Throwing Bad Money After Worse

You'd think investors would have learned a harsh lesson. Let's talk about that after the break:

Concerns are mounting that efforts by governments and central banks to stoke a recovery will create a nasty side effect: asset bubbles in real-estate, stock and currency markets, especially in Asia.

The World Bank warned Tuesday that the sudden reappearance of billions of dollars in investment capital in East Asia is "raising concerns about asset price bubbles" in equity markets across Asia and in real estate in China, Hong Kong, Singapore and Vietnam. Also Tuesday, the International Monetary Fund cited "a risk" that surging Hong Kong asset prices are being driven by a flood of capital "divorced from fundamental forces of supply and demand."

Behind the trend are measures such as cutting interest rates and pumping money into the financial system, which have left parts of the world awash in cash and at risk of bubbles, or run-ups in asset prices beyond what economic fundamentals suggest are reasonable.

Prices are surging across a host of markets. Gold, up about 44% this year, soared to a record high Tuesday. Copper is up about 50% in the past year. In the U.S., risky assets are rising rapidly in price: The risk spreads, or interest-rate premiums, on low-rated junk bonds have narrowed to about where they were in February 2008, before Bear Stearns and Lehman Brothers fell, according to Barclays Capital.

Before I start talking about the "why", let me sum up what you just read because, in truth, my eyes glazed over the first four times I read it, and I'm supposed to be interested in this stuff for a living.

In short, there's a lot of free capital out there that is not being reinvested in companies, or infrastructure, but in speculative investments. The laws of supply and demand, while imperfect, do apply here: opportunities are created when there is more money available than can reasonably be invested/spent.

Those bonuses at Goldman Sachs, that could be lent to struggling shopkeepers or small manufacturers are only the top of the iceberg of available cash that is being used creatively to whip up yet another frenzy.

Why?

Fair question, and a simple answer: addiction.

Greed is a drug. It is like alcohol or heroin, only greed destroys more lives than either of those.

When you've spent the past thirty years receiving double digit percent returns on your invested capital (yes, we've been in an overheated market for that long, despite the occasional bump and drop), you're not going to suddenly accept money market rates of 1 or 1.5% on your money.

You're going to force higher returns. You're going to look for pockets where the worldwide recession has not hit yet, and cycle your money in and out quickly.

How do I know this is what is happening? Personal experience.

Over the past three weeks, I have seen no fewer than three investment funds offer investors refunds on their invested capital. They've called for too much and were unable to complete investments they believed they could close on at an appropriate return.

They were, in other words, outbid by people willing to accept a lower-but-still-healthy return.

How does that work? Here's a thought experiment.

I'm willing to accept a 5% return so I bid to invest one dollar, expecting to get back $1.05.

I do this knowing that I'm faring better than the bank, who would give me a $1.01.

Someone else realizes they'd be willing to accept a 4% return, and so offer to invest $1.01, to get back the same $1.05.

The investment would be foolish to accept less money to pay back more in interest. After all, they get to keep an extra penny themselves.

Greed.

Basically, this is one step up from a Ponzi scheme. And it signals that we are far from out of the woods in this economy.

I'm not sure what the answer is. Part of me would like to see stronger oversight of the markets, but that might stifle true innovation. After all, green energy ain't gonna be financed at the prime rate for the foreseeable future. Neither is stem cell research.

On the other hand, the anarchist in me would like to see the entire capitalist system go cold turkey on stupidity. But that would destroy us in the process, and that kind of violent change only begets more violence.

This is not going to be pretty.

Greed Is God

Much of this week, hell, much of this year, has been about the coming economic disaster, which appears is now arriving on Track 13.

It got me to thinking a little about the capitalist system and its built-in, inherent flaw. Hell, it's such an obvious flaw that it boggles the mind that a rational people would choose it for their economy. Even Adam Smith saw it coming and warned against it.

Laissez-faire capitalism can loosely be defined as each person acting in his own interest contributes to the benefit of society at large.

For the large part, this system works pretty well: it's simple, easy to implement, and eventually, all people can benefit from truly free markets.

The one flaw in the ointment, the thing that ultimately Smith warned us on, is, well, greed. I mean, it's right there in the first part of that equation: A person's self-interest.

Implicit in that statement, of course, is the question "Which self-interest?" After all, one can be greedy to the point that it no longer is in one's self-interest. Think about Ebenezer Scrooge.

The assumption Smith made in his time was that man would remain ultimately a polite creature, fair and impartial, and more to the point, powerless over his fellow man (except for nobility, royalty and slavers).

In other words, business would remain small and personal. Indeed, his specific warning was against business combinations that would tend to unduly influence a market.

In fact, despite Republican tendencies to the otherwise, he insisted on government regulation in markets to assure that companies would remain beholden to the market, to the customer, and to society.

What we have witnessed over the past eight years is one of the least regulated markets in world history. Even the Romans, no socialist society, had the decent sense to keep the overseers at least nominally independent of the overseen!

The systematic deregulation, either de jure or de facto by ignoring regulatory oversight or simply paying lip service to it (SEC chairman: "Say, you boys over there at Bear Stearns aren't doing anything I should know about, are you?" *winkwink*), of the Bush administration was teasing the tiger with a thick steak on the wrong side of a short fence. It was asking for trouble. It was practically BEGGING for it.

Combined with the recent hard-line business attitude that economic royalists have taken since at least the Reagan administration (another Republican), which has seen huge companies overthrown because any shlub with a sufficient credit line thought he could squeeze more shareholder value out of the company than current ownership, and you have a deadly combination.

Management at corporations have had to genuflect to the shareholders, but those shareholders have tended more and more to focus on the short-term quarterly profit than the more nebulous, less objective, "value of the company".

The "self-interest", if you will. As companies have gotten bigger and bigger and more out of touch with their customers and the community, we've seen less and less accountability, less and less care, on the part of the corporation.

Which I think may have been Adams' point: business combinations, whether in the form of conglomerates, mergers, or even simply a gathering of minds at the watering hole on a Friday night to split up a market, mean less attention is paid to the business at hand: providing society with the benefits it deserves from putting up with the plunder of capitalists.

Smith, in other words, believed that so long as people could remain human, capitalism would always be in balance with the rest of society.

And yet, we've all seen that this was not the case, and in my estimation, could never have been the case: Greed is a powerful intoxicant.

That may be why it is one of the seven deadly sins. Which now brings us to the message at hand for today.

I've often wondered how capitalism can exist in a society that considers itself Christian.

Indeed, for the first two thousand years, give or take a couple of centuries, Christianity banned capitalism, on the grounds that earning money on money or charging more for a good than what it cost, was a form of usury, which is barred in the Old Testament.

In 1635, a Massachussetts man was convicted of "greed"...yes, it was a crime!...because he earned 6% on his sales, which was 2% more than the law allowed.

A law! About greed! Unthinkable today!

Christ himself warned against the accumulation of wealth. You might recall the "camel thru the eye of the needle" parable.

We see that Christianity is antithetical, even hostile, towards capitalism and vice versa. Why?

Because Christianity is about your fellow man, and capitalism is about, well, taking that fellow to the cleaners. Capitalism is soulless, godless and worships nothing so much as efficiency, the more ruthless, the better.

That's not me saying that. That's the damn system, which rewards short term efficiencies, even if it means breaking the law or the covenants of society, in order to squeeze one more dollar out of a transaction.

Greed pervades the system. Greed is inherent in the homeowner who borrows more money that he can realistically afford to pay back, because he's certain the value of his home will increase exponentially, and that value is his nest egg for retirement.

Greed is inherent in the banker who finances that mortgage, who knows that when the house of cards falls down people are going to get hurt, but he can justify the month's loan activity to his regional office with increases, not decreases, only.

Greed is inherent in the broker who bundles that mortgage along with countless others in a resaleable bite-size package to a series of investors looking to make money off other people's pains. The idea was to diversify the risk, to take the mortgages off the banks' books and to hand the risk over to other people who needed to balance their portfolios, but you know what happened: everyone jumped into the game and soon not enough good mortgages were floating around, so people just effectively packaged "junk mortgage bonds" and passed them off as AAA credits.

Greed, in other words: squeeze them for every buck you can get.

Greed is inherent in the municipalities, states and even the Federal Government, who all benefit from higher home values and balance their budgets on the backs of the greedy in the form of property taxes and the income taxes upon sale or disposal of the property, as the greedy homeowner climbs the social ladder to his McMansion built on his veery own McCloud in the McSky.

Do none of these people, for there must be a whole lot of crossover here, listen in church when the minister or priest talks about the evils of greed?

I've always believed that America, being somewhat psychotic in this regard, should make a choice: God or mammon.

If you're going to choose God, then turn communist. Communism and Christianity are perfectly suited to each other: to each according to his needs, from each according to his ability dovetails nicely with love thy neighbor and turn the other cheek.

If you're going to choose mammon, money, then drop the fucking pretense of being godly. It insults my God and it's silly on its face. I mean, seriously, is there a stupider sight than to see John McCain shocked, SHOCKED, to find there's no one minding the store?

(Showing Memeorandum da love)

A Novel Approach

One thing I value in my quest to seek the office of NotPresident (see sidebar to the right to make campaign contributions) is novel ideas to solve stubborn or impopsing problems. As you are no doubt aware, I've put you to sleep bored you to tears spent many days talking about mortgage defaults and the plight of the middle and working classes who are loaded up with debt and have very shaky incomes to pay them off with.

So when the latest Democracy Journal was delivered to my inbox this week, I found an amazingly simple idea from Elizabeth Warren, the nation's premier expert on middle class bankruptcies: a Financial Products Safety Commission

I t is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?

The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the "R-word" supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves. Credit products, by comparison, are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features. By comparison, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.

Sharp practices such as raising your interest rate on one credit card because you were a day late on another one, and raising it to some usurious rate of near 25%, only because some states in the nation allow that (most do not, but it's based on the state where the card company operates. Hullo, South Dakota!).

Why do people go into debt? Basically, debt is an advance on your income, with the promise to pay it back over time. Usually, you do this when you need to buy something, like a house or a car, that will last a long time and costs a lot of money.

But credit is also a trap, more so for people who get addicted to the feeling of wealth one gets from being flush with cash and able to buy things.

Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products – a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.

Isn't my credit rating at least as important as the fact that my house might burn down from a faulty toaster?

Particularly given the recent changes to the bankruptcy law that make it less likely that a consumer will ever be discharged from his debts if he gets in too deep over his head, this proposal is now more vital than ever. Things are only going to get worse for people as banks compete harder in a tighter mortgage and credit market for consumer dollars.

Americans are drowning in debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders have missed payments in the past year, and an additional 2.1 million families missed at least one mortgage payment. Last year, 1.2 million families lost their homes in foreclosure, and another 1.5 million families are likely headed into mortgage foreclosure this year.

Families’ troubles are compounded by substantial changes in the credit market that have made debt instruments far riskier for consumers than they were a generation ago. The effective deregulation of interest rates, coupled with innovations in credit charges (e.g., teaser rates, negative amortization, increased use of fees, cross-default clauses, penalty interest rates, and two-cycle billing), have turned ordinary credit transactions into devilishly complex financial undertakings. Aggressive marketing, almost nonexistent in the 1970s, compounds the difficulty, shaping consumer demand in unexpected and costly directions. And yet consumer capacity–measured both by available time and expertise–has not expanded to meet the demands of a changing credit marketplace. Instead, consumers sign on to credit products with only a vague understanding of the terms.

Indeed. To most of us, the language in a credit card agreement may as well be Sanskrit, for all we understand of it. The Schumer box, which is supposed to summarize the rates included in the agreement in plain English, can't possibly cover all the contingencies that are spoken about in the small print in which those rates may change.

Will this proposal ever see the light of day? I doubt it, without a concerted effort on the part of consumers and advocacy groups. Banks and other financial institutions make enormous contributions to politicians of both parties, precisely to keep regulations as lax as possible.

But something needs to be done and soon. Consumer debt to the United States is as big a problem as global warming is to the planet: it could cause the entire meltdown and collapse of the US economy, which is run on the fuel of consumer spending. For sure, the economy is going to take massive hits over the next several years as the mortgage market contracts, which will create opportunities for the fleecing of Americans, both legally and fraudulently, by legitimate financial concerns and, to put it politely, shady lenders and Nigerian princes whose money is trapped in Lagos.

It currently costs the American consumer $89 billion just to make the interest payments and fees on credit card debt. That doesn't include auto loans and mortgages, you'll notice. That's money that could be spent on shoes, books, clothing and laundry. Pretty essential stuff, and I chose those because they rank only slightly higher, in toto, than credit card servicing costs to the average Amerian family.

Yet, most people can tell you who makes quality clothes and shoes, or writes books worth reading.

We need an agency, not to protect Americans from falling into bankruptcy, that would be way too hard to do, but to help Americans understand what they are getting themselves into long before they get into trouble. Loan and credit language is deliberately obtuse, and that's the equivalent of putting rat poison into a teddy bear.

And poison is precisely what this language is designed to sugar-coat, or at least obscure. Most card companies will do as they damned well please, no matter how much you beg or complain, and the legal recourses you have are usually stacked in the lenders favor. You can't take them to court, you have to go to an arbiter that they get to choose. And so on.

I could go on, but Ms. Warren states the case more plainly than I could. What troubles me most about this is, its such an obvious solution to a pressing problem that it should be getting much more attention than some backwater webjournal and blog.

Spread the word, folks. We need this. Now.

The New Math Of A False Economy

(graphic courtesy tengrain at mockpaperscissors.com)
As my long-time readers know, I'm a wonk for economic stuff. Hazard of my avocation, I suppose, needing to stay on top of the economy and make decisions based on my observations. So I stumbled across this story, and started reading it, when I found a paragraph that I think can help explain and tie together some loose threads that have been floating on the periphery of your field of perception lately:

"The negative housing wealth effects on consumer spending could be more pronounced than anticipated," Zandi warned, estimating that a third of U.S. households tapped a substantial amount of home equity in recent years to support spending.

But with stagnant or falling home values, and rising mortgage delinquencies, consumer spending's sole support looks to be wage and income growth, and this at a time when households are being heavily taxed with higher energy prices.

Energy costs rose only 2.9 percent in 2006. But in the first three months of this year, they shot up at an annual rate of 22.9 percent, accounting for about 41 percent of the increase in U.S. consumer prices.

The Consumer and Producer Price indices that are so heavily reported by the mainstream media purposely ignore energy and food prices, due to their volatility. Personally, I think that's a mistake: first, we have much better tools to measure these and to factor out volatility now, and second, these are two core purchases that consumers must make, so to say "inflation was only 3% last year," while food and energy prices were up together anywhere around ten percent is a lie designed to make the administration look good.

But I digress.

Take a closer look at the excerpt I posted: you'll note that the past several years' economic growth has been generated not by wage and income increases (which have remained stagnant to down. It wasn't until 2004 that the final leg irons of recession, consumer income, surpassed the levels at the end of the Clinton administration and even that's not factoring in inflation), but by borrowing against the equity in our homes.

An increase in debt, in other words. Debt can be defined as an advance against income you hope to receive in the future, and interest payments a hedge against the lender losing all that money if your gamble fails.

The optimistic presumption the average American lives on is things are going to get better: my company will make more money. They'll pay me a higher wage. I'll be able to pay off my debts.

Not so much, anymore. Wages have stagnated for nearly thirty years while the banking industry has gone to great lengths to fool consumers into believing they are worth more money than they truly are.

I suppose to a large extent, bankers can be blamed for this situation. Anyone with half a brain who spends a little time studying the overall economic state of this nation would have tightened their lending rules, not expanded them, in order to keep their balance sheets honest and their mortgages current. And banks are chock-a-block with MBAs from Ivy League schools who are trying desperately to learn the lessons I learned on the streets of Noo Yawk: don' lend someone money what can't pay youse back, unless youse is prepared to break deir bot' legs.

See, another side of this comes out in the quarterly earnings report that banks have to prepare for their shareholders. Obviously, if I'm Chase Manhattan, I have to keep my earnings higher than Citibank in order to keep my investors from moving their money there. New loans generate gobs of short term income. Old loans do not. The shell game is to keep those fees and surcharges rolling in (which is why the penalties on credit cards have also become so exorbitant: that's pure profit).

That "immediacy culture" pervades right down to the administrative level, as those Ivy League MBAs are thrown into competition with each other to come up with "the next insanely profitable cash cow." To the winner goes the spoils: make the bank the most money, and you get the corner office, the bigger bonus, the trips to Hawaii.

No one thinks long term, so no one looks long term, so in truth, no one saw this coming, but it is.

We're already in the soup on this, and there's not much to do to bail Americans out. The government could try but thanks to Bush and his tax cuts for the wealthy and his invasion of Iraq, the government has no money either and the money it has borrowed is not going to be allowed to go to its people who need it most.

In effect, we'll all be wage slaves to China. And we've seen what their standard of living is like.

After that, the future gets murky. Obviously, taxes on the wealthy will skyrocket. They have to, particularly as baby boomers retire in greater numbers each year and the pool of productive tax paying Americans dwindles. Taxes on all of us will go up, as well.

Suppose for a second, though, that they don't. Some political pressure keeps honest politicians from talking about tax increases. It becomes a political third rail.

We can't cut spending sufficiently to offset the loss in revenue. Aside from Social Security (which is funded separately anyway) and defense, there's not a whole lot the government spends money on that could scale up to free hundreds of billions of dollars for domestic spending programs that would now go from discretionary to mandatory, unless the sight of people dying in the streets is somehow magically made palatable to Americans. Events of the past week indicate Americans wouldn't want that on their TVs.

About the only places we could cut are defense. And defense. And homeland security.

I think we all know what that means.

So by destabilizing the American economy for decades if not centuries to come, Bush has created the single most dangerous breeding element for the domestic security of Americans: a weakened economy with not enough money to spend on protecting us all.

Thanks, Dumbya.

Bush
economy
mortgages
taxes

Take A Hike!

This article points out one of the most devastating aspects of American domesticity, the multi-car family:

OSLO (Reuters) - Surging use of cars and planes will push up greenhouse gas emissions in coming decades, making the transport sector a black spot in a fight against global warming, according to a draft U.N. report.

"Transport activity is expected to grow robustly over the next several decades," according to a 101-page technical summary of a draft report by the U.N. climate panel, the most authoritative on threats from global warming.

The summary, to be issued on May 4 in Bangkok at a meeting of scientists and more than 100 governments, says efforts to curb emissions from transport "are faced with many barriers" despite options such as new engine technologies or biofuels.[...]

In some nations such as the United States, Italy and Australia car ownership is already 5 to 8 per 10 inhabitants -- 10 or 100 times more than in developing states.

The report stop short of condemning multi-car families or for that matter, suggesting limiting automobile and truck sales. Transport vehicles account for 26% of greenhouse emissions, according to the draft report (expect this report to undergo some more watering down before its May 4 release).

Admittedly, in nations like the United States and Australia, sheer geographic distribution of people, places and cities make multiple car households inevitable: when it's five miles to the nearest grocery store, you aren't going to walk or even ride a bicycle. However, steps to encourage at least more sane automotive practices could and should be in place. We've had enough warning, from the 70s OPEC oil crises to the global warming warnings we've had: smaller, lighter, and better designed vehicles, as opposed to mammoth SUVs in railroad parking lots ought to be de riguer, and a hefty penalty paid by those who insist on abominations.

I've advocated for decades now that SUVs and pick-up trucks ought to be taxed and insured as, well, trucks. That's what they are meant to be, and that's what they ought to be treated as. Further, I think people ought to be forced to upgrade their licenses to account for the fact that they drive a truck. As someone who has frequently driven parkways (designed for cars) and highways with massive hills, I can attest from personal observation that jamming on the gas pedal may make your truck move faster but it creates significant wear and tear on your engine and transmission and that manuevering a truck on a parkway is akin to making a cow water ski.

But any truck driver could tell you that.

By implementing my plan, I anticipate the demise of the SUV and pick-up, except where absolutely necessary, such as for farmers and others who need the extra carrying capacity. Of a truck. Those folks, however, would pay the extra premium and taxes because they'd need to. Cost of doing business.

And this is only going to get worse, as China and India start to reap the benefits of a growing economy. Of course, Chinese emission standards are higher than the US', even California's, which helps a little.

What is this need we have for mass consumption? Is it media fed? Is it psychological? Is it tautological, in that it appears out of nowhere yet gets self-reinforced in an echo chamber?

Is there, in fact, a sub-atomic particle of the mind that says "me want more"? Phrenology believes that "acquisitiveness" lies on the lower half of the temple, just in front of the ear, which may be why I get headaches watching commercials.

Is greed so vital to our psyches that it can't be soothed merely by possessing more, but more AND bigger? We know greed is an integral part of capitalism, but everyt economic system suffers from greed, so it must be part of human nature: people who live in communist and socialist regimes don't suddenly wake up one morning and start only taking what they need while giving all they can to society.

Gordon Gekko, in the movie Wall Street, speaks the immortal words written by Oliver Stone and Stanley Weiser:

The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.

Which is both true and not true. Greed, it's true, is an efficient taskmaster, but sometimes, along with the fat, it cuts bone and muscle.

And more important, it cuts corners. Life IS greedy, its true. Life is invasive, aggressive and competition for survival is what drives the entire living planet. But greed has coupled with its ideal partner in man. Man is capable of destroying the planet and nearly all life on it.

Maybe this is life's plan, through greed. Perhaps Noah's Ark is an omniscient metaphor for mankind itself, where the bulk of mankind represents the Flood, and Noah represents whatever mechanism (God?) that saves whatever life it can from man's predation and greed.

And maybe, indeed, Greed is God himself. As Zager and Evans put it in Exordium and Terminus:

In the year 7510
If God's a-coming, He oughta make it by then
Maybe He'll look around Himself and say
"Guess it's time for the judgement day"

In the year 8510
God is gonna shake His mighty head
He'll either say "I'm pleased where man has been"
Or tear it down, and start again

In the year 9595
I'm kinda wonderin' if man is gonna be alive
He's taken everything this old earth can give
And he ain't put back nothing

global warming
global climate change
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