The Housing Boom Boomerang

Thomas L. Friedman at the NY Times describes the current state of the financial crisis and what it reveals about the US. Excerpts below.

Link: Op-Ed Columnist – The Great Unraveling – NYTimes.com.

I have no sympathy for Madoff. But the fact is, his alleged Ponzi scheme was only slightly more outrageous than the “legal” scheme that Wall Street was running, fueled by cheap credit, low standards and high greed. What do you call giving a worker who makes only $14,000 a year a nothing-down and nothing-to-pay-for-two-years mortgage to buy a $750,000 home, and then bundling that mortgage with 100 others into bonds — which Moody’s or Standard & Poors rate AAA — and then selling them to banks and pension funds the world over? That is what our financial industry was doing. If that isn’t a pyramid scheme, what is?

Far from being built on best practices, this legal Ponzi scheme was built on the mortgage brokers, bond bundlers, rating agencies, bond sellers and homeowners all working on the I.B.G. principle: “I’ll be gone” when the payments come due or the mortgage has to be renegotiated.

The Madoff affair is the cherry on top of a national breakdown in financial propriety, regulations and common sense. Which is why we don’t just need a financial bailout; we need an ethical bailout. We need to re-establish the core balance between our markets, ethics and regulations. I don’t want to kill the animal spirits that necessarily drive capitalism — but I don’t want to be eaten by them either.

Wilderness and Wildness

Bronwen Dickey, daughter of James Dickey (author of Deliverance), describes her father's view of wilderness and rivers.

I've shed blood in the Chattooga River, the result of incompetent kayaking. Wildness doesn't tolerate fools.

Link: Chattooga Conservancy, The Last Wild River.

My father didn't talk much about wilderness, it was "wildness" he was interested in. Wilderness, to him, was just an idea, a romantic falsification of nature rather than the untamed, untamable thing itself. Wildness was a place where man risked everything; it wasn't a theme park or a toy you played around with or a place you ventured into for thrills. It could kill you. The characters in Deliverance were prepared only for wilderness, and they found wildness. Wildness bites back.

"I think a river is the most beautiful thing in nature," my father wrote in one of his journals, right before the novel was published in 1970. "Any river is more beautiful than anything else I know." He was drawn to writers who felt similarly inspired by water, like Melville and Conrad. Heraclitus's philosophy of universal flux and his famous dictum, "you cannot step into the same river twice," particularly moved him. But there were few things that terrified my father as much as man's ever-growing intrusion into the natural world. "We're never going to be able to get out of the 'man world,'" he said in a documentary back in the '70s, "if we don't have any place to go to from the man world. That's why we need these rivers and streams and creeks and woods and mountains. You need to be in contact with nature as it was made by something else than men." As much as Deliverance was a story of survival, or, as so many define it, a story of "man against nature," it was a story about the commercial destruction of a rugged, primordial landscape and a part of the South that was slipping away, even back then.

Note: Here's a link to some scenes from the movie Deliverance, if you haven't seen it.

Photos of the Chattooga River:

www.mykesweblog.com/2008/12/beautiful-image-the-narrows-chattoogariver.html

www.mykesweblog.com/2005/08/bull_sluice_on_.html

Causes of the Financial Crisis

Joseph E. Stiglitz, a Nobel Prize winning economist and professor at Columbia University, describes the critical decisions that created the financial crisis. Excerpts below.

Stiglitz says that the underlying critical flaw was a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.”

I flashed back to Gordon Gekko's famous line "Greed is good".

Link: Joseph E. Stiglitz on capitalist fools: About Us: vanityfair.com.

What were the critical decisions that led to the crisis? Mistakes were made at every fork in the road—we had what engineers call a “system failure,” when not a single decision but a cascade of decisions produce a tragic result. Let’s look at five key moments.

No. 1: Firing the Chairman

In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.  

No. 2: Tearing Down the Walls

The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act—the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest.

The most important consequence of the repeal of Glass-Steagall was indirect—it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people’s money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people’s money—people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top.

No. 3: Applying the Leeches

Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease—the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil—money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America’s household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.

The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly—and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending—not that American consumers needed any more encouragement.

No. 4: Faking the Numbers

Meanwhile, on July 30, 2002, in the wake of a series of major scandals—notably the collapse of WorldCom and Enron—Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can’t have faith in a company’s numbers, then you can’t have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are “incentive pay” in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.

The incentive structure of the rating agencies also proved perverse. Agencies such as Moody’s and Standard & Poor’s are paid by the very people they are supposed to grade. As a result, they’ve had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy—that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.

No. 5: Letting It Bleed

The final turning point came with the passage of a bailout package on October 3, 2008—that is, with the administration’s response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America’s banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.

The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn’t address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding—and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, “cash for trash,” buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America’s taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.

The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues—they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely—which they hadn’t—the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.

The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems—the flawed incentive structures and the inadequate regulatory system.

Chimpanzee helps care for Two White Tiger Cubs

Barry Bland: Anjana the Chimpanzee helps care for 2 White Tiger Cubs

Chimp and Tiger

When two white tiger cubs were born during a hurricane they had to be separated from their mother after their sanctuary flooded.However they have since found an unlikely surrogate mother in chimpanzee Anjana, who has taken on the role of caring for the cubsThe two-year-old chimp has been helping keeper China York care for the 21-day-old cubs at The Institute of Greatly Endangered and Rare Species, T.I.G.E.R.S., in Myrtle Beach, South Carolina.

 

Food for Thought

I know of none of the world’s great spiritual traditions that would approve the claim that people living extravagant lifestyles of wealth and privilege – this is, after all, a fair description of life in modern industrial societies from the standpoint of the rest of human experience – can expect a sudden leap to an even more comfortable and convenient life, just because they happen to want it, and would find it a useful way to avoid dealing with the consequences of their own shortsighted choices.

John Michael Greer, The Archdruid Report: Taking Evolution Seriously

Beautiful Image: Window to the World

Link: Earth Shots » Window to the World by Stephen Oachs

Window to the World by Stephen Oachs
 
Window To The World by Stephen Oachs
 
The beaches of Big Sur are often cloaked in a blanket of fog, with uneven terrain and miscellaneous flotsam and jetsam decorating the coastline. Such imperfections make Big Sur’s beaches uniquely beautiful, and often less traveled. Pfeiffer Beach is a favorite place in Big Sur, and as this photograph shows, it has an amazing rock formation. The setting sun casts a glow, illuminating the “window” as though showing an opening to another world.
Equipment: Canon 1Ds Mark III

Russia in Denial about Election

Peggy Noonan at WSJ.com describes how a not-so-free press supports the ruling power. Denial can be very revealing.

Link: 'At Least Bush Kept Us Safe' – WSJ.com.

The Russian newspapers had generally played down Mr. Obama's victory, she said, because it got in the way of the establishment line: that the corrupt American democracy is composed of two warring family machines that have the system wired and controlled with the help of their corporate oligarch cronies. It's not a real democracy but a pretend democracy, and a hypocritical one. This helps the Russians rationalize and excuse their infirm hold on democratic ways and manners. And then the black man from Chicago with no longtime machine or money is elected . . .

So the Russian press muted its coverage. Mr. Obama's victory upset their story line. They have to think up a new one now. They will.