A Second Hand Conjecture

I was in the supermarket earlier tonight buying candy and they had a rack of Halloween themed t-shirts. I didn’t notice it at first, but the slogan on each shirt was an old Misfits song. “Ghoul’s Night Out”, “Astro Zombies”, “Die, Die My Darling”, “I Turned Into A Martian” you name it. Pretty damn fine, thought me. Time to kick some Misfits in all its noisy low-fidelity, punk rock glory methinks. “Halloween”:

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Could a liberal lesbian rights activist actually win South Carolina’s 1st congressional district? Sure looks possible, as Linda Ketner has closed to within 5 in her aggressive challenge to incumbent Rep. Henry Brown. Of interest, Ketner is also a member of  “the Cabinet” which Time just published an interesting piece on. It’s an informal group of gay tech and hereditary millionaires, who have been investing large sums toward a systematic defeat of social conservative Republicans nationwide.

The success of Ketner and other socially liberal Democrats running on explicitly pro-gay rights platforms in traditionally social conservative friendly districts, would certainly tend to complete the trinity of broader Republican political decline. Not only are economic and national security focused conservatives losing on their traditional strong suit thanks to economic woes and Iraq, but the cultural debate may be shifting substantially leftward as well.

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This is the greatness of the internet

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Synova wrote a little post that gets halfway to where I would come down on this perennial parlor game of  the John Galt general strike. Sy recognized that to be successful, such a revolt would realistically be a miserable experience for a society, resulting in bloodshed and economic ruin. But she does not depart from Rand in assuming that the eventual outcome would be desirable. I’d advise the ancient wisdom that if the means are clearly evil in a political project, one should become immediately skeptical of the alleged justice of the ends.

We should also be skeptical of the social assumption for Galt, that there is a definable and rigid division among men into a minority of Platonic creative guardians, and an empowered majority of proletarian oppressors and their craven political servants — and that these factions could have accurate self-recognition of their social roles. I would contend that anyone who thinks of the majority of the people as disposable abstracted parasites, under a constitutional order that explicitly derives its governing powers from the majority consent of the governed, is never selling you anything that’s going to arrive in a happy place.

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The idea of “Going John Galt” makes me a little bit uncomfortable, to tell the truth.    John Galt essentially said screw them all, and shut down knowing that a whole lot of people would be hurt.    It was about the only way he could make his point and make it stick.

Maybe we could do this without shutting down the economy?

But, as I think about it, a protest citing John Galt and out and out telling people what is going on might be a good idea, because people are going to go John Galt… quietly.

And I have no faith at all that anyone who now thinks that it’s a good thing to make the rich pay are going to understand what happened any more than Chavez or Mugabe understand what happened (or is happening) to their economies.

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Filipino writer Benjamin Pimentel is surprised to discover that his countrymen were among the very few foreign populations to prefer John McCain to Barack Obama in a Gallup international survey. A happy place for Republicans in a lonely world apparently, as in the Philippines the outgoing Bush administration enjoys a 66% approval (more than twice its abysmally low domestic support).

Pimentel then speculated somewhat interestingly that had the Philippines ever applied for US statehood or multi-statehood (the most recent proposals call for the country to be broken into three states: Luzón, Visayas, and Mindanao), McCain would handily win the general election. The Philippines 91 million plus population would easily dwarf the combined advantage of Democratic California and New York in the electoral college.

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Former head of FEMA Michael Brown, now has a blog. And you’ll pardon me for saying but (outside aesthetics which don’t matter a whole lot to me) I find myself liking a lot of his posts! Read some for yourself.

(HT – Megan)

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Alan Reynolds at Cato asks “How’s Obama Going to Raise $4.3 Trillion?”

Altogether, Mr. Obama is promising at least $4.3 trillion of increased spending and reduced tax revenue from 2009 to 2018 — roughly an extra $430 billion a year by 2012-2013.

How is he going to pay for it?

Read the whole thing for an overview of what Obama is promising in inscreased spending and loss of tax revenues and how his rational for paying for it falls far short of the goal. How will we pay for all this? It’s something I’ve wondered for a long long time and have only found hand waving about corporate loopholes and better efficiencies savings that seem absurd on their face.

That leaves 3 options as I see it. We will do one or some combination of

1. Increase the national debt
2. Raise taxes
3. Cut Spending

Increasing the national debt may not be as politially feasible in the near future as it has been in the past (at least I hope), so it’s clear that can’t account for all of it. I’m not sure how much more the democrats will be able to tax the rich and corporations. I mean, they might try, but I don’t think it will give them the returns they would hope for. So that leaves raising taxes on the rest of us and cutting spending. Any whats the only part of the budge the democrats have been known to favor spending cuts for? The military.

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Under McCain and Obama's tax plans 43% and 44% would pay no income tax respectively

Fewer and fewer people are paying income tax and even less will be with either candidates tax plan. I don’t think this would be such a problem if we didn’t have such high spending, growing entitlements, and if so many of these zero income tax filers weren’t getting additional handouts from the government (especially under Obama’s tax “cuts” ie. handouts).

It has been said by an unknown author “[Democracy] can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury…” and this is where we’ve been heading for awhile. I think just as a tax plan can be too regressive, it can be too progressive in that it places too high a burden on “the rich” resulting in them leaving (atlas shrugs) or seeking tax shelters, and at the same time having too much of the population with no civic tax obligation leaving them no incentive to constrain public spending (hey, it’s not their money right?)

(HT Greg Mankiw)

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Does the object of our desire tend to change during tough times?

Yes, according to this paper on men’s preferences when it comes to Playboy’s models:

Consistent with Environmental Security Hypothesis predictions, when social and economic conditions were difficult, older, heavier, taller Playboy Playmates of the Year with larger waists, smaller eyes, larger waist-to-hip ratios, smaller bust-to-waist ratios, and smaller body mass index values were selected. These results suggest that environmental security may influence perceptions and preferences for women with certain body and facial features.

For those wishing to do their own analysis you can download the data here. Tyler Cowen notes that the hypothesis is not fully supported by 2008’s selection.

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Stéphane Dion, leader of the defeated Canadian Liberal Party, has rather ignominiously resigned his position today. Thereby he becomes the first Liberal Party leader since the 19th century to have never become Prime Minister of Canada. Given his dismal political skills, it might seem somewhat mystifying how he ever even became a national party leader. According to Dion himself, that’s not a minority opinion:

“In my consultations it became very clear, that in the door-to-door canvassing, my colleagues, my friends were told, ‘We don’t like your leader.’”
(National Post)

Unflattering as it is, the print does the statement a certain justice. Dion’s grasp of the English language often seemed rather more tenuous than it reveals.

For the international observer with no stake in the outcome of the election, it was often amusing to watch Dion’s struggles with common conversations. Something that doubtlessly would have been a little more troubling for Canadian voters with a very real stake in the results. For example, here’s an entertaining flashback from just prior to the election:

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You’ve probably heard that John McCain has denounced Barack Obama’s ’spread the wealth’ formulation for tax policy as . It’s an inflammatory but not unjustified charge, as a good definition for socialism is the equitable distribution of wealth to the community, coercively enforced by law.

But here’s a troubling aspect: suppose the electorate doesn’t mind if it is socialism?

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I’ve been seeing this amusing banner ad for Obama popping up all over the web. Given the behavior of some of ACORN’s representatives, it might not be an illegitimate question.

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interrogating Christopher Hitchens over his rather weakly supported endorsement of Barack Obama for president.

Hitch’s primary position in this chat is that Obama should be supported because he is “evolving” toward support of a more aggressive policy against international terrorism. Hardly the most persuasive pitch to say the least. Perhaps all those years of arguing for evolution through natural selection may have given him too much of a preference for the word itself.

His auxillery case is that McCain has become senile and temperamentally unfit for leadership. That’s something which is supposedly entirely and exclusively demonstrated by his “irresponsible” selection of Sarah Palin for vice president. Hardly more persuasive.

But in reading Hitchens’ recent writing on this matter, one tends to think that last point is what is actually driving the others (something Laura instantly zeroes in on). There is a certain reflexive personal hostility to Mrs. Palin in Hitchens’ writing, which is far closer to a definition of political irresponsiblity than McCain’s selection of her allegedly is.

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The collision of Mr. Obama’s ambitions with the architecture of reality is going to be a thunderous thing to hear. Be prepared.

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Heh, heh, heh.

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I’m experiencing a little déjà vu over the invective that’s starting to pour out of the left against “Joe the Plumber.” It has a decidedly reminiscent over-reactive, hysterical feel to it of the anti-Palin crusade. Here’s a typical example of what I mean from a Kos diarist:

“I have watched the Joe Plumber video several times and this right wing nut is nothing but a liar.”

Uh-huh. Regular Nazi threat to the republic that plumber.

Probably not the wisest attack. As my friend Jason puts it: “Joe the Plumber is Pennsylvania and Ohio personified.” By consequence, team Obama might want to restrain the volume on this sort of immoderate ideological raving to the fullest extent that they can.

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I wonder if the juxtaposition of that headline and that photo was intentional?

Anyway, over at Risk and Return I follow up Dale, McQ and my discussion of the markets and the economy during the last couple of podcasts with some thoughts, observations and suggested readings on the investment climate we are in now. Lots of links, some enlightening graphics and views from those who saw this coming, including, ahem, me.

There are hopeful signs, but large risks. How cheap are stocks? What are the risks that remain? Will recent government moves help?

My own view is that some of it will, though it is not ideal, but possibly close enough for government work.

Let me know what you think in the comments here or via e-mail.

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Equal to the horror of this, is the futility.

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What a day for indignity. Just when I’d stopped shaking my head at the image of Paul Krugman accepting the Nobel Prize, I read two of my most cherished heroes offering rather embarrassing endorsements for bad things.

Christopher Hitchens, always aloof from the elderly McCain, has been pushed into a categorical and insulting rejection in Slate, animated mostly by a festering hatred of Sarah Palin that seems to grow more infected by the day. It’s not quite an Andrew Sullivan endoresement in that it lacks the enchanted fascination with Obama, but it’s still advocacy that makes you wince at the superficiality.

But worse is yet to come. Francis Fukuyama, in his most aggressive Obama endorsement yet, reboots history in The Times (adapted from the Newsweek piece) by denouncing the entire edifice of the Reagan-Thatcher revolution for capitalism and democracy as destructive and driven by uneducated American swing voters, who are stupid enough to endorse the philosophy he once championed as the endgame of civilzation itself.

Sad affairs. I suspect I shall have to become an antiquarian for these men’s opinions in order to remain a fan. Their current thinking seems only demonstrative of the strangely stupefying effect partisanship for Obama can have on otherwise able minds.

(ht: Ghost of a Flea)

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Yves Smith hits a theme I have been harping on, the Federal Reserve, and central banks in general, are making things worse in may ways by destroying the incentive for banks to lend or borrow from one another. She quotes James Bianco of Arbor Research:

The Fed’s massive and numerous liquidity facilities are making things worse. The problem is more than banks unwilling to lend to each other, they are also unwilling to borrow from each other. Banks can get all the funding they need (and then some) from their central bank so they do not need to seek a loan from another bank. I believe it has gotten so bad that they don’t even bother to make a decent market for inter-bank loans anymore. No reason to, they don’t need them anymore as central banks have replaced them.

I would suggest more subtle factors should also be emphasized besides how this distorts rates on loans. If banks do not need each other then they don’t communicate. Thus the hard work of investigating what counterparties real credit risk is goes undone. The market is shunting that off to governments. Furthermore, banks have no incentive to arrive at a believable accounting of their assets, they can wait and hope for a bailout rather than find a way or terms that other banks will accept.

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Financially according to the Financial Times. Check out this interactive map of the states and their comparative rankings in different financial categories.

(HT: Megan McArdle)

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The Markets have spoken, the best place to invest in the world is…Iraq!

Now it’s stock and awe in Baghdad!

As the Dow plummeted nearly 700 points yesterday to fall well below the 9,000 mark, the Iraqi stock exchange – where this broker was merrily keeping up with her booming business – was flourishing, buoyed by four-year lows in violence and hopes of a reconstruction windfall.

Last month, Iraq’s general index went up nearly 40 percent, about the same percentage the Dow dropped over the past year. The jovial trading-floor mood is reminiscent of Wall Street’s bygone ‘greed is good’ era of the 1980s.

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Well, with any luck our voter ID law will weed out anyone not legitimately registered to vote.

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from Megan McArdle.

Don’t look.

I looked yesterday, but I’m just going to pretend I didn’t.

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says two UCLA economists.

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt’s record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

“Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump,” said Ohanian, vice chair of UCLA’s Department of Economics. “We found that a relapse isn’t likely unless lawmakers gum up a recovery with ill-conceived stimulus policies.”

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

Not exactly news to free market liberals, but still something very important to remember in these comming days of cries for the government to “do something” and distrust of the free market.

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I am often asked about individual bank stocks, especially JP Morgan. Generally my answer is that Bank of America, JP Morgan and a few others look to be likely survivors, but how profitable they will be I am really unsure.

JP Morgan is a special discussion, because I point out a rather astonishing fact, they have a notional exposure to around 90 trillion in derivative contracts, or did last March (pdf.) 58 trillion of it swaps of some sort. Probably credit default swaps (CDS) are the majority. Which means…what? I don’t know, and frankly if anybody really does they aren’t telling me. In essence I am left telling people that I have to treat that as a “black box.” Not exactly confidence raising. Personally there are better ways to make money than hoping a company with 90 trillion in derivatives exposure has a handle on it in my book, but then again, I am admitting that I have no idea what I am talking about, and cannot find anyone else who does either.

Warren Buffet often speaks of defining a circle of competency when investing and staying inside it. It doesn’t matter how big the circle is, just knowing when you are inside it. Well, 90 trillion in derivatives exposure is outside of my circle of competency to assess.

The nightmare is what if it is outside of JP Morgans circle? I suspect it is, and the massive exposure of two other banks as well (Citibank and Bank of America have approx. 38 trillion apiece.)

What makes me wonder about it today? Personally I have always felt that there was a good chance that JP Morgan was who was being saved when the Fed brokered the acquisition of Bear Stearns. Bear goes under and JP Morgan would have to come up with huge payments on CDS contracts. Also, I suspect that Bear was a counterparty for a large number of derivatives, which if Bear was insolvent might not have all been paid up. Or maybe not. Then I see this over at Barry Ritholtz’s:

“Lehman Brothers Holdings Inc.’s main lender and clearing agent, JPMorgan Chase & Co., caused the liquidity crisis that led to Lehman’s collapse, creditors said.

JPMorgan had more than $17 billion of Lehman’s cash and securities three days before the investment bank filed the biggest bankruptcy in history on Sept. 15, the creditors committee said in a filing Oct. 2 in bankruptcy court in Manhattan. Denying Lehman access to the assets on Sept. 12, the bank “froze” Lehman’s account, the creditors claimed.

JPMorgan, the biggest U.S. bank by deposits, financed Lehman’s brokerage operations with daily advances, while money market funds and other short-term lenders provided overnight loans, according to bankruptcy court documents. When JPMorgan shut Lehman off from funds, Lehman “suffered an immediate liquidity crisis that could have been averted by any number of events, none of which transpired,” according to the filing.

The creditors asked the judge in charge of the case to let them interview a witness and request relevant documents from JPMorgan and to pursue possible legal claims. U.S. Bankruptcy Judge James M. Peck is scheduled to hold a hearing Oct. 16 on that request, the creditors said.”

Hmmm, so Lehman may have been torpedoed by JP Morgan? Hardnosed but not weird, until this little tidbit in the update:

Ron Kirby notes: “I wrote about a very strange occurrence – the reporting of J.P. Morgan “transferring” 138 billion dollars to Lehman, after Lehman had already filed for Chapter 11 bankruptcy early last Monday morning…It is highly likely [or a certainty on my planet] that J.P. Morgan was INSOLVENT and was “BAILED OUT” last Monday, September 15, to the tune of 138 billion dollars. This would explain why the Fed and Treasury dictated that Lehman fail – to disguise or otherwise obfuscate the recapitalization of or illicit transfer of 138 billion to A MUCH SICKER, TEETERING ENTITY, J.P. Morgan Chase.”

The link is filled with some rather out there speculation (and I have no intention of confirming or discrediting it) but this is a very odd transaction. Immediately after sending Lehman 138 billion they received 138 billion from the Federal Reserve. What were they off loading? Meanwhile they allegedly cut off Lehman.

Back to Bear. Was allowing JPM to take over Bear and the Fed guaranteeing most of their debt a back door method of recapitalizing a banking behemoth? Are the acquisitions that JPM has been making under very favorable terms a sign of strength or weakness? Gifts from the Federal Reserve to recapitalize them? How much trouble is in that book of derivatives?

I have already pointed out the problems in Europe, problems which the failure of AIG would have exacerbated due to their massive involvement in the CDS market. Is it possible that JPM was also heavily exposed to a failure by AIG? With 90 Trillion in nominal exposure it is hard to imagine they were not. With that much exposure who could possibly be more of a candidate for the “too big to fail” label. Could the Fed be manipulating these events to save them without causing the kind of panic that Bear and the later victims have caused?

I don’t know, which is the real tragedy. Nobody knows what the exposure of anybody is, so we are all left guessing. The Federal Reserve, our government, the financial institutions themselves are all busy obscuring rather than bringing things to light. In order to avoid panic by showing us all how deep the problems are, they are busy spreading suspicion, distrust and panic by keeping everybody, including financial institutions they have to deal with, in the dark. The hope of generous terms from the government keeps banks from admitting what their books really look like, or to try and sell in an orderly manner what they have. Who needs to expose your books to potential lenders when the Federal Reserve will take a used car as collateral and at a lower rate.

How bad off are these institutions? We have no idea. We are left with our imagination and our nightmares.

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I have argued in the past that the Federal Reserve’s policies may be helping in some ways, but hurting in others. Way too much borrowing and lending is running through the Fed which is drying up lending between banks. It also reduces the need for banks to find reasons to communicate and trust each other, keeping the atmosphere of mistrust alive.

On a similar note one of Yves Smiths commenters left this comment, which is well worth pondering when thinking of the bailout plan being considered:

One of the most critical functions of the banking system is converting short-term deposits into longer-term loans for businesses. Much of the working capital market, for decades has come via money market funds (MM). Joe public or Joe CFO deposits money into a MM. That MM loans it to a bank (usually by buying paper, and usually at a medium duration) and then that bank loans it out to business for inventory, payroll or whatever. The MM has converted Joe’s demand deposit into a fixed-duration loan.

The problem we’re having is that people are fleeing commercial MM for treasury MM. Those are buying treasuries and thus converting the money to the desirable medium duration BUT that money is loaned to the Fed, and the Fed doesn’t make working capital loans. So the deposited money that had been made into working capital has been diverted into the Fed and lost to working capital.

The Fed is kind of trying to address this by loaning out money via various auction/discount windows. BUT, those loans have been overwhelmingly overnight – a particularly nasty demand deposit because it goes back so fast. For a bank to convert that to a 90-day loan it’s got to win 90 auctions in a row – a very risky deal with a crunch on. So the Fed undoes the duration conversion, and then some, converting the liquidity into a form that the banks can’t make into useful-duration loans.

Right now we have both commercial and treasury MMs. Deposits have shifted from commercial MMs to treasury MMs, and consequently we have less working capital (a commercial MM product) and better credit for the Fed (a treasury MM product). But, treasury MM rates are now very low and the gap between treasury and commercial fairly high, which creates an incentive for depositors to put money into commercial funds, producing some working capital.

When Paulson dumps out his 700 billion in treasuries it’s going to be at the short end. That will drive up rates for short-term treasuries. This will obviously draw even *more* deposits into the treasury MMs. That means even less in the commercial MMs and thus less working credit, the eventual commercial MM product. Hence Paulson’s billions remove working capital by competing for the deposits that could get used to make working capital loans. That 700 billion is going to go to fairly long-term mortgage securities. So Paulson’s billions divert credit from working capital to long-term mortgages – from where it’s most needed to where it’s most wasted.

Even if the giveaway adequately props up the banks, which I doubt, they still can’t make working capital loans, because the raw material they used (commercial MM deposits) will be desperately short.

I think it’s very telling that in two days of hearings and two weeks of discussion we have yet to see *any* detailed mechanism for how Paulson’s plan will increase the supply of, say, inventory loans. It’s not that every economist in the world is an idiot, it’s just not going to help. I think people have fallen into the fallacy that if it costs a lot it must be valuable. Paulson’s plan falls into the category of very expensive way to hurt ourselves.

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Tyler Cowen states his basic views on the crisis. My response in italics:
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A new distressed debt leveraged hedge fund has been launched:

Go visit the website for all their competitive advantages!

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I was commenting to my wife the other night when we saw the trailer for “Religulous,” just what the Obama camp needs at the moment, something to remind the right, and especially the religious right, why they hate liberals.

Bill Maher jabs his style of comedy into the eye of religions and those that follow them, in his latest film. I’ve not seen anything but the trailer, and it does look like he’s being an equal opportunity ass with this film. I really expect this, fairly or not, to get a lot of time on the radio, and pulpit.

We’re probably going to skip, since we can’t stand Maher.

We probably will go see “An American Carol,” with one of the big reasons being, liberals don’t want you to see this movie.

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Let us look at one of the ways that we are being panicked unnecessarily, and why incidentally we can help many of these financial institutions in the fashion I discussed in my post on a potential alternative plan. In my next post we will discuss ways in which we are not being misled, and why we in my mind should do something about this.
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I do believe we should be doing something as a nation, through our government, to avoid the not insignificant chance of a total financial meltdown. I have seen several things proposed that I find interesting, and I will get into them and other longer term issues in coming days. I had hoped to address this all comprehensively, but time just isn’t allowing that, so let us do so piecemeal.

Today I would like to endorse one proposal that aligns exactly with my thoughts on this, which is we need to recapitalize banks in a more effective, less arbitrary manner while protecting taxpayers and homeowners as well.
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If you support the Paulson bailout plan that is. The New York Times has coverage.

The Senate proposal would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power.

The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms.

In a delicious bit of soon to be civics geek trivia, the Senate worked around the Constitutional restrictions against voting on tax legislation not already considered by the House by attaching the bailout plan along with a tax extender bill to the Mental Health & Addiction Act (which passed the House several months ago).

You gotta love our government.

In addition to the Paulson plan details, various tax cuts and dealing with the AMT it includes a very helpful proposal, increasing government insurance on bank deposits from 100k to 250k.

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