Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: March 06, 2009, 05:38:27 PM
March 6, 2009
Banana Republic, U.S.A
By Thomas E. Woods, Jr.
Barack Obama is already making the Clinton and Bush years seem like the good old days.
Close to a trillion dollars are being tossed around in a "stimulus" package that no one in his right mind-and I do not here include the mainstream of the economics profession, which has disgraced itself in this crisis-expects to bring about recovery. Economist Robert Wenzel rightly describes the stimulus as "just the insiders raiding the till while there is still money in it." Trillions of dollars are likewise being thrown at financial institutions that (if we actually believe in the free market) richly deserve to go bankrupt. Nationalization of the banks is being openly discussed-an outcome our rulers assure us they would undertake only as a last resort, deploring every minute of it, and only for our own good.
We are learning what it is like to live in an Orwell novel. Our television screens are filled with people offering choices between idiotic and suicidal option A and idiotic and suicidal option B. We are being told that we must at least partially nationalize our banks, prop up zombie companies, lower interest rates to zero, and pass stimulus packages in order to escape the fate of Japan-which, um, partially nationalized its banks, propped up zombie companies, lowered interest rates to zero, and passed eight stimulus packages. We have a president who tells us we cannot rely on the free market to get us out of this mess because the free market is what got us here, as if the Federal Reserve and its bubble-inducing monetary policy never existed.
F. A. Hayek won the Nobel Prize in 1974 for showing how central bank manipulation of interest rates gives rise to the kind of boom-bust cycle we are experiencing now, and that such phenomena are not caused by the unhampered market. If by some miracle you manage to hear this point of view on television, it will be sandwiched between hours and hours of Keynesian droning.
Of course, the rationale we're being given for the insanity is that these are crisis times, and the usual rules go out the window. That's what Paul Krugman means when he speaks of "depression economics"-a special set of economic principles come into play in times like this that differ radically from those we would abide by under normal conditions. And so we see once again why Keynesian economics swept the board so successfully: it tells the regime just what it wants to hear. It provides intellectual cover for the expansion of government power and the seizure of private property that state officials want to engage in anyway.
"Never allow a crisis to go to waste," said chief of staff and former Freddie Mac board member Rahm Emmanuel. He needn't worry. The Keynesian economists who suddenly dominate public life in America, years after everyone else assumed Keynes and his fallacies were long dead and buried, will weave every apologia under the sun for whatever activity Emmanuel and the president he serves choose to undertake. The all-purpose pretext is ready at hand: why, we've got to do something about this terrible crisis.
Indeed we should do something-but, as usual, it's exactly the opposite of what the federal government intends to do. We should cut the government's budget as drastically as possible, thereby releasing resources for use by the productive sector. (That worked pretty well in stopping the terrible depression of 1920-21.) We should stop the Fed from interfering in the recovery process. We should let the private economy sort out which activities undertaken during the artificial Greenspan boom are genuine wealth-generating activities and which are wealth-destroying bubble activities. The latter should be promptly liquidated so their resources can be better employed by the former.
Meanwhile, we still have some conservatives, frozen in the 1980s, calling for reductions in marginal income tax rates, among other feckless suggestions. Tax reductions are desirable, to be sure, but the crisis we are facing is a systemic one that is not going to be fixed by marginal changes here and there. We need to start talking big changes. We need to open up questions the regime has long since considered closed. We need to talk about the monetary system, the Fed, entitlements, and much else.
In other words, if the Left can advocate $1 trillion-plus annual deficits as far as the eye can see, why can't supporters of the free market be equally bold in the opposite direction?
Conservatives' rediscovery of government frugality has been a refreshing thing to behold. The important thing now is for conservative intellectuals to be sure they know sound economics. For instance, the problem with the stimulus package isn't the "pork," however evil, stupid, and counterproductive it surely is. The problem is the Keynesian nonsense on which the very idea of "fiscal stimulus" is based. The problem is the mistaken view that "spending" is what the economy needs now, and that all our efforts must be expended on ways to revive consumer spending and borrowing.
The president has unveiled a program to help troubled homeowners make their mortgage payments and stay in their homes. He is going to encounter the same problem Charles Murray identified in the mid-1980s in his book Losing Ground: American Social Policy 1950-1980. There Murray famously argued that poverty persisted in the United States not in spite of anti-poverty programs, but because of them. Before evaluating the empirical evidence, though, Murray first explained why, from a theoretical point of view, we should in fact expect this perhaps counterintuitive result.
Murray challenged his readers to devise a social program that would not cause net harm. He gave the example of a government program aimed at discouraging smoking. I can't reproduce his whole argument here, which is quite lengthy, but his point is that the reward the government offers for people who quit has to be substantial enough to persuade them to go to the trouble of quitting, but not so substantial as to encourage nonsmokers to start smoking. Just as Murray says, this task turns out to be borderline impossible. It is especially difficult when the program in question makes it more desirable to be out of work. Given man's inclination to acquire wealth with the least possible exertion, such programs threaten to drag additional people into a cycle of dependency that mankind's inclination to sloth will only reinforce over time.
For similar reasons, every attempt to solve the problems caused by a housing bubble that the Fed should not have blown up in the first place, such as the proposed measures for mortgage relief, will exacerbate the problems, thereby leading to still more government intervention, in the very pattern Ludwig von Mises identified in his famous essay "Middle-of-the-Road Policy Leads to Socialism." That is the fallacy in the usual statement that "it would cost only $X billion to give every American who needs it" this or that benefit. Once people realize the government is giving out a benefit for free, more and more people will place themselves in the condition that entitles them to the benefit, thereby making the program ever more expensive.
The best outcome I can see is that under Obama the United States will experience the kind of economic stagnation that is now routine in Western Europe, with high unemployment and sluggish (if any) growth, and people standing around pretending not to know what could be causing it. A smaller and smaller core of productive firms and individuals will be expected to support a larger and larger demand for bailouts and other corporate and individual welfare. Who is John Galt, indeed.
The worst outcome, which we cannot dismiss out of hand, is a hyperinflationary destruction of the currency or, barring that, the reduction of America to banana-republic conditions.
Regardless of which of these outcomes actually occurs, the Obama administration will have moved the country farther away from a market economy than it has ever been in peacetime (barring perhaps the early years of the New Deal and its outright cartelization of industry), accelerating trends already at work under the Bush administration. If you want to succeed in the so-called private sector, you had better have some friends in Washington, because that's where credit and capital will be allocated from.
And if you want to hold on to your wealth, assume the dollar is going to collapse. The euro is under terrific strain right now, and so the dollar may continue its artificial rally in the near term, but in light of the accelerating demands of the predatory sector (that is, the government) on the shrinking productive sector, the dollar's bust has to come. The printing press will be the regime's only way out. If this crisis doesn't do it, the looming entitlement disaster will finish off the dollar. How else are $70 trillion in entitlement liabilities going to be paid for? Floating a few more bonds?
Things could get very bad indeed. If we are to have any chance of beating back these unprecedented incursions of the state, supporters of the free market need to know their position cold. I wrote my just-released book Meltdown for this reason: to educate Americans about the causes of the crisis, to be sure, but also to give supporters of the free market the ammunition they need to make their case effectively.
Even that may prove not to be enough. We may have to be consoled with the knowledge that at least we fought with all our strength. And fight we must, as Ludwig von Mises urged: "No one can find a safe way out for himself if society is sweeping toward destruction. Therefore, everyone, in his own interests, must thrust himself vigorously into the intellectual battle. None can stand aside with unconcern; the interest of everyone hangs on the result."
Thomas E. Woods, Jr. is senior fellow in American history at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: The Politically Incorrect Guide to American History and the just-released Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Why the Aussies could have predicted Geithner’s incompetence
on: March 06, 2009, 05:24:58 PM
Why the Aussies could have predicted Geithner’s incompetence
posted at 5:12 pm on March 6, 2009 by Ed Morrissey
Remember when the Obama administration and its allies in Congress urged the confirmation of Tim Geithner despite his tax problems? They claimed that Geithner was “uniquely qualified” to lead the nation out of an economic collapse, and that no other candidate could possibly replace Geithner. Former Australian prime minister Paul Keating must have thought the Democrats and American media had discovered a completely different Tim Geithner than the one he knew:
If anyone in the US media had thought to ask a former Australian prime minister for his assessment, they would have heard a different view. And they would not have been so surprised at Geithner’s performance since.
In a speech to a closed gathering at the Lowy Institute in Sydney on Thursday, Paul Keating gave a starkly different account of Geithner’s record in handling the Asian crisis: “Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis.”
In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.
In fact, Geithner bungled the job so badly that Asian nations still refuse to “stick their head in the IMF noose,” as Keating puts it. Despite 7% compound growth over several years afterwards, Indonesia still couldn’t get itself out of the hole Geithner dug for them. Soeharto lost power, and countries like China paid attention. Instead of working more cooperatively, China built up big reserves instead, creating a debt imbalance that helped make the current financial crisis much worse than it might have been.
Geithner’s performance since his confirmation hasn’t surprised Keating at all. The dithering on bank issues has left the US with few realistic options outside of nationalization on some scale. The vacillation and fumbled rollouts of economic policy have left the markets with no confidence at all in his leadership, leading to a flight from capital investment clearly shown in the stock market performance of the last few weeks. Keating understands that lack of confidence from his own experiences with Geithner, but the US has just begun to figure out Geithner’s incompetence.
That sound you hear from down under? Laughter at the gullibility of Congress and the media in buying the argument that a man who couldn’t figure out his own taxes had the only qualifications for handling American economic policy. Our mainstream media never reported on this botch-up until it was far too late to do anything about it.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Big Picture WW3: Who, when, where, why
on: March 06, 2009, 03:42:50 PM
|**Meanwhile, this administration can't even lick Putin's boots competently.**http://www.politico.com/news/stories/0309/19719.html
Clinton gift gaffe: 'Overcharge'
By DAVID S. CLOUD | 3/6/09 3:58 PM EST
GENEVA—Secretary of State Hillary Clinton opened her first extended talks with Russian Foreign Minister Sergei Lavrov by giving him a present meant to symbolize the Obama administration’s vow to “press the reset button” on U.S.-Russia relations.
She handed a palm-sized box wrapped with a bow. Lavrov opened it and pulled out the gift: a red button on a black base with a Russian word peregruzka printed on top.
“We worked hard to get the right Russian word. Do you think we got it?” Clinton asked.
“You got it wrong,” Lavrov said.
Instead of "reset," Lavrov said the word on the box meant “overcharge.”
Clinton and Lavrov laughed.
“We won’t let you do that to us,” she said. Trying to recover, Clinton said the new administration was serious about improving relations with Moscow. “We mean it, and we’re looking forward to it.”
Lavrov said he would put the button on his desk and he and Clinton pushed the button together, before sitting down for their meeting.
A State Department official said the misspelling on the button was being corrected, in time for the post-meeting news conference.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Homeland Security
on: March 06, 2009, 10:55:24 AM
FBI Watching Somali Muslims In Minneapolis
CBS Evening News: 20 From Same Mosque Have Repatriated, One Became A Suicide Bomber; Mosque Officials Deny Radical Agenda
MINNEAPOLIS, March 3, 2009 | by Dean Reynolds
Breeding Terror In Minneapolis
U.S. officials have become concerned over some 20 U.S. citizens who have joined Somalia's Civil War. As Dean Reynolds reports, these Minneapolis residents could bring their skills stateside. | Share/Embed
(CBS) On election night last November, the outcome was wildly celebrated by Somalis living in Minneapolis, 70,000-strong, mostly refugees from their war-torn country. It is the largest Somali community in the United States, reports CBS News correspondent Dean Reynolds.
But the evening was noteworthy for something else, too. That night, the latest in a line of young Somalis who grew up here, departed unannounced for Somalia itself, joining a civil war in a country few had ever seen and causing concern in the United States.
Hussein Samatar's 17-year old nephew left without a word to his family.
"He was an A student," says Samatar. "He has everything to hope for to attend any Ivy League school that he wanted to. Why he would do it is a mystery to us."
Some 20 vanished last year - all American citizens - an exodus the FBI has noticed for a troubling reason.
"A man from Minneapolis became what we believe to be the first U.S. citizen to carry out a terrorist suicide bombing," said agency director Robert Mueller.
The October attack by 27-year-old Shirwa Ahmed killed 30 near Mogadishu, and there is alarm that the skills acquired abroad could be brought back to America.
"He could have done it here," says Omar Jamal, a Somali advocate in Minnesota. "We don't see anything that would have prevented him from doing this right here in the heart of Minneapolis."
This much seems clear:
"It appears that this individual was radicalized in his hometown in Minnesota," Mueller said.
The missing men all came from one local mosque, according to the FBI. But officials at the mosque deny that they play any role in turning young people into radicals, Reynolds reports.
This week they held an open house to answer critics and confront recent harassment.
"We absolutely deny that such things happen in this mosque," says Omar Hurre, executive director at the Abubakar Islamic Center.
But Somalis here are deeply troubled. Who is behind this exodus? Who is paying for it? And who may be the next to go?
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: March 06, 2009, 10:26:21 AM
Obama's Radicalism Is Killing the Dow
A financial crisis is the worst time to change the foundations of American capitalism.
By MICHAEL J. BOSKIN
It's hard not to see the continued sell-off on Wall Street and the growing fear on Main Street as a product, at least in part, of the realization that our new president's policies are designed to radically re-engineer the market-based U.S. economy, not just mitigate the recession and financial crisis.
The illusion that Barack Obama will lead from the economic center has quickly come to an end. Instead of combining the best policies of past Democratic presidents -- John Kennedy on taxes, Bill Clinton on welfare reform and a balanced budget, for instance -- President Obama is returning to Jimmy Carter's higher taxes and Mr. Clinton's draconian defense drawdown.
Mr. Obama's $3.6 trillion budget blueprint, by his own admission, redefines the role of government in our economy and society. The budget more than doubles the national debt held by the public, adding more to the debt than all previous presidents -- from George Washington to George W. Bush -- combined. It reduces defense spending to a level not sustained since the dangerous days before World War II, while increasing nondefense spending (relative to GDP) to the highest level in U.S. history. And it would raise taxes to historically high levels (again, relative to GDP). And all of this before addressing the impending explosion in Social Security and Medicare costs.
To be fair, specific parts of the president's budget are admirable and deserve support: increased means-testing in agriculture and medical payments; permanent indexing of the alternative minimum tax and other tax reductions; recognizing the need for further financial rescue and likely losses thereon; and bringing spending into the budget that was previously in supplemental appropriations, such as funding for the wars in Iraq and Afghanistan.
The specific problems, however, far outweigh the positives. First are the quite optimistic forecasts, despite the higher taxes and government micromanagement that will harm the economy. The budget projects a much shallower recession and stronger recovery than private forecasters or the nonpartisan Congressional Budget Office are projecting. It implies a vast amount of additional spending and higher taxes, above and beyond even these record levels. For example, it calls for a down payment on universal health care, with the additional "resources" needed "TBD" (to be determined).
Mr. Obama has bravely said he will deal with the projected deficits in Medicare and Social Security. While reform of these programs is vital, the president has shown little interest in reining in the growth of real spending per beneficiary, and he has rejected increasing the retirement age. Instead, he's proposed additional taxes on earnings above the current payroll tax cap of $106,800 -- a bad policy that would raise marginal tax rates still further and barely dent the long-run deficit.
Increasing the top tax rates on earnings to 39.6% and on capital gains and dividends to 20% will reduce incentives for our most productive citizens and small businesses to work, save and invest -- with effective rates higher still because of restrictions on itemized deductions and raising the Social Security cap. As every economics student learns, high marginal rates distort economic decisions, the damage from which rises with the square of the rates (doubling the rates quadruples the harm). The president claims he is only hitting 2% of the population, but many more will at some point be in these brackets.
As for energy policy, the president's cap-and-trade plan for CO2 would ensnare a vast network of covered sources, opening up countless opportunities for political manipulation, bureaucracy, or worse. It would likely exacerbate volatility in energy prices, as permit prices soar in booms and collapse in busts. The European emissions trading system has been a dismal failure. A direct, transparent carbon tax would be far better.
Moreover, the president's energy proposals radically underestimate the time frame for bringing alternatives plausibly to scale. His own Energy Department estimates we will need a lot more oil and gas in the meantime, necessitating $11 trillion in capital investment to avoid permanently higher prices.
The president proposes a large defense drawdown to pay for exploding nondefense outlays -- similar to those of Presidents Carter and Clinton -- which were widely perceived by both Republicans and Democrats as having gone too far, leaving large holes in our military. We paid a high price for those mistakes and should not repeat them.
The president's proposed limitations on the value of itemized deductions for those in the top tax brackets would clobber itemized charitable contributions, half of which are by those at the top. This change effectively increases the cost to the donor by roughly 20% (to just over 72 cents from 60 cents per dollar donated). Estimates of the responsiveness of giving to after-tax prices range from a bit above to a little below proportionate, so reductions in giving will be large and permanent, even after the recession ends and the financial markets rebound.
A similar effect will exacerbate tax flight from states like California and New York, which rely on steeply progressive income taxes collecting a large fraction of revenue from a small fraction of their residents. This attack on decentralization permeates the budget -- e.g., killing the private fee-for-service Medicare option -- and will curtail the experimentation, innovation and competition that provide a road map to greater effectiveness.
The pervasive government subsidies and mandates -- in health, pharmaceuticals, energy and the like -- will do a poor job of picking winners and losers (ask the Japanese or Europeans) and will be difficult to unwind as recipients lobby for continuation and expansion. Expanding the scale and scope of government largess means that more and more of our best entrepreneurs, managers and workers will spend their time and talent chasing handouts subject to bureaucratic diktats, not the marketplace needs and wants of consumers.
Our competitors have lower corporate tax rates and tax only domestic earnings, yet the budget seeks to restrict deferral of taxes on overseas earnings, arguing it drives jobs overseas. But the academic research (most notably by Mihir Desai, C. Fritz Foley and James Hines Jr.) reveals the opposite: American firms' overseas investments strengthen their domestic operations and employee compensation.
New and expanded refundable tax credits would raise the fraction of taxpayers paying no income taxes to almost 50% from 38%. This is potentially the most pernicious feature of the president's budget, because it would cement a permanent voting majority with no stake in controlling the cost of general government.
From the poorly designed stimulus bill and vague new financial rescue plan, to the enormous expansion of government spending, taxes and debt somehow permanently strengthening economic growth, the assumptions underlying the president's economic program seem bereft of rigorous analysis and a careful reading of history.
Unfortunately, our history suggests new government programs, however noble the intent, more often wind up delivering less, more slowly, at far higher cost than projected, with potentially damaging unintended consequences. The most recent case, of course, was the government's meddling in the housing market to bring home ownership to low-income families, which became a prime cause of the current economic and financial disaster.
On the growth effects of a large expansion of government, the European social welfare states present a window on our potential future: standards of living permanently 30% lower than ours. Rounding off perceived rough edges of our economic system may well be called for, but a major, perhaps irreversible, step toward a European-style social welfare state with its concomitant long-run economic stagnation is not.
Mr. Boskin is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He chaired the Council of Economic Advisers under President George H.W. Bush.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: The Cognitive Dissonance of His Glibness
on: March 05, 2009, 10:12:29 PM
- Pajamas Media - http://pajamasmedia.com
Laughing at the Contradictions of Socialism in America
Posted By Oleg Atbashian On March 5, 2009 @ 12:35 am In . Column2 01, . Positioning, Culture, History, Humor & Fun, Politics, US News | 86 Comments
There was a time in recent American history when certain Soviet jokes didn’t work in translation — not so much because of the language differences, but because of the lack of common sociopolitical context. But that is changing. As President Obama is preparing us for a great leap towards collectivism, I find myself recollecting forgotten political jokes I shared with comrades while living in the old country under Brezhnev, Andropov, and Gorbachev. (I was too young to remember the Khrushchev times, but I still remember the Khrushchev jokes.) I also noticed that the further America “advances” back to the Soviet model, the more translatable the old Soviet jokes become. Not all Soviet advancements have metastasized here yet, but we have four more glorious years to make it happen.
One of my favorite political jokes is this:
The six dialectical contradictions of socialism in the USSR:
There is full employment — yet no one is working.
No one is working — yet the factory quotas are fulfilled.
The factory quotas are fulfilled — yet the stores have nothing to sell.
The stores have nothing to sell — yet people got all the stuff at home.
People got all the stuff at home — yet everyone is complaining.
Everyone is complaining — yet the voting is always unanimous.
It reads like a poem — only instead of the rhythm of syllables and rhyming sounds, it’s the rhythm of logic and rhyming meanings. If I could replicate it, I might start a whole new genre of “contradictory six-liners.” It would be extremely difficult to keep it real and funny at the same time, but I’ll try anyway.
Dialectical contradictions are one of the pillars in Marxist philosophy, which states that contradictions eventually lead to a unity of opposites as the result of a struggle. This gave a convenient “scientific” excuse for the existence of contradictions in a socialist society, where opposites were nice and agreeable — unlike the wild and crazy opposites of capitalism that could never be reconciled. Hence the joke.
Then I moved to America, where wild and crazy opposites of capitalism were supposedly at their worst. Until recently, however, the only contradictions that struck me as irreconcilable were these:
America is capitalist and greedy — yet half of the population is subsidized.
Half of the population is subsidized — yet they think they are victims.
They think they are victims — yet their representatives run the government.
Their representatives run the government — yet the poor keep getting poorer.
The poor keep getting poorer — yet they have things that people in other countries only dream about.
They have things that people in other countries only dream about — yet they want America to be more like those other countries.
Without capitalism there’d be no Hollywood — yet filmmakers hate capitalism.
Filmmakers hate capitalism — yet they sue for unauthorized copying of their movies.
They sue for unauthorized copying — yet on screen they teach us to share.
On screen they teach us to share — yet they keep their millions to themselves.
They keep their millions to themselves — yet they revel in stories of American misery and depravity.
They revel in stories of American misery and depravity — yet they blame the resulting anti-American sentiment on conservatism.
They blame the anti-American sentiment on conservatism — yet conservatism ensures the continuation of a system that makes Hollywood possible.
I never thought I would see socialist contradictions in America, let alone write about them. But somehow all attempts to organize life according to “progressive” principles always result in such contradictions. And in the areas where “progressives” have assumed positions of leadership — education, news media, or the entertainment industry — contradictions become “historically inevitable.”
If one were accidentally to open his eyes and compare the “progressive” narrative with facts on the ground, one might start asking questions. Why, for instance, if the war on terror breeds more terrorists, haven’t there been attacks on the U.S. soil since 2001? Why, if George W. Bush had removed our freedom of speech, was nobody ever arrested for saying anything? And if Obama has returned us our freedoms, why was a man harassed by police in Oklahoma for having an anti-Obama sign in his car? Why would anyone who supports free speech want to silence talk radio? And why is silencing the opposition called the “Fairness Doctrine”?
After the number of “caring,” bleeding-heart politicians in Washington reached a critical mass, it was only a matter of time before the government started ordering banks to help the poor by giving them risky home loans through community organizers. Which resulted in a bigger demand, which resulted in rising prices, which resulted in slimmer chances of repaying the loans, which resulted in more pressure on the banks, which resulted in repackaging of bad loans, which resulted in a collapse of the banks, which resulted in a recession, which resulted in many borrowers losing their jobs, which resulted in no further mortgage payments, which resulted in a financial disaster, which resulted in a worldwide crisis, with billions of poor people overseas — who had never seen a community organizer, nor applied for a bad loan — becoming even poorer than they had been before the “progressives” in the U.S. government decided to help the poor.
As if that were not enough, the same bleeding hearts are now trying to fix this by nationalizing the banks so that they can keep issuing risky loans through community organizers. In other words, to prevent the toast from landing buttered side down, they’re planning to butter the toast on both sides and hope that it will hover in mid-air. Which also seems like a sensible alternative energy initiative.
If that doesn’t fix the problem, there’s always the last resort of a liberal: blame capitalism. It’s always a win-win. Today government regulators may be blaming capitalism for the crisis caused by their dilettantish tampering with the economy, but who do you think they will credit after market forces resuscitate the economy?
Years ago, living in America made me feel as though I had traveled in a time machine from the past. But after the recent “revolutionary” changes have turned reality on its head — which is what “revolution” literally means — I’m getting an uneasy feeling I had come from your future.
As your comrade from the future, I also feel a social obligation to help my less advanced comrades in the American community, and prepare them for the transition to the glorious world of underground literature, half-whispered jokes, and the useful habit of looking over your shoulder. Don’t become a  nation of cowards — but watch who might be listening.
Let’s start with these few.
Liberals believe they’re advancing people’s power — yet they don’t believe people can do anything right without their guidance.
People can’t do anything right — yet the government bureaucracy can do everything.
The government bureaucracy can do everything — yet liberals don’t like it when the government takes control of their lives.
Liberals don’t like it when the government takes control of their lives — yet they vote for programs that increase people’s dependency on the government.
They vote for programs that increase people’s dependency on the government — yet they believe they’re advancing people’s power.
Bush and the media:
The media said Bush was dumb — yet he won over two intelligent Democrats.
He won over two intelligent Democrats — yet the media said his ratings were hopeless.
The media said his ratings were hopeless — yet the 2004 electoral map was red.
The 2004 electoral map was red — yet the media said his policies failed.
The media said his policies failed — yet the economy grew and the war was won.
The economy grew and the war was won — yet the media said we needed “change.”
Liberals have been in charge of education for 50 years — yet education is out of control.
Education is out of control — yet liberal teaching methods prevail.
Liberal teaching methods prevail — yet public schools are failing.
Public schools are failing — yet their funding keeps growing.
Their funding keeps growing — yet public schools are always underfunded.
Public schools are always underfunded — yet private schools yield  better results for less.
Private schools yield better results for less — yet public education is the only way out of the crisis.
Foreign radicals hate America — yet they’re all wearing American blue jeans.
They’re all wearing American blue jeans — yet they disdain American culture.
They disdain American culture — yet they play American music, movies, and video games.
They play American music, movies, and video games — yet they call Americans uncivilized.
They call Americans uncivilized — yet they expect Americans to defend their civilization.
They expect Americans to defend their civilization — yet they think American capitalism is outdated.
They think American capitalism is outdated — yet most of their countries require American handouts.
(* Some Democrat politicians have  similar opinions about their redneck constituents — yet they won’t shut up about how proud they are to have their mandate.)
Liberals and taxes:
Liberals want to help the poor — yet they won’t give money to charities.
They won’t give money to charities — yet they’d like the government to become a gigantic charity.
They’d like the government to become a gigantic charity — yet the money has to be taken from people by force.
The money has to be taken from people by force — yet they call it welfare.
They call it welfare — yet higher taxes make everyone poorer.
Higher taxes make everyone poorer — yet liberals find ways not to pay taxes.
Liberals find ways not to pay taxes — yet they get to be chosen to run the government.
Liberals and the CIA:
The CIA is a reactionary institution — yet its agents always leak information that helps liberals politically.
CIA agents always leak information that helps liberals politically — yet liberals say the CIA is clueless.
Liberals say the CIA is clueless — yet in their movies the CIA is running the world.
In their movies the CIA is running the world — yet they tell us that better intelligence could have prevented the war.
Better intelligence could have prevented the war — yet “enhanced interrogations” of captured terrorists must not be allowed.
Love and marriage:
Sex differences are the result of social conditioning — yet homosexuality is biological.
Homosexuality is biological — yet everybody is encouraged to experiment with it.
Everybody is encouraged to experiment with it — yet venereal diseases are treated at the taxpayers’ expense.
Venereal diseases are treated at the taxpayers’ expense — yet taxpayers have no right to impose standards since there are no moral absolutes.
There are no moral absolutes — yet gay marriage is an absolute must.
Gay marriage is an absolute must — yet family is an antiquated tool of bourgeois oppression.
Article printed from Pajamas Media: http://pajamasmedia.com
URL to article: http://pajamasmedia.com/blog/laughing-at-the-contradictions-of-socialism-in-america/
URLs in this post:
 Image: http://pajamasmedia.com/files/2009/03/time_machine_redsquare.jpg
 nation of cowards: http://online.wsj.com/public/article/SB123514880910734301.html
 better results for less: http://www.cato.org/pub_display.php?pub_id=3231
 similar opinions about their redneck constituents: http://gatewaypundit.blogspot.com/2008/10/now-murtha-calls-voters-in-his-district.html
Politics, Religion, Science, Culture and Humanities / Politics & Religion / No worries, the trainee-president will fix it....
on: March 05, 2009, 10:59:28 AM
The U.S. Financial System Is Effectively Insolvent
Nouriel Roubini 03.05.09, 12:01 AM ET
For those who argue that the rate of growth of economic activity is turning positive--that economies are contracting but at a slower rate than in the fourth quarter of 2008--the latest data don't confirm this relative optimism. In 2008's fourth quarter, gross domestic product fell by about 6% in the U.S., 6% in the euro zone, 8% in Germany, 12% in Japan, 16% in Singapore and 20% in South Korea. So things are even more awful in Europe and Asia than in the U.S.
There is, in fact, a rising risk of a global L-shaped depression that would be even worse than the current, painful U-shaped global recession. Here's why:
First, note that most indicators suggest that the second derivative of economic activity is still sharply negative in Europe and Japan and close to negative in the U.S. and China. Some signals that the second derivative was turning positive for the U.S. and China turned out to be fake starts. For the U.S., the Empire State and Philly Fed indexes of manufacturing are still in free fall; initial claims for unemployment benefits are up to scary levels, suggesting accelerating job losses; and January's sales increase is a fluke--more of a rebound from a very depressed December, after aggressive post-holiday sales, than a sustainable recovery.
For China, the growth of credit is only driven by firms borrowing cheap to invest in higher-returning deposits, not to invest, and steel prices in China have resumed their sharp fall. The more scary data are those for trade flows in Asia, with exports falling by about 40% to 50% in Japan, Taiwan and Korea.
Even correcting for the effect of the Chinese New Year, exports and imports are sharply down in China, with imports falling (-40%) more than exports. This is a scary signal, as Chinese imports are mostly raw materials and intermediate inputs. So while Chinese exports have fallen so far less than in the rest of Asia, they may fall much more sharply in the months ahead, as signaled by the free fall in imports.
With economic activity contracting in 2009's first quarter at the same rate as in 2008's fourth quarter, a nasty U-shaped recession could turn into a more severe L-shaped near-depression (or stag-deflation). The scale and speed of synchronized global economic contraction is really unprecedented (at least since the Great Depression), with a free fall of GDP, income, consumption, industrial production, employment, exports, imports, residential investment and, more ominously, capital expenditures around the world. And now many emerging-market economies are on the verge of a fully fledged financial crisis, starting with emerging Europe.
Fiscal and monetary stimulus is becoming more aggressive in the U.S. and China, and less so in the euro zone and Japan, where policymakers are frozen and behind the curve. But such stimulus is unlikely to lead to a sustained economic recovery. Monetary easing--even unorthodox--is like pushing on a string when (1) the problems of the economy are of insolvency/credit rather than just illiquidity; (2) there is a global glut of capacity (housing, autos and consumer durables and massive excess capacity, because of years of overinvestment by China, Asia and other emerging markets), while strapped firms and households don't react to lower interest rates, as it takes years to work out this glut; (3) deflation keeps real policy rates high and rising while nominal policy rates are close to zero; and (4) high yield spreads are still 2,000 basis points relative to safe Treasuries in spite of zero policy rates.
Fiscal policy in the U.S. and China also has its limits. Of the $800 billion of the U.S. fiscal stimulus, only $200 billion will be spent in 2009, with most of it being backloaded to 2010 and later. And of this $200 billion, half is tax cuts that will be mostly saved rather than spent, as households are worried about jobs and paying their credit card and mortgage bills. (Of last year's $100 billion tax cut, only 30% was spent and the rest saved.)
Thus, given the collapse of five out of six components of aggregate demand (consumption, residential investment, capital expenditure in the corporate sector, business inventories and exports), the stimulus from government spending will be puny this year.
Chinese fiscal stimulus will also provide much less bang for the headline buck ($480 billion). For one thing, you have an economy radically dependent on trade: a trade surplus of 12% of GDP, exports above 40% of GDP, and most investment (that is almost 50% of GDP) going to the production of more capacity/machinery to produce more exportable goods. The rest of investment is in residential construction (now falling sharply following the bursting of the Chinese housing bubble) and infrastructure investment (the only component of investment that is rising).
With massive excess capacity in the industrial/manufacturing sector and thousands of firms shutting down, why would private and state-owned firms invest more, even if interest rates are lower and credit is cheaper? Forcing state-owned banks and firms to, respectively, lend and spend/invest more will only increase the size of nonperforming loans and the amount of excess capacity. And with most economic activity and fiscal stimulus being capital- rather than labor-intensive, the drag on job creation will continue.
So without a recovery in the U.S. and global economy, there cannot be a sustainable recovery of Chinese growth. And with the U.S, recovery requiring lower consumption, higher private savings and lower trade deficits, a U.S. recovery requires China's and other surplus countries' (Japan, Germany, etc.) growth to depend more on domestic demand and less on net exports. But domestic-demand growth is anemic in surplus countries for cyclical and structural reasons. So a recovery of the global economy cannot occur without a rapid and orderly adjustment of global current account imbalances.
Meanwhile, the adjustment of U.S. consumption and savings is continuing. The January personal spending numbers were up for one month (a temporary fluke driven by transient factors), and personal savings were up to 5%. But that increase in savings is only illusory. There is a difference between the national income account (NIA) definition of household savings (disposable income minus consumption spending) and the economic definitions of savings as the change in wealth/net worth: savings as the change in wealth is equal to the NIA definition of savings plus capital gains/losses on the value of existing wealth (financial assets and real assets such as housing wealth).
In the years when stock markets and home values were going up, the apologists for the sharp rise in consumption and measured fall in savings were arguing that the measured savings were distorted downward by failing to account for the change in net worth due to the rise in home prices and the stock markets.
But now with stock prices down over 50% from peak and home prices down 25% from peak (and still to fall another 20%), the destruction of household net worth has become dramatic. Thus, correcting for the fall in net worth, personal savings is not 5%, as the official NIA definition suggests, but rather sharply negative.
In other terms, given the massive destruction of household wealth/net worth since 2006-07, the NIA measure of savings will have to increase much more sharply than has currently occurred to restore households' severely damaged balance sheets. Thus, the contraction of real consumption will have to continue for years to come before the adjustment is completed.
In the meanwhile the Dow Jones industrial average is down today below 7,000, and U.S. equity indexes are 20% down from the beginning of the year. I argued in early January that the 25% stock market rally from late November to the year's end was another bear market suckers' rally that would fizzle out completely once an onslaught of worse than expected macro and earnings news, and worse than expected financial shocks, occurs. And the same factors will put further downward pressures on U.S. and global equities for the rest of the year, as the recession will continue into 2010, if not longer (a rising risk of an L-shaped near-depression).
Of course, you cannot rule out another bear market suckers' rally in 2009, most likely in the second or third quarters. The drivers of this rally will be the improvement in second derivatives of economic growth and activity in the U.S. and China that the policy stimulus will provide on a temporary basis. But after the effects of a tax cut fizzle out in late summer, and after the shovel-ready infrastructure projects are done, the policy stimulus will slacken by the fourth quarter, as most infrastructure projects take years to be started, let alone finished.
Similarly in China, the fiscal stimulus will provide a fake boost to non-tradable productive activities while the traded sector and manufacturing continue to contract. But given the severity of macro, household, financial-firm and corporate imbalances in the U.S. and around the world, this second- or third-quarter suckers' market rally will fizzle out later in the year, like the previous five ones in the last 12 months.
In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on "bank nationalization" is borderline surreal, with the U.S. government having already committed--between guarantees, investment, recapitalization and liquidity provision--about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
But even in this case, the distinction is only between partial nationalization and full nationalization: With 36% (and soon to be larger) ownership of Citi, the U.S. government is already the largest shareholder there. So what is the non-sense about not nationalizing banks? Citi is already effectively partially nationalized; the only issue is whether it should be fully nationalized.
Ditto for AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
Given that common shareholders of AIG are already effectively wiped out (the stock has become a penny stock), the bailout of AIG is a bailout of the creditors of AIG that would now be insolvent without such a bailout. AIG sold over $500 billion of toxic credit default swap protection, and the counter-parties of this toxic insurance are major U.S. broker-dealers and banks.
News and banks analysts' reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout. (Maybe Bloomberg should sue the Fed and Treasury again to have them disclose this information.)
But some things are known: Goldman's Lloyd Blankfein was the only CEO of a Wall Street firm who was present at the New York Fed meeting when the AIG bailout was discussed. So let us not kid each other: The $162 billion bailout of AIG is a nontransparent, opaque and shady bailout of the AIG counter-parties: Goldman Sachs, Merrill Lynch and other domestic and foreign financial institutions.
So for the Treasury to hide behind the "systemic risk" excuse to fork out another $30 billion to AIG is a polite way to say that without such a bailout (and another half-dozen government bailout programs such as TAF, TSLF, PDCF, TARP, TALF and a program that allowed $170 billion of additional debt borrowing by banks and other broker-dealers, with a full government guarantee), Goldman Sachs and every other broker-dealer and major U.S. bank would already be fully insolvent today.
And even with the $2 trillion of government support, most of these financial institutions are insolvent, as delinquency and charge-off rates are now rising at a rate--given the macro outlook--that means expected credit losses for U.S. financial firms will peak at $3.6 trillion. So, in simple words, the U.S. financial system is effectively insolvent.
Nouriel Roubini, a professor at the Stern Business School at New York University and chairman of Roubini Global Economics, is a weekly columnist for Forbes.com.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Obama Declares War!
on: February 27, 2009, 05:19:52 PM
Obama Declares War on Investors, Entrepreneurs, Businesses, and More
Let me be very clear on the economics of President Obama’s State of the Union speech and his budget. He is declaring war on investors, entrepreneurs, small businesses, large corporations, and private-equity and venture-capital funds. That is the meaning of his anti-growth tax-hike proposals, which make absolutely no sense at all -- either for this recession or from the standpoint of expanding our economy’s long-run potential to grow.
Raising the marginal tax rate on successful earners, capital, dividends, and all the private funds is a function of Obama’s left-wing social vision, and a repudiation of his economic-recovery statements. Ditto for his sweeping government-planning-and-spending program, which will wind up raising federal outlays as a share of GDP to at least 30 percent, if not more, over the next 10 years.
This is nearly double the government-spending low-point reached during the late 1990s by the Gingrich Congress and the Clinton administration. While not quite as high as spending levels in Western Europe, we regrettably will be gaining on this statist-planning approach.
Study after study over the past several decades has shown how countries that spend more produce less, while nations that tax less produce more. Obama is doing it wrong on both counts.
And as far as middle-class tax cuts are concerned, Obama’s cap-and-trade program will be a huge across-the-board tax increase on blue-collar workers, including unionized workers. Industrial production is plunging, but new carbon taxes will prevent production from ever recovering. While the country wants more fuel and power, cap-and-trade will deliver less.
The tax hikes will generate lower growth and fewer revenues. Yes, the economy will recover. But Obama’s rosy scenario of 4 percent recovery growth in the out years of his budget is not likely to occur. The combination of easy money from the Fed and below-potential economic growth is a prescription for stagflation. That’s one of the messages of the falling stock market.
Essentially, the Obama economic policies represent a major Democratic party relapse into Great Society social spending and taxing. It is a return to the LBJ/Nixon era, and a move away from the Reagan/Clinton period. House Republicans, fortunately, are 90 days sober, as they are putting up a valiant fight to stop the big-government onslaught and move the GOP back to first principles.
Noteworthy up here on Wall Street, a great many Obama supporters -- especially hedge-fund types who voted for “change” -- are becoming disillusioned with the performances of Obama and Treasury man Geithner. There is a growing sense of buyer’s remorse. Well then, do conservatives dare say: We told you so?
Politics, Religion, Science, Culture and Humanities / Science, Culture, & Humanities / Re: Race, religion, ethnic origin
on: February 27, 2009, 03:54:56 PM
- Pajamas Media - http://pajamasmedia.com
No Country for Black Men
Posted By Travis Rowley On February 27, 2009 @ 12:30 am In . Column2 02, . Positioning, Politics, Race Issues, US News | 44 Comments
The Coen Brothers’ 2007 film  No Country for Old Men revolves around the tale of several young men engaged in a violent race for a satchel of cash. Tommy Lee Jones plays an aging sheriff investigating the depressing trail of bloodshed, markings that inform the old man that the customs and morals that guided his generation have decayed even faster than he has. Jones ends up as a depiction of the anguish experienced by people left without a country they can call home.
Democrats remain on their quest to offer similar anguish to African-Americans, as liberals now embark on their fifth decade aimed at stripping these reliable party constituents of American nationalism.
Liberal mouthpieces have long emphasized a shameful American history, one marked by slavery and segregation. And they insist that, even today, a majority of Americans hold contempt for dark-skinned people. “Something is clearly wrong when the government’s most effective affirmative-action program is the preference people of color receive when entering not college, but the criminal-justice system,” proclaims one prominent progressive text titled  A Covenant with Black America — which goes on to say that there is “a multi-headed, multi-tentacled monster out there devouring blacks who live in certain neighborhoods.”
Such rhetoric has caused many African-Americans to experience feelings of anti-Americanism and national detachment. Blacks now see mirages of racism everywhere, albeit disguised by “code words” and “institutional racism.” The outrage last year over Barack Obama being referred to as “articulate” provided a powerful example of this paranoia.
Anger and hatred typically accompany blacks’ racial anxiety. Before the start of a game last year, the NBA’s  Josh Howard said to a live camera, “‘The Star-Spangled Banner’ is going on. I don’t celebrate this [expletive]. I’m black.” Denver Nuggets guard  Mahmoud Abdul-Rauf refused to even stand for the national anthem, stating that the American flag was a “symbol of oppression” and that the United States had a long “history of tyranny.”
In Democratic circles, this is known as “patriotism.”
These are not so much black sentiments as they are liberal. But many blacks now subscribe to the anti-American wing of contemporary liberalism.
Last year Michelle Obama said that America was “just downright mean” and admitted, “For the first time in my adult lifetime, I am really proud of my country.” And any Google search of Jeremiah Wright provides a score of videos showing Barack Obama’s longtime pastor condemning America for practicing “state terrorism” and for “inventing the HIV virus as a means of genocide against people of color.” We find him referring to the United States as the “U.S. of KKK A.” and thundering, “Not God Bless America. Goddamn America!”
His all-black congregation cheers.
To be without a home is to live with pain. But this has been the Democratic scheme for decades — to promote government intrusion by convincing minorities that most Americans, especially Republicans, reject them. Republicans are racist and against affirmative action. Democrats care and will give you stuff.
The misinformation campaign has succeeded. Many black Americans now view racial solidarity as more important than black individualism. Each year a handful of notorious black leaders convene the State of the Black Union, calling all “brothers” to recognize the uniformed plight that all African-Americans endure. Liberals stripped blacks of their country. So they concocted a new one — the Black Union.
Because racial camaraderie has resulted in more than 90% of blacks predictably voting for Democrats, the advice to be more “inclusive” is oft delivered to the GOP. Replicate the way in which Democrats pander to minorities in order to attract blacks to the Republican Party.
But safeguarding the feelings of minorities by adhering to liberals’ politically correct pap is precisely the cause of blacks’ adoption of big-government, anti-American liberalism. Do Republicans really want to be associated with such a philosophy?
The advice is backwards. Blacks are the ones to make concessions. They must abandon their liberalism before the party of conservatism can consider their membership. A simple matter of principle.
Yet, in order to convince Republicans to alter their strategy, Los Angeles-based writer Chaise Nunnally recently  referenced the Don Imus controversy in which Imus referred to the Rutgers women’s basketball team as “nappy-headed hoes.” Even though Nunnally found the opinions expressed by conservatives involved in the debate “legitimate and defensible,” he thought “they also struck the wrong note in communicating with the black community on a racially sensitive topic.”
Nunnally’s counsel was to be more racially symbolic, recommending Republicans find “a more race-sensitive tack to woo black voters.” Join the left in their truth-stifling political correctness in order to trick blacks into voting for you.
That’s how much liberals respect minorities.
Republicans would be better off listening to black conservative columnist Thomas Sowell, who recently reminded his readers, “Most Americans’ principles are closer to those of the Republicans than to those of the Democrats. … [Republicans] won big when they stood for something and told the people what that something was. … Ronald Reagan was the classic example. But another example would be the stunning Republican victories in the 1994 Congressional elections. … Articulating the message of Newt Gingrich’s ‘contract for America’ was a key to that historic victory.”
Republicans win when they underline conservatism, not when they dilute their principles by pandering to special interests. They should leave such prostitution to the Democrats.
For black Americans addicted to Democrats’ coddling sense of self-pity and collectivism, they will find no such slavery within the Republican Party. Only when blacks finally recognize the big-government whip held in Democratic hands can the party of Lincoln help them regain their independence, sustain their dignity, strengthen their families, and recapture their country.
Article printed from Pajamas Media: http://pajamasmedia.com
URL to article: http://pajamasmedia.com/blog/no-country-for-black-men/
URLs in this post:
 No Country for Old Men: http://www.imdb.com/title/tt0477348/
 A Covenant with Black America: http://www.amazon.com/gp/redirect.html?ie=UTF8&location=http%3A%2F%2Fwww.amazon.com%2FCovenant-B
 Josh Howard: http://www.dallasnews.com/sharedcontent/dws/dn/latestnews/stories/091708dnspomavslede.112d818.html
 Mahmoud Abdul-Rauf: http://vault.sportsillustrated.cnn.com/vault/article/magazine/MAG1007881/index.htm
 referenced: http://www.projo.com/opinion/contributors/content/CT_chaise4_02-04-09_1DCS222_v15.3ff46f6.html
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: February 27, 2009, 03:11:03 PM
|**Not a coincidence. Glad Scott Grannis and I are in agreement!** http://scottgrannis.blogspot.com/2009/02/coincidence.html
Friday, February 27, 2009
No one can prove that the crash in global equity markets has anything to do with Obama becoming president, but there are reasons to think so.
Obama is seeking to implement virtually overnight a blueprint for an unprecedent expansion of government's size and power, and huge new tax burdens and deficits will be required to fund this. He justifies it all with the unproven and logic-lacking theory that more government spending and intervention can expand the economy. He is rushing to implement a massive shift in the way we use energy by putting in place a politically motivated tax on the cheapest energy available, based on an increasingly smaller "consensus" among scientists that reducing carbon emissions will "save the planet."
In short, Obama is taking monumental risks, not only with his own presidency, but with the future of our country, and ultimately with the well-being of the entire world. He wasn't kidding when he said he was audacious. But it's increasingly looking like his audacity is spinning out of control. In my view, that's what is worrying equity markets all over the world. This is far more serious than the subprime lending and related financial crisis, which is well on its way to getting fixed.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Iran
on: February 26, 2009, 11:23:22 PM
Agree the Israeli are awesome, but the logistics of hitting Iran are a b*tch.I don't think Israel will go nuclear first.
**It's difficult, to be sure, but not impossible.**
Distance makes fuel a serious issue, even flying over Iraq. Do you think His Glibness will let them fly over Iraq?!?
**What is he going to do? Scramble fighters to shoot down the IAF?**
**The IAF recently defeated Syria's air defenses and cratered certain buildings, didn't they?**
And WHERE to hit? With WHAT? The sites are quite numerous, many locations not known, and most of them are hardened, and as Stratfor knows, plenty of them are now protected by Russian AA.
**I don't think Israel can wipe out the nuclear program, however they can delay/expose it.**
The only technically feasible option which occurs to me is missile launches from Israeli subs-- and that opens the gates to hell itself.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Iran
on: February 26, 2009, 09:39:11 PM
The Iran-Israel nuclear endgame is now much closer
Feb. 26, 2009
EDWIN BLACK , THE JERUSALEM POST
In recent days, four key developments have clicked in to edge Iran and Israel much closer to a military denouement with profound consequences for American oil that the nation is not prepared to meet.
What has happened?
First, Iran has proven it can successfully launch a satellite into outer space as it did on February 2. Teheran claimed, to the incredulity of Western governments, that the satellite was to monitor earthquakes and enhance communications. Few believe that, especially since America's own space program continuously launches unpublished military satellite missions. Teheran plans three more satellites this year, creating an easily weaponized space net that worries American military planners.
Second, the International Atomic Energy Agency last week admitted that it had underestimated Iran's nuclear stockpile by about one-third. The watchdog group now confirms Iran possesses 2,227 lbs. of nuclear material, sufficient to create at least one nuclear bomb. That stockpile includes 1,010 kilograms of low-enriched uranium hexafluoride, or approximately 700 kilograms containing the vital uranium 235 isotope, the stuff needed to weaponize.
Third, Iran has ramped up its enrichment program with thousands of new homegrown, highly advanced centrifuges. As The Cutting Edge News reported in April 2008, Iran wants 6,000 centrifuges to speed the enrichment of weapons-grade material. The number of working centrifuges now exceeds 5,400, including 164 new ones believed to be the faster and more efficient IR-2 and IR-3 models made in Iran. These new Iranian centrifuges are at least as sophisticated as its recently imported P-2 models.
American policymakers are now convinced that Iran, despite all protests and charades, is in a mad dash to create a deliverable nuclear weapon. The Obama administration has almost openly abandoned the assertions of the CIA's much-questioned 2008 National Intelligence Estimate that concluded Iran was not pursuing nuclear weaponry for the simple reason that its atomic program and military programs were housed in separate buildings.
Fourth, Binyamin Netanyahu has just become prime minister of Israel. He is determined to take action before - not after - Iran achieves its nuclear potential. This creates a volatile, hair-trigger situation that could explode at any moment. Hence, the endgame is now vastly closer than it was in mid-January, when many believed Israel might take action during the lame-duck interregnum.
Israeli countermeasures to date have included a massive international covert program of equipment sabotage, assassination of key nuclear personnel and a vibrant diplomatic offensive. But all these efforts combined amount to nothing more than delaying tactics, as Iran is irrevocably determined to achieve a nuclear weapon as fast as possible. Many believe such a weapon will be used to fulfill its prediction that Israel will soon be wiped off the map.
THE CONSEQUENCES for this confrontation are apocalyptic because Iran's full partner in this enterprise is Russia. The Russian company Atomstroiexport has provided most if not all of the nuclear material for the 1,000 megawatt Bushehr reactor, along with thousands of technicians to service and operate it.
Following its invasion of Georgia, Moscow forged ahead with final delivery plans for the S-300 advanced air defense system which can track scores of IAF airborne intruders simultaneously, whether low-level drones or high-altitude missiles, and shoot them down. But the S-300, the linchpin of Iran's defense against Israel, will not be fully operational for several months, creating a narrow window for Israel to act. Indeed, Russia has just announced a pause in missile deliveries for the system in fear that it will accelerate an Israeli response.
Iran, of course, has repeatedly threatened to counter any such attack by closing the Strait of Hormuz, as well as launching missiles against the Ras Tanura Gulf oil terminal and bombarding the indispensable Saudi oil facility at Abqaiq which is responsible for some 65 percent of Saudi production. Any one of these military options, let alone all three, would immediately shut off 40% of all seaborne oil, 18% of global oil, and some 20% of America's daily consumption.
America's oil vulnerability has been back-burnered due to the economic crisis and the plunge in gasoline prices. However, the price of gasoline will not mitigate an interruption of oil flow. The price of oil does not impact its ability to flow through blocked or destroyed facilities. Indeed, an interruption would not restore prices to those of last summer - which Russian and Saudi oil officials say is needed - but probably zoom the pump cost to $20 per gallon.
American oil vulnerability in recent months has escalated precisely because of oil's precipitous drop to $35 to $40 a barrel. At that price, America's number one supplier, Canada, which supplies some 2 million out of 20 million barrels of oil a day, cannot afford to produce. Canadian oil sand petroleum is not viable below $70 a barrel. Much of Canada's supply has already been cancelled or indefinitely postponed. America's strategic petroleum reserve can only keep that country moving for approximately 57 days.
THE OBAMA ADMINISTRATION, like the Bush administration before it, has developed no plan or contingency legislation for an oil interruption, such as a surge in retrofitting America's 250 million gas guzzling cars and trucks - each with a 10-year life - or a stimulus of the alternate fuel production needed to rapidly get off oil. Ironically, Iran has undertaken such a crash program converting some 20% of its gasoline fleet yearly to compressed natural gas (CNG) as a countermeasure to Western nuclear sanctions against the Teheran regime that could completely block the flow of gasoline to Iran. Iran has no refining capability.
The question of when and how this endgame will play out is not known by anyone. Israeli leaders wish to avoid military preemption at all costs if possible. But many feel the military moment must come; and when that moment does come, it will be swift, highly technologic and in the twinkling of an eye. But as one informed official quipped, "Those who know, don't talk. Those who talk, don't know."
The writer is The New York Times best-selling investigative author of IBM and the Holocaust, Internal Combustion and the just released The Plan: How to Save America When the Oil Stops - or the Day Before (Dialog Press).www.edwinblack.com
This article can also be read at http://www.jpost.com
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Funny, this IS the Hillary I always knew....
on: February 26, 2009, 09:26:48 PM
Jewish Leaders Blast Clinton Over Israel Criticism
Zuckerman, Lawmakers, Local Jews Say Secretary Of State Not The Hillary Clinton They Used To Know
Hillary Pressuring Israel To Speed Up Aid To Gaza
NEW YORK (CBS) ?
Transition To A New Government
In a swift about face from her views as New York's senator, Secretary of State Hillary Clinton is now hammering Israel over its treatment of Palestinians in Gaza.
As First Lady, Clinton raised eyebrows when she kissed Suha Arafat.
Since she was then seeking a Senate seat the resulting brouhaha caused her to "re-think" her positions.
"I'm a very strong supporter of Israel," Clinton said back in February 2000.
On Thursday, as Secretary of State she had yet another about face in the form of angry messages demanding Israel speed up aid to Gaza. Jewish leaders are furious.
"I am very surprised, frankly, at this statement from the United States government and from the secretary of state," said Mortimer Zuckerman, publisher of the New York Daily News and member of the NYC Jewish Community Relations Council.
"I liked her a lot more as a senator from New York," Assemblyman Dov Hikind, D-Brooklyn, said. "Now, I wonder as I used to wonder who the real Hillary Clinton is."
Clinton's decision to hammer Israel comes as the Clintons and President Barack Obama are planning to give the Palestinians $900 million toward the rebuilding of Gaza in the wake of the Israeli offensive that was sparked by Hamas rocket fire.
"We are working across the government to see what our approach will be," Clinton said.
"I don't believe that we should be in a position at this point to do anything to strengthen Hamas," Zuckerman said. "We surely know what Hamas stands for as I say they are the forward battalions of Iran."
For some, Clinton's change of position is upsetting.
"I feel it's unfortunate that they don't continue the policy of the Bush administration, which was much more pro-Israel," said Akiva Homnick of Jerusalem.
"I happen to have a lot of family who live in Israel and I feel, personally, when you are dealing with people who are very strong against you, you have to stand up to them," said Tami Davudoff of Kew Gardens.
"Hillary had Mrs. Arafat here and she invited Mrs. Arafat for lunch when she was the first lady," added Babak Chafe of Great Neck. "She is pro-Palestinian 100 percent, really. Of course, we always knew it."
"The easy way to make a peace agreement is to pressure Israel because you can't pressure the Arabs," said Solomon Loewi of Monsey, N.Y.
All this could lead to a chilly reception when Mrs. Clinton arrives in the Middle East next week.
The new U.S. envoy to the Middle East, George Mitchell, arrived in Israel on Thursday with a mission to inject new life into peace talks between Israel and the Palestinians.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / We're on the brink of disaster
on: February 26, 2009, 01:05:51 PM
We're on the brink of disaster
Violent protests and riots are breaking out everywhere as economies collapse and governments fail. War is bound to follow.
By Michael Klare
Editor's note: This article has also appeared on TomDispatch.com.
Feb. 26, 2009 |
The global economic meltdown has already caused bank failures, bankruptcies, plant closings and foreclosures and will, in the coming year, leave many tens of millions unemployed across the planet. But another perilous consequence of the crash of 2008 has only recently made its appearance: increased civil unrest and ethnic strife. Someday, perhaps, war may follow.
As people lose confidence in the ability of markets and governments to solve the global crisis, they are likely to erupt into violent protests or to assault others they deem responsible for their plight, including government officials, plant managers, landlords, immigrants and ethnic minorities. (The list could, in the future, prove long and unnerving.) If the present economic disaster turns into what President Obama has referred to as a "lost decade," the result could be a global landscape filled with economically fueled upheavals.
Indeed, if you want to be grimly impressed, hang a world map on your wall and start inserting red pins where violent episodes have already occurred. Athens (Greece), Longnan (China), Port-au-Prince (Haiti), Riga (Latvia), Santa Cruz (Bolivia), Sofia (Bulgaria), Vilnius (Lithuania) and Vladivostok (Russia) would be a start. Many other cities from Reykjavik, Paris, Rome and Zaragoza to Moscow and Dublin have witnessed huge protests over rising unemployment and falling wages that remained orderly thanks in part to the presence of vast numbers of riot police. If you inserted orange pins at these locations -- none as yet in the United States -- your map would already look aflame with activity. And if you're a gambling man or woman, it's a safe bet that this map will soon be far better populated with red and orange pins.
For the most part, such upheavals, even when violent, are likely to remain localized in nature, and disorganized enough that government forces will be able to bring them under control within days or weeks, even if -- as with Athens for six days last December -- urban paralysis sets in due to rioting, tear gas and police cordons. That, at least, has been the case so far. It is entirely possible, however, that, as the economic crisis worsens, some of these incidents will metastasize into far more intense and long-lasting events: armed rebellions, military takeovers, civil conflicts, even economically fueled wars between states.
Every outbreak of violence has its own distinctive origins and characteristics. All, however, are driven by a similar combination of anxiety about the future and lack of confidence in the ability of established institutions to deal with the problems at hand. And just as the economic crisis has proven global in ways not seen before, so local incidents -- especially given the almost instantaneous nature of modern communications -- have a potential to spark others in far-off places, linked only in a virtual sense.
A global pandemic of economically driven violence
The riots that erupted in the spring of 2008 in response to rising food prices suggested the speed with which economically related violence can spread. It is unlikely that Western news sources captured all such incidents, but among those recorded in the New York Times and the Wall Street Journal were riots in Cameroon, Egypt, Ethiopia, Haiti, India, Indonesia, Ivory Coast and Senegal.
In Haiti, for example, thousands of protesters stormed the presidential palace in Port-au-Prince and demanded food handouts, only to be repelled by government troops and U.N. peacekeepers. Other countries, including Pakistan and Thailand, quickly sought to deter such assaults by deploying troops at farms and warehouses throughout the country.
The riots only abated at summer's end when falling energy costs brought food prices crashing down as well. (The cost of food is now closely tied to the price of oil and natural gas because petrochemicals are so widely and heavily used in the cultivation of grains.) Ominously, however, this is sure to prove but a temporary respite, given the epic droughts now gripping breadbasket regions of the United States, Argentina, Australia, China, the Middle East and Africa. Look for the prices of wheat, soybeans and possibly rice to rise in the coming months -- just when billions of people in the developing world are sure to see their already marginal incomes plunging due to the global economic collapse.
Food riots were but one form of economic violence that made its bloody appearance in 2008. As economic conditions worsened, protests against rising unemployment, government ineptitude and the unaddressed needs of the poor erupted as well. In India, for example, violent protests threatened stability in many key areas. Although usually described as ethnic, religious or caste disputes, these outbursts were typically driven by economic anxiety and a pervasive feeling that someone else's group was faring better than yours -- and at your expense.
In April, for example, six days of intense rioting in Indian-controlled Kashmir were largely blamed on religious animosity between the majority Muslim population and the Hindu-dominated Indian government; equally important, however, was a deep resentment over what many Kashmiri Muslims experienced as discrimination in jobs, housing and land use. Then, in May, thousands of nomadic shepherds known as Gujjars shut down roads and trains leading to the city of Agra, home of the Taj Mahal, in a drive to be awarded special economic rights; more than 30 people were killed when the police fired into crowds. In October, economically related violence erupted in Assam in the country's far northeast, where impoverished locals are resisting an influx of even poorer, mostly illegal immigrants from nearby Bangladesh.
Economically driven clashes also erupted across much of eastern China in 2008. Such events, labeled "mass incidents" by Chinese authorities, usually involve protests by workers over sudden plant shutdowns, lost pay or illegal land seizures. More often than not, protesters demanded compensation from company managers or government authorities, only to be greeted by club-wielding police.
Needless to say, the leaders of China's Communist Party have been reluctant to acknowledge such incidents. This January, however, the magazine Liaowang (Outlook Weekly) reported that layoffs and wage disputes had triggered a sharp increase in such "mass incidents," particularly along the country's eastern seaboard, where much of its manufacturing capacity is located.
By December, the epicenter of such sporadic incidents of violence had moved from the developing world to Western Europe and the former Soviet Union. Here, the protests have largely been driven by fears of prolonged unemployment, disgust at government malfeasance and ineptitude, and a sense that "the system," however defined, is incapable of satisfying the future aspirations of large groups of citizens.
One of the earliest of this new wave of upheavals occurred in Athens on Dec. 6, 2008, after police shot and killed a 15-year-old schoolboy during an altercation in a crowded downtown neighborhood. As news of the killing spread throughout the city, hundreds of students and young people surged into the city center and engaged in pitched battles with riot police, throwing stones and firebombs. Although government officials later apologized for the killing and charged the police officer involved with manslaughter, riots broke out repeatedly in the following days in Athens and other Greek cities. Angry youths attacked the police -- widely viewed as agents of the establishment -- as well as luxury shops and hotels, some of which were set on fire. By one estimate, the six days of riots caused $1.3 billion in damage to businesses at the height of the Christmas shopping season.
Russia also experienced a spate of violent protests in December, triggered by the imposition of high tariffs on imported automobiles. Instituted by Prime Minister Vladimir Putin to protect an endangered domestic auto industry (whose sales were expected to shrink by up to 50 percent in 2009), the tariffs were a blow to merchants in the Far Eastern port of Vladivostok who benefited from a nationwide commerce in used Japanese vehicles. When local police refused to crack down on anti-tariff protests, the authorities were evidently worried enough to fly in units of special forces from Moscow, 3,700 miles away.
In January, incidents of this sort seemed to be spreading through Eastern Europe. Between Jan. 13 and Jan. 16, anti-government protests involving violent clashes with the police erupted in the Latvian capital of Riga, the Bulgarian capital of Sofia, and the Lithuanian capital of Vilnius. It is already essentially impossible to keep track of all such episodes, suggesting that we are on the verge of a global pandemic of economically driven violence.
A perfect recipe for instability
While most such incidents are triggered by an immediate event -- a tariff, the closure of a local factory, the announcement of government austerity measures -- there are systemic factors at work as well. While economists now agree that we are in the midst of a recession deeper than any since the Great Depression of the 1930s, they generally assume that this downturn -- like all others since World War II -- will be followed in a year, or two, or three, by the beginning of a typical recovery.
There are good reasons to suspect that this might not be the case -- that poorer countries (along with many people in the richer countries) will have to wait far longer for such a recovery, or may see none at all. Even in the United States, 54 percent of Americans now believe that "the worst" is "yet to come" and only 7 percent that the economy has "turned the corner," according to a recent Ipsos/McClatchy poll; fully a quarter think the crisis will last more than four years. Whether in the U.S., Russia, China or Bangladesh, it is this underlying anxiety -- this suspicion that things are far worse than just about anyone is saying -- that is helping to fuel the global epidemic of violence.
The World Bank's most recent status report, Global Economic Prospects 2009, fulfills those anxieties in two ways. It refuses to state the worst, even while managing to hint, in terms too clear to be ignored, at the prospect of a long-term, or even permanent, decline in economic conditions for many in the world. Nominally upbeat -- as are so many media pundits -- regarding the likelihood of an economic recovery in the not-too-distant future, the report remains full of warnings about the potential for lasting damage in the developing world if things don't go exactly right.
Two worries, in particular, dominate Global Economic Prospects 2009: that banks and corporations in the wealthier countries will cease making investments in the developing world, choking off whatever growth possibilities remain; and that food costs will rise uncomfortably, while the use of farmlands for increased biofuels production will result in diminished food availability to hundreds of millions.
Despite its Pollyanna-ish passages on an economic rebound, the report does not mince words when discussing what the almost certain coming decline in First World investment in Third World countries would mean:
"Should credit markets fail to respond to the robust policy interventions taken so far, the consequences for developing countries could be very serious. Such a scenario would be characterized by ... substantial disruption and turmoil, including bank failures and currency crises, in a wide range of developing countries. Sharply negative growth in a number of developing countries and all of the attendant repercussions, including increased poverty and unemployment, would be inevitable."
In the fall of 2008, when the report was written, this was considered a "worst-case scenario." Since then, the situation has obviously worsened radically, with financial analysts reporting a virtual freeze in worldwide investment. Equally troubling, newly industrialized countries that rely on exporting manufactured goods to richer countries for much of their national income have reported stomach-wrenching plunges in sales, producing massive plant closings and layoffs.
The World Bank's 2008 survey also contains troubling data about the future availability of food. Although insisting that the planet is capable of producing enough foodstuffs to meet the needs of a growing world population, its analysts were far less confident that sufficient food would be available at prices people could afford, especially once hydrocarbon prices begin to rise again. With ever more farmland being set aside for biofuels production and efforts to increase crop yields through the use of "miracle seeds" losing steam, the Bank's analysts balanced their generally hopeful outlook with a caveat: "If biofuels-related demand for crops is much stronger or productivity performance disappoints, future food supplies may be much more expensive than in the past."
Combine these two World Bank findings -- zero economic growth in the developing world and rising food prices -- and you have a perfect recipe for unrelenting civil unrest and violence. The eruptions seen in 2008 and early 2009 will then be mere harbingers of a grim future in which, in a given week, any number of cities reel from riots and civil disturbances that could spread like multiple brush fires in a drought.
Mapping a world at the brink
Survey the present world, and it's all too easy to spot a plethora of potential sites for such multiple eruptions -- or far worse. Take China. So far, the authorities have managed to control individual "mass incidents," preventing them from coalescing into something larger. But in a country with a more than 2,000-year history of vast millenarian uprisings, the risk of such escalation has to be on the minds of every Chinese leader.
On Feb. 2, a top Chinese party official, Chen Xiwen, announced that, in the last few months of 2008 alone, a staggering 20 million migrant workers, who left rural areas for the country's booming cities in recent years, had lost their jobs. Worse yet, they had little prospect of regaining them in 2009. If many of these workers return to the countryside, they may find nothing there either, not even land to work.
Under such circumstances, and with further millions likely to be shut out of coastal factories in the coming year, the prospect of mass unrest is high. No wonder the government announced a $585 billion stimulus plan aimed at generating rural employment and, at the same time, called on security forces to exercise discipline and restraint when dealing with protesters. Many analysts now believe that, as exports continue to dry up, rising unemployment could lead to nationwide strikes and protests that might overwhelm ordinary police capabilities and require full-scale intervention by the military (as occurred in Beijing during the Tiananmen Square demonstrations of 1989).
Or take many of the Third World petro-states that experienced heady boosts in income when oil prices were high, allowing governments to buy off dissident groups or finance powerful internal security forces. With oil prices plunging from $147 per barrel of crude oil to less than $40, such countries, from Angola to shaky Iraq, now face severe instability.
Nigeria is a typical case in point: When oil prices were high, the central government in Abuja raked in billions every year, enough to enrich elites in key parts of the country and subsidize a large military establishment; now that prices are low, the government will have a hard time satisfying all these previously well-fed competing obligations, which means the risk of internal disequilibrium will escalate. An insurgency in the oil-producing Niger Delta region, fueled by popular discontent with the failure of oil wealth to trickle down from the capital, is already gaining momentum and is likely to grow stronger as government revenues shrivel; other regions, equally disadvantaged by national revenue-sharing policies, will be open to disruptions of all sorts, including heightened levels of internecine warfare.
Bolivia is another energy producer that seems poised at the brink of an escalation in economic violence. One of the poorest countries in the Western Hemisphere, it harbors substantial oil and natural gas reserves in its eastern, lowland regions. A majority of the population -- many of Indian descent -- supports President Evo Morales, who seeks to exercise strong state control over the reserves and use the proceeds to uplift the nation's poor. But a majority of those in the eastern part of the country, largely controlled by a European-descended elite, resent central government interference and seek to control the reserves themselves. Their efforts to achieve greater autonomy have led to repeated clashes with government troops and, in deteriorating times, could set the stage for a full-scale civil war.
Given a global situation in which one startling, often unexpected development follows another, prediction is perilous. At a popular level, however, the basic picture is clear enough: Continued economic decline combined with a pervasive sense that existing systems and institutions are incapable of setting things right is already producing a potentially lethal brew of anxiety, fear and rage. Popular explosions of one sort or another are inevitable.
Some sense of this new reality appears to have percolated up to the highest reaches of the U.S. intelligence community. In testimony before the Senate Select Committee on Intelligence on Feb. 12, Adm. Dennis C. Blair, the new director of national intelligence, declared, "The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications ... Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period" -- certain to be the case in the present situation.
Blair did not specify which countries he had in mind when he spoke of "regime-threatening instability" -- a new term in the American intelligence lexicon, at least when associated with economic crises -- but it is clear from his testimony that U.S. officials are closely watching dozens of shaky nations in Africa, the Middle East, Latin America and Central Asia.
Now go back to that map on your wall with all those red and orange pins in it and proceed to color in appropriate countries in various shades of red and orange to indicate recent striking declines in gross national product and rises in unemployment rates. Without 16 intelligence agencies under you, you'll still have a pretty good idea of the places that Blair and his associates are eyeing in terms of instability as the future darkens on a planet at the brink.
-- By Michael Klare
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: February 26, 2009, 11:40:40 AM
The 2% Illusion
Take everything they earn, and it still won't be enough.
President Obama has laid out the most ambitious and expensive domestic agenda since LBJ, and now all he has to do is figure out how to pay for it. On Tuesday, he left the impression that we need merely end "tax breaks for the wealthiest 2% of Americans," and he promised that households earning less than $250,000 won't see their taxes increased by "one single dime."
This is going to be some trick. Even the most basic inspection of the IRS income tax statistics shows that raising taxes on the salaries, dividends and capital gains of those making more than $250,000 can't possibly raise enough revenue to fund Mr. Obama's new spending ambitions.
Consider the IRS data for 2006, the most recent year that such tax data are available and a good year for the economy and "the wealthiest 2%." Roughly 3.8 million filers had adjusted gross incomes above $200,000 in 2006. (That's about 7% of all returns; the data aren't broken down at the $250,000 point.) These people paid about $522 billion in income taxes, or roughly 62% of all federal individual income receipts. The richest 1% -- about 1.65 million filers making above $388,806 -- paid some $408 billion, or 39.9% of all income tax revenues, while earning about 22% of all reported U.S. income.
Note that federal income taxes are already "progressive" with a 35% top marginal rate, and that Mr. Obama is (so far) proposing to raise it only to 39.6%, plus another two percentage points in hidden deduction phase-outs. He'd also raise capital gains and dividend rates, but those both yield far less revenue than the income tax. These combined increases won't come close to raising the hundreds of billions of dollars in revenue that Mr. Obama is going to need.
But let's not stop at a 42% top rate; as a thought experiment, let's go all the way. A tax policy that confiscated 100% of the taxable income of everyone in America earning over $500,000 in 2006 would only have given Congress an extra $1.3 trillion in revenue. That's less than half the 2006 federal budget of $2.7 trillion and looks tiny compared to the more than $4 trillion Congress will spend in fiscal 2010. Even taking every taxable "dime" of everyone earning more than $75,000 in 2006 would have barely yielded enough to cover that $4 trillion.
Fast forward to this year (and 2010) when the Wall Street meltdown and recession are going to mean far few taxpayers earning more than $500,000. Profits are plunging, businesses are cutting or eliminating dividends, hedge funds are rolling up, and, most of all, capital nationwide is on strike. Raising taxes now will thus yield far less revenue than it would have in 2006.
Mr. Obama is of course counting on an economic recovery. And he's also assuming along with the new liberal economic consensus that taxes don't matter to growth or job creation. The truth, though, is that they do. Small- and medium-sized businesses are the nation's primary employers, and lower individual tax rates have induced thousands of them to shift from filing under the corporate tax system to the individual system, often as limited liability companies or Subchapter S corporations. The Tax Foundation calculates that merely restoring the higher, Clinton-era tax rates on the top two brackets would hit 45% to 55% of small-business income, depending on how inclusively "small business" is defined. These owners will find a way to declare less taxable income.
The bottom line is that Mr. Obama is selling the country on a 2% illusion. Unwinding the U.S. commitment in Iraq and allowing the Bush tax cuts to expire can't possibly pay for his agenda. Taxes on the not-so-rich will need to rise as well.
On that point, by the way, it's unclear why Mr. Obama thinks his climate-change scheme won't hit all Americans with higher taxes. Selling the right to emit greenhouse gases amounts to a steep new tax on most types of energy and, therefore, on all Americans who use energy. There's a reason that Charlie Rangel's Ways and Means panel, which writes tax law, is holding hearings this week on cap-and-trade regulation.
Mr. Obama is very good at portraying his agenda as nothing more than center-left pragmatism. But pragmatists don't ignore the data. And the reality is that the only way to pay for Mr. Obama's ambitions is to reach ever deeper into the pockets of the American middle class.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / The next shoe to drop?
on: February 25, 2009, 08:25:03 PM
World GDP: $ 70,650,000,000,000
From the Wired article posted above:
The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion
. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.
Banks in Europe and the US face a new wave of losses linked to contracts issued to insure against companies going bust and defaulting on their loans, City analysts have warned.
After the billions lost over the US subprime market and leveraged loans, investment banks such as Morgan Stanley, Deutsche Bank, Barclays, UBS and RBS face losses on credit default swaps (CDS) – contracts that allow an investor to be repaid if a company loan or a bond defaults.
CDS contracts became a favourite tool of speculators, mostly hedge funds, which bought the contracts without having any link to the original lending. They bought the contract to trade or in the expectation the company would in fact default, meaning they could claim back the full value of a loan they never made.
The CDS market exploded to be worth as much as $50tn, many times the size of the underlying assets. Each loan could have thousands of protection contracts, even if there were only a few lenders. Hedge funds accounted for about 60% of CDS trading, according to ratings agency Fitch.
But now that a rising number of companies are going bust, the issuers of the contracts could face significant losses, analysts say. US carmaker General Motors, which is seeking government aid, was the company that had most protection bought and sold on it by the end of 2006, according to Fitch.
Investment banks were attracted by the method as they didn't have to report any issuance data to any regulator and could issue as many contracts as they wanted.
At present, nobody knows which banks have issued which contracts. The uncertainty and the deepening recession have sent the cost of insurance protection to record highs this week. The itraxx index, which tracks the senior debt of 25 European financial institutions, closed at 165 basis points today, near its record yesterday of 166 points, according to financial information provider Markit.
CDS contracts have also gained on growing uncertainty over eastern European banks and after Citigroup asked the US government for aid.
The banks say they are protected as they have daily updates on the collateral needed for their CDS contracts.
German CDS debt spreads hit record as economy crumbles
The cost of bankruptcy protection on German debt has reached an all-time high on spill-over from the financial crisis in Eastern Europe and mounting concerns about the stability of Germany's banking system.
Credit default swaps measuring risk on five-year sovereign debt touched 90 basis points on Tuesday and looks poised to rise above French debt for the first time.
The spike follows a warning by Deutsche Bank that Germany’s economy will contract by 5pc this year as industrial exports collapse at the fastest pace since the Great Depression.
Norbert Walter, the bank’s chief economist, said there was a risk of an even deeper slump if the economy fails to stabilize by the summer. “A bigger contraction can’t be ruled out,” he said.
The state governments of Hamburg and Schleswig-Holstein agreed on €3bn (£2.7bn) cash rescue on Tuesday for Landesbank HSH Nordbank, the world’s top source of finance for shipping, raising the public stake to 80pc. The bank has already drawn on a €10bn guarantee from the government’s bail-out fund Soffin. HSH lost €2.8bn last year, mostly on credit instruments and fall-out from the Lehman debacle.
“Of course these costs will weigh on the budget. We had no choice,” said Peter Harry Carstensen, the premier of Schleswig Holstein. He denied press reports that his own state was facing bankruptcy.
There are eleven state-owned Landesbanken in Germany and most are in trouble. While their mission is to boost regional industry and finance the family Mittelstand firms, they strayed disastrously into almost every form of leveraged excess through off-books `conduits’, many based in Dublin.
“The entire Landesbanken system is rotten,” said Hans Redeker, currency chief at BNP Paribas.”Credit will collapse if they are allowed to fail so they have to be recapitalized. But it is not just the banks in trouble: Germany’s entire export structure has been hit drastically.”
“German CDS spreads are going massively higher. German bank exposure to Eastern Europe, although less than Austria, is still very high. The markets have started to price in a de facto bail-out of Eastern Europe and they think that Germany that will have to pay the bill,” he said.
The rating agency Standard & Poor’s said in a report on Tuesday that the region was “shuddering to a halt”, with a number of countries were “crumbling under the weight of high foreign currency debt.” It is unclear whether they can roll over debts as Western banks retreat to their home market.
S&P said foreign debt is 115pc of GDP in Estonia, 103pc in Bulgaria, 93pc in Hungary, all far above danger level. “All the ingredients of a major crisis are in place,” said Jean-Michel Six, the group’s Europe economist.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / The Super Expressway to Serfdom !
on: February 25, 2009, 03:30:45 PM
Obama seeks $634B over 10 years for health care
By RICARDO ALONSO-ZALDIVAR, Associated Press Writer 2 mins ago
WASHINGTON – President Barack Obama wants a significant "down payment" for overhauling the health care system: $634 billion over 10 years. A senior administration official says Obama's budget calls for financing the overhaul by trimming Medicare spending and limiting tax deductions for upper-income earners. The official spoke on condition of anonymity because the budget won't be released until Thursday.
About 48 million Americans are uninsured, according to recent estimates. The cost of guaranteeing coverage for all could easily exceed $1 trillion over 10 years.
Obama has asked Congress for health reform this year, but senior members of both political parties say they are concerned about the cost.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Rachel, has Obama sold Israel out yet?
on: February 25, 2009, 01:57:52 PM
Hamas 'happy' with Obama's $900 million pledge
Funds earmarked for U.N. agency that openly employs terrorists
Posted: February 24, 2009
11:16 pm Eastern
By Aaron Klein
© 2009 WorldNetDaily
TEL AVIV, Israel – Hamas is "very happy" with a pledge this week from the Obama administration to provide $900 million in aid for rebuilding the Hamas-controlled Gaza Strip, a spokesman from the Islamist organization told WND.
"We are very happy with this decision," said Hamas spokesman Fawzi Barhoum, speaking by cell phone from Gaza. "In the first place, this money will go toward reconstructing efforts."
Barhoum said he expects the money to be tightly controlled. He said the funds are likely to be delineated to the Palestinian Authority and to the United Nations Relief and Work Agency, or UNWRA, which administers aid to millions of Palestinian "refugees" in the Gaza Strip and West Bank.
Hamas has a close relationship with UNWRA; the agency openly employs a large number of Hamas members, including some of the group's most senior terrorists.
The U.S. aid has not yet been officially approved by Congress. The package is expected to be formally announced by Secretary of State Hillary Clinton when she attends an international Gaza donors conference in Egypt next week. A U.S. official reported the money will not reach Hamas but will go instead to nongovernmental organizations, most notably UNWRA. Still, the terrorist organization controls the Gaza Strip. Any reconstruction efforts in the territory are likely to bolster Hamas.
Hamas, UNWRA closely linked
From 1990 until today, teachers affiliated with the Islamic Bloc, which is formally associated with Hamas, have won elections as representatives of the teachers' section of the UNRWA union. By 2003, they held all seats and fully constituted the executive committee of this section of the union. The publication of UNWRA school books in Gaza is coordinated with Hamas.
Saeed Siam, Hamas former interior minister and one of the leaders of the group's so-called military wing, taught in UNRWA schools from 1980 to 2003 and served as a representative to the UNWRA union. He was killed during an Israeli air strike last month.
Sheik Ahmed Yassin, the man who founded Hamas and has been immortalized by it, worked as a UNRWA teacher from 1967 to 1994.
On July 6, 2001, Hamas convened a conference in the UNRWA school in the Jabalya refugee camp in Gaza, with students, teachers and school administrators in attendance. Yassin presented his ideology, and then an official named Saheil Alhinadi, who represented the teaching sector of UNRWA, praised students who had recently carried out suicide attacks against Israel, declaring "the road to Palestine passes through the blood of the fallen, and these fallen have written history with parts of their flesh and their bodies."
A 2002 report from the Intelligence and Terrorism Center at Israel's Center for Special Studies, a think tank associated with Israeli intelligence, documented how a number of wanted terrorists were found hiding inside schools run by UNRWA.
"A large number of youth clubs operated by UNRWA in the refugee camps were discovered to be meeting places for terrorists," said the report.
Muhammad Ali Hassan, a Hamas terrorist arrested in February 2002, confessed he had carried out a sniper shooting from the school run by UNRWA in the al-Ayn refugee camp near Nablus, or biblical Shechem. He also reportedly told his interrogators that bombs intended for terrorist attacks were being manufactured inside the school's facilities.
Nidal Abd al-Fattah Abdallah Nazzal, a Hamas activist from Kalkilya, was arrested in August 2002. He had been employed as an ambulance driver by UNRWA. He confessed during his interrogation that he had transported weapons and explosives in an UNRWA ambulance to terrorists.
Additional information about arrests of UNRWA employees by Israel came in 2003 from the U.S. General Accounting Office, which was charged with conducting an investigation of UNRWA operations. The office found that in three instances Israeli military courts convicted UNRWA employees of involvement with explosives.
More recently, in the time leading up to and since the Hamas takeover of Gaza in the summer of 2007, there has been concern in Jerusalem about UNRWA camps being used for the manufacture, storage, and launching of rockets and mortars into Israel. Also, camp residents have been suspected of active involvement in launching missiles and infiltrating shooters and suicide bombers into Israel.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: February 24, 2009, 11:54:52 PM
Enter Li, a star mathematician who grew up in rural China in the 1960s. He excelled in school and eventually got a master's degree in economics from Nankai University before leaving the country to get an MBA from Laval University in Quebec. That was followed by two more degrees: a master's in actuarial science and a PhD in statistics, both from Ontario's University of Waterloo. In 1997 he landed at Canadian Imperial Bank of Commerce, where his financial career began in earnest; he later moved to Barclays Capital and by 2004 was charged with rebuilding its quantitative analytics team.
Li's trajectory is typical of the quant era, which began in the mid-1980s. Academia could never compete with the enormous salaries that banks and hedge funds were offering. At the same time, legions of math and physics PhDs were required to create, price, and arbitrage Wall Street's ever more complex investment structures.
In 2000, while working at JPMorgan Chase, Li published a paper in The Journal of Fixed Income titled "On Default Correlation: A Copula Function Approach." (In statistics, a copula is used to couple the behavior of two or more variables.) Using some relatively simple math—by Wall Street standards, anyway—Li came up with an ingenious way to model default correlation without even looking at historical default data. Instead, he used market data about the prices of instruments known as credit default swaps.
If you're an investor, you have a choice these days: You can either lend directly to borrowers or sell investors credit default swaps, insurance against those same borrowers defaulting. Either way, you get a regular income stream—interest payments or insurance payments—and either way, if the borrower defaults, you lose a lot of money. The returns on both strategies are nearly identical, but because an unlimited number of credit default swaps can be sold against each borrower, the supply of swaps isn't constrained the way the supply of bonds is, so the CDS market managed to grow extremely rapidly. Though credit default swaps were relatively new when Li's paper came out, they soon became a bigger and more liquid market than the bonds on which they were based.
When the price of a credit default swap goes up, that indicates that default risk has risen. Li's breakthrough was that instead of waiting to assemble enough historical data about actual defaults, which are rare in the real world, he used historical prices from the CDS market. It's hard to build a historical model to predict Alice's or Britney's behavior, but anybody could see whether the price of credit default swaps on Britney tended to move in the same direction as that on Alice. If it did, then there was a strong correlation between Alice's and Britney's default risks, as priced by the market. Li wrote a model that used price rather than real-world default data as a shortcut (making an implicit assumption that financial markets in general, and CDS markets in particular, can price default risk correctly).
It was a brilliant simplification of an intractable problem. And Li didn't just radically dumb down the difficulty of working out correlations; he decided not to even bother trying to map and calculate all the nearly infinite relationships between the various loans that made up a pool. What happens when the number of pool members increases or when you mix negative correlations with positive ones? Never mind all that, he said. The only thing that matters is the final correlation number—one clean, simple, all-sufficient figure that sums up everything.
The effect on the securitization market was electric. Armed with Li's formula, Wall Street's quants saw a new world of possibilities. And the first thing they did was start creating a huge number of brand-new triple-A securities. Using Li's copula approach meant that ratings agencies like Moody's—or anybody wanting to model the risk of a tranche—no longer needed to puzzle over the underlying securities. All they needed was that correlation number, and out would come a rating telling them how safe or risky the tranche was.
As a result, just about anything could be bundled and turned into a triple-A bond—corporate bonds, bank loans, mortgage-backed securities, whatever you liked. The consequent pools were often known as collateralized debt obligations, or CDOs. You could tranche that pool and create a triple-A security even if none of the components were themselves triple-A. You could even take lower-rated tranches of other CDOs, put them in a pool, and tranche them—an instrument known as a CDO-squared, which at that point was so far removed from any actual underlying bond or loan or mortgage that no one really had a clue what it included. But it didn't matter. All you needed was Li's copula function.
The CDS and CDO markets grew together, feeding on each other. At the end of 2001, there was $920 billion in credit default swaps outstanding. By the end of 2007, that number had skyrocketed to more than $62 trillion. The CDO market, which stood at $275 billion in 2000, grew to $4.7 trillion by 2006.
At the heart of it all was Li's formula. When you talk to market participants, they use words like beautiful, simple, and, most commonly, tractable. It could be applied anywhere, for anything, and was quickly adopted not only by banks packaging new bonds but also by traders and hedge funds dreaming up complex trades between those bonds.
"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie, a Stanford University finance professor who served on Moody's Academic Advisory Research Committee. The Gaussian copula soon became such a universally accepted part of the world's financial vocabulary that brokers started quoting prices for bond tranches based on their correlations. "Correlation trading has spread through the psyche of the financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.
The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.
David X. Li
Illustration: David A. Johnson In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.
In finance, you can never reduce risk outright; you can only try to set up a market in which people who don't want risk sell it to those who do. But in the CDO market, people used the Gaussian copula model to convince themselves they didn't have any risk at all, when in fact they just didn't have any risk 99 percent of the time. The other 1 percent of the time they blew up. Those explosions may have been rare, but they could destroy all previous gains, and then some.
Li's copula function was used to price hundreds of billions of dollars' worth of CDOs filled with mortgages. And because the copula function used CDS prices to calculate correlation, it was forced to confine itself to looking at the period of time when those credit default swaps had been in existence: less than a decade, a period when house prices soared. Naturally, default correlations were very low in those years. But when the mortgage boom ended abruptly and home values started falling across the country, correlations soared.
Bankers securitizing mortgages knew that their models were highly sensitive to house-price appreciation. If it ever turned negative on a national scale, a lot of bonds that had been rated triple-A, or risk-free, by copula-powered computer models would blow up. But no one was willing to stop the creation of CDOs, and the big investment banks happily kept on building more, drawing their correlation data from a period when real estate only went up.
"Everyone was pinning their hopes on house prices continuing to rise," says Kai Gilkes of the credit research firm CreditSights, who spent 10 years working at ratings agencies. "When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn't rating agencies build in some cushion for this sensitivity to a house-price-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO."
Bankers should have noted that very small changes in their underlying assumptions could result in very large changes in the correlation number. They also should have noticed that the results they were seeing were much less volatile than they should have been—which implied that the risk was being moved elsewhere. Where had the risk gone?
They didn't know, or didn't ask. One reason was that the outputs came from "black box" computer models and were hard to subject to a commonsense smell test. Another was that the quants, who should have been more aware of the copula's weaknesses, weren't the ones making the big asset-allocation decisions. Their managers, who made the actual calls, lacked the math skills to understand what the models were doing or how they worked. They could, however, understand something as simple as a single correlation number. That was the problem.
"The relationship between two assets can never be captured by a single scalar quantity," Wilmott says. For instance, consider the share prices of two sneaker manufacturers: When the market for sneakers is growing, both companies do well and the correlation between them is high. But when one company gets a lot of celebrity endorsements and starts stealing market share from the other, the stock prices diverge and the correlation between them turns negative. And when the nation morphs into a land of flip-flop-wearing couch potatoes, both companies decline and the correlation becomes positive again. It's impossible to sum up such a history in one correlation number, but CDOs were invariably sold on the premise that correlation was more of a constant than a variable.
No one knew all of this better than David X. Li: "Very few people understand the essence of the model," he told The Wall Street Journal way back in fall 2005.
"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.
Nassim Nicholas Taleb, hedge fund manager and author of The Black Swan, is particularly harsh when it comes to the copula. "People got very excited about the Gaussian copula because of its mathematical elegance, but the thing never worked," he says. "Co-association between securities is not measurable using correlation," because past history can never prepare you for that one day when everything goes south. "Anything that relies on correlation is charlatanism."
Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.
In the world of finance, too many quants see only the numbers before them and forget about the concrete reality the figures are supposed to represent. They think they can model just a few years' worth of data and come up with probabilities for things that may happen only once every 10,000 years. Then people invest on the basis of those probabilities, without stopping to wonder whether the numbers make any sense at all.
As Li himself said of his own model: "The most dangerous part is when people believe everything coming out of it."
— Felix Salmon (firstname.lastname@example.org
) writes the Market Movers financial blog at Portfolio.com.
Politics, Religion, Science, Culture and Humanities / Politics & Religion / Re: Political Economics
on: February 24, 2009, 11:54:02 PM
WIRED MAGAZINE: 17.03
Tech Biz : IT
Recipe for Disaster: The Formula That Killed Wall Street
By Felix Salmon 02.23.09
In the mid-'80s, Wall Street turned to the quants—brainy financial engineers—to invent new ways to boost profits. Their methods for minting money worked brilliantly... until one of them devastated the global economy.
Photo: Jim Krantz/Gallery Stock
Road Map for Financial Recovery: Radical Transparency Now! A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.
For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.
His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.
Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.
David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
How could one formula pack such a devastating punch? The answer lies in the bond market, the multitrillion-dollar system that allows pension funds, insurance companies, and hedge funds to lend trillions of dollars to companies, countries, and home buyers.
A bond, of course, is just an IOU, a promise to pay back money with interest by certain dates. If a company—say, IBM—borrows money by issuing a bond, investors will look very closely over its accounts to make sure it has the wherewithal to repay them. The higher the perceived risk—and there's always some risk—the higher the interest rate the bond must carry.
Bond investors are very comfortable with the concept of probability. If there's a 1 percent chance of default but they get an extra two percentage points in interest, they're ahead of the game overall—like a casino, which is happy to lose big sums every so often in return for profits most of the time.
Bond investors also invest in pools of hundreds or even thousands of mortgages. The potential sums involved are staggering: Americans now owe more than $11 trillion on their homes. But mortgage pools are messier than most bonds. There's no guaranteed interest rate, since the amount of money homeowners collectively pay back every month is a function of how many have refinanced and how many have defaulted. There's certainly no fixed maturity date: Money shows up in irregular chunks as people pay down their mortgages at unpredictable times—for instance, when they decide to sell their house. And most problematic, there's no easy way to assign a single probability to the chance of default.
Wall Street solved many of these problems through a process called tranching, which divides a pool and allows for the creation of safe bonds with a risk-free triple-A credit rating. Investors in the first tranche, or slice, are first in line to be paid off. Those next in line might get only a double-A credit rating on their tranche of bonds but will be able to charge a higher interest rate for bearing the slightly higher chance of default. And so on.
"...correlation is charlatanism"
Photo: AP photo/Richard Drew The reason that ratings agencies and investors felt so safe with the triple-A tranches was that they believed there was no way hundreds of homeowners would all default on their loans at the same time. One person might lose his job, another might fall ill. But those are individual calamities that don't affect the mortgage pool much as a whole: Everybody else is still making their payments on time.
But not all calamities are individual, and tranching still hadn't solved all the problems of mortgage-pool risk. Some things, like falling house prices, affect a large number of people at once. If home values in your neighborhood decline and you lose some of your equity, there's a good chance your neighbors will lose theirs as well. If, as a result, you default on your mortgage, there's a higher probability they will default, too. That's called correlation—the degree to which one variable moves in line with another—and measuring it is an important part of determining how risky mortgage bonds are.
Investors like risk, as long as they can price it. What they hate is uncertainty—not knowing how big the risk is. As a result, bond investors and mortgage lenders desperately want to be able to measure, model, and price correlation. Before quantitative models came along, the only time investors were comfortable putting their money in mortgage pools was when there was no risk whatsoever—in other words, when the bonds were guaranteed implicitly by the federal government through Fannie Mae or Freddie Mac.
Yet during the '90s, as global markets expanded, there were trillions of new dollars waiting to be put to use lending to borrowers around the world—not just mortgage seekers but also corporations and car buyers and anybody running a balance on their credit card—if only investors could put a number on the correlations between them. The problem is excruciatingly hard, especially when you're talking about thousands of moving parts. Whoever solved it would earn the eternal gratitude of Wall Street and quite possibly the attention of the Nobel committee as well.
To understand the mathematics of correlation better, consider something simple, like a kid in an elementary school: Let's call her Alice. The probability that her parents will get divorced this year is about 5 percent, the risk of her getting head lice is about 5 percent, the chance of her seeing a teacher slip on a banana peel is about 5 percent, and the likelihood of her winning the class spelling bee is about 5 percent. If investors were trading securities based on the chances of those things happening only to Alice, they would all trade at more or less the same price.
But something important happens when we start looking at two kids rather than one—not just Alice but also the girl she sits next to, Britney. If Britney's parents get divorced, what are the chances that Alice's parents will get divorced, too? Still about 5 percent: The correlation there is close to zero. But if Britney gets head lice, the chance that Alice will get head lice is much higher, about 50 percent—which means the correlation is probably up in the 0.5 range. If Britney sees a teacher slip on a banana peel, what is the chance that Alice will see it, too? Very high indeed, since they sit next to each other: It could be as much as 95 percent, which means the correlation is close to 1. And if Britney wins the class spelling bee, the chance of Alice winning it is zero, which means the correlation is negative: -1.
If investors were trading securities based on the chances of these things happening to both Alice and Britney, the prices would be all over the place, because the correlations vary so much.
But it's a very inexact science. Just measuring those initial 5 percent probabilities involves collecting lots of disparate data points and subjecting them to all manner of statistical and error analysis. Trying to assess the conditional probabilities—the chance that Alice will get head lice if Britney gets head lice—is an order of magnitude harder, since those data points are much rarer. As a result of the scarcity of historical data, the errors there are likely to be much greater.
In the world of mortgages, it's harder still. What is the chance that any given home will decline in value? You can look at the past history of housing prices to give you an idea, but surely the nation's macroeconomic situation also plays an important role. And what is the chance that if a home in one state falls in value, a similar home in another state will fall in value as well?
Here's what killed your 401(k) David X. Li's Gaussian copula function as first published in 2000. Investors exploited it as a quick—and fatally flawed—way to assess risk. A shorter version appears on this month's cover of Wired.
Specifically, this is a joint default probability—the likelihood that any two members of the pool (A and B) will both default. It's what investors are looking for, and the rest of the formula provides the answer. Survival times
The amount of time between now and when A and B can be expected to default. Li took the idea from a concept in actuarial science that charts what happens to someone's life expectancy when their spouse dies.
A dangerously precise concept, since it leaves no room for error. Clean equations help both quants and their managers forget that the real world contains a surprising amount of uncertainty, fuzziness, and precariousness.
This couples (hence the Latinate term copula) the individual probabilities associated with A and B to come up with a single number. Errors here massively increase the risk of the whole equation blowing up.
The probabilities of how long A and B are likely to survive. Since these are not certainties, they can be dangerous: Small miscalculations may leave you facing much more risk than the formula indicates.
The all-powerful correlation parameter, which reduces correlation to a single constant—something that should be highly improbable, if not impossible. This is the magic number that made Li's copula function irresistible.