Tuesday, September 30, 2008

Self Bailout (as the rich see it)

If we are to believe a story that Javier Blas filed today for the Financial Times, then the rich may have developed a bailout strategy of their own:

Investors in gold are demanding “unprecedented” physical levels of bullion bars and coins and moving them into their own vaults as fears about the health of the global financial system deepen.

Industry executives and bankers at the London Bullion Market Association annual meeting said the extent of the move into physical gold was unseen and driven by the very rich.

“There is an enormous pick-up in investment demand. I have never seen a market like this in my 33-year career,” said Jeremy Charles, chairman of the LBMA. “The gold refineries cannot produce enough bars.”

The move comes as fears grow among investors over the losses at investment vehicles previously considered almost risk-free, such as money funds.

Philip Clewes-Garner, associate director of precious metals at HSBC, added that investors were not flying into gold simply because they saw it as a haven amid Wall Street’s woes. “It is a flight into gold because it is a physical asset,” he said.

“Vault staff are also doing overtime,” another banker at the LBMA meeting said, adding that investors in some countries were paying premiums of up to $25 an ounce above the London spot price to secure scarce gold bars.

Spot gold prices in London on Tuesday traded at about $900 an ounce, more than 25 per cent above the level before Lehman Brothers’ collapse. Although some traders said the rush into physical gold could boost prices, others cautioned that prices were depressing jewellery demand, capping any price gain. Industry executives said gold refineries and government mints were working at full throttle to keep up with investor demand, but acknowledged they were suffering from shortages, particularly on coins.

So, while we keep hearing our own elected representatives talking at great length about avoiding golden parachutes, it would appear that those with enough money to do so have decided that "bailout" means bailing out of the financial system as it currently stands and trading in the whole farm for gold coins. However, the stakes have gotten so high that we now seem to be facing a situation where the supply cannot keep up with the demand, which is likely to mean that these guys will only be interested in tangible stuff, rather than any flimsy certificates of ownership. We may yet see the outmoded epithet, "Mister Moneybags," recover its original semantics!

Where will that leave the rest of us? I suppose once the seriously rich have all secured their position in specie, none of them will have any qualms about letting the cat out of the bag and revealing that no currency has inherent value but is only worth what people want it to be worth. Put another way, the value of any currency is determined by those with the strongest buying power and their ability to set prices. The rest of us just have to go along for the ride; and, as I have previously suggested, that ride is likely to lead down Friedrich Hayek's "road to serfdom!"

Words to Remember

In his post last night to The Beat on the Web site for The Nation, John Nichols extracted a few remarks from the debate made by those who voted against the bailout. I feel it a good idea to reproduce those remarks; so we can remember them for what they said and who said them:

  • Texas Democrat Lloyd Doggett: "Like the Iraq War and the Patriot Act, this bill is fueled by fear and haste."
  • Texas Republican John Culberson: "This legislation is giving us a choice between bankrupting our children and bankrupting a few of these big financial institutions on Wall Street that made bad decisions."
  • California Democrat Joe Baca, Chairman of the Congressional Hispanic Caucus: "There's nothing in here that guarantees new jobs, nothing that guarantees salary increases. And that's a huge problem."

There we have three members of the House, each representing different interests but each trying to serve those who voted him into office and will have to make that decision again in November. If President George W. Bush was not aware of what these three Congressmen said during debate before speaking to the nation this morning, then his staff was negligent if providing him with an account of why his "solution" was voted down yesterday. If he was aware, then it is clear from what he said this morning that he chose to ignore those remarks. I suppose he can. After all, he does not have to worry about keeping his seat in the House of Representatives! Perhaps he does not care how any of the positions up for election in November will be decided. That should be sufficient reason for the Congress to discard all input from the White House, summon their own economic experts, and start from scratch to build a new solution plan that will see to the needs of those most in need, so to speak. Meanwhile, the President can go back to his faith-based convictions that God will take care of those who believe in Him; perhaps he will find out just what God has in mind for him!

The Denial Presidency

President George W. Bush's remarks this morning indicated little more than what we knew all along, which is that denial is still the strong suit in his hand of Presidential strategies. At a time when we are hearing more and more language to the effect that the needs of the many American citizens facing problems of unmanageable debt vastly exceed the needs of those shareholders who would suffer without a bailout, the President continues to believe that easing Wall Street's pain is the only way to go. We know the specious logic. The President's father once tried to play up the flaws of "trickle-down" reasoning, calling it "voodoo economics;" but he stilled his voice of reasonable protest in the interest of political expediency. These were the days when Ronald Reagan was in his ascendancy; and, when wealth was not trickling down from the haves to the have-nots, there was still a rising tide lifting all boats. The elder Bush could have pressed on about how fallacious this reasoning was, but he chose to run as Reagan's Vice President and eventually became part of the problem.

What the younger Bush does not seem to realize in denying such flaws of the past is that (unless the dark materials at his disposal really have locked up the elections regardless of how the public actually votes) every American facing debt problems still has the power of the ballot box at his or her disposal; and every one of them gets to vote for who will stand for them in the House of Representatives. In other words, if the House votes for something that is not acceptable to the general public, whatever the powers of the Executive Branch and the K Street lobbyists may be, then every member will have to explain that vote of approval to a disapproving electorate (and will have only about a month to do it). There was something historic about yesterday's vote. At a time when most of the rhetoric has been about accountability for reckless financial practices, a critical mass of members of the House remembered their own accountability to their constituency; and they placed that accountability over the powers of Wall Street that once dreamed they were "Masters of the Universe." If both houses of the Congress remember their accountability, fairness to the American public may yet prevail.

Monday, September 29, 2008

Is The Sky Falling? (yet?)

Even as the House of Representatives was giving a firm vote of no-confidence to the purported resolution of an economic rescue plan, claimed to be as fair to Main Street as it was palliative to Wall Street, Ann Pettifor, author of The Coming First World Debt Crisis, was putting the finishing touches on a Viewpoint for the BBC NEWS Web site on why the plan would not work. Her argument is based on the premise that, regardless of what Nancy Pelosi may have told us all last night, the only real beneficiaries of this plan would be "a small number of shareholders and creditors with stakes in Wall Street financial institutions - people like investment guru Warren Buffett [one of the plan's champions] - and potentially some foreign banks." More important, however, is that, while Joseph Stiglitz framed his opposition by paying more attention to what problems needed to be solved, Pettifor see those like Stiglitz as proposing "an overhaul of the whole economic system" and has taken the trouble to compile a four-point plan:

  1. "That means, first, dumping the orthodox free-market zealots responsible for the policies that got us into this mess. Frederick Hayek's and Milton Friedman's de-regulation policies have already been dis-credited, with Republicans obliged to disown Margaret Thatcher and Ronald Reagan's contempt for government."
  2. "Second, it will be vital to restore to the Federal Reserve and other central banks the power to set the rate of interest - across the whole spectrum of lending, so that all rates can be lowered on the massive debts incurred across the board in countries that followed the Anglo-American economic model."
  3. "Third, we must abandon the policy of holding down wages and other forms of compensation, especially if we want people to repay debts, and help salvage the banks. Jobs will have to be protected, or even created by government, and incomes must rise."
  4. "Fourth, we have to simply write off the debts of those poor people who cannot ever repay. Just as we write off the debts of companies or governments that can no longer pay, so we must recognise that many citizens are effectively insolvent. The refusal to acknowledge this truth lies at the heart of Mr Paulson's plan - and that is why his plan will fail."

Note how Pettifor's approach complements Stiglitz' problem analysis by taking a social approach, rather than beginning with technical models of financial behavior. To some extent she is saying, "Markets do what markets do, whether or not there are ideologues trying to control them; so get the ideologues out of the way." Next she tries to fix the problem that lack of regulation has undermined the Federal Reserve's primary instrument of control, taking down Main Street's confidence in the Fed as a stabilizer with it. Most important, however, is that her final two points suppress any interest in Wall Street by seeing to what may be the most urgent needs of Main Street.

Is anyone in Washington paying attention to this woman?

Hyphenated Identity

Having invoked Daniel Mendelsohn's proposition that "Good people do not, generally speaking, make good subjects for operas" in examining Simon Boccanegra, the first offering in the new San Francisco Opera season, I was reminded of it again while watching the second offering, The Bonesetter's Daughter. Unlikely as it may seem, these two operas share the common theme of reconciliation. However, while the former involves a reconciliation that sustains the strength of the republic of fourteenth-century Genoa, the latter involves the reconciliation of a contemporary "hyphenated American" with her past and, therefore, with her own sense of identity. If today there is no longer any question that the collaboration of Giuseppe Verdi with Arrigo Boito made a good subject for an opera, The Bonesetter's Daughter probably comes closer to the difficulty that Mendelsohn had in mind. One may appreciate reconciliation with one's identity in a novel (and, in the case of The Bonesetter's Daughter, novelist Amy Tan found many readers who did appreciate it); but would that appreciation translate to opera?

As I previously wrote, Mendelsohn based his argument on an Aristotle's approach to the nature of tragedy. Let me reproduce his key premise, as he published it in The New York Review:

Aristotle, in his Poetics, refers to plot as a knot tied by the author (he calls it a dêsis, a "binding up") out of the manifold strands representing competing wills or desires or ideologies; an ugly and worrisome knot that will, in due course, ultimately come undone in a climactic moment of loosening or release of tension (the lysis, or "undoing")—a concept that survives in our term "dénouement."

Mendelsohn invoked this logic in writing about the Philip Glass opera, Satyagraha; and it is actually provides a perfectly reasonable frame for both the life of Mohandas Karamchand Gandhi and the principle of Satyagraha that played such a strong role in how he lived his life. What distinguishes the conception of the opera by Glass and his librettist Constance DeJong is the dénouement, which has less to do with Gandhi's own life and more to do with the passing of the Satyagraha principle over time down to Martin Luther King.

In Tan's case the "knot" is that of the "hyphenated American;" and, in casting her novel as an opera libretto, Tan made this clear in the Scene 1 of Act I, where we encounter the tension of Chinese-Americans and Jewish-Americans, brought together by the protagonist's marriage, gathered at a Chinese restaurant for a birthday celebration. Can this make a good subject for opera? (George Balanchine is famous for once saying there are no mothers-in-law in ballet. How, I wonder, would he have reacted to an opera that puts two mothers-in-law together on the stage?) Having now seen The Bonesetter's Daughter as an opera, I have no trouble answering my rhetorical question in the affirmative.

I suspect that one of the reasons for the success of this work is that the production itself was highly "hyphenated." Composer Stewart Wallace invested considerable time in exposing himself to traditional Chinese music, not so much for the sake of appropriating it but in order to convey his own experience of what it meant to hear those sounds through Western ears. Thus, the suona, a double-reed instrument with the impact of a trumpet, plays a major role, which is as much dramatic as musical; and Chinese percussion instruments deftly coexist with a Western battery. The character of the bonesetter's daughter was sung by Qian Yi, trained in traditional Chinese opera and bringing that characteristic vocal sound to her performance. However, the hyphenation extends beyond the score. Director Chen Shi-Zheng conceived of a staging that combined the techniques of contemporary theater with the traditional skills of Chinese acrobats. The very experience of watching this production is one of hyphenated identity.

All this might sound like too much; and I have to confess that my first sight of the acrobats during the Prologue took me back to Peter Hall's catastrophic staging of Verdi's Macbeth for the Metropolitan Opera, in which he wanted to "fly" the witches and expected them to sing Verdi's score at the same time! However, Chen did not repeat Hall's blunders: Every performer stuck to what (s)he was trained to do; and everything came together like the tiles of a mosaic from which the narrative then emerged. To say too much about that narrative would be to spoil the critical revelation of the plot. If this opera has the staying power of even one of Verdi's lesser efforts (like Macbeth), that revelation may eventually have less surprise, as the story will have become more familiar; but for now those new to the opera should be allowed to let its impact run its course.

Thus I would prefer to put the narrative aside and make an observation about Wallace's "Western ears." As I have frequently written, the music of the present cannot help but be informed by the music of the past. While listening to Wallace's score, I found myself thinking about how Igor Stravinsky had drawn upon his own exposure to indigenous Russian music and turned it into a voice of his own. There are occasional flashes that would indicate that Stravinsky was very much part of Wallace's own listening experience, as was Ligeti, with his capacity for weaving fine textures from a prodigious number of independent voices. (I have to confess that Ligeti may have been on my mind since, once again, I had an opportunity to hear a contrabass clarinet, such as the one Ligeti had used in "Lontano.") Yet there also seemed to be a clear invocation of Maurice Ravel's Ma Mère l'Oye suite in the final scene, almost as if to emphasize that this was a tale more timeless than the Tan novel itself. The score was thus a reflection of Wallace as Western listener as well as a discoverer of traditional Chinese sonorities.

Finally, credit must be given to David Gockley for taking on this project. Since coming to San Francisco, he has added two world premieres to the company's repertoire, Appomattox being the first. He has given us two significantly different operas, each of which is worthy of that aforementioned staying power in a business in which all "product" is highly volatile. We should all be following the San Francisco Opera to see what future seasons will bring.

Better Literature

Yesterday I accused Peggy Noonan of "groping for a way to describe lives of quiet desperation without drawing upon anyone as cerebrally radical as Henry David Thoreau." This morning I realized that the elephantine passage I extracted from her Wall Street Journal piece had once been distilled down to a mere eighteen lines of poetry:

We are the hollow men
We are the stuffed men
Leaning together
Headpiece filled with straw. Alas!
Our dried voices, when
We whisper together
Are quiet and meaningless
As wind in dry grass
Or rats' feet over broken glass
In our dry cellar

Shape without form, shade without colour,
Paralysed force, gesture without motion;

Those who have crossed
With direct eyes, to death's other Kingdom
Remember us—if at all—not as lost
Violent souls, but only
As the hollow men
The stuffed men.

This is Section I, in its entirety, from "The Hollow Men," by T. S. Eliot. As a matter of record, it was published in 1925, which means that it was probably written when Eliot was working for Lloyds Bank, making it singularly appropriate reading in our current economic situation and a perfect foil with which to parry the "hollow" prose of The Wall Street Journal!

As I suggested yesterday, Noonan was about as far as anyone could get from what Arthur Miller was trying to tell us about Willy Loman. In the text of Death of a Salesman, Willy succumbs to his inability to keep up with the changes in his own world of work (probably because his worldview has distorted his vision). If, as his wife Linda implores of all of us, "attention must be paid," it is to a man who bet all on personality in a world in which business was becoming more and more impersonal. Noonan's vision is not of Willy Loman's but of that new world of impersonal workers. Eliot saw that world in the making and invoked what is now some of his most memorable language to bring our attention to it. Unfortunately, poetry, once a stimulus for our memories, is now easily forgotten and is unlikely to register in those heads "filled with straw," which now do little more than turn the wheels of an economic system no longer understood. Eliot was too optimistic. Those in "death's other Kingdom" will not remember us at all, because there is no longer anything worth remembering.

Sunday, September 28, 2008

The Literature Dunces

It has been almost two months since I wrote a post entitled "The History Dunces," inspired by reading posts on Andrew Keen's Great Seduction blog, which seemed to be reflecting on uninformed readings of uninformed columnists, where the primary information gap was in the domain of history. Well, in the classic words of Twin Peaks, "It is happening again;" but this time the discipline seems to have shifted from history to literature. This time the uninformed columnist is Peggy Noonan, one of the more inspired sources for the scripted words that used to emanate from the mouth of President Ronald Reagan, now flogging her new book, Patriotic Grace: What It Is and Why We Need It Now, in the "Life & Style" section of The Wall Street Journal in a piece which the editors describe as being "on heightened anxiety, the rough election and what the country needs now." How could one not be skeptical in approaching such a text?

Whether or not The Great Communicator really ever communicated, he always seemed to be good at invoking memorable images; and there is a good chance that many (if not most) of those images sprang forth from Noonan's ever-fertile imagination. As we read her opening paragraphs, we see that there is still plenty of fertilizer in that imagination:

Where is America?

America is on line at the airport. America has its shoes off, is carrying a rubberized bin, is going through a magnetometer. America is worried there is fungus on the floor after a million stockinged feet have walked on it. But America knows not to ask. America is guilty until proven innocent, and no one wants to draw undue attention.

America left its ticket and passport in the jacket in the bin in the X-ray machine, and is admonished. America is embarrassed to have put one one-ounce moisturizer too many in the see-through bag. America is irritated that the TSA agent removed its mascara, opened it, put it to her nose, and smelled it. Why don't you put it up your nose and see if it explodes? America thinks, but does not say.

And, as always America thinks: Why do we do this when you know I am not a terrorist, and you know I know you know I am not a terrorist? Why this costly and embarrassing kabuki when we both know the facts, and would even admit privately that all this harassment is only the government's way of showing that it is "fair," of demonstrating that it will equally humiliate anyone in order to show its high-mindedness and sense of justice? Our politicians congratulate themselves on this as we stand in line.

All the frisking, beeping, and patting down is demoralizing to our society. It breeds resentment, encourages a sense that the normal are not in control, that politics has lessened everything, including human dignity. Another thing: It reduces the status of that ancestral arbiter and leader of society, the middle-aged woman. In the new fairness, she is treated like everyone else, without respect, like the loud ruffian and the vulgar girl on the cellphone. The middle-aged woman is the one spread-eagled over there in the delicate silk blouse beneath the removed jacket, praying that nothing on her body goes beep and makes people look.

America makes it through security, gets to the gate, waits. The TV monitor is on. It is Wolf Blitzer. He is telling us with a voice of urgency about the latest polls. But no one looks up. We are a nation of Willy Lomans, dragging our wheelies through acres of airport, walking through life with a suitcase and a slack jaw, trying to get home after a long day of meetings, of moving product.

No one in crowded Gate 14 looks up to see what happened with the poll. No one. Wolf talks to the air.

Gate 14 is small-town America, a mix, a group of people of all classes and races and ages, brought together and living in close proximity until the plane is called. Our town appears, the plane is boarded, the town disappears. An hour passes, a new town begins. This is the way of modern life. We live in magic and are curiously unillusioned.

Gate 14 doesn't think any of the candidates is going to make their lives better. But Gate 14 will vote anyway, because they know they are the grown-ups of America and must play the role and do the job.

Man, that is some heavy shit (speaking of which, had there been a bit more drug-addled surrealism in the imagery, one might suspect that Noonan is now channeling the spirit of Hunter Thompson)! This is not just imagery. This is the ceiling of the Sistine Chapel as we might find it in a Las Vegas simulacrum of Vatican City! So what was it from this hypertrophied mural that seized Keen's attention? The answer lies in the title of his latest Great Seduction post, "A Nation of Willy Lomans."

Unfortunately, it does not take much further reading to realize that Noonan neither knows nor cares very much about Arthur Miller's antihero. Willy Loman is a throwaway image, not even a metaphor. Noonan was groping for a way to describe lives of quiet desperation without drawing upon anyone as cerebrally radical as Henry David Thoreau. So she invokes the way anyone who has seen Death of a Salesman (on stage or film) remembers that first impression of Willy Loman. She then throws it away, so she can get on to her real business of Reagan nostalgia. After all, that is what she did best when she wrote Reagan's scripts: conjure up images that would arrest the attention, regardless of whether they were relevant or, for that matter, made any sense! As far as I can tell, the real motive behind this piece was to give Wall Street Journal readers the comfort of blaming someone else for the problems they themselves cultivated; and what better time to run it than while our Congress is working overtime on a plan to bail them out of those problems while leaving those suffering the worst consequences deepest in the lurch?

Saturday, September 27, 2008

Missed Opportunity

As I see it, Barack Obama blew two opportunities to revive that audacity that built his base in the first place.

  1. The more drastic was the way he fumbled around on the question of where he would cut the budget. He basically rehashed his highest priorities for spending, thereby leaving any assumptions about low-priority stuff getting cut as implicit. Standing in front of John McCain, he had the perfect opportunity to get there first on getting the bloat out of the Defense budget (allowing McCain to play that card) by seeing to the needs of the armed forces and not worrying so much about pie-in-the-sky Beltway-Bandit research ventures or an unmanageable counterproductive system of contractors.
  2. He also missed out on a key talking point "hot off the presses" (the "press" in this case being the Web site for The Nation). Joseph Stiglitz (as in The Three Trillion Dollar War) pointed out that there are four major problems in the current economic crisis. Paulson's "solution" only deals with one. This overlooks the question as to whether solving that one problem will make the other three worse. This then leads to an equally important question: If you cannot solve all four at once (which is a realistic assumption), where is the best place to start?

The economic crisis should have given Obama a hand full of trump cards. Instead, all we got was Michael Cohen at The New York Times saying he "acquitted" himself well. Obama has the capacity to go back to Washington, while the deliberations are taking place, and not make a fool of himself the way McCain did. Having blown his opportunity during the debate, he needs to show us his worth in the trenches.

Friday, September 26, 2008

Shame Trumps Contrition

William Greider has argued, in his piece on the Web site for The Nation, that what the American public really wants by way of resolution to the current economic crisis is a "frank and open" (my turn of phrase) display of "Acts of Contrition." Here is the core of his argument:

The spectacle I want to see is powerful and self-important leaders getting down on bended knee and asking the country's forgiveness.

Henry Paulson could offer apologies for Wall Street and also for the Bush administration's lackadaisical response to the spreading financial contagion. He is not alone.

The Republican party owes us an apology but so does the Democratic party, because both are directly implicated in creating the conditions that caused the disaster. So is the august Federal Reserve. It dismissed the early bonfires and actively encouraged the money fever that has led to ruin. So are deep ranks of learned economists. So are the corporate think tanks that blessed and promoted the financial gimmicks that made the country vulnerable to what is now unfolding.

That's before we tick off the names of celebrated billionaires.

I would like to hear someone in authority say they are sorry. Instead, the political dance in both Washington and Wall Street is focused on holding hands in crisis and diverting blame elsewhere. Maybe it was those careless homeowners who didn't read the fine print in their mortgages. Or sleepy regulators and the creepy lobbyists. Maybe it was the Chinese, who lent us too much money for own good. Maybe it was God punishing his most-favored nation for our sins.

I am not so sure that the rest of the country shares this desire. If we look back on past financial catastrophes, such as the Enron scandal, we see that (probably with the assistance of the media) the American public has a much greater blood-lust. They want to see shame, rather than contrition. They remember the "perp walk" from Enron days; and there is nothing they would like more than to see it again. They would like to see those "celebrated billionaires" in handcuffs being escorted by police, having their heads pressed down as they enter the back seat of a police car; and, with the same hunger that fed the French Reign of Terror, they probably want to see Hank Paulson do that same perp walk. Greider's fantasy that all will be healed by some "reconciliation commission" is just that: a fantasy. Even South Africa recognized that reconciliation would not heal all wounds, and this may be a case where contrition may not even begin to cleanse those wounds. Main Street is "mad as hell and not going to take it any more;" and that is not a position from which one can talk about contrition, forgiveness, and healing. Does anyone still want to get on Barack Obama's case for invoking an adjective like "bitter?"

Another Input Source for Congressional Deliberation

In the time since I made my assertion this morning that "the Congress should recognize that there are more voices to hear in addition to the Treasury Department and the Federal Reserve," The Nation has provided us with one of those voices, Joseph Stiglitz. For those who may have forgotten, Stiglitz is the Nobel laureate in Economics who co-authored, with Linda Blimes, The Three Trillion Dollar War: The True Cost of the Iraq Conflict. This provides us with a useful perspective:

  • He is not afraid to get down and dirty with his mathematics.
  • He is not afraid of large numbers.
  • In the tradition of his fellow Nobel laureate, Robert Solow, he knows that talk about "value" is a dangerous proposition; so he keeps his eye on the ball of price.
  • He is not afraid to speak truth to power.

If Senate Banking Committee Chairman Christopher Dodd does not invite Stiglitz to appear before his committee, it would not hurt for him to drop whatever else he may be doing and give Stiglitz' Nation piece a serious read. My guess is that he will then make it required reading for everyone else on his Committee and pass it on to the House Financial Services Committee.

Thus far my primary argumentative position has been to question the consequences of adopting the Treasury proposal. Stiglitz takes a different approach: He grants the problem it does solve and then identifies three problems that it ignores. Here is how Stiglitz frames his argument:

There are four fundamental problems with our financial system, and the Paulson proposal addresses only one. The first is that the financial institutions have all these toxic products--which they created--and since no one trusts anyone about their value, no one is willing to lend to anyone else. The Paulson approach solves this by passing the risk to us, the taxpayer--and for no return. The second problem is that there is a big and increasing hole in bank balance sheets--banks lent money to people beyond their ability to repay--and no financial alchemy will fix that. If, as Paulson claims, banks get paid fairly for their lousy mortgages and the complex products in which they are embedded, the hole in their balance sheet will remain. What is needed is a transparent equity injection, not the non-transparent ruse that the administration is proposing.

The third problem is that our economy has been supercharged by a housing bubble which has now burst. The best experts believe that prices still have a way to fall before the return to normal, and that means there will be more foreclosures. No amount of talking up the market is going to change that. The hidden agenda here may be taking large amounts of real estate off the market--and letting it deteriorate at taxpayers' expense.

The fourth problem is a lack of trust, a credibility gap. Regrettably, the way the entire financial crisis has been handled has only made that gap larger.

Paulson and others in Wall Street are claiming that the bailout is necessary and that we are in deep trouble. Not long ago, they were telling us that we had turned a corner. The administration even turned down an effective stimulus package last February--one that would have included increased unemployment benefits and aid to states and localities--and they still say we don't need another stimulus. To be frank, the administration has a credibility and trust gap as big as that of Wall Street. If the crisis was as severe as they claim, why didn't they propose a more credible plan? With lack of oversight and transparency the cause of the current problem, how could they make a proposal so short in both? If a quick consensus is required, why not include provisions to stop the source of bleeding, the millions of Americans that are losing their homes? Why not spend as much on them as on Wall Street? Do they still believe in trickle down economics, when for the past eight years money has been trickling up to the wizards of Wall Street? Why not enact bankruptcy reform, to help Americans write down the value of the mortgage on their overvalued home? No one benefits from these costly foreclosures.

The administration is once again holding a gun at our head, saying, "My way or the highway." We have been bamboozled before by this tactic. We should not let it happen to us again. There are alternatives. Warren Buffet showed the way, in providing equity to Goldman Sachs. The Scandinavian countries showed the way, almost two decades ago. By issuing preferred shares with warrants (options), one reduces the public's downside risk and insures that they participate in some of the upside potential. This approach is not only proven, it provides both incentives and wherewithal to resume lending. It furthermore avoids the hopeless task of trying to value millions of complex mortgages and even more complex products in which they are embedded, and it deals with the "lemons" problem--the government getting stuck with the worst or most overpriced assets.

Finally, we need to impose a special financial sector tax to pay for the bailouts conducted so far. We also need to create a reserve fund so that poor taxpayers won't have to be called upon again to finance Wall Street's foolishness.

I am not saying that Main Street will quickly grasp all the twists and turns of Stiglitz' reasoning, but he has expressed himself with a rhetoric that may well be the best retaliation against that "shock doctrine" thinking that has Main Street so convinced that they are about to be "bamboozled" again, this time for an astronomical sum. If Franklin Roosevelt tried to reassure the United States by telling its citizens that the only thing they had to fear was fear itself, today's citizens need to recognize (and may, indeed, have recognized) that what they most need to fear are the very purveyors of fear.

Needless to say, we should not be seduced into trying to find that Holy Grail that will resolve all four problems in one fell swoop. Mencken's precept remains: Complex problems are rarely (if ever) resolved by clear and simple solutions. The Congress should not immediately embrace everything that Stiglitz has to say, just because he has demonstrated that, whatever Hank Paulson and Ben Bernanke may tell them, there are alternatives worth considering. A good first step for the Senate Banking Committee would be to decide whether or not they accept Stiglitz' proposition that the current crisis is grounded in more than a single problem. If they can agree on that, then perhaps they can also agree on how many in Stiglitz' list of four need to be addressed, if not in terms of a single solution then by asking if solving the first problem will end up making matters worse for the others (meaning that it will only be a matter of time, more likely sooner than later, that they will be deliberating yet another expensive proposal). For that matter they may even ask if that first problem on the list is really the first one that should be addressed.

The good news is that Dodd has the support he needs to hold to his conviction that doing things right is more important than doing them quickly. Main Street clearly shares that conviction. They also know better than to fall for that "My way or the highway" line. They may not know where the straight path is, but they know when someone is trying to bamboozle them into taking a crooked one.

Bush Keeps Collecting Them!

Leave it to President George W. Bush to turn the economic crisis into an opportunity for winning yet another Chutzpah of the Week award, bumping his count up to eleven. Within this very hour, as reported by Al Jazeera English, our President has offered his wisdom (sic) with all the keen perception of General William Westmoreland's light-and-the-end-of-the-tunnel reasoning:

There is no disagreement that something substantial must be done. We are going to get a package passed.

I am reminded of a former colleague who once asked me (rhetorically) if there was any such thing as "negative information." I suppose we should be grateful that a content-free statement is better than taking an action that would only make matters worse, such as the meeting convened yesterday at the White House, which Senate Banking Committee Chairman Christopher Dodd accurately described as a "photo op and political theatre that had nothing to do with us getting to work." This is nothing less than the chutzpah of trying to "appear Presidential" when the best course of action would be to shut up and let those who know what they are doing "get to work." Fortunately, no taxpayer dollars are spent in financing the Chutzpah of the Week awards; so I have no "economic guilt" in adding this one to the President's collection!

Can the System Take Care of Itself?

As deliberations over the bailout proposition continue to flounder, I found myself thinking back on a question I posed on Wednesday: For all the problems currently besieging it, can this system take care of itself? Put another way, if the Congress decides to take the sky-is-falling rhetoric coming out of the White House as a bluff, rejects the prevailing wisdom that time is of the essence, and schedules a more serious period of deliberation (which would mean staying in session longer than originally planned, to the potential detriment of those members up for election), will the system provide its own corrective actions until the deliberations arrive at a conclusion? Paul Krugman does not seem to think so:

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.

However, is the choice really between doing nothing and swift Government action? As I wrote on Wednesday, the Panic of 1907 was alleviated, at least in part, because J. P. Morgan did not hoard cash and persuaded others as well-endowed as he was to follow his lead. Similar activities were observed on Wednesday, the closest to home being Warren Buffet's injection of $5 billion into Goldman Sachs. Since that announcement I have not heard any news about the Berkshire Hathaway faithful rushing to unload their shares. Now we have a report from Norma Cohen, Economic Correspondent for the Financial Times, that the Bank of England is making a similar move:

The Bank of England said it would extend $30bn in cash for a week against eligible collateral, drawing on currency swap lines put in place earlier this month with the Fed.

”These operations are intended to address funding pressures over quarter-end,” the Bank said.

The Bank will also make $10bn available for overnight borrowing. It had previously agreed to provide $40bn daily in overnight money last week, but so far, there has not been demand for the full amount.

Moreover, the Bank said it will inject longer term money into the sterling markets, as banks had been pressing it to do. It said it will extend its long-term repurchase operations against extended collateral, including mortgages. As of September 29, it will offer £40bn for maturity on January 15, taking banks through the year end when cash is generally hoarded by banks.

I take this as a sign that, even on a global scale, the "high rollers," who can think in terms of actions based on ten or more figures, recognize the growing outrage of "the rest of us." This does not mean that, as Krugman put it, doing nothing is a serious option. Rather, it means that the path to solution involves (and has always involved) players other than elected officials; so, rather than pursuing a rush to action grounded in "shock doctrine" thinking, we need interim measures that will buy time for more serious deliberation. If "the system" is in a position to provide those interim measures, then our Government should accept the time purchased on their behalf and use it wisely.

This amounts to little more than reinforcing Senate Banking Committee Chairman Chris Dodd's conviction that doing things right is more important than doing them quickly. The only change may be that, in its deliberations, the Congress should recognize that there are more voices to hear in addition to the Treasury Department and the Federal Reserve (and, oh yes, the President of the United States). When Krugman writes about "players throughout the system," he is writing about (among other things) sources for input for Congressional deliberation, some of which, as we have now seen in the Financial Times are based outside the United States but are still significant "players."

Admittedly, this is not a good time to be a member of Congress. There is growing hostility in just about every Congressional district, and every one of those districts gets to choose who will represent it on Election Day. One third of the Senate seats are in a similar position. However, as an extension of my premise about Barack Obama and John McCain, being a member of Congress takes priority over being a candidate. Every member of Congress up for election has an opportunity to demonstrate that actions taken in office during a time of crisis will always count for more than campaign rhetoric or even "pressing the flesh." Our entire Government is being tested over whether it can still do things right. If it fails that test, then the very foundations of our Constitution run the risk of being undermined; and that threat to the Constitution is even greater than any of those advanced by the Bush Administration!

Thursday, September 25, 2008

Is This the Work of a Spoiler?

Another Presidential candidate has weighed in on how we got into the current economic mess and what he thinks of Treasury Secretary Hank Paulson's proposed solution for getting out of it. His name is Ralph Nader. Is it any surprise that he has put together a statement in clear and cogent language that exposes just how much shallow rhetoric there is in anything Barack Obama or John McCain has tried to say (let alone do) over the last two weeks? The "unreasonable man" has struck again with the conviction that comes from arguing on a turf he knows so well, the protection of ordinary consumers from abusive practices. How long will it be before we hear the first howls of "Spoiler!"?

How You got Maxed Out

Anyone interested in data points to add to those collected by James Scurlock for his documentary, Maxed Out, might be interested in a report prepared for Reuters by Pedro Nicolaci da Costa. Now that credit card company MNBA has been acquired by Bank of America, some of its former employees have decided it is time to blow the whistle:

Cate Colombo, from Maine, said she signed up for a customer service job but was instead instructed to make insistent sales pitches aimed at getting MBNA customers deeper into debt.

"I was hired to sell money," she said on a conference call organized by Americans for Fairness in Lending, an advocacy group. "We had a goal of selling $25,000 an hour, $4 million per month. And I was one employee among hundreds, just at this one site."

To meet these goals, Colombo said she was told to turn every regular call from a customer into a sales call. She would do this by running the customer's name through the computer and finding out every possible line of credit they had ever obtained through MBNA.

She would then total the amount of credit outstanding and offer it to the customer as a blank check. MBNA was a bit lighter on disclosure details, such as telling customers that taking on more debt would reduce the borrower's credit score and thereby boost their outstanding interest rates.

"If we didn't attempt to max out, we were considered insubordinate," said Colombo.

If there was any doubt that debt is basically an addiction, all we have to do is take the word of one of the "pushers!"

That Was the Deal That Was(n't)?

We are now a sufficient distance from the initial "breaking news" of a bailout agreement to have a better sense of where things stand; and Associated Press writers Jennifer Loven and Julie Hirschfeld Davis have done as good a job as any of providing us with an orientation. The first red flag goes up in their second paragraph when the very first sentence of that paragraph refers to the "tentative accord." Of course nothing is final before votes are taken, but it is still worth noting that cautious language early and often is the order of the day in this particular report. It remains unclear just what is in this accord. However, Loven and Davis seem to have tapped into the heart of the Congressional input:

Under the plan agreed to by key lawmakers at the Capitol, the Treasury secretary would get $250 billion immediately and could have an additional $100 billion if he certified it was needed, congressional aides said. The last $350 billion could be blocked by a vote of Congress under the arrangement, designed to give lawmakers a stronger hand in controlling the unprecedented rescue.

Listening to the BBC on the way back to San Francisco from Palo Alto, I got the distinct impression that there was more than this; but I also got the impression that both the Executive and Legislative branches are trying to limit the flow of information to the press until matters are better defined. That would make this day rather a first for trappings of harmony. Not only have those two branches finally agreed on something; but also we had a "seriously bipartisan" meeting at the White House at which both Presidential candidates were present. However, little is known about that meeting either, although Loven and Davis tried hard to mine what they could:

Democrat Barack Obama and Republican John McCain, who have both sought to distance themselves from the unpopular Bush, sat down with the president at the White House for an hourlong afternoon session that was striking in this brutally partisan season and apparently without precedent. By also including Congress' Democratic and Republican leaders, the meeting gathered nearly all Washington's political power structure at one long table in a small West Wing room.

"All of us around the table ... know we've got to get something done as quickly as possible," Bush told reporters, brought in for only the start of the meeting. Obama and McCain were at distant ends of the oval table, not even in each other's sight lines. Bush, playing host in the middle, was flanked by Congress' two Democratic leaders, House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid.

No one else spoke before the cameras left.

Unfortunately, none of these intimations of harmony have yet propagated to the other end of Pennsylvania Avenue:

There were signs that the conservative-leaning House Republican Caucus was not on board. Both of Congress' Republican leaders, Rep. John Boehner and Sen. Mitch McConnell, issued statements saying there was not yet an agreement.

This makes for major data in the context of Pelosi's claim that she is not going to move energetically on any plan that does not have solid Republican support. Furthermore, while first word of the "agreement" was delivered by Senate Banking Committee Chairman Chris Dodd, his Republican counterpart, Richard Shelby, emerged from that same White House meeting and said, "I don't believe we have an agreement."

Most disappointing is that Dodd seems to have dropped his rhetoric about how doing things right is more important than doing them quickly. As far as the reporters were concerned, time was of the greatest essence, which may be true; but it could be just as true that Bush is still trying to get his way through "shock doctrine" sky-is-falling rhetoric. The problem is that all of the language in the Loven-Davis report was about Wall Street; and I, for one, do not think that Main Street is going to come away with any feeling other than that of being victimized (yet again?). To invoke my favorite metaphor, this opera is far from over; and, from where I am sitting in the auditorium, the fat lady is nowhere in sight.

The Politics of Withholding Information?

This item was released as "BREAKING NEWS" about ten minutes ago (10:24 PM PDT) on the BBC NEWS Web site and, in fairness, should probably be reproduced in its entirety:

US agrees to details of bail-out

Both US parties in Congress have reached agreement on the outline of a $700bn (£380bn) bail-out plan to revive the financial sector.

Leading Democrat Senator Christopher Dodd said they had reached "fundamental agreement" on the package though he did not reveal details.

He said Congress could act in the next few days to pass a bill on the subject.

The plan is aimed at helping finance firms offload their bad debt, which has triggered a global credit crisis.

"We now expect that we will have a plan that can pass the House, pass the Senate and be signed by the president," Senator Robert Bennett of Utah said after meetings with lawmakers on Thursday.

Details of the package were not immediately available but it is expected to include limits on executives' pay as well as oversight requirements.

The news comes as President George W Bush is set to meet both presidential candidates.

The idea that there is a statement of "fundamental agreement" without the slightest trace of substantiation should send chills down all of our spines. If Main Street has been saying that this is a serious problem that requires serious deliberation rather than a knee-jerk reaction, then the reads a lot like Wall Street trumping Main Street. This will probably not surprise anyone, but that does not mean we can be depressed about it.

From my point of view, I have what ought to be a more relevant question: If details have not yet been polished enough to present to the news media, are they at least in a form that can be presented to President Bush's meeting? If not, then there is no way in which that meeting can address the merits of the case, since all parties will be equally in the dark about what that case is. There is then the related question: Are the details in a form in which all Senators can start reading them in preparation for floor debate? If so, then shouldn't both Barack Obama and John McCain be at their offices reviewing those details, rather than consenting to a ceremonial appearance in the Oval Office? My guess is that we are about to get hoodwinked (by hoods of the highest order, I fear); and it may be that the only question that will have a fighting chance of getting answered will be the one concerned with the extent to which either Obama or McCain was complicit in the hoodwinking!

The Priority of Campaigning

It is interesting to contemplate the extent to which President George W. Bush's address to the nation last night may have amounted to a non-event. It may have been at the top of my Yahoo! home page this morning; but the link was to Yahoo! Finance (rather than Yahoo! News), which reflected an analysis at Forbes.com by Brian Wingfield, whose assessment reflected the sort of position one might expect from a "capitalist tool" like Forbes:

In a way, he's the best pitchman the administration's got. The credit crunch is an extraordinarily complicated issue, and Bush's most popular trait is his homespun way of connecting with people.

Wingfield never got closer to Main Street than that "homespun way of connecting with people" phrase; and, if we are to take the interviews aired this morning on NPR's Morning Edition, then, whatever the "capitalist tool" may have hoped, the pitchman just did not connect.

One reason may have been that Main Street just was not paying attention. The President had been "scooped" by John McCain's announcement that he would leave the campaign trail and return to Washington and work with his fellow Senators on their reaction to the proposal submitted by the Treasury Department. One analyst on NPR described this as yet another example of McCain's willingness to take big risks, seeing it as a parallel to the nomination of Sarah Palin. At the very least, McCain seems to have been just as effective at "scooping" Barack Obama as he was with the President. I have never heard Obama sound quite so tongue-tied as in is attempt to define his response to McCain's actions. Now the confusion is spreading among the Obama supporters, many of whom would like to dismiss McCain's gambit as a cheap political shot.

Well, to be fair, it is hard to imagine any politician doing anything for a motive that was not political; but it may be that the most important consequence for the rest of us is that McCain has reminded us all about priorities. I may be going against the grain on this one, but I continue to hold to the premise that a Senator is a Senator first and a candidate second. Yes, what Lyndon Johnson famously called "pressing the flesh" is important; but (remembering the Olympic "wisdom" of Thomas Bach) let's not kid ourselves: The campaign is a media product. As in a Hollywood film, the "star" does not have to be "on screen" all the time and may even be there "virtually." Hollywood knew about this with stunt men even in the days before CGI. By recognizing this prioritization, McCain has challenged Obama on it; and, whether or not he did this as a baldly political strategy, I have to give him points in my own scorecard.

Back in the days when the business world was sane, a major commitment of funds would never be made without first performing "due diligence" over the nature of the commitment. We are currently seeing this practice in the current efforts to rescue Washington Mutual, which, as a point of personal record, happens the be the bank that holds both my checking account and my (fixed-rate) mortgage. It is the role of Congress to perform such "due diligence" over the bailout proposal; and, Congress being what it is, the machinery of due diligence consists primarily in hearings and debates. This particular commitment of funds is sufficiently serious that, by all rights, the two Senators who are also Presidential candidates should be involved in that Congressional machinery. Furthermore, as I have previously noted, that involvement will be documented in the Congressional Record, providing one of the few sources pertaining to either candidate that is not a skillfully crafted media product. We the people (could not resist the cliché) have the perfect opportunity to observe both candidates in a major decision-making situation; and we should celebrate that opportunity.

Whatever McCain's motives may have been, I applaud the move he has taken. I am disappointed that Obama's response has run the gamut from lame reaction ("I thought of it first") to rejection ("I still plan to be at the debate"). I also agree with Congressional leaders (such as Harry Reid) who are concerned that either candidate could easily turn the Senate floor into the site of a stump speech; but the beauty of the Congressional Record is its objectivity. It documents our representatives' efforts to come up with solutions, and it documents when they make fools of themselves. With a little bit of clever manipulation, McCain has managed to get Obama to look a bit like Achilleus sulking in his tent (not the first time I have invoked this simile); and Obama had better be quick about getting his focus back on that electorate he is supposed to be serving!

Wednesday, September 24, 2008

McCain's Gauntlet

This seems to be a day for my rhetorical chickens coming to roost. Having already observed that the FBI is following through on my suggestion that the current economic crisis should be examined in terms of fraudulent behavior, I just read an Associated Press account of another suggestion coming up for grabs. This time what is at stake is a conclusion I came to on Monday:

At the same time those of us supporting Barack Obama should inform him of the importance that he let the electorate know that he has given serious consideration to the proposals of both Paulson and Sanders and that he believes that the significance of the crisis at hand demands serious debate of the merits of both proposals. Furthermore, Senator Obama should substantiate his position by participating in that debate in the Senate. If his opponent decides to keep campaigning while he is seeing to the people's business, that could easily trigger a response in Obama's favor.

It is unclear who first picked up on this suggestion; but, at least as far as the Associated Press is concerned, it seems to be John McCain who is getting all the credit. Here is how Beth Fouhy (Is that pronounced the way I think it is?) wrote the story:

Republican John McCain said Wednesday he wants to delay Friday's debate with Democratic rival Barack Obama and temporarily put aside their partisan campaign to resolve the nation's financial crisis.

McCain's announcement came after the two candidates held private talks about joining forces to address the Wall Street meltdown. The Obama campaign said the Democrat initiated the talks, but McCain beat Obama to the punch with the first public statement calling for the two to rise above politics in a time of crisis.

McCain said the Bush administration's plan seemed headed for defeat and a bipartisan solution was urgently needed.

McCain said he would put politics aside and return to Washington Thursday to focus on the nation's financial problems after addressing former President Clinton's Global Initiative session in New York. McCain said he had spoken to President Bush and asked him to convene a leadership meeting in Washington that would include him and Obama.

"It has become clear that no consensus has developed to support the administration's proposal," McCain said. "I do not believe that the plan on the table will pass as it currently stands, and we are running out of time."

McCain said he has spoken to Obama about his plans and asked the Democratic presidential nominee to join him.

Obama's campaign did not immediate say whether he supported a delay of the debate or would also stop campaigning.

The Obama campaign said in a statement that Obama had called McCain around 8:30 a.m. Wednesday to propose that they issue a joint statement in support of a package to help fix the economy as soon as possible. McCain called back six hours later and agreed to the idea of the statement, the Obama campaign said. McCain's statement was issued to the media a few minutes later.

The good news is that both candidates have publicly acknowledge personal commitment to resolving the current economic crisis. The bad news is that we do not know how that commitment will be demonstrated. I continue to hold to my original position: The Treasury Department has submitted a concrete proposal to the Congress for approval. Congress is currently deliberating over that proposal. (As I write this, the House Financial Services Committee should be in session.) Presumably, deliberation will involve more than Committee review; it will probably also require debate on the floor of both the Senate and the House. McCain has "scooped" Obama by announcing his intention to leave the campaign trail and return to Washington. As of the writing of Fouhy's report, Obama has not made any such commitment.

This may be bad news for Obama supporters. Right now the Senate floor may be the ne plus ultra of bully pulpits from which both McCain and Obama can not only state their positions on economic recovery but also have those statements captured in the Congressional Record. If the economy turns out to be the deciding factor in November, both hands of cards will be on the table for observation by every voter and interpretation by every analyst. This could very well be the defining moment when many (most?) voters decide they have seen each candidate for what he really is. I shudder to think what would happen if Obama withdrew from that moment. I have already been on his case for neglecting his "day job;" I am not sure how I would react to his neglecting one particular aspect of that "day job" that is likely to be of importance to every tax-paying American.

The FBI is on the Case!

When I asked yesterday whether or not fines arising from fraud prosecution might contribute to solving financial problems from Main Street's, rather than Wall Street's point of view, my question was not entirely rhetorical. Nevertheless, I did not have high hopes that it would be taken seriously. Well, if I am to believe a report this morning on the BBC NEWS Web site, there is at least one institution (in the Department of Justice, no less) that has decided that fraud investigation is in order:

The FBI has begun an investigation into four major US financial institutions caught up in the current financial crisis, US media say.

Investigators are reportedly examining possible fraud by mortgage giants Fannie Mae and Freddie Mac, the failed bank Lehman Brothers and insurer AIG.

Top managers at those firms are also being investigated, the reports say.

In the past year, as the US housing market slumped, the FBI began a broad inquiry across the financial sector.

It was prompted by concerns over the way high-risk, "sub-prime" mortgages were being sold.

The FBI has been looking at lenders who sold home loans to buyers on low or unpredictable incomes and also the investment banks that packaged these loans and sold them on.

I find that third paragraph particularly important: This is not a case of trying to pin the crime on an institution that is too bankrupt to pay a fine. The FBI is trying to identify specific individuals who perpetrated fraud and presumably benefitted from it (in which case finding out the extent of that benefit will also be relevant). Now, as we know from history, the Oval Office has a track record in trying to muck with FBI investigations; but the fact that we do know this should make it harder for the current occupant to go down a trail that Richard Nixon once blazed. So strike up the Prokofiev (for anyone with radio nostalgia): The FBI is on the case, and let's all hope that they smoke out the bad guys!

Will the Sky Fall?

This past weekend Book TV devoted a slot to a book about the Panic of 1907. Since they tend to set their schedules at the beginning of the week, they could not have anticipated that viewers would be thinking about Treasury Secretary Hank Paulson's bailout proposal during the broadcast, but the timing could not have been better. I turned to Wikipedia for a reasonably succinct summary of the basic story:

The crisis was ignited by an attempt to corner the market in a copper company that had collapsed that October. When the bid failed, banks that had loaned money for the scheme experienced a number of runs which eventually spread to affiliated banks and trusts, leading a week later to the downfall of the Knickerbocker Trust Company, New York's third largest trust company. From Knickerbocker, fear spread throughout the city's trusts and across the country as regional banks pulled deposits from New York, and as nationwide people withdrew deposits from their regional banks.

At the time the United States had no central bank to inject liquidity. The panic may have been worse if not for the intervention of J.P. Morgan, who convinced other bankers in the city to provide a backstop for the crisis. By November the contagion had stopped, and the following year, Senator Nelson W. Aldrich established and chaired a commission to investigate the crisis and propose future solutions, leading to the creation of the Federal Reserve System.

Speaking of the Federal Reserve, there has been an energetic debate over at Truthdig stimulated significantly by Ben Bernanke's testimony yesterday before the Senate Banking Committee. I was reminded of the Panic of 1907 when I read the following brief contribution from reader "troublesum:"

Congress should call their bluff and see if the sky falls in the next few days.

This morning I heard on the radio that House Speaker Nancy Pelosi has declared that she is not going to rush into things unless there is solid support for the $700 billion "solution" on the Republican side, knowing full well that those Republicans (all of whose seats are up for grabs in November, most of which will be decided by Main Street, rather than Wall Street) have yet to give any signs of such "solid support." Meanwhile, in the Senate Banking Committee hearing room the skepticism was so thick you could cut it with a knife; and it was being voiced with equal passion by both Committee Chair Christopher Dodd and his Republican counterpart, Richard Shelby (admittedly for different reasons).

So, is the sky going to fall? It seems that one of the most important lessons of the Panic of 1907 is that it was resolved without any Government intervention, for the simple reason that, at that time, the Government did not have any institution that could intervene! The intervention came from J. P. Morgan, who may well have been the fattest of the fat cats at that time, and his combined powers of strategic planning and aggressive persuasion to engage the resources of other fat cats. Like it or not, the system took care of itself!

Can this system take care of itself? One place to start might be with a morning dispatch from Reuters:

U.S. stocks headed for a higher open on Wednesday after Warren Buffett made a $5 billion investment in Goldman Sachs Group Inc late on Tuesday, buoying sentiment in the beleaguered financial sector.

Additionally, Japan's No. 3 bank, Sumitomo Mitsui Financial Group, plans to invest in Goldman Sachs, Japanese media said, in what would be the third big Japanese investment this week on Wall Street.

Before the bell, shares of Goldman Sachs jumped nearly 5 percent to $130.85, while rival Morgan Stanley rose 4.6 percent to $29.30. JPMorgan Chase, the No. 3 U.S. bank, were up 2.3 percent at $41.48.

A rise on Wall Street would help reverse the worst two-day slide in six years.

Who has (as the risk of making Barack Obama's supporters cringe) "power you can believe in," Warren Buffett or any representative of the Bush Administration? Now, to be fair, this same Reuters report does not write off the significance of the current turmoil in our Congress:

But even as the Goldman Sachs news suggested confidence, investors worried congressional wrangling could delay or weaken the proposed $700 billion plan to rescue the financial sector, increasing unease about the struggling U.S. economy.

Nevertheless, Buffett's action is but one of several signs of "movement from within" (most of which have originated in Europe or Asia) to address the problem with resources already available. Additional resources would probably help, but who would know best what to do with them? If Congress is "wrangling" over their confidence in Hank Paulson, perhaps they should consider bringing other people to the table in whom both they and Wall Street have the necessary confidence.

Since this is not 1907, we have to be careful just how far we can reason with this particular analogy. On the other hand, rather than a government that took a detached laissez-faire position, we have one that is not beyond causing the sky to fall by deliberately undermining some of its props! (Think of Naomi Klein's "shock doctrine" thesis.) We are so far from being out of the woods that we barely know the extent of the woods! Nevertheless, we are beginning to identify a few cool heads trying to take corrective actions with the resources they have. Will any of them be testifying before the Senate Banking Committee or the House Financial Services Committee?

Tuesday, September 23, 2008


Anyone interested in a relatively straightforward account of how we got into the mess of our current financial crisis may consider taking a look at James Scurlock's documentary, Maxed Out. Indeed, since the film was released in 2006, it makes for an interested bell-wether in its capacity for recognizing how (and why) things would get worse. The film has one fundamental take-away message:

If an ordinary American citizen accumulates an unmanageable debt (which is a lot easier than one might think), that citizen is likely to spend the rest of his/her life paying for it.

However, there is a message that parallels this one that brings us closer to the present:

If the United States government accumulates an unmanageable debt, its ordinary citizens are likely to spend the rest of their lives paying for it.

We can now home in on the message for our current situation:

If a major American financial institution accumulates an unmanageable debt, the United States government will absorb that debt into its own unmanageable debt; and the result is (guess what?) that ordinary citizens are likely to spend the rest of their lives paying for it.

Basically, the whole activity bears a shocking resemblance to any gaming table in Las Vegas, which is intentionally designed to keep the house rich at the expense of its customers. Is it any wonder that German Chancellor Angela Merkel is speaking out so strongly about keeping her country away from such a table?

Further Consequences of Globalization

I sure hope Tom Friedman saw this report on the BBC NEWS Web site:

The Indian head of an Italian auto parts company has been beaten to death in a suburb of Delhi, allegedly by a group of sacked workers.

Lalit Kishore Choudhary, of Graziano Transmissioni India, died at the company factory in Greater Noida.

Police said more than 100 dismissed workers entered the factory vandalised machinery and attacked Mr Choudhary.

The confrontation came after a long industrial dispute. The workers denied killing Mr Choudhary.

Nearly 300 workers at Graziano Transmissioni were dismissed two months ago after they demanded pay rises and allegedly ransacked its offices, the AFP news agency reported.

How does this fit into your utopian vision of globalization, Tom? How much does Graziano Transmissioni know about what happens in India, other than the premise that labor is cheaper there? Some new chickens may be coming home to roost!

How Much IS $700 Billion?

This past Saturday I referred to $700 billion, the amount of money the Bush Administration wishes to allocate to bail out the bad debts of the current financial crisis, as "a quantity that most of us can barely (if at all) comprehend." Just how much is $700 billion? BBC News reporter Steve Schifferes has now provided us with one way to approach the answer to that question. Ironically, it is embedded in his article entitled, "The Politics of the Bail-Out;" but it is presented as the form of a useful comparison. Referring to the campaign promises that both John McCain and Barack Obama have been making about how they will manage the Federal budget, Schifferes wrote:

But with the size of the bail-out now roughly equivalent to annual government spending (excluding social security and Medicare) such claims are less and less credible.

There you have it: Take away Social Security and Medicare, and $700 billion is basically the amount of money our government spends in a single year. This is not to ignore the budgetary impact of either Social Security or Medicare, but it makes for a reminder that the Bush Administration wants to increase the national debt by a quantity that amounts for a major chunk of the amount of money our Government spends in a single year.

Is this realistic? Would you go into debt over the amount of money you spend in the course of a year? Would any sensible institution float you a loan for that amount of money? Isn't this just an exaggerated variation on those predatory lending practices based on convincing unwitting poor families to take out mortgages they could not afford? Is it any wonder that, as Schifferes put it in his report, "the bail-out is not playing as well on Main Street as it is on Wall Street?" On Main Street when you make a mess, you pay for the damage you have caused. (This is, of course, the "Pottery Barn parable" that Colin Powell tried to present to our President and ultimately failed.) Having acknowledged the lack of regulations that could have prevented any of these messes in the first place, does our legal system not have resources for fraud prosecution through which one could impose fines on individually specified defendants on Wall Street and apply the collected funds to solve the problems of the many plaintiffs on Main Street?

After 9/11 Gore Vidal was one of the first (and few) to call out the Bush Administration for misreading reality. He took (and probably still takes) the position that the destruction of an office building is a criminal act and should be investigated and prosecuted as such. Unfortunately, his efforts to expose criminality got blown away by a commitment to a Global War on Terror. Does fraud not provide us with a basis for addressing most (if not all) of the elements contributing to our economic crisis through legal machinery? Shouldn't any "solution" we consider begin by asking simple legal questions about liability, rather than obsessing over proposals for life preservers? (For what it is worth, it appears that Nicolas Sarkozy was asking similar questions last night.) Did I recently hear a pundit ask rhetorically how much more damage the Bush Administration could do before leaving office? Do we really want to know the answer to that question?

Watching the Senate Banking Committee

Clichéd as it may sound, the eyes of the world are likely to be on the Senate Banking Committee today. Both Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke are scheduled to testify, and we can already read what they are expected to say on the BBC NEWS Web site. However, this is not where the action will be. The focus of attention will be on the questions that Committee members will pose to both Paulson and Bernanke and the quality of the answers that are delivered. If I was concerned yesterday that Congress would rubber-stamp the Administration's proposed $700 billion "solution" in the same reckless way that they approved the President's ill-conceived plans for deploying our troops, then my fears have been alleviated far more that I could have anticipated. Not only is there skepticism in the Congress; but also that skepticism is bipartisan (even if the reasons for skepticism are not always bipartisan). The whole affair looks more and more as if the only "solution" on the table is tantamount to rewarding those whose bad judgment brought about this mess in the first place, while the needs of the general public are ignored unless they can be hauled out for a specific rhetorical strategy.

Consider, as an example, the following statement that the BBC included from Paulson's anticipated testimony:

When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.

We have heard this sentence too many times since the beginning of last week. The fact that it has been used so often by not only those who really do not know what they are talking about but also those who, by all rights, should know better, should be enough to arouse our suspicions; and, as soon as we take a closer look, it is easy enough to see why we should be suspicious. In the first place this sentence is little more than a tautology: "When the financial system doesn't work," then the activities of anyone trying to do anything with their money "are threatened." Thus, from a logical point of view, the sentence really does not say anything, which means that, in the realm of argumentation, it does nothing to warrant any claim advocating the proposed solution. On the other hand it is one of those rhetorical moves that will try to convince the Senate Banking Committee that the solution is "good for everyone," not only the high-rollers in the financial sector who have discovered what it feels like to crap out but also all those "ordinary Americans" who work for, or perhaps own, businesses (getting less and less ordinary if we read the unemployment numbers) and who cannot avoid being consumers.

One way to counter such a move is to assume the consequent and start questioning its consequences. For example what will a $700 billion increase in the national debt do to "Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation?" Is there not the threat that those personal savings will be devalued, not only in terms of foreign currency trading but also at the lowest level of domestic buying power; and, if the underlying buying power of the money we have (or think we have) is undermined, what will that do to "spending, investment and job creation" in the business sector? Then there is the question of what will happen to Government spending? Beyond what they have saved for themselves, what will happen to those Americans' Social Security checks? Will they provide adequate support against the hard numbers behind the cost of living? What about the role of longer-term Government spending in areas such as education and health care (both of which have been blithely ignored in just about every other decision the current Administration has made)?

Ultimately, there is really only one question that Paulson and Bernanke need to answer in their testimony today: Cui bono? Who actually benefits? The members of the Senate Banking Committee need to provide an answer to that question to those who elected them as representatives, and that answer should do for the rest of us. (To this end it is important that they consider alternative perspectives, such as, for example, those of leading economic experts in Germany.) If the answer is that the primary benefit will be to maintain the comfort of those who brought about this crisis in the first place (in the interest of increasing their own comforts, otherwise known as greed), then Congress should speak up for the rest of us before we get screwed one more time by an Administration that has never taken the overall quality of life of the electorate to heart. This may well be the day when we see who still has respect for the "job description" specified in our Constitution!

Monday, September 22, 2008

A Tragedy of Republic

Whether or not, as Daniel Mendelsohn has argued, good people (and, as I have extrapolated, good fortune) "make good subjects for operas," there remains Aristotle's precept that tragedy (on the basis of the data available to him) is basically about αγών (antagonism) between two nobles. This should remind us of how detached the subject matter of Aeschylus, Sophocles, and Euripides was from either Athenian democracy or the concerns of Plato's "Republic." Yet the primary strength of Giuseppe Verdi's opera Simon Boccanegra (at least in the revised 1881 version currently being performed by the San Francisco Opera) resides in its setting in a republic (fourteenth-century Genoa) and the αγών between two men, one of whom (Jacopo Fiesco) is noble by birth, while the other (Boccanegra) is a commoner whose nobility resides in his deeds. Operatic αγών usually tends to bring down both antagonists, along with a generous number of supporters on both sides, often to the extent that no one is left to bring about a reconciliation. In this case, however, the two antagonists are basically "good people;" the αγών is more an opposition of their value systems through which each, respectively, tries to "do the right thing."

The 1881 libretto for Simon Boccanegra is by Arrigo Boito. I find this particularly interesting since Boito tends to be best known for his libretto for Otello, set in fifteenth-century Cyprus, which, at that time, was part of the Venetian republic. However, there is little noble about any of the characters that Shakespeare conceived for this play; and there is no shortage of suggestive vulgar language to play to the baser instincts of the audience. Verdi and Boito smoothed over much of that vulgarity, but neither of them stinted on tapping into J(I)ago's truly vile nature. Furthermore, there is little sense of anyone putting priority on "doing the right thing;" and the αγών between Otello and Jago is about as destructive as things get. On the other hand Otello was first performed in 1887; so it may be that, for all the ways in which Verdi and Boito fixed up the 1857 version, Simon Boccanegra did not attract audiences because it did not have enough blood and guts.

The San Francisco Opera production is an import from the Royal Opera, Covent Garden, originally conceived by Elijah Moshinsky, a director who never seems to be afraid taking a cerebral approach to cerebral subject matter. It is not the easiest opera to stage, particularly because so many of the plot elements are not explicitly enacted and only referred to by the characters. Reading the synopsis is thus a somewhat daunting matter. Not only does one have to sort out past and present into a coherent time line, but one also has to deal with names that are changed for reasons of political intrigue.

Nevertheless, it is ultimately the complexity of the situation that makes the opera so intriguing, particularly when one recognizes how nondestructive the underlying αγών is. Yes, reconciliation with Fiesco only comes when Boccanegra is on the brink of death; but it is a reconciliation that has been taking shape as the plot unfolds. So we as audience desire it as surely as we expect it. Ultimately, there is only one "agent of destruction" in the opera, Paolo Albiani. If we overlook Moshinsky's decision to give us a brief glimpse of Amelia during the orchestral introduction, Albiani is the first character we encounter; and we see him buying votes to assure the election of Boccanegra as Doge of Genoa. In other words we first see him as a destructive force against the integrity of Genoese republican politics; so it is no great surprise when he later turns that force against Boccanegra, first through political machinations and, when those are thwarted, through poisoning.

This brings us to why there is antagonism between Boccanegra and Fiesco in the first place: It is the antagonism of an early manifestation of class warfare triggered by Fiesco's offense at Boccanegra's amorous relationship with his daughter. Boccanegra thinks that his stature in Fiesco's eyes will improve when he is elected Doge. Instead, it aggravates the antagonism and their personal relationship is reflected in an ongoing strain between commoners and nobles in the council chamber and the efforts of those, like Albiani, to rouse the rabble in the streets. Boccanegra is stern enough to recognize his enemies and deal with them, but he also recognizes that class antagonism is Genoa's greatest obstacle to effective government. The republic always seems on the brink of collapse until the personal reconciliation between Boccanegra and Fiesco culminates in Boccanegra's final decree as Doge: the appointment of the noble Gabriele Adorno, Boccanegra's son-in-law and Fiesco's grandson-in-law, as the next Doge. Boccanegra dies, but the republic survives far stronger than it had been under his administration.

The best way to make this work on the stage is to pace the plot slow enough to be absorbed but not so slow as to drag. Moshinsky understood this in terms of the staging demands, and Donald Runnicles took care of the rest in pacing the music. Needless to say, having singers with solid voices and acting skills committed to the strength of the characters being portrayed was also a great benefit. Dmitri Hvorostovsky (Boccanegra) and Vitalij Kowaljow (Fiesco) knew exactly how to deliver the intensity of the underlying αγών, while Barbara Frittoli (Amelia) and Marcus Haddock (Adorno) delivered the kind of romantic couple one always hopes for in an opera. Patrick Carfizzi was also particularly effective as Albiani. While Jago is vile at first sight, Albiani's capacity for malicious destruction is a cumulative one; and Carfizzi was particularly effective in portraying that accumulation from scene to scene.

One can appreciate why Simon Boccanegra is not the sort of opera one expects to find regularly in the repertoire, but productions like this make one wish it were performed more often.

Sanders' Way

The media would like you to believe that Treasury Secretary Henry Paulson's $700 billion "solution" to the current financial crisis is the only option. Indeed, they are so convinced of this that they have decided that it is unnecessary to report on the nuts and bolts of the actual legislative proposal that the Treasury Department has submitted to the Congress. Anyone who believes that the Devil is in the details will have to do this by visiting Tim Dickinson's National Affairs blog on the Rolling Stone Web site. Anyone gullible enough to believe that there is as little room for debate over this proposal as there was over the proposals that launched our military adventures in Afghanistan and Iraq would do well to visit the Web site for The Nation this morning. Senator Bernie Sanders is a member of the Senate Budget Committee and seems to be the sort of guy you can't fool twice (without tying his tongue over the old saying). As a result this morning he submitted a statement of his own position, available for all of us to read on the aforementioned Web site. Here is the core of that position:

Let us be clear. If the economy is on the edge of collapse we need to act. But rescuing the economy does not mean we have to just give away $700 billion of taxpayer money to the banks. (In truth, it could be much more than $700 billion. The bill only says the government is limited to having $700 billion outstanding at any time. By selling the mortgage-backed assets it acquires--even at staggering losses--the government will be able to buy even more resulting is a virtually limitless financial exposure on the part of taxpayers.) Any proposal must protect middle income and working families from bearing the burden of this bailout.

I have proposed a four part plan to accomplish that goal which includes a five-year, 10 percent surtax on the income of individuals above $500,000 a year, and $1 million a year for couples; a requirement that the price the government pays for any mortgage assets are discounted appropriately so that government can recover the amount it paid for them; and, finally, the government should receive equity in the companies it bails out so that when the stock of these companies rises after the bailout, taxpayers also have the opportunity to share in the resulting windfall. Taken together, these measures would provide the best guarantee that at the end of five years, the government will have gotten back the money it put out.

Second, in addition to protecting the average American from being saddled with the cost, any serious proposal has to include reforms so that we end the type of behavior that led to this crisis in the first place. Much of this activity can be traced to specific legislation that broke down regulatory safety walls in the financial sector and allowed banks and others to engage in new types of risky transactions that are at the heart of this crisis. That deregulation needs to be repealed. Wall Street has shown it cannot be trusted to police itself. We need to reinstate a strong regulatory system that protects our economy.

Third, we need to address the needs of working families in this country who are today facing very difficult times. If we can bail out Wall Street, we need to respond with equal vigor to their plight. That means, for example, creating millions of jobs through major investments in rebuilding our crumbling infrastructure and creating a new renewable energy system. We must also make certain that the most vulnerable Americans don't freeze in the winter or die because they lack access to primary health care.

Finally, we need to protect ourselves from being at the mercy of giant companies that are "too big to fail," that is, companies who are so large that their failure would cause systemic harm to the economy. We need to assess which companies fall into this category and insist they are broken up. Otherwise, the American taxpayer will continue to be on the financial hook for the risky behavior, the mismanagement, and even the illegal conduct of these companies' executives.

As I see it, we have work set out for us on two fronts. Most important is that we all inform our elected representatives, not only in the Senate but also the House (for me, that's Pelosi … whoopee!), that we have read Sanders' proposal and do not want to see it "pass unnoticed." At the same time those of us supporting Barack Obama should inform him of the importance that he let the electorate know that he has given serious consideration to the proposals of both Paulson and Sanders and that he believes that the significance of the crisis at hand demands serious debate of the merits of both proposals. Furthermore, Senator Obama should substantiate his position by participating in that debate in the Senate. If his opponent decides to keep campaigning while he is seeing to the people's business, that could easily trigger a response in Obama's favor.

Dickinson reduced his own interpretation of the Paulson proposal to the simplest of terms:

We. Are. So. Screwed.

The only way Dickinson can be refuted is by the Congress coming up with a better plan and sending it to the White House. Sanders has taken a serious step in that direction. It is up to us to make sure that he does not get swept under the carpet (where all he will find is consolation from Dennis Kucinich, who is used to being there)!