightest of an educated society – these are the idiots that bid up the credit bubble that just crashed and caused the oncoming depression. They also bid up all the bubbles before this – the dot com, the speculative excesses of 1987, and all the rest – and have now piled on the government bail-out bubble of printing trillions of phantom dollars to rescue the so-called investors whose wealth is imperiled by the asset price deflation. The “Wisdom of the Market” is the biggest snake oil pitch since the Devil handed Eve the apple. The market is the abode of the largest collection of fools and swindlers the world has ever known.

President Obama, the bit between his teeth and eager to leap into the role of tragedian has lavished trillions of taxpayer dollars on the bleeding hearts and squeaky wheels on Wall Street. He devotes great attention to the 19 biggest banks that serve the investment community while ignoring the thousands of smaller banks where ordinary Americans keep their savings. He has allowed his administration to underwrite the investments (speculations) of any petty crook who owns a bank, a hedge fund, insurance or financial company – and every sharp eyed market operator out in the bushes – in distressed assets that guarantees them the lion’s share of any profits and uses taxpayer money to backstop any losses. This guy really must have his heart set on the Othello role.

“I pray you, in your letters,
When you shall these unlucky deeds relate,
Speak of me as I am; nothing extenuate,
Nor set down aught in malice: then, must you speak
Of one that lov’d not wisely but too well; …”

It’s quite clear that Americans love free-market capitalism far too well, and blind themselves to the faults and weaknesses that wise oversight and direction could ameliorate. That said, I have to acknowledge the Austrian school and admit that wise oversight and regulation has been conspicuously absent ever since the first cave man took out a loan to buy a flint-knapping site. I state categorically that the greatest problem has been the investment community’s selfish interest in blocking adult supervision until their failures have caused it to land on their necks. The plans for regulating market excesses may work wonderfully well, but the time to institute them and have them operate is before disaster strikes, not afterwards.

I cannot leave this without offering a preview of the next plot element of Obama’s tragedy we must look at next time. The British government has printed so many treasury bonds that no one wants – and bought them itself with phantom pounds – that the UK is expected to lose its triple A credit rating. I have to look at our protagonist’s supervision of the US Treasury bond market, that is actually in no better shape, for the first downward turning point of the novel.


Follow the Money … the Tragedy.

May 22, 2009

Continuing our examination of the plot and cast of our proposed novel on the current financial crisis, we move from last week’s structure of comedy (in the ancient Greek classification) to tragedy. I had a couple of reasons for excluding Barack Obama from consideration as the hero of our Great Crash novel, “Follow the Money”, but now we turn to a consideration of the novel as a classic tragedy, he seems the most appropriate candidate for protagonist. The Greek term tragedy comes from ‘goat-song’ (when goats were used for sacrifice) and one has to admit the man who stumbled into the biggest disaster of the century and inherited it, lock stock and barrel, is the ultimate fall guy. If he’s the goat, he’s at least taking some of the big steps slowly and carefully, so he could yet wind up the hero – even if a tragic one.

As before we look at a simple plot diagram, for tragedy the inverted W. Since I cannot turn this one upside down, I have to ask you to squint at it a bit and imagine it the other way up. The opening of the novel is a deep low point of disaster that waits for our protagonist to begin clawing his way out of the mess. President Obama reaches the White House after the swearing in ceremonies, and before he can kick off his shoes and loosen his tie one of his new staff escorts him to the Oval Office and hands him the Domesday Book – the straight scoop on everything that the Bush administration has done and has kept under wraps. Hoo boy! Talk about ruining your day. Opening page one is the inciting incident.

The name Domesday comes from the book where William the Bastard, King of England in1066, had  complete inventory of his newly acquired kingdom written down. A thousand years later we don’t know how accurate or complete its information was but I doubt its evasions, omissions, and outright lies (bought as bribes to the inspectors) were any worse than a similar record of 2009 State of the USA would be if the incoming president had one to read. Just look at one segment of the US body politic – the movers and shakers inside the Beltway.

The US Congress, where at least 75% of the members have been bought by lobbyists for various public and private interests (as evidenced by the number of Congress men and women who attended the AIPAC convention at the beginning of May) has to vote on every measure the President puts forward. AIPAC is the American Israel Public Affairs Committee, a body founded and operating to advance the interests of a foreign country by manipulating the lawmaking and legislation of another – the US. There’s a Trojan Horse if ever there was one. However, since we are concerned about financial and economic matters instead of foreign policy here let’s just take a quick scan of the pork barreling in what is euphemistically called defence spending, where every multi-million dollar contract is split between a multitude of cities and states to increase the political pressure on any honest lawmaker who might want to curtain wasteful spending. What about the earmarks, where extraneous expenditures are tacked on to congress bills to provide enough pork barrel funds to buy sufficient house votes for the measure to pass? Need I go on?

I don’t have any equivalent Senate estimates but note that the cost of campaigning for election to the Senate rose from about $437,000 in 1974 to $5,300,000 in 2000 – and increase of 1200%. (“Parties and Elections in America” by Louis Sandy Maisel.) This kind of money does not grow on trees, and many political commentators have expressed concern that the financial contributors to these Senators have, at least, bought preferential access to the official. The same pork barreling and earmarking as mentioned for Congress apply similarly to the Senate.

When it comes to picking officials for cabinet and other administration positions, the majority of candidates come through a revolving door of top bureaucrats and experts who divide their time between running companies dependent on government largess and overseeing those same companies as members of a government. An example: Treasury Secretary, Henry Paulson had to decide upon bailing out the top financial institutions in trouble and gave money to Goldman Sachs, who he had previously headed, and denied it to Lehman Brothers who he hadn’t. Without even suggesting wrongdoing it’s clear the expectation that unbiased decisions are impossible jumps out at any observer.

With these considerations, we haven’t even reached as far as the first action of the President after his jaw has bounced back off the floor. Everything he considers a necessary action needs first to be discussed with an army of advisers – most of them insiders of previous administrations or dependent corporations. Not much leeway for change when the only opinions garnered are those grounded firmly in the way things have always been done. Let’s just note that the first hundred days saw a continuation of the Bush administration’s financial remedies – with a few bits of fine tuning. That the failing and unnecessary war in Afghanistan – a vested interest of both the Pentagon and CIA – has expanded to Pakistan and is now a vital Overseas Contingency Operation. The necessary cleansing of the American soul by holding an investigation into the previous administration’s record on torture has to be set aside as ‘divisive’. Guantanamo still doesn’t have its marching orders. And pulling the troops out of Iraq within 18 months has become the renaming of combat units as support troops so they can remain forever.

I’ll need to continue the plot of the novel further next time – we need to give the President a chance to impose more of his promises onto an unwilling Washington – but it’s sure looking a lot like a tragedy to me.

Looking for a Plot…….

May 14, 2009

Like every other novel, our proposed fictional account of the present economic crisis “Follow the Money” should have a logical and concise structure. Since we haven’t yet identified our hero of the novel, last week I suggested looking at the structure of the unfolding plot to hopefully define who that person should be. Yes, I know, it’s backwards from the way I and every other novelist works.

Let’s start by looking at the simple W novel plot structure. Imagine each corner of the letter, where the lines change direction, represents a turning point in our story. The letter also has a starting and an ending point. The relative height of the turning points define whether they are ‘up’ points (high points) or ‘down’ points (disasters) – three ups and two downs.

For a comedy – using the ancient Greek definition of literature –  we need the upright W so it ends at a high point (happy ending). Following this diagram, we need to begin our comedy with the situation as good as it gets, only to be struck by some disaster – the inciting incident. Things go downhill and later it gets better … and so on. For a tragedy we must turn the W upside down so that it ends at a disastrous low point. An M is the nearest I can get to showing an inverted W with this typeset. A tragedy has to start where the situation is dire, but some manna from heaven arrives to carry the situation upwards to another turn for the worse.

Let’s look at our comedy that starts at the high point on the W – the stock markets are booming, no one’s mortgage has been foreclosed – everything is coming up roses. Ben Bernanke as protagonist surveys his world on March 17th 2007 as he prepares to make a speech at the Federal Reserve Bank of Chicago’s 43rd Annual Conference. What does he say?

“… given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.”

(Thanks to Henry C K Liu in Asia Times Online for the quote.) Wow! How could anyone be so wrong? The proverbial sh*t hits the fan three months later. That is our inciting incident – in spades.

The first turning point for the comedy comes after a steady decline into disaster, when the hero seizes control of the situation and, bit between his teeth, and drags it forward to a high point. Ben and his buddy Henry Paulson begin their disaster control control by making borrowing even cheaper, having treasury bonds pay little or no interest, and throwing the taxpayers’ money at the bankrupt banks, rescuing some of their buddies and letting others crash. This is continued after Henry sails off into the sunset with George W Bush and is replaced by Tim Geithner. Tim needs help to throw even more money down the well, because the water of hope hasn’t made an appearance yet, so Ben begins buying Treasury notes with money that doesn’t exist and pretending they both know what they’re doing. Eventually a glimmer of light appears as the water in the well swallows up all the free money. The rate of mortgage foreclosures decreases – wow, that must be good news. Not everyone in the States has lost their job – more good news. People begin buying stocks again and the Dow begins to fly. Whoopee! The crisis is going away – that’s where we sit today.

This is where, when all seems fine and the problem is solved, disaster strikes again and shoots the whole shebang into the basement. The housing bubble hands over to the credit card bubble and the banks are in trouble again because no one can pay their monthly minimums – then the bear market in stocks (which is what my experts all say it is – a false rally) collapses. Now the stock market really hits the skids as Mr Market crushes all the surviving investors and speculators under his heel. You thought your 401(k) looked bad before. You ain’t seen nothin’ yet.

This is where Hero has to make a new decision and find new courage and strength to claw back to the final high point where we find …  Triumph! What’s he going to do to reach this Nirvana? Your guess is as good as mine. What if Ben cannot pull any more strings? They’ve all been pulled. Pay magic money to people so they buy Treasury bills with phantom dollars? Uncover a huge gold mine in Nevada that can pay off all the overseas creditors who expect to have their Treasuries redeemed on schedule? Apply to the World Bank for a loan … oh, sorry, the World Bank operates on real money and it hasn’t been paid either.

I don’t think I’m going to follow Ben Bernanke as hero beyond this point. This novel may have trouble reaching the planned happy ending. Next time we will explore the tragedy, to see if it turns out any better.

Looking for a Hero.

May 9, 2009

Continuing the search for a protagonist of our Great Crash novel, “Follow the Money” I’m going to look at three competing economic philosophies and their proponents. Finding names is not easy, but a few candidates for our hero are bound to be mentioned here. Pity that most of them are dead.

There are three economics schools in conflict here, and in order to avoid falling too deeply into their convoluted depths, I’ll give a simplistic description of their basis. Keynesianism, named after John Maynard Keynes, is the school advocating the employment of government oversight to manipulate the levers of economic activity and create stability in employment and markets. The so-called Austrian school of Ludwig von Mises disputes Keynes entirely and holds that intervention in the market, rather than the market economy itself, is the driving factor behind economic instability. The Chicago School of Milton Friedman holds that the free market is always right and that monetarist measures by the central bank can perpetuate the boom phase of the business cycle indefinitely, banishing the bust phase from finance capitalism altogether. (Thanks to Henry C K Liu in Asia Times Online for this last info.)

Keynes seems to be the winner of the economics arguments at the moment, because all governments have become converts to Keynsianism almost overnight (except Angela Merkel, the Chancellor of Germany). Taxpayer money is being poured into stimulation schemes to make up for the loss in real wealth and real spending by the great mass of the population (the productivity and savings of prudent people being the root source of all wealth). Time will tell whether Keynes, whose ideas and proposals could well have prevented the crash, will be as effective in correcting it. Keynes would have made a protagonist for a novel, he wasn’t afraid to go out on a limb, nor to fight for his side – as when the US attempted to crush Britain with debt after 1945. Pity that he died in 1946, his health failing from overwork – he would have been a good hero for today. (With input from Prof. Robert Skidelsky’s biography of Keynes.)

A brief description of the other two economics schools follows –
The Chicago School has just been kicked into the garborator for its handling of boom economies since Nixon and Reagan, where a succession of crashes have culminated in this latest greatest one. One must also mention the unfettered Chicago economics pursued in Chile from 1973 to 1989 that resulted in financial failures the very opposite of the economic promises made – as well as having to be kept in operation by a dictator (Pinochet) and his death squads. (This part adapted from Wikipedia)

For the Austrians – F.A. Hayek won the Nobel Prize for his work showing how the central bank’s intervention into the economy gives rise to the boom-bust cycle, making us feel prosperous until we suffer the inevitable crash. Most Americans know nothing about Hayek’s theory (known as the Austrian theory of the business cycle), and are therefore easy prey for the quacks who blame the market for problems caused by the manipulation of money and credit. The artificial booms the Fed provokes, wrote economist Henry Hazlitt decades ago, must end “in a crisis and a slump, and…worse than the slump itself may be the public delusion that the slump has been caused, not by the previous inflation, but by the inherent defects of ‘capitalism’.” (The Libertarian view from Thomas E. Woods Jnr.) It was Keynes who arranged for Hayek to take refuge in Britain during WWII and sponsored his election to the British Academy – the great pity was that Keynes died before the two could square off as advocates for their different economics views.

I must admit to an attempt to blend the thinking of the Keynsians and the Austrians to understand what will develop – a systems theory view – the philosophy where one has to accept that all inputs are important factors contributing to the operation of the overall complex system, and that the highest goal is to balance them. Although I do not subscribe to the views of the Libertarians,  their Austrian economics teachers do have a very useful perception of this Great Crash, what caused it, and what will prolong and deepen it. To wit –

Everything our governments are doing to conquer the crash are actually mistaken and are only policies that will worsen the world’s economies for the future. They point out the Brits and Washington are trying to print enough money to buy back the boom economy that was lost in 2007-8 – and that amount of money just does not exist. Their extreme Keynsianism within the financial circumstances of excess debt, caused by the Chicago school, has created a scenario where the measures cannot possibly work. Plenty of conflict here. Perhaps one could introduce a supernatural element into the novel and have the ghosts of Hayek, Friedman, and Keynes fighting to influence their present day successors – a somewhat Kurt Vonnegut novel structure.

The drama and skullduggery at the heart of the present crisis could hardly be improved by adding any fiction to the tale. The financial markets and the banks went out on an insupportable limb with the credit boom, and now the market reverse has destroyed a couple of trillion imaginary dollars the chips should be allowed to fall as they may. Rampant speculation and bad decisions must lead to bankruptcies to free the remaining resources for a recovery, and printing money in such huge quantities is only going to put our children and grandchildren into debt (to pay our bills) for the rest of their lives. Only the incompetents and crooks who profited from the boom speculation are going to profit from the bail-outs.

I have to hold off looking for our living hero in the Obama administration until they scale back their destructive interference in sovereign countries (like Pakistan). Meanwhile I’m leaning quite strongly toward non-American candidates –  Angela Merkel, the German Chancellor, or Peer Steinbrück, the Finance Minister, as the hero of our bust novel. Both seem show enough pragmatism to blend the doctrines of both the Austrians and Keynes – a very difficult feat – that some might think impossible. As for finding a candidate who warned us of the coming crash and was ignored, I have to nominate Henry C K Liu who runs his own NY private investment group and who said in the March 17th 2007 issue of Asia Time Online –
“On the pages of Asia Times Online over the past two years, I have tried to put forth the rationale for the inevitability of a US housing bubble burst, pointing out reasons that the resultant financial meltdown will be much more widespread and severe than has been generally acknowledged.”

You can’t find a plainer warning than that. So far we have gathered material and character possibilities – next time I had better begin to put something of a plot outline together.

“Follow the Money”; a novel about the new depression; Part Two

May 1, 2009

Since many commentators are suggesting China will recover the most – and the earliest – what about making Hu Jintao, the president, the hero of our Great Crash epic? In some ways it would be appropriate, as it was Chinese savings and Chinese industriousness that propped up much of the American financial bubble for the past ten years. Perhaps longer. However, the Chinese exports to the US, and the huge trade deficit provided a significant contribution toward the crash. Were they on the good side, or the bad? The Americans would not have become financially insolvent if the rest of the world had not indulged them.

Perhaps having the world’s reserve currency since the Second World War has been a deadly trap, that the supposedly smart people in Washington and Wall Street fell into like rubes at a carnival. Because every trading nation in the world had to buy US dollars in order to pay for export and import business the US dollar was made to seem more resistant to setbacks than it really is. That’s still the situation even today when panicked foreigners are buying US Treasury bonds as an attempt to find financial security. Nothing is everlasting, and the more financial operators extend their faith in the fiat dollar the more they invite its failure. (Fiat dollar refers to a currency that has no item of value, like gold, to back it.)

Hu Jintao, the Chinese President, at the recent G-20 promoted the idea of using IMF Special Drawing Rights, or something based on them, as the world’s new reserve currency – to take the pressure off the US dollar. This would enable the US to institute fiscal policies that address its own particular problems – future inflation as well as chronic unemployment – without further upsetting the global economy. Does this qualify him as our future hero who will save the world from economic collapse?

Let’s look at another part of the picture first. Over the last six years, China has increased its holdings of gold by 75%. Does this look like a commitment to help the US over its monetary crisis?

From “The Daily Reckoning” April 29th 2009:

<China has increased their gold holdings 75% in the last six years. They recently announced that the gold holdings have been transferred from the State Administration of Foreign Exchange (SAFE) books to the People’s Bank of China. PBOC. Our intrepid correspondent, Byron King explains what this really means: “China is monetizing its gold!

“This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But in keeping with a nation where youngsters get their Sun Tzu with their mother’s milk, the Chinese went through an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not “monetary,” then it was just another non-monetary investment commodity like iron ore or copper or petroleum.

“But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves.

“This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset. Gold has not been a factor in global trade and currency exchange since the late 1960s. But there’s a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It’s because the U.S. dollar has been so badly mismanaged over the decades. No, you won’t read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It’s happening.>

Add to that an item in today’s ( April 29th) Der Spiegel:

<Germany’s foreign intelligence agency, the Bundesnachrichtendienst (BND), has decided to address the issue (of changing world order).

In mid-April, BND President Ernst Uhrlau presented German President Horst Köhler with his analysis of the repercussions of the current situation. During the meeting at Berlin’s Bellevue Palace, the president’s official residence, the two men discussed a “metamorphosis in geopolitics” and the future political make-up of a world that will never be the same again.

The core message for the German government is that Europe and the United States will come under growing political pressure, and will face growing competition from China. Beijing will be one of the likely beneficiaries of future shifts on the political map.

Uhrlau believes that there are three possible scenarios. The first scenario, the most optimistic of the three, assumes that the current economic stimulus programs will work, leading to a rapid shift in trends in the stock and credit markets, and that confidence will return and the economy will pick up speed soon.

Under this scenario, the United States will remain the dominant superpower, but it will emerge from the crisis economically weakened and with less available capital to fund its military activities. The People’s Republic of China would benefit from this development as the strongest exporting nation.

The Chinese will benefit even more if scenario two, which the BND calls the “China scenario,” becomes reality. It describes what will happen if the billions from the West’s economic stimulus programs end up primarily in Asian countries.

The foreign capital would reinvigorate Asian domestic markets, allowing Beijing to invest even more heavily in advanced technology and take over the prime assets of Western industry, thereby accelerating its modernization process.

This, in turn, would speed up China’s process of catching up with the West. For Beijing, the crisis would serve as the catalyst for a development that has already been underway for several years. “China would develop even more strongly into a superpower in Asia and a reference point for countries like the Arab Gulf states and other raw materials producers,” says Uhrlau. “The United States, on the other hand, could forfeit some of its dominant status.”

India would also grow in the slipstream of the Chinese, though not as dynamically. The BND believes that under this scenario, competitors to central institutions like the IMF would take shape, such as an Asian Monetary Fund.>

( PS. You don’t want to know the third scenario.)

Well…seen enough? If you are Chinese or even a citizen of almost every country in the world – except America – this might qualify Hu Jintao as a worthy hero of our proposed novel about saving the world from the current depression. Since I’m assuming most of my readers are American, I have to carry on to find a protagonist they might find more palatable in my next posting.