Sunday, September 28, 2008

SEC Inspector General: Deregulation and lack of oversight led to crisis

A very important bit of insight from the New York Times published Friday - which I missed when it first came out - can be read here. Stephen Labaton writes that according to a report recently released by the SEC's Inspector General, the agency tasked with oversight of Bear Sterns and other financial services institutions completely dropped the ball in relying upon a "voluntary" supervision program for the industry wherein these companies essentially monitored themselves.

The key paragraphs from the article:
The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

The complete Inspector General's report can be viewed here and here. And check out this post on Christopher Cox's pro-industry (and anti-investor) policies from last year here.



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Thursday, September 25, 2008

Galbraith's Alternative

Besides arguing against the Treasury Department's critically flawed Wall Street bailout plan, economist James Galbraith actually puts forward some workable, common-sense solutions in this Washington Post editorial for the main problems caused by the credit crisis.



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Saturday, September 20, 2008

Treasury's bailout proposal considered

(Updated below, 9/21)
The Paulson bailout plan is Illogical in that it doesn't address the reasons behind this spectacular market failure, or offer taxpayers protection from a similar crisis unfolding in the near future.

First in our coverage, Robert Borosage is dead on in latest editorial his latest Op-Ed for the Huffington Post. He makes several very compelling arguments here, most notably that the flawed logic of using taxpayer money to bail out quasi-public entities without simultaneously putting in place the right kind of incentives to prevent an inevitable relapse puts taxpayers at greater risk.

Referring explicitly to the Treasury Department's massive rescue of Freddie Mac and Fannie May, he makes this point:
These enterprises are operating on our tab now -- completely. Why not just nationalize them, as even that font of economic convention, Sabastian Mallaby suggested yesterday in the Washington Post. Sure, we'd have to add the $5 trillion in debt to the federal balance sheet, but we could add the assets also. And after Paulson's announcement, global investors are already toting up their debts onto the federal balance sheet.

Why pay dividends to shareholders when they are essentially playing with our money? Why pay managers of public enterprises the bloated pay packages of Wall Street speculators? Why allow them to finance lobbyists to shield them from accountability? The fiction of their separate existence has been exploded; let's save the dough and run them efficiently.

(For that ever-reliable stalwart of the free-market Sebastian Mallaby's cited editorial in the Washington Post, see here.)

To roughly paraphrase Borosage, here is essentially what has happened. The Fed, under Helicopter Ben Bernanke, has figured out how to solve the Freddie and Fanny mess. After these two agencies cooked their balance sheets and were laid low by the collapse of the subprime mortgage market last year, it had to be the taxpayers to take responsibility.

Yes, thanks to the Fed, taxpayers like you and me are currently the guarantors not only of the financial institutions that it regulates, but even those entities it doesn't. Says Borosage: "After the bailout of Bear Sterns, they basically are gambling with our money. The Federal Reserve has now traded more than $500 billion in federal bonds for the toxic paper of private banks and investment houses, some $200 billion of it in mortgage backed securities, worth dimes on the dollar. This massive subsidy -- justified as necessary to keep the banking system afloat -- is not accompanied by limits on what gambles the speculators can make, how much debt they can take on, what rewards they can pocket. They are playing with house money -- not exactly an incentive for prudence."

I do think that there is one argument Borosage attempts to make in his article that is markedly weaker than his aforementioned critique. He seems to lay the blame, at least for this situation, squarely on the GOP and what he (accurately) perceives as its culture of shifting financial risk from multibillion dollar financial institutions and heavily rigged "free markets." I think this argument requires a whole other blog post from me, but the deep, structural flaws that have resided for decades within the Neoliberal view of capitalism and global markets is very much a bipartisan one. As just one quick illustration, witness the long-lasting damage done to this country's economy by Clinton Treasury Secretary Robert Rubin.

Likewise, It should go without saying that I find merit in the inevitable response to this critique of Paulson's plan that it's better to do something than nothing - which would result in a catastrophe for the global economy. While this is most certainly correct, it evades the more important point, which is that in between doing nothing and rushing forward with the administration's demanded bailout for the powerful lobbying force of the financial services industry without reflecting on the latter's serious defects (in matters of policy policy and motivation), there are better ideas, including some of the one's offered below.

Next, the New York Times' Gretchen Morgenson reports on the latest outrageous development from Congress, which is now debating whether to create what Treasury chief Paulson is calling the "Troubled Asset Relief Program." This concept, which is clearly a no-winner for taxpayers but a huge boon for the financial services industry, is so creates such conflict of interest from the industry supposedly being regulated that it's breathtaking. She notes, for example than in bailing out insurance giant AIG, the Fed has left taxpayers on the hook to pay off the same wealthy financial players - we don't know which, naturally - that made the risky countertrades (i.e. credit default swaps) that threatened AIG with bankruptcy!

The $85 billion taxpayer loan to AIG was really, she explains, a bailout of the company’s counterparties or trading partners who had purchased mortgage-backed derivative contracts that saw their market value collapse.

And Morgenson recommends the following to economic policymakers and the Federal government that has been ignoring financial regulation for the past eight years: "Stop pretending that the $62 trillion market for credit default swaps does not need regulatory oversight."

Update: And credit where it's due, Warren Buffett accurately predicted this collapse years ago, and he also correctly fingered one of the chief culprits here: the exploding market of complex financial derivatives. I think this will require its own post as well, but basically over the past decade financiers and credit agencies bundled worthless securities together (called securitization), backed by undesirable and unmarketable assets, slapped on a meaningless credit rating and successfully sold them to pension funds and other institutional investors. The market value for these types of securities has without hyperbole exploded in the last few years, a troubling development given the increasingly interdependent and globalized world economy as well as the purposefully unregulated and unexamined nature of the asset class in question.

I know a thing or two about this field of "alternative investments" because as a financial journalist, I worked to uncover how Moody's and Standard & Poor's (the two major credit rating agencies) dropped the ball in informing their sophisticated investor clientele know how much derivative-embedded bonds launched by US airlines (back via sketchy securitization of either airplanes or airplane leases), insured by monolines like Ambac and MBIA and bought up by other investors. These deals are usually referred to as "structured bonds," or in aircraft finance, EETCs.

Then, in a situation frighteningly similar to what we are now dealing with, in the aftermath of the 2001 recession and the 9/11 terrorist attacks (which used commercial airlines as their tools of destruction) the demand for air travel dropped like a rock. Consequently, these asset-backed securities, which were valued by investors precisely based on the value of the issuing carrier's airline fleet - as opposed to the airline's (usually below investment-grade) corporate credit rating, lost a lot of their value and left the investors to fight over the crumbs in bankruptcy court.

Update #2: Upon further investigation, I see that the Brookings Institution's resident expert Douglas Elmendorf also agrees with Borosage and Mallaby; arguing that government would be much better advised to just nationalize these troubled institutions themselves, as opposed to just sliding their bad assets over to workers' personal balance sheet.

Here's the important distinction to keep in mind: The latter will definitely make future generations even more financially burdened, adding to our already existing budget and trade deficits, after the US is forced to borrow money from our typical sources of credit such as China - just to be able to repay a fraction of this additional debt of trillions of dollars!



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Friday, September 19, 2008

Dodd statement on Russia-Georgia

The prepared remarks can be read here. I don't know, his analysis seems to be rather one-sided, and you'll note there is nary a mention of the US's role in sparking these tensions in the Caucasus region, specifically its push to gain Georgia entry into NATO. I suppose this is going to be the official Democratic Party position on these matters, completely leaving out any mention of US foreign policy's role in it all.
Here they are, reprinted from Dodd's Senate website:
Last month’s war between Russia and Georgia began in the small region of South Ossetia, but it cast a shadow that crosses continents. In the aftermath of the conflict, the United States and our allies face serious new challenges.

As we survey the situation in Georgia today, we face three strategic questions:
First, what can we do to shore up Georgia’s democracy, economy, and institutions?
Second, how do we convince Russia’s leaders that their actions in Georgia are antithetical to their own stated goal of becoming a successful, respected member of the international community?
And third, what can and should the Euro-Atlantic community do to prevent the consequences of this war, which has already taken a heavy toll on Russia and Georgia, from undermining the ambitions of the entire region?

In many respects, the first question is the most urgent. In the course of the conflict, tens of thousands of Georgians were driven from their homes. In some areas, entire villages were burned to the ground by South Ossetian forces armed and supported by Russia, and their residents have been told that they will never be allowed back. As winter approaches, this situation could become a serious humanitarian crisis. Georgia’s problems have been compounded by Russia’s gratuitous destruction of critical economic infrastructure far outside the autonomous regions of South Ossetia and Abkhazia. Georgia’s main rail line, cement factory, and even its national forests were all targeted by Russia’s military.

There are two ways to undermine, if not topple, a democratic government: either militarily or by crushing and strangling the economy to make life so miserable that the government’s mandate comes into question. Many expert observers believe that, having failed in the first approach, Russia now seems to have shifted to the second.

Russians undoubtedly know that the reason young democracies survive is that each year, peoples’ lives get a little better. That happened in Georgia. Before the Rose Revolution in 2003, Georgia’s whole economy was barely $5 billion a year. By last year, it had grown to $10 billion. Next year, it was going to be almost $14 billion. Hundreds of thousands of Georgians have joined the country’s new middle class. If Russia can halt that progress, it will cripple Georgia’s young democracy.

Georgians don’t want a handout. They know how to grow their economy out of this conflict situation – they’ve done it before. We have pledged to them – rightly so – that the United States and the international community are not going to turn our back and walk away from the situation. The Administration’s speedy commitment of assistance and other important signals of support from the international community will go far to persuading international investors who have supported the country’s growth to come back and help them rebuild on their own.

We also need to help ensure that Georgia’s institutions remain true to the principles on which they were founded. Georgia remains a very young democracy, and is certainly not immune from the political problems that challenge other countries at its stage of development. It will be critical for Georgians to maintain unity in the face of serious adversity, but – at the same time – this crisis cannot become an excuse for any actions by the government that compromise Georgia’s standing as a proud democracy.

Second, we will need to continue reassessing our approach for dealing with Russia. We simply cannot allow Russia to act like the Soviet Union. We cannot allow them to go around intimidating or toppling democracies. In many respects, this question is bigger than Georgia and bigger than Russia. It’s a matter of what kind of world we’re going to live in. And whether small democracies will thrive in that world, or whether they’re going to get bullied by the biggest kids on the block. (emphasis added - ed)

Russia has a critically important relationship with the United States and the West – but it’s a relationship that is now badly off track. Obviously, we want to work with Russia on a wide range of issues. The United States has supported Russia’s attempts to join international organizations and tried to partner with Moscow on a wide range of issues. Russia’s increasing integration into the international community has had significant benefits for the Kremlin and the Russian people. The country’s economy has grown rapidly in recent years, and Russians are understandably proud of their progress.

With integration and success come responsibilities. Once a country becomes a part of international political and financial networks, reputations matter. And if you develop a reputation for flaunting the rules, you pay a price. It should be clear to leaders in Moscow that there are some real costs associated with failures to play by the rules of the international system.

Russia’s benchmark RTS stock market index has lost more than half its value – three quarters of a trillion dollars – since its peak in May. Yesterday, and again today, the situation has been so bad that the index halted trading. Capital flight from the country has spiraled, and risk premiums for investment in Russia are nearing stratospheric levels. Russia’s economic success has been the signature achievement of the country’s leadership, even if it has been largely predicated on high energy prices. If Russia does not reestablish a reputation as a country that abides by rules – both at home and abroad – it may sacrifice both its international standing and its economic success.

Finally, this crisis also has significant regional implications. Georgia is an east-west land bridge between the Caspian Sea and the Black Sea. When the Russian attack severed communications, Armenia was cut off from its one trade route to the West. Azerbaijan saw its economic lifeline -- its oil export route to the West – closed down. And the countries in Central Asia realized that their only alternative to exporting oil through Russia was in danger.

Georgia’s location in the Caucasus makes it a critical bridge for goods, energy, and ideas. But it also makes it an attractive target for those who would like to stop commerce and contact between East and West.

Beyond Central Asia and the Caucasus, what happened in Georgia will have echoes in Ukraine, Moldova, the Baltics, and Eastern Europe. If leaders in those countries are intimidated to the point that they begin acting in opposition to their democratic interests, it will be a major blow to the process Euro-Atlantic integration that has transformed much of the region so successfully.

Geopolitically, we are witnessing a major moment in history. Future generations will remember the war in Georgia as a turning point – the only question is what type of turning point. Will it mark the moment that Russia recognized the political and economic costs of military conflict with its neighbors was prohibitively high, and permanently abandoned the practice? Or, will it usher in a new era of insecurity in which no country in the region – Russia included – feels confident in its ability to prosper in the absence of outside pressure? How the United States and our allies respond will have a significant impact in determining which of those scenarios comes to be.

New (temporary) ban on short-selling selected corporations

Wait a minute, I think I actually agree with something Larry Kudlow wrote (in reference to this new development). Then again, liberal economist Dean Baker (Center for Economic and Policy Research) also agrees that a SEC regulatory change banning short selling is nonsensical and counter-productive, too.

I guess sometimes and idea (or an actual policy!) is so terribly irrational that both ultra-Right Wing-Free-Market-Fundamentalists like Kudlow and hipply-left wing economists like Baker end up united in proclaiming their disgust!

However, technically Baker is opposed to the ban less as a matter of political ideology, and more because the utter hypocrisy and pointlessness of such an anti-free market measure. So Kudlow is, in fact, just a few months behind Baker in reaching his conclusions.

Sunday, September 14, 2008

Lots of money seems to be hiding

An (extremely) wonkish economic question from John Quiggin about apparently mismatched data related to US household income.
Over the past 40 years or so, real median US household income has risen by about 30 per cent. But real US GDP per person has more than doubled. How can this be?

I’ve done enough work to rule out a couple of easy answers. Average household size has fallen from around 3 to 2.6, but that’s not enough to account for more than a small part of the gap. And inequality as measured by the ratio of mean to median household income has gone up, but again, not enough to account for the gap. In fact, even top quintile income hasn’t quite kept up with GDP per person

So it seems as if the ratio of total household income to GDP must have fallen. Where has the extra income gone.

My candidate answers:
(1) A big chunk of income goes to the top 1 per cent of households and isn’t captured by the survey. The seminar gave some support to this idea, at least insofar as this group seems to have a big enough share of the total that the choice of the point where the Census Bureau stops measuring income makes a big difference

(2) A lot of income is flowing to the corporate sector and never being recorded as household income, perhaps because it is distributed in the form of capital gains, which aren’t counted. Again, a very large chunk of these would go to the top 1 per cent.

And through the wonderful magic of "crowdsourcing", Quiggin has finally found his answer here.

Saturday, September 13, 2008

Jim Rogers rails on the US's corporate welfare state

The Big Picture, a great behavioral finance blog by trader Barry Ritholtz, drops a jaw-dropping and brutally honest quote very recently made by super-pundit Jim Rogers. It just so happens that Rogers co-founded the insanely profitable Quantum Fund with fellow-loudmouth George Soros back in the 1970s.

Rogers' quote: "America is more communist than China is right now. You can see that this is welfare of the rich, it is socialism for the rich… it's just bailing out financial institutions."

As the included video clips of Rogers being interviewed by CNBC make clear, the quote was made in reference to the US government's "intervention" to rescue large financial institutions like Freddy Mac and Fannie May. Rogers also makes very clear that this multibillion dollar, taxpayer-funded bail out for mammoth financial institutions is a disgusting display of hypocrisy from the conservative GOP supporters of this policy: These same lawmakers are essentially admitting that governmental social and economic programs which rely upon taxpayers' money to assist working poor families is very, very bad. But taxpayer-funded largess on behalf of big banks threatening "imminent bankruptcy" is just fine, thank you!

Update: I almost forgot to note this interesting and extremely relevant little nugget about Rogers' views on the global economy, courtesy of Wikipedia:
In September 2007, Rogers sold his mansion in New York City for about 15 million USD and moved to Singapore. This is due mainly in his belief that this is a ground-breaking time for investment potential in Asian markets. Rogers' daughter is being tutored in Mandarin to prepare her for the future, he says. "

Moving to Singapore and Dubai now is like moving to New York City in 1908," he said. Also, he is quoted to say: "If you were smart in 1807 you moved to London, if you were smart in 1907 you moved to New York City, and if you are smart in 2007 you move to Asia." In an CNBC interview with Maria Bartiromo broadcast on May 5, 2008, Rogers said that people in Asia are extremely motivated and driven, and he wants to be in that type of environment to be himself motivated and driven. He said during that interview that, this is how America and Europe used to be.

Friday, September 12, 2008

Rentier states and democracy promotion in the Middle East

Brian Ulrich, who is currently guest blogging over at American Footprints (one of my favorites) and refers to a piece written earlier this month for the Carnegie Endowment for International Peace by Riad al-Khouri, a Senior Fellow at the William Davidson Institute at the University of Michigan, Ann Arbor. al-Khouri described in his initial article the relevance of so-called "Rentier States" in spurring democracy promotion in the Gulf Region.

In his response, Ulrich's gives what appears to be a well-informed perspective on the topic thusly:
I've never been a big fan of political science's tendency to privilege the model over the case. In this case, it seems likely that the historic lack of political liberalization isn't tied to the fact that Gulf governments don't extract tax revenue from their citizens, but that said citizens haven't historically made agitation for political reform a priority. I also think that at least Kuwait, Qatar, and the United Arab Emirates should be seen as something like politically authoritarian economic communes on which the form of the nation-state is a new, still uncertain fit. A distribution of resources people see as equitable still matters, which leads to some interest in reform. In addition, people do have other interests which, from time to time, they decide would be best met through democratization as opposed to, say, patronage ties.

And if you are so inclined, be sure to check out this Op-Ed detailing why rentier states are partially to blame for the historical and conspicuous absence of democratic institutions (or even political rhetoric) taking root in the Middle East region, as well as the effect of foreign aid policy:
What most Americans have yet to fully grasp is that the administration’s grand strategy of democratizing the rest of the Middle East is also a fantasy. However much we might want to share the blessings of liberty with everyone in the region, it is the last place we ought to anticipate seeing widespread democratization. The problem is that nearly all of the countries in the region are rentier states. Their governments depend not on taxes from the governed but on economic rents--revenues earned from sources other than productive labor, technical ingenuity, and capital investment—and as a consequence have no reason to tolerate dissent from a free press or seek the consent of the governed through democratic elections.

Oil revenues support the governments of Algeria, Libya, Saudi Arabia, Kuwait, Gulf States and Iran. Foreign aid supports the governments of Afghanistan, Egypt, Iraq and Pakistan. Money earned from soaking religious pilgrims in Saudi Arabia and Iraq and from opium growing in Afghanistan complete the picture of national economies which create little or no new wealth. This is not a region where governments are busy encouraging new investment in manufacturing or cutting edge consumer technology.

The fundamental political problem with dependence on economic rents is that it reduces all politics to a zero sum game in which tolerating dissent, negotiating compromise and choosing leaders through free and fair elections are deeply irrational behaviors for political elites. Competition for political power in a rentier state is simply too raw to be constrained by liberal institutions. That’s why some Iraqi political elites are only going through the motions of participating in the flimsy, American built democratic institutions while the rest are already openly fighting a civil war.

Thursday, September 11, 2008

On economic liberation and prevention of military conflicts

During an interview (a complete transcript can be found here) conducted by Marketplace Radio, economist, professor of international politics and blogger extraordinaire Dan Drezner makes a strong argument that although economic modernization is oftentimes (correctly) considered to provide a good buffer against war for most countries, the recent conflict between Russia and Georgia illustrates the limitations of relying upon such an extreme generalization.

In other words: Drezner succeeds in taking a recent, high-profile conflict between two nations (one of which just so happened to have been one of the globe's superpowers) and using this example to illustrate to naive observers that the infamous Golden Arches Theory of Conflict Prevention, originally coined by Tom Friedman in his book "The Lexus and the Olive Tree" is total bullshit and a dangerous theory in which to subscribe to.

The political economy of clean water

David Zetland, a postdoctoral fellow in Natural Resource Economics and Political Economy over at University of California, Berkeley. has been busy as a guest contributor at the New York Times' quirky-yet-well trafficked Freakonomics blog, and his two post from the past week are actually quite enjoyable to read. I think what he is writing here represents the best popular economics can offer non-expert, casual readers.

His first post from September 9th is named "The Economics of Clean Water," and explains some of the Bush-supported Millennium Development Goals and the policies' inherent limitations in solving the critical global challenge of ensuring an adequate supply of clean water. The "international development community" comes in for what I would argue is its appropriate share of criticism - especially the enormously popular "Big Idea" promoters like Bono and Columbia University economist Jeffrey Sachs.

Instead, he pursues a line of reasoning that is in fact quite similar to contrarian New York University development economist Bill Easterly: The amount of money thrown at solving a global problem is much less relevant than the quality of the institutions managing the projects. The global community's failure to even make a dent in the scourge of global poverty - regardless of how much foreign aid is thrown at the problem by governments and NGOs, is unfortunately an illustrative case-in-point.

His second post which was published today is succinctly titled "Oil and Water," and it presents readers with a refreshingly comprehensible explanation as to why the the US and the global community has had far greater success in handling the scarcity of oil than it has achieved in coping with the tragic consequences of the perennial supply-demand imbalance of clean, drinkable water.

Of course, all of this is just a teaser: You actually have to read the two (fairly short) posts to get the answers to these provocative questions.

(And for even more fun, check out this 16-page working paper entitled "The Political Economy Of The Human Right To Water" in .pdf format here.)

I should also mention that Zetland's has his own blog, which specializes in the economics and public policy of water as a resource (and a commodity?), that he cleverly named Aguanomics and his writing there are not nearly as esoteric or geeky as one might initially assume.

The case for "re-nationalizing" Fannie Mae and Freddy Mac

Contrarian economist extraordinaire Robert Kuttner is clearly at the top of his game right now; his writings and accomplishments in recent years as the head of non-profit think tank makes him a member in the small clique of progressive economics who helped create and manage two of the most important institutions the progressive movement has relied upon as a clearinghouse for new voices, independent news and the proffering of fresh opinions and perspective.

Continuing to stick closely to his academic fascination in how powerful political forces (and, of course, politicians) have in the past managed to be so successful in determining our nation's domestic, economic and (industrial) regulatory policy agendas.

This brings us to a blunt, unsentimental and yet timely and well-argued article Kuttner wrote for the Huffington Post two days ago entitled "Nationalize Fannie Mae? It Worked Until It Was Privatized"
When asked by journalists about the takeaway lessons imparted by his article, Kuttner discussed what he believed to be the crux of the policy issue:
In the past several days, before the U.S. Treasury Department acted to seize Fannie Mae and Freddie Mac, several people asked me if I thought it was a good idea for the government to "nationalize" the two mortgage giants. In virtually none of the coverage of the Bush administration's latest emergency action did anyone bother to tell the backstory. Fannie Mae, [previously known as] the Federal National Mortgage Association (FNMA), began life as a government invention. It was born "nationalized" -- and it worked beautifully until it was privatized.


Of historical note is that in reality, the FNMA was part of the New Deal's trinity of housing agencies -- the other two being the Home Owners Loan Corporation and the FHA agencies that Roosevelt formed in order to literally create the modern mortgage system. Before the New Deal, there were no long-term, self-amortizing mortgages. The loan was due and payable at the end of the term -- usually five years -- and if you couldn't persuade a bank or savings-and-loan to roll it over, you lost the house. After foreclosures exploded during the Depression, Roosevelt invented a whole new system. FNMA's job was to buy approved mortgages from banks, to replenish their working capital, so that they could make more mortgages. As the biggest buyer, FNMA also maintained standards.

The system worked like a fine watch. Home-ownership rates soared. Loan standards were generous but not stupid. Nobody in the home mortgage business got filthy rich, and mortgage lenders hardly ever went broke. The government's bank insurance funds regularly turned a profit. And here's a quaint, archaic concept: It operated in the public interest.

Then in 1968, as part of a general budget reform, government technocrats decided to get FNMA off the government's books. This was intended as a purely technical revision. It was tacitly understood that Fannie was to keep doing the same thing it always did -- buy mortgages from banks, turn them into securities, keep some and sell others, but maintain its standards and service to the public good.

It took about two decades for the wise guys to realize that there was big money to be made. And I am sorry to report that this was a bipartisan trough. In the Clinton era, many of the wise guys at FNMA were Democrats.

Criticism was limited to the Right and Left. Both the Wall Street Journal as well as (neo)libertarian think tanks regularly warned that Fannie was getting too big and too speculative for a self-regulating quasi-governmental financial institution with an implicit government guarantee. A few progressives like your faithful writer objected that FNMA's true purposes were being perverted and the system was being put at risk so that insiders could get very rich.

After 2000, Fannie also served to abet the subprime mess. For the most part, Fannie refused to buy the very worst subprime loans, but it was happy to buy so called "Alt-A" loans, which were a slightly milder version of the same abuse -- very risky loans with exorbitant interest costs (and profits) and almost nonexistent standards. Those loans are now going into default at almost the same rate as subprime loans.

Under private management, Fannie did a 180. It was perverted from a government-sponsored and well managed agency that served the public interest into a privatized casino whose big bets enriched a few insiders and then helped crash the entire system.

So now, the Bush administration is playing half-of-FDR. It is saving capitalism from itself as Roosevelt did -- but without getting serious about regulatory standards going forward. The taxpayers will bail out Fannie, but the rules for regulation of the mortgage system have yet to be written. That will await the next administration. And if the next administration is led by John McCain, the top financial guy is likely to be former Sen. Phil Gramm, the senate's biggest cheerleader for reckless deregulation.

The truth about the surge

With even the Democratic Party's Presidential nominee Barack Obama "admitting" the falsity that somehow the Petraeus surge campaign in Iraq was responsible for turning the tide in our war over there, made the 2003 invasion justifiable, etc., it may be instructive to go back over the evidence. In fact, perhaps it's worth recounting how the media has portrayed the surge's efficacy and by extension, helped shape public perception.

It might be a good idea for me to buy, read and review Bob Woodward's latest book "The War Within."

A quick review of Bush's eight year economic policies and performance; and will McCain endorse his predecesor's track record?

Dean Baker writes in his latest column "The Whiners' Recession"

Jerry Walker of Denver, Colorado, searches the job posting board at a local employment center. (Photo: Matthew Staver / Bloomberg News)
Senator McCain and his friends no doubt still believe that the economy's fundamentals are strong, but Friday's jobs numbers clearly show how bad things have gotten. The 6.1 percent unemployment rate reported for August is almost as high as the worst levels from the last recession. A broader measure of labor market weakness, that includes people who can only find part-time work or who have given up looking for jobs, is higher than at any point in the last recession.

When the labor market weakens, workers have less bargaining power with their employers. As a result, wages are trailing more than 2 percentage points behind inflation over the last year.

Wages are virtually the entire income for most workers. If the purchasing power of their wages falls by 2 percent, this is the equivalent of a 2 percentage point increase in their tax rate.

This is worth thinking about. Most workers in the country have just seen the equivalent of a 2 percentage point increase in their tax rate, and it has gotten almost no attention. By contrast, Senator McCain is claiming that the economy will collapse if we increase the tax rate by 3.6 percentage points for people who can't remember how many homes they own.

It is easy to understand how a typical family experiences real hardship when their wages don't keep up with the price of food, gas, and heating oil. It's a bit harder to understand how the folks who can't keep track of their homes will suffer by restoring tax rates to the Clinton-era levels.

This brings us to the other important point about the Friday jobs numbers. The economy is in bad shape and getting worse. This disaster is happening while we are experimenting with the tax policies advocated by Senator McCain. We have an economy that is now shedding jobs at the rate of almost 100,000 a month. There is no prospect of turnaround in sight. We could have half a million fewer jobs by the time the next president is sworn into office than we do today.

This is the Bush-McCain economy. Senator McCain may have forgotten, but President Bush already tried his economic policies and the results are not good. We have just been through a business cycle in which the wage of the typical worker and the typical working family fell. This is the first time that has ever happened.

As bad as the situation is, it will surely get worse as the recession deepens. Wages and incomes will fall further behind inflation as the unemployment rate continues to rise. By contrast, the Clinton-era tax rates were associated with the most prosperous period since the early seventies.

As I have written many times, Clinton's policies do not deserve all the credit for the prosperity of the late 90s, and President Bush's polices do not deserve all the blame for the economy's poor performance in the current decade.

However, it strains credulity to argue that the Clinton-era tax rates are a recipe for stagnation, while the Bush-McCain tax cuts for the rich are the road to prosperity. When he pushes his tax cuts as a remedy for the economy's ills, Senator McCain is effectively imitating Groucho Marx's famous line: "what are you going to believe, me or your lying eyes?"

At this point, McCain should be embarrassed to even say that tax cuts for the rich help the economy. Tax cuts for the rich help the rich, they don't help the economy. It's that simple.

This economic catastrophe was many years in the making. There is no painless way to recover from the collapse of the housing bubble and the correction from an over-valued dollar. We do know that Senator McCain's plan to keep giving the rich more money is not a road to prosperity because that is exactly what we have been doing.

We can't know exactly how Senator Obama will address the economy's problems if he takes office in January in part because we don't know exactly where the economy will be. However, a plan that focuses on supporting ordinary workers and promoting clean technologies, is likely to produce much better results than policies that are focused on redistributing even more income to the wealthy.

Wednesday, September 10, 2008

The tragedy of a war without end

The New York Times scores a home run with this unsigned lead editorial. Its title, "Still No Exit" says it all about the never-ending Iraq war

It is short, so here is the whole thing:
President Bush is nothing if not consistent. In a speech on Tuesday, he made it clear that he has no plan at all for ending the war in Iraq and no serious plan for winning the war in Afghanistan.

Mr. Bush wants to have it both ways — claiming success in tamping down violence in Iraq and yet refusing to make the hard choices that would flow from that.

Speaking at the National Defense University, he said he would withdraw only 8,000 more troops from Iraq by the time he leaves office. That would leave 138,000 troops behind — more than were deployed in Iraq before his January 2007 “surge.”

All of this seems to be driven more by what is happening in American battleground states than any battleground in Iraq.

While Mr. Bush and his party’s nominee, John McCain, both want to stay the course until some undefined “victory” is achieved, American voters have run out of patience. Mr. Bush and his advisers are clearly hoping that this token withdrawal will be enough to keep Iraq out of the news and out of the election debate. (Ironically, Mr. McCain who doesn’t want to withdraw any troops at all, had no choice but to declare his support for the president’s plan.)

Iraq’s leaders have also run out of patience, and they are pushing to have American troops out by 2011. That means the next president — whether it is Mr. McCain or Barack Obama — will have to quickly come up with a plan for a safe and responsible exit.

Like Mr. Bush, Iraq’s leaders want to have it both ways. They want to talk about an American withdrawal, but they are still refusing to make the tough political compromises that are their only hope for keeping things under control once the Americans are gone.

All of these months later, and Iraq’s Parliament has still not adopted an oil revenue-sharing law or a law establishing the rules for provincial elections.

So long as an American president refuses to start seriously planning for a withdrawal, Iraq’s leader will continue on this way.


Mr. Bush was right on one point Tuesday when he said that “Afghanistan’s success is critical to the security of America.”

What he didn’t say is that Washington is in real danger of losing the war against the Taliban and Al Qaeda — the war Mr. Bush shortchanged again and again for his misadventure in Iraq.

American commanders in Afghanistan need a lot more help than the 4,500 additional troops Mr. Bush has now pledged to send there.

Mr. Obama has offered a sensible blueprint for quickly drawing down American troops in Iraq and bolstering the fight in Afghanistan. After a befuddling silence, Mr. McCain on Tuesday finally agreed that more troops are needed in Afghanistan. What Mr. McCain has yet to explain is where those troops will come from.

Mr. Bush’s disastrous war in Iraq has so overtaxed American forces that the math is painfully simple: Until there is a real drawdown from Iraq, there will not be enough troops to win in Afghanistan.

Details revealed about Freddy Mac and Fannie Mae’s taxpayer-funded bailouts

If you should be fortunate enough to have a little free time on your hands this week - and you find yourself anxious to gain a better-informed perspective on global affairs, be sure to read this exclusive report in the New York Times. It discusses the financial future of the two quasi-governmental mortgage agencies Freddy Mac and Fannie Mae. It was written by veteran NYT financial journalist Andrew Ross Sorkin (who also compiles the NYT's online database of merger and acquisition activity DealBook.

From Sorkin's reporting:

According to Treasury Secretary Henry M. Paulson Jr., he informed a Congressional panel in July about his plans to stabilize Fannie Mae and Freddie Mac and, with them, the financial markets as well as “If you’ve got a bazooka, and people know you’ve got it, you may not have to take it out.”

The bazooka in question was his new authority to seize the two mortgage finance giants if things went horribly wrong. The thinking was, if the markets knew that Mr. Paulson was packing heat, the markets would back off and confidence would be restored. He might save Fannie and Freddie without firing a shot — sort of a Wall Street version of the theory of deterrence.

And yet the moment Mr. Paulson uttered that line, it was all over for Fannie and Freddie. Once he mentioned that bazooka — that is, the possibility that the Bush administration might take over the two companies — he virtually guaranteed that that was exactly what would happen. On Sunday, his bazooka went off, and the shot is still reverberating around the world.

The rest was just theater. For the last two months, Fannie and Freddie ran around Wall Street searching for a savior. Private equity? Sovereign wealth funds? Anyone?

But Wall Street was never really sure what Mr. Paulson would do — and that was a problem. “He never laid out a roadmap and how he would use the power. Because of the uncertainty nobody was willing to put in money” into Fannie or Freddie, said Doug A. Dachille, the chief executive of First Principles Capital Management.

The companies also never got the chance to tap people who already owned their stock for additional cash. “We will never know whether existing shareholders would have put in money,” Mr. Dachille said.
Meanwhile, the companies’ bankers — Goldman Sachs, JPMorgan Chase and others — jockeyed for positions of influence, and yes, fees. (Morgan Stanley, which had been working for Freddie — and was at one point demoted, according to company executives — jumped ship and found a more prestigious, pro bono role advising Mr. Paulson and the government.)

But the real question is, did things have to end this way? The answer, many on Wall Street believe, is yes. But maybe not when nor the way it did.

Many people in financial circles can’t quite figure out why Mr. Paulson, the former chairman of Goldman Sachs, pulled the trigger when he did. He insisted politics had nothing to do with it. Never mind that the news broke just after the Democratic and Republican conventions, but as far away as possible from the November election.

But as of last week, Fannie and Freddie, for all their troubles, seemed to be bumbling along O.K. Both were able to roll over their enormous debts in the capital markets. Sure, Wall Street was nervous about those debt auctions, but the sales were running efficiently, in part because Mr. Paulson’s promise — or threat, depending on your view — showed that the government would stand behind the companies in the end.

What’s more, Fannie had made good on its promise to raise $5.5 billion last spring, before Mr. Paulson asked Congress for his bazooka. By most analysts’ accounts, Fannie had enough wiggle room to stay in business for a while longer, if not find a way out of the mess down the road.

“We are surprised that such measures are deemed necessary at this time,” Bradley Ball, a research analyst at Citigroup, wrote in a research report on Sunday night.

Freddie — long considered the more troubled of the two — was capitalized enough to keep going through 2009, many analysts believe. “Even if neither raises another dollar of capital over the next year, we estimate that both companies will likely remain above their statutory minimum requirements,” Bruce W. Harting, an analyst at Lehman Brothers wrote.

Neither company is blameless. Freddie seemingly refused to raise new money while it still could, in part, for fear of diluting its shareholders and selling too low. Freddie was convinced it could recover first; the power of optimism is a dangerous force. Indeed, it was Freddie’s balance sheet that had Mr. Paulson most worried, at least in the immediate term.

Could Mr. Paulson have put Freddie into a conservatorship without bringing Fannie in too? Probably not. It would have just put more pressure on Fannie.

In the end, Mr. Paulson’s decision seems to have been a philosophical one, rather than one forced by imminent crisis. Of course, for stagecraft purposes, it was played as impending disaster.

His decision will either go down as a masterstroke of genius — or as a horrible lapse of judgement that future generations of American taxpayers will get stuck paying off..

[Paulson] appeared to want to take care of the problem himself — perhaps guaranteeing him a lasting legacy — during his time in the Bush administration. This way, had either Fannie or Freddie run into problems in the next administration, nobody could point the finger at him. For that reason, perhaps we should give credit to Mr. Paulson for jumping in ahead of more problems instead of looking back and playing Washington’s blame game after the fact.

There’s something very Wall Street about the decision: firms often write down their bad investments in one year, so they can start the next year fresh.

All of us will bear the cost, of course. The scariest part of Mr. Paulson’s economic acrobatics is that we won’t know for years just how much this will cost us. On CNBC on Monday morning, when asked about how big the bill might be, Mr. Paulson replied, “We didn’t sit there and figure this out with a calculator.” Apparently, he wasn’t joking.

For an example, check out this excerpt from an article by William Greider from The Nation's blog "The Notion":
The 2008 election has many unusual aspects, but none is more bizarre than the sorry spectacle of the bailout for Fannie Mae and Freddie Mac.

American voters are like the lambs being led to slaughter and at the very height of the presidential campaign. Yet not a peep of protest from John McCain and Barack Obama, not even a hint of the righteous anger injured taxpayers will rightly feel as they figure out the deal for themselves. The rescue of the two giant mortgage firms is another huge expenditure of the public's money--one or two hundred billion dollars this time--to reassure bankers and financiers the government stands by them in their troubles, whatever the costs.

Think about it. Candidates Obama and McCain are wagging their fingers at the governing system in Washington, both warning they intend to make big changes if elected. Meanwhile, business-as-usual doesn't wait for the next president. The financial system needs the capital right now, and so Treasury Secretary Henry Paulson has opened up the spigot. Obama and McCain meekly bless the deal. This sequence of events makes them look look the political goats, their grand talk of change pushed aside by what Wall Street demands.

The 2008 election may be close, but it looks like the status quo has already won.

There is a lot more pain and embarrassment to come. The nation is in the midst of an historic financial crisis--more bank failures are ahead and probably another bailout of even larger scale. Yet the two major parties act as though this subject is too complicated for ordinary Americans to understand. Neither candidate has found the nerve (or decency) to explain the full dimensions of what the country is facing. Both men are no doubt told to say as little as possible, for fear of touching off more panic among investors. Voters can safely be left in the dark.

Facing the crisis honestly would not fit very well with the flag-waving campaign themes. The United States is financially busted and utterly dependent on lending from foreign powers--both friends and rivals around the world. The government rescue of Fannie Mae and Freddie Mac could not be put off until after the election, as insiders had hoped, because foreign creditors were beginning to back away from lending any more capital to the two failing US firms. The major creditors are led by China, Japan and other Asian nations, plus oil-rich Arab states and even Russia. The Bank of China has reduced its $376 billion in lending to Fannie and Freddie by 25 percent since July and other nations threaten to do the same.

So the Treasury arranged a deal that throws Fannie and Freddie shareholders over the side, but promises to protect the creditors, foreign and domestic. Bill Gross, chief investment officer of PIMCO, the mammoth bond house in California, issued an ominous warning in advance. If Washington didn't "open up the balance sheet of the US Treasury" and pump lots of public money into the ailing financial firms, the major lenders would sit by and let the great deflation of Wall Street proceed to its ruinous climax. Without the big lenders, credit would dry up through the US economy and the destruction could prove bloody historic for all. The Treasury Secretary heard the message.

How much more capital does Wall Street need to get well? Maybe as much as $500 billion, some experts estimate. What's frightening is that even that great amount might not provide a cure for anytime soon for the real economy, where unemployment rises along with mortgage foreclosures. Thus, Washington puts up unlimited billions for financial repair, but has been rather penny-pinching about paying for economic stimulus aimed at work and production. Obama now proposes a new stimulus package, but the pitiful sum of $50 billion. McCain talks up more corporate tax cuts.

If Americans had a functioning democracy, both of these guys would be competing furiously to get real.

A postmortem of the US's "Global War on Terror"

Here's what professor Andrew Bacevich has to say about the last seven years of the US's Global War on Terror.
The events of the past seven years have yielded a definitive judgment on the strategy that the Bush administration conceived in the wake of 9/11 to wage its so-called Global War on Terror. That strategy has failed, massively and irrevocably. To acknowledge that failure is to confront an urgent national priority: to scrap the Bush approach in favor of a new national security strategy that is realistic and sustainable - a task that, alas, neither of the presidential candidates seems able to recognize or willing to take up.


Bacevich notes that it was just weeks after the terror attacks on September 11th, 2001 that Bush received from his Secretary of Defense Rumsfeld a memo that boldly and succinctly defined the administration's chief objectives in the War on Terror. Drafted by Rumsfeld's chief strategist, neocon Douglas Feith, the memo declared stated quite matter of factly: "If the war does not significantly change the world's political map, the US will not achieve its aim." As we all know now, Feith and his fellow travelers in the administration saw the inevitable aim of America foreign policy as completing a "transformation" of the Middle East region, and the Islamic world as well.

You would be hard-pressed to find a phrase that better expresses the nonsensical doctrines of "War on Terror" and "Pre-Emptive war," or the strategy of "running the tables" in the Middle East than "dangerously idealistic." And it was directly out of this unrealistic, hubristic notion that the US not only could, but actually needed to change the most anti-American region of the world - and billions of Muslims right along with it - that the unprovoked illegal invasion of Iraq was hatched.

Tuesday, September 09, 2008

Examining the relationship between economic inequality and voting preferences

Matthew Yglesias has just recently written what I consider to be a refreshingly provocative post for his blog - currently hosted by the progressive think tank The Center for American Progress, based in DC.

In his blog post, Yglesias links to former Bush political advisor and proud Neoconservative David Frum's most recent article which appeared in the September 7th, 2008 issue of the New York Times. Frum's article is entitled "The Vanishing Republican," and it really merits a good deal of very close attention being provided by the child's father, mother and legal guardian.

Check out this great excerpt from Frum's NYT piece:
Republican economic management since 2001 has not yielded many benefits for middle-income America. Adjusting for inflation, the incomes of college graduates actually dropped by 5 percent between 2000 and 2004 — and 44 percent of the people of Prince William are college graduates. Prince William is also ground zero for the middle-class revolt against the Bush administration’s easy immigration policies. An estimated 10 million migrants have entered the United States since 2000, at least half of them illegally, and few places in the United States have reacted more angrily than Prince William County. Last year, the Prince William Board of Supervisors voted unanimously to require the local police to check the immigration status of all arrested persons.

It’s widely understood that abundant low-skilled immigration hurts lower America by reducing wages. As the National Research Council noted in its comprehensive 1997 report: “If the wage of domestic unskilled workers did not fall, no domestic worker (unskilled or skilled) would gain or lose, and there would be no net domestic gain from immigration.” In other words, immigration is good for America as a whole only because — and only to the extent that — it is bad for the poorest Americans. Conversely, low-skilled immigration enriches upper America, lowering the price of personal services like landscaping and restaurant meals. And by holding down wages, immigration makes the business investments of upper America more profitable.


Middle-class Americans surely share in the cost-lowering benefits of immigration. But the middle class also pays the higher local tax bills that can result from immigration. Immigrants do not qualify for many federal benefits, but they do use the roads, schools, hospitals and prisons supported by state and local property taxes — the taxes that fall most disproportionately on the middle class.

It is also clear that immigration thickens the ranks of the American poor. The poverty rate for post-1970 immigrants and their native-born children is almost 50 percent higher than for the native born. (In 1970, established immigrants were much less likely to be poor than the native born.) No mystery why this should be so: one-third of adult new immigrants have not finished high school. And there is reason to fear that this poverty will become entrenched: barely half of Latino students complete high school on time; 48 percent of births to Latino women occur outside marriage.

Going back to Yglesias' original blog post, his analysis provides some very important new insights, such as:
Quantitatively, “the Democrats’ vote share by state is slightly correlated with income inequality, but much less than the correlation with income itself.” High levels of in-state inequality seem to be correlated with high levels of immigration (I assume that part of the story is immigration causing inequality and part of the story is that the immigrants are going to places where there are very rich people and, therefore, jobs to be had servicing them) which, in turn, is only pretty loosely associated with Democrats doing well.


Several commenters over at Yglesias' original blog post have added some additional valuable comments (and criticisms) of his analysis. For example. one commenter wrote that:
Frum’s thesis applies to cities and counties. It makes no sense on a statewide basis. Remember the county-by-county voting maps from the past two presidential elections — each a sea of red with blue urban enclaves? It’s those blue cities and counties where there is the greatest inequality, like the specific examples he discusses.

At first glance it would seem that high income equality in Democratic states would reflect badly on the Democrats. But yes, high levels of immigration and urbanisation seem to be the deciding factors here, urbanisation being the one Matt doesn’t mention. Big cities tend toward having more unequal populations, and the urban poor by a massive margin vote democratic, outweighing the votes of the rich, republican leaning urban elite. It has nothing to do with Democratic policy at a state level.

And finally, for those readers who want to gain an advanced understanding of the myriad statistical relationships that exist between voting patterns and economic insecurity, Columbia professor of Statistics and Political Science Andrew Gelman's has conducted a great deal of quantitative, eye-opening research on how the increased widening of systemic economic inequality in the US both informs and impacts on the complex decision-making models developed by the voting public to inform their decisions of which politician(s) to cast their vote for. You can read the entire blog here.

Update: Ezra Klein has a few thoughts of his own regarding another, smaller editorial written by Frum that is entitled "Palin's Working Class Appeal"; it was published in The Week Magazine six days ago. Writing in his eponomous blog, which is published by the liberal magazine The American Prospect, Klein's post "Class, Racism and Voting" takes issue with some of Frum's more provocative conclusions:
[W]hat Frum is offering as a class divide is, at times, a racial divide, or at least the enduring legacy of a racial divide. The societal insecurities that Frum thinks Democrats play into may have something to do with education, but they have a lot more to do with a lingering resentment that pointy-headed Democrats think they know what's best for the South, which is the direct descendant of a period when Democrats did think they knew what was best for the South, and that was integration, and the South didn't agree. Over time, it became untenable to express that conflict in racial terms, and it got folded into a more sterile and broad-based attack on Democrats for being elitist, or cosmopolitan, or another word that suggests contempt for traditional American ways, which has the virtue of occasionally being true. But not always.

Why are Republican hawks unable to move beyond the surge?

So asks Chris Hayes of The Nation:
"[I] just read Steve Coll's edifying and nuanced profile of David Petraeus and it occurred to me that there's been kind of a strange flip between the two parties on Iraq. There was a time when Republicans all wanted to talk about "the way forward" in Iraq and a lot of Democrats basically said "we shouldn't be there in the first place!" I was one of them, and I think it was a legitimate sentiment. The answer to "what next?" was and is: leave.

But now, the Democrats, and the party's nominee have a vision for the way forward: begin withdrawal. They talk about it all the time.

And the GOP has....what? That the surge was awesome. That we're now winning. That we can't withdraw because that would be an admission of defeat or an insult to our honor or something. But what next? I sat through four days of the RNC and didn't hear anyone even pretend to answer this question.

Old EIA report on "drill here, drill now"

I generally tend not to blog about environmental issues: Not because I don't recognize just how important they are in the scheme of challenges facing all of humanity, but because I inevitably fall back on reading about the economy and war in Iraq. But this post is just too good to not share and document for posterity's sake.

Basically, according to the US Energy Information Administration's latest report last October, McCain's energy plan, which consists of little more that empty chants of "Drill Baby Drill," won't make a dent in getting America off of its addiction to fossil fuels, and will instead just put off to future generations the difficult work of conserving and retooling our domestic economy.

Monday, September 08, 2008

Evaluating Bush's (inevitable) decision to bail out Freddie Mac & Fannie Mae

I applaud liberal political journalist and blogger Ezra Klein for putting together an important road map for the systemic collapses on Freddy Mac and Fammy Mae over the last few years. His coverage is marked both by erudition as well as an almost uncanny ability to imagine how changes in legislation, bureaucracy and better regulation in general could have helped prevent (or at least mitigate) this mess. He put a number of economic policy gurus on the record to try and explain the origins of this whole filthy mess the US taxpayer will be underwriting for decades.

And as for Dean Baker, the collapse of Fannie and Freddy was also utterly predictable as well: see this post "Fannie and Freddie Go Under: Yes, This Was Predictable."
Okay, this is a bit of gloating. After having debated the economists at Fannie and Freddie more than a dozen times over the past six years, I am going to take the opportunity to say that I was right and they are bankrupt.

Their economists consistently dismissed the possibility that there was a housing bubble and were enraged at the suggestion that these two corporate giants could face financial problems. Of course there was a housing bubble and it was inevitable that it would collapse and impose serious strains on Fannie and Freddie.

As I said back in September of 2002:

"If housing prices fall back in line with the overall rate price level, as they have always done in the past, it will eliminate more than $2 trillion in paper wealth and considerably worsen the recession. The collapse of the housing bubble will also jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions."

Pentagon air strikes on Afghani village kills nearly 100 civilians



As this tragic report from the Associated Press filed this afternoon reveals: The bodies of at least ten children and many more adults appear in grainy videos taped by bystanders with their camera phones were obtained by the AP, "lending weight to Afghan and UN allegations that a US-led raid last month killed more civilians" than the Pentagon reported to the media. The air strikes - which were conducted by US Special Forces - took place in the western Afghanistan village of Azizabad; according to an Afghani government commission and UN report, an estimated 90 civilians - including 60 children and 15 women - were killed.

According to the AP: "The videos do not provide proof that 60 children died in the operation, but the images do appear to contradict a US military investigation that found only seven civilians were killed in Azizabad, along with up to 35 militants. [. . .] It was impossible to verify conclusively that the videos showed the aftermath of the Azizabad attack, but the contents appeared to back claims by Afghan and UN officials that the US operation killed far more civilians than the military has acknowledged."
For more coverage of this attack, be sure to check out this post from the Afghanistan Conflict Monitor; a website that contains a treasure trove of resources for those covering the US's continued military operations in Afghanistan against the newly resurgent Taliban as well as the remnants of al Qaeda.

Thursday, September 04, 2008

The Daily Show on Sarah Palin

Watch as Jon Stewart evicerates the GOP and right-wing campaign strategists like Karl Rove for their defense of Sarah Palin as being qualified to be this nation's next Vice President - using their own words. It is impossible not to notice the radically inconsistent standards that are applied to Obama and Palin in the GOP talking points.



Additionally, more and more evidence is starting to trickle out, indicating that it was not John McCain who chose Palin to be his running mate, but rather a secretive far-right organization tied in to the Christian Zionist movement.

Pentagon launches botched attack on Pakistani village, 20+ civilian casualties estimated

The Financial Times reports on a botched US military raid in the village of Angor Adda in Pakistan - apparently based on faulty intelligence. While the Pentagon stated that it was meant to be a strike against al Qaeda (who else?), the strike by Special Forces ended up killing up to 20 civilians, including women and children.

The strike is being interpreted as an obvious effort by the Bush administration to intensify its counter-terrorism efforts against al Qaeda in Pakistan, the country where most analysts believe bin Laden and al-Zawahiri are still hiding if they are in fact still alive. But the fact that this raid ended up targeting and killing civilians ended up having the predictable effect of angering Pakistani civilians as well as the country's new government:
“This was a complete botch up. The Americans went wild upon receiving what has turned out to be very faulty intelligence” said one Pakistani diplomat. “The Americans put boots on the ground and got egg on their face”.

Opposition leaders used the occasion to condemn the government for its failure to defend Pakistan’s interests.

“The US attack on Pakistani soil is totally condemnable. The government must defend our frontiers. America has disregarded all norms of law” said Javaid Hashmi, a senior leader of the opposition Pakistan Muslim League-Nawaz (PML-N) led by former prime minister Nawaz Sharif.

And further complicating matters, Pakistan is holding its presidential elections on Sunday, adding even more tension to the mix. According to the FT: "[W]estern diplomats said that Wednesday’s cross-border raid was likely to make the popular mood increasingly hostile to the government as well as Washington."

More on the disastrous raid from Time, including this wonderful quote from Pakistan's Foreign Ministry: "The Foreign Ministry called the strike 'a gross violation of Pakistan's territory,' saying it could 'undermine the very basis of cooperation and may fuel the fire of hatred and violence that we are trying to extinguish.'"

Update: I didn't realize this, but according to the report from Time, this was actually "[T]he first incursion onto Pakistani soil by troops from the foreign forces that ousted Afghanistan's hard-line Taliban regime after the Sept. 11 attacks."

Last month's geopolitical chess match between Bush and Putin



Global energy policy expert Michael Klare has penned what is probably the most comprehensive and strongly supported analysis of the historical context and geopolitical implications of last month's military flare-up between Russia, Georgia and the independent states in the Caucasus region.

Klare begins his article by getting straight to his main point - most of the analysis (from the West) of the complex situation and the root causes thereof is based upon an misunderstanding of the geopolitical context, mistaken assumptions and deeply misguided logic:
Many Western analysts have chosen to interpret the recent fighting in the Caucasus as the onset of a new Cold War, with a small pro-Western democracy bravely resisting a brutal reincarnation of Stalin's jack-booted Soviet Union. Others have viewed it a throwback to the age-old ethnic politics of southeastern Europe, with assorted minorities using contemporary border disputes to settle ancient scores.

Neither of these explanations is accurate. To fully grasp the recent upheavals in the Caucasus, it is necessary to view the conflict as but a minor skirmish in a far more significant geopolitical struggle between Moscow and Washington over the energy riches of the Caspian Sea basin -- with former Russian President (now Prime Minister) Vladimir Putin emerging as the reigning Grand Master of geostrategic chess and the Bush team turning out to be middling amateurs, at best.

In other words, it is simply not as straightforward as Russia representing the aggressor while Georgia played the role of innocent victim here, despite the protestations of Dick Cheney and the usual Neoconservative suspects. Klare explains that what this conflict is actually about is "control over the flow of oil and natural gas from the energy-rich Caspian basin to eager markets in Europe and Asia." He notes that according to the most recent estimates mde by BP, the Caspian's leading energy producers, all former "socialist republics" of the Soviet Union -- notably Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan -- together possess approximately 48 billion barrels in proven oil reserves (ror approximately the amount still remaining in the US and Canada) and 268 trillion cubic feet of natural gas (essentially equivalent to what Saudi Arabia possesses).

While Moscow controlled access to these massive energy resources before the collapse of the Soviet Union in 1991, in the aftermath Western oil companies such as Chevron, BP, Shell, and Exxon Mobil began to participate in the "hydrocarbon equivalent of a gold rush to exploit Caspian energy reservoirs, while plans were being made to channel the region's oil and gas to markets across the world."

It turned out that convincing the political leaderships of the newly-established independent Caspian states to sign exploraton and access agreements ended up being relatively straightforward since the governments were all-too-happy to attract investment capital from these multinational energy corporations. The bribes that these firms offered up to the local political elite made the proposition even more attractive, as did the prospect of these independent states being able to further free themselves from Moscow's iron economic grip.

Enter President Bill Clinton in 1992, who made the calculated decision to create an "energy corridor" through the newly-independent Republic of Georgia to make possible the export of Caspian basin oil and gas to the West, completely bypassing Russia in the process. Klare details how an initial, "early-oil" pipeline was subsequently constructed in order to carry petroleum from the newly-developed fields in Azerbaijan's section of the Caspian Sea all the way to the port city of Supsa on the Black Sea coast of Georgia. From there, it was loaded onto tankers for delivery to international markets. He goes on to note that this development would be followed by a far more "audacious" scheme: the construction of the 1,000-mile BTC pipeline from Baku in Azerbaijan to Tbilisi in Georgia and then on to Ceyhan on Turkey's Mediterranean coast:
[Even at the time] Clinton understood that this strategy entailed significant risks, particularly because Washington's favored "energy corridor" passed through or near several major conflict zones -- including the Russian-backed breakaway enclaves of Abkhazia and South Ossetia. With this in mind, Clinton made a secondary decision -- to convert the new Georgian army into a military proxy of the United States, equipped and trained by the Department of Defense. From 1998 to 2000 alone, Georgia was awarded $302 million in U.S. military and economic aid -- more than any other Caspian country -- and top U.S. military officials started making regular trips to its capital, Tbilisi, to demonstrate support for then-president Eduard Shevardnadze.

According to high-level officials at the US's National Security Council, these efforts to promote the construction of new pipelines through Azerbaijan and Georgia were clearly intended "to break Russia's monopoly of control over the transportation of oil from the region."

But when Vladimir Putin took the political stage in Russia in 1999, there was a strong priority given to pushing back against Washington's attempts to monopolize the vast oil and gas supplies of Central Asia right in their backyard. Even before assuming the presidency in 2000, Putin indicated that he believed state control over energy resources should be the basis for Russia's return to great-power status.

On this basis, Putin presided over the re-nationalization of many of the energy companies that had been privatized by Yeltsin and the virtual confiscation of Yukos -- once Russia's richest private energy firm -- by Russian state authorities. He also brought Gazprom, the world's largest natural gas supplier, back under state control and placed a protégé, Dmitri Medvedev -- now president of Russia -- at its helm.

According to Klare:
Once he had restored state control over the lion's share of Russia's oil and gas resources, Putin turned his attention to the next obvious place -- the Caspian Sea basin. Here, his intent was not so much to gain ownership of its energy resources -- although Russian firms have in recent years acquired an equity share in some Caspian oil and gas fields -- but rather to dominate the export conduits used to transport its energy to Europe and Asia.

This is the historical background that simply must be thoroughly understood and taken into account to even begin to understand the military actions in Georgia and the independent states on Russia's south border - Abhkazia and South Ossetia. The Bush administration ultimately decided to use Georgia's recently elected President, Mikheil Saakashvili, as a "useful pawn in [Washington's] pursuit of a long smoldering anti-Russian agenda" and [both Bush and Saakashvili] ended up walking into a trap that had been cleverly designed by Putin.

As the article goes on to explain:
It is hard not to conclude that Russian prime minister goaded the rash Saakashvili into invading South Ossetia by encouraging Abkhazian and South Ossetian irregulars to attack Georgian outposts and villages on the peripheries of the two enclaves. Secretary of State Condoleezza Rice reportedly told Saakashvili not to respond to such provocations when she met with him in July. Apparently her advice fell on deaf ears. Far more enticing, it seems, was her promise of strong U.S. backing for Georgia's rapid entry into NATO. Other American leaders, including Senator John McCain, assured Saakashvili of unwavering U.S. support. Whatever was said in these private conversations, the Georgian president seems to have interpreted them as a green light for his adventuristic impulses. On August 7th, by all accounts, his forces invaded South Ossetia and attacked its capital city of Tskhinvali, giving Putin what he long craved -- a seemingly legitimate excuse to invade Georgia and demonstrate the complete vulnerability of Clinton's (and now Bush's) vaunted energy corridor.

As this article so convincingly illustrates, as with most geopolitical conflicts to which the US is a party to (and which major conflicts is the US completely disengaged from, really?), the Ossetia War and the broader conflict between Russia and its former client states of Georgia and the Ukraine has as much to do with the Great Game and control of resources as it does the more obvious, long-term military ambitions of these Central Asian states.

Therefore, this latest report from today's Financial Times (UK) on VP Dick Cheney's promise of a $1 billion (US taxpayer funded!) humanitarian aid package for Georgia to help rebuild must be read with all of the aforementioned facts in the front of one's mind. Context is simply everything here, and by ignoring it, or worse getting it wrong- we will end up being led to what can only be described as a radically confused understanding of the ins and outs of these rapidly developing world events and their dynamics.

Lakoff on the strategy behind the Palin pick

Some great insight from UC Berkeley linguist and political theorist George Lakoff on the background behind McCain's decision to choose Sarah Palin as his running mate here.
[T]he Palin nomination changes the game. The initial response has been to try to keep the focus on external realities, the "issues," and differences on the issues. But the Palin nomination is not basically about external realities and what Democrats call "issues," but about the symbolic mechanisms of the political mind-the worldviews, frames, metaphors, cultural narratives, and stereotypes. The Republicans can't win on realities. Her job is to speak the language of conservatism, activate the conservative view of the world, and use the advantages that conservatives have in dominating political discourse.

Our national political dialogue is fundamentally metaphorical, with family values at the center of our discourse. There is a reason why Obama and Biden spoke so much about the family, the nurturant family, with caring fathers and the family values that Obama put front and center in his Father's day speech: empathy, responsibility and aspiration. Obama's reference in the nomination speech to "The American Family" was hardly accidental, nor were the references to the Obama and Biden families as living and fulfilling the American Dream. Real nurturance requires strength and toughness, which Obama displayed in body language and voice in his responses to McCain. The strength of the Obama campaign has been the seamless marriage of reality and symbolic thought.

The Republican strength has been mostly symbolic. The McCain campaign is well aware of how Reagan and W won-running on character: values, communication, (apparent) authenticity, trust, and identity - not issues and policies. That is how campaigns work, and symbolism is central.

Lakoff's main point is that Democrats should take the Palin pick very seriously, remembering the lessons learned the hard way from the Reagan and George H.W. Bush campaigns. To treat her as a joke and a source of derision could end up blowing up in our collective faces.

The again, the fact that Palin was ultimately tapped as the Republican ticket's Vice Presidential nominee really is a joke is just as likely to end up blowing up in John McCain and his advisors' faces.

Wednesday, September 03, 2008

Bush compares his critics to torturers

Yes, his scumbaggery never ceases to amaze.
Speaking via a live video feed from the White House, Bush enthusiastically endorsed the man his campaign smeared in the 2000 Republican presidential primary campaign. Then, after recalling presumptive presidential nominee John McCain's status as a POW during the Vietnam War, Bush tossed off what may well have been the crudest applause line ever uttered by a sitting president with regard to the campaign to succeed him.

Referring to the prison in which McCain was held, Bush revealed the depth of his own bitterness by declaring: "If the Hanoi Hilton could not break John McCain's resolve to do what is best for his country, you can be sure the angry left never will."

Obama campaign finally calls out Lieberman

And it's been long overdue.

Edward S. Herman: "The Law of the Conservation of Violence"

Leftist US economist/journalist Edward Herman writes on "The Law of the Conservation of Violence":
It is interesting and depressing to see that as Obama calls for some kind of withdrawal or at least substantial cutbacks of the U.S. occupation of Iraq, at the same time he calls for escalation in Afghanistan. By doing this he hopes to ease the threat of vulnerability to accusations of weakness on "national security" and an un- or anti-American "cut and run" perspective. This has long been a problem for the Democrats, who have a mass populist constituency that would like some transfer of government resources to their pressing civilian needs.

The establishment, including the mainstream media, therefore, keeps the pressure on to assure that the Democrats stay in line and the Democrats often compensate, even overcompensate, to demonstrate their integration into an imperialist worldview and weapons culture. Both Gore and Bush wanted a bigger military budget in 2000 (Nader, who wanted cuts, was marginalized). Both Hillary Clinton and Barack Obama on the campaign trail called for a larger army to meet U.S. "defense" needs. Now Obama wants us to take on a bigger commitment to violence. This will keep the arms cargo ships and planes busy and the bomb factories and plane and missile factories working at full capacity. Of course, those wanting infrastructure improvements and resources will have to wait and "hope" for a better future after our enemies are defeated and full hegemony and stability are established. They need a good dollop of "vision."

The law of conservation of the level of violence thus rests on the structure of power and its reflection in politics. If you want to compete in politics in the militarized America of today you can't scrimp on money for "national security" and you need to display a readiness to exercise a "muscular" foreign policy. If you call for reduced forces in one country, you must urge their increase in another. Keep those muscles in shape and bombs dropping.