Saturday, March 12, 2011

Quantitative Easing, Round 3: In the Bag and On the Way

New York Fed President William Dudley, in what had to be the understatement of the year thus far, said the following at a meeting of business leaders in Queens in regards to the objectives of full employment and price stability: 

"Faster progress toward these objectives would be very welcome."

Yes, given that there hasn't been full employment ever in the United States, even since the establishment of the Federal Reserve, an institution established with full employment as its objective, faster progress would be very welcome.  Given that the 8.9% unemployment statistic relies on the omission of people who have given up looking for work, and the real unemployment rate is somewhere around 22%, with one and in every five Americans now on some form of government assistance, faster progress would be very welcome.

And it would have been possible, had we actually dealt with the systemic issues that led to our economic crisis.  You know those issues, bad mortgages built on fraud and profits generated thereof.  We'd have liquidated several large banks and gradually unwound their bad assets, and we'd have burned all the speculators and hedge funds who incentivized a decade of fraud and excess.  Imagine, if you will, a ruthlessly capitalistic solution to the problem of too big to fail: banks going bankrupt based on the realities of their balance sheets, with no off-sheet structuring allowed!

We'd have no more Goldman Sachs, no more JP Morgan Chase, no more Bank of America, no more Citigroup...and what would we really have lost? A bunch of overpaid assholes who built profits out of mirages and fraud, while wrecking the world's economy in the process.

But faster progress has to be delayed in order to preserve and perpetuate a failed system, as opposed to allowing it to fail of its own excess and due to its own utter lack of merit apart from getting politicians to commit taxpayer money and the full faith and credit of the United States towards its survival.  Is that even merit?  Is it?

What disturbs me about the Tea Party and Republican Party is this: we're all worked up about pension funds and public unions, but the reality is we just dropped $23.7 trillion in loans, guarantees, and outright giveaways on the financial sector.  Public unions don't even compare to the financial sector in their demands.  And what's even better is this: we will get another chance to deal with the financial sector.

All those bad assets and subprime mortgages and toxic securities are still on the balance sheets.  That's right.  After $23.7 trillion in loans, guarantees, and bailouts, the problems are still there.  The bad habits are still there.  I don't even have a job, because I'm in graduate school, and I get at least half a dozen pre-approved credit offers a week.  My wife, who has thousands of dollars in debt, is clinically depressed, and is afflicted with fibromyalgia, epilepsy, and migraines, gets even more offers than I get.  Between her $400 a month in prescriptions and her past medical bills, she doesn't have the money to justify receiving any additional credit lines, much less the ones she already has.

Congratulations, banking industry: you're still dumber than hell.  Still giving out lines of credit to people with no income, no jobs, and no assets to speak of.  What an amazing strategy for success!  The difference between myself and a lot of other Americans is that I have one credit card, which hasn't even been activated yet.  I got it for an actual emergency, and when I have one of those, I suppose I'll activate it.  And yes, I got it because it had a zero percent APR until November.  Should I not have an emergency between now and then, I'll cancel the damn card and get another zero percent introductory APR card.  I take it out and look at it every now and then, and think about how awesome it is to have a Capital One Platinum Card with the Constitution on it.

The only income I have consists of loans for school, and these idiots are sending me pre-approved credit applications left and right.  It was interesting to listen to the pundits on CNBC talk about the cons of paying down your debt and canceling your credit cards, because they were noting that you needed to be in debt to qualify for a mortgage and credit cards were "ideal" for that purpose.  Let's all pause for a moment and think about the society we've created: only the people who are dumb enough to go for 14.99% to 24.99% APR are building the kind of credit necessary to qualify for a home mortgage.  That seems like a really productive and intelligent way to build credit and qualify for home ownership, doesn't it?  Those are exactly the kind of candidates I'd want to lend to if I were a banker!

You can't have faster progress when you're dragging around this kind of an anchor behind you.  It slows you down when you're trying to prolong the last gasp of a system that has completely and utterly failed to a point where you can't foreclose on delinquent properties because no one knows where the damn title is.  But such is the way of our world: we incentivize failure and punish sagacity.  Since I refuse to incur revolving debt in my name at 14.99% - 23.99% APR (the range of possible interest rates for my card should I choose to ever activate), I'm the guy who can't get a home loan at a decent interest rate.  Hell, I'm the guy you want on a mortgage. I'm not going to declare bankruptcy due to my overwhelming credit card balances! I don't have any!

But Mr. Dudley works for the Federal Reserve, a private bank owned by other banks like Citi and JP Morgan Chase, and he isn't interested in upheaval.  Mr. Dudley is interested in staying the course, even if that course means another round of economic collapse in the future.  Recessions are just natural occurrences, don't you know.  They don't have anything to do with excess liquidity and malinvestment as a result of that excess money.  They just...happen.

As the article in the Huffington Post tells it, Dudley has no worries about inflation as a result of commodities prices, which have gone through the roof as a result of speculators taking the extra dollars created by quantitative easing and plunging it into futures:

"In his speech, Dudley said some of the commodity price rises are likely to be temporary and unlikely to feed through into a sustained rise in inflation."

Of course Dudley has no worries! The government doesn't count food or energy in its inflation statistics! How can they contribute to inflation when they're exempted from the count!

There's no reason, even if the economy picks up steam and jobs are coming back, to really entertain the idea of raising interest rates and putting an end to the easy money generated by expansions of the monetary supply and quantitative easing:

"Dudley reiterated that a stronger recovery is not a reason for the Fed to reverse course."

In June of this year, the second round of quantitative easing will end.  However, the economy would have to add six million jobs between now and then for the Fed to consider its mandate of full employment near fulfillment.  I think we know that isn't going to happen, so what Dudley meant to say was this:

"We're going to have a third and fourth round of quantitative easing, because failure to do so would mean that our carefully orchestrated appearance of recovery would collapse and then everyone would actually want to deal with the banks we really represent.  Oh, you thought I was talking about your full employment?  No, no, no!  I was talking about full employment for the likes of Goldman and JP Morgan and Citi!"

Whatever liquidity is created out of future rounds of quantitative easing will go somewhere, and the likely candidates are in futures markets both here and abroad. Get ready for soaring commodities and stunning speculation. Quantitative easing is in the bag and on the way for the foreseeable future, common sense be damned.  

Friday, March 11, 2011

Current Economic Realities

There are certain barometers of our economy that do not look good at the moment.  The NAHB Housing Market Index (HMI) was unchanged for February at 16.  This is the metric made famous in 2006 in a Fortune magazine article that pointed out the simple truth: the HMI is a telling indicator of where our economy is headed, and the market usually lags a year behind any plunge in the HMI.  It also lags a year behind any rise in the HMI, as the following graph indicates:

We are all well aware of the events of 2007, when the economy began a tailspin into utter collapse.  By 2008, the conflagration was full swing. The world was burning, but the Federal Reserve's only answer, indeed that of the entire government, was to flood the market with liquidity and flood the bond market with dollars in order to bolster Treasuries so as to justify keeping rates low.  It was a self-perpetuating strategy, one that could never be unwound without tremendous problems for Main Street.   It's still continuing.  

It is informative, however, to consider who had the best performing stock index in the world in 2007.  By April of 2007, the Zimbabwe Stock Exchange (ZSE) had grown 595% for the year and 12,000% over the previous 12 months.  

Zimbabwe's GDP, on the other hand, had been halved over the prior seven years in real terms.  What was Zimbabwe doing?  Why, flooding the market with liquidity!  Market realities, to the extent that they were real, had more to do with Zimbabwe's over-issuance of currency than any actual growth in production or actual wealth.  It was a phantasm.   

Now, extrapolate that reasoning to Western economies, particularly the United States, and what you will see is that since 1993, there hasn't been a single quarter of economic growth absent Federal Reserve monetary stimulus.  There is no real demand for anything besides stock, because when the Federal Reserve drowns the marketplace in dollars, those dollars enter through banks, who then lend to other financial institutions and investors, who then purchase...stock.  The difference between the 2000-2007 and now is that a significant amount of the money was being broadly disseminated to subprime borrowers, giving off  the appearance of actual red-hot demand for housing.  

Banks were booking the profits for future loan repayments as current revenue, thereby making it look as though they were doing quite well.  Additionally, banks were repackaging the subprime mortgages and other forms of junk credit into securities, which were then sold and resold to other investors and institutions.  Add the insurance of credit default swaps, and insurers were assuming the risk not only of the banks, but of their downstream institutional and individual securities investors as well.  Furthermore, as insurance companies keep only a percentage of their premiums in reserve to pay losses, the excess of the premiums that didn't go to reserves or compensation went into the market, creating more demand for...stocks, or securities, or whatever was in vogue at the time.  

What you had was an explosion of demand created solely by an explosion in liquidity.  There was no actual demand absent the expanded liquidity, because broad-based wages and benefits were stagnant or declining.  However, more than any other crisis, the subprime mortgage crisis was driven by egalitarian ideology.  So long as the poor received no income, no job, no asset loans or various loans with built in self-destruct triggers to spike the interest, government regulators and legislators sitting on oversight committees had little if anything to say.  So long as the liquidity was spread around to the people, so that they could buy houses in the short-term, no one cared about the long-term implications.  

There was never any real demand for housing in the early part of the decade.  Had the money supply remained flat, people would have been forced to rely solely on their assets and their wages to buy homes.  The majority of people in this country had stagnations in both areas.  Real wages were flatlining, and the assets of individuals in the bottom 90% had been siphoned upward into the top 5%.  If you invested in a 401(k), and you lost significant amounts of money in the market crashes of the past 30 years, somebody else was sitting there with the functional equivalent of a vacuum to suck up your losses for their gain.  That somebody was usually in the top 5%, and the further you went up that 5% in increments of tenths, the more pronounced the disparities became.  

The only way for individuals in the bottom 90% of wage earners and wealth-holders to purchase a home was for the Federal Reserve and various government backed agencies like Fannie and Freddie to flood the market with stunning amounts of cheap liquidity.  You couldn't or wouldn't save up a down payment on your own, typically speaking.  You had to wait for market conditions to arrive at a point where you could a.) get a loan that didn't require a down payment at all; b.) get a loan that required a stunningly low down payment; or, c.) get a tax credit for your down payment.  

That's what happened.  You had the first scenario at the beginning, the second scenario in the middle, and the last scenario at the end when the government tried its hardest avoid allowing home values to plummet back to reality by ginning up demand.  It didn't work.  New homes simply have no demand, because new homes are built to sell at present valuations that are no longer relevant.  You can sell older homes in this economy to some degree, but the only individuals who can get liquidity in this economy are speculators and real-estate flippers.  The critical thing to understand is that without booming levels of new home starts, there are no jobs in construction and little if any real demand for building materials.  

Everything is interconnected.  If you don't have home buyers, you don't have homeowner's insurance.  If you don't have homeowner's insurance, you don't have a broad pool of individuals who can bear the risk of say, a natural disaster.  Premiums go up as a result of having fewer parties to bear the risk.  If you don't have new home buyers, you don't have demand for drywall, lumber, masonry, shingles, insulation, concrete, and windows, all of which are built by other businesses downstream of the home market.  Each of those components are in turn made of other raw materials extracted by even more parties downstream of the market.  

Like dominoes the parties fall into each other, and the end result is what we have today: people standing around angry that their situations aren't as good as they used to be.  What you have to understand is that it was never good.  The early part of this century wasn't real.  It was built on liquidity for which there was never any real demand and certainly never any real ability to repay.  Securitization of debt only magnified the problem; more importantly, securitization of debt ensured that you couldn't unravel the mess.  Instead of having a mortgager who held your title, ownership of your deed was unclear.  No one knows who owns the actual title to the majority of homes facing foreclosure because simple procedures designed to preserve a clear provenance were not followed throughout the mortgage crisis.  As a result, we have utter and complete gridlock.  

We surrendered to a fantasy in the early part of the century, and we believed that homes were really worth that much.  On their own, they weren't worth a fraction of their reported prices.  But inflated by vast sums of liquidity injected into the market by the Federal Reserve, and directed by Fannie and Freddie and other private entities towards those parties least able to repay with onerous terms that virtually guaranteed home buyers would fail, homes were worth an awful lot more than they'd ever been worth previously.  Think of our home market like the ZSE, because that's exactly what it was:  a phantasm built on the over-issuance and malinvestment of credit.  

The problem is that people took on mortgages at those valuations for homes that were destined to one day fall back to reality in terms of worth.  However, there is no process in place to deal with this essential issue in a timely, professional, and orderly manner.  Actually, there is.  It's called bankruptcy for businesses, but our government didn't want businesses to perish like individuals, so it prevented the orderly unraveling of this mess by bailing them out to enable them to survive and perpetuate their failed business models.  

Current economic realities are as follows: 

1.  Banks are still broke, and their balance sheets are built on legally mandated fraud, because the government has endorsed keeping their liabilities off the balance sheets and unreported. 
2.  The economy, in particular the stock market, is every bit as overvalued as the home market was in early 2007.  
3.  The only way to create such overvaluations is through the devaluation of currency, which causes food and energy prices to skyrocket.  See your grocery store.  
4.  Prices should and would be falling absent the Federal Reserve's attempts to plug the economy with liquidity, because production is over a third below capacity, which means demand relative to supply and capacity has plunged.  
5.  China, the world's exporter, reported an actual trade deficit last month.  That means that China is exporting less than it imports.  Think about that, and what it means relative to the rest of the world insofar as actual demand is concerned.  
6.  Government reported statistics on employment and inflation are built on outright fraud.  They are more notable for what they exempt than what they report, and the only way to gauge just how badly we've been mismanaged and misled is to account for the unreported data.  We are at 22% real unemployment, and we are at over 8% real inflation.   
7.  The only way to prolong the illusion is for a third round of quantitative easing to be announced by the Federal Reserve.  If the Fed does so, the stock market will continue to go up, but unease and disturbance around the world will also increase because the liquidity has to go somewhere. Where it's going is simple: speculation in commodities and energy markets that drives the prices of staples through the roof for developing and emerging economies, thereby putting their populations at risk of starvation.  Increasingly, the role of speculators will become a problem in Western countries as well.  
8.  Unrest in the Middle East may bring us an economic reality check this month, but by the latter part of this year, absent quantitative easing, we will see a stock market collapse since quantitative easing is the only factor holding the stock market up.  

I leave you with this classic video footage, whereby Ben Bernanke sidesteps any acknowledgement that currency swaps are being used to buy Treasuries: 

Even our debt has no real demand absent liquidity expansion.  

Thursday, March 10, 2011

Libertarians, Gender, and Race: Trannies on Stilts!

Shane Thayer, the owner and main writer over at Gonzo Times, recently posted an article entitled "Libertarians, Gender, and Race Issues," the central thesis of which was that libertarians tend to be right-wing on issues of gender and race.  As a contributing writer to Gonzo Times, and as an individual who counts Shane as a friend, I respectfully disagree.

I hold deeply traditional views on gender roles as part of my upbringing and my own personal view of the world.  As an individual, I don't allow my wife to open doors.  I pull her chair out for her at restaurants, and I firmly believe that a man has a position with a role to fulfill in marriage and in life.  I do not believe in subjugation, but rather in exaltation.  My role as a husband and a man is to defend, provide for, and honor my wife.  My role as a man is to ensure that my female relatives are accorded a certain level of respect.  I don't put up with a lot from males who date my sisters.  There are lines of appropriate behavior and inappropriate behavior, and if you disrespect or dishonor my sisters or my mother in any way, I'll hurt a lot more than your feelings.  I have personally put hands to my sister's ex-husband when he pulled a knife on her in my presence.  I also made it clear to him on multiple occasions just where I stood on the issue of spousal abuse.  He required frequent reminders.

I don't feel that this makes me a chauvinist.  I don't feel that acknowledging the obvious realities of life, intellect, and physiology makes me anti-feminist.  Try as I might, I can't give birth to a child.  There are innate differences between a woman and a man.  I recognize that men often blur and overstate these issues to avoid dealing with emotional issues or issues traditionally viewed as the purview of a woman such as child-rearing, specifically the parts that involve nurturing.

I don't think any of my nieces or nephews would say that I'm a hard or insensitive man.  I love them, and my actions demonstrate as much.  Am I harder than my wife?  Certainly.  When my nieces got out of line in the mall, my wife called me to come and restore order.  The moment I walked into the store, all I had to do was look at my nieces.  I never raised my voice.  I never threatened them. I never put my hands on them or threatened to put my hands on them.  I'm a man.  The way I carry myself embodies power, but most importantly, it projects control.  I won't say that my wife couldn't accomplish the same thing, but when the situation calls for my unique presence and intervention, she's quite happy with my distinctly masculine way of dealing with matters.  My nieces are cognizant of my role as a man, and I have never once explained that role to them.  It's just there.

They've noticed the gestures that I make towards their aunt, and they've learned to wait until the car door is opened for them, and to wait until any door is opened for them by their uncle.  Can they open their own doors?  Yes.  Should they have to?  No.  A man who respects a woman assumes certain responsibilities and roles in order to edify her.  By setting these precedents for my nieces, I'm showing them what they should rightfully expect from any boy or man who tries to approach them in life.

I won't say that gender roles are all innate and hard-wired into us genetically.  I learned by watching my father.  In my house, I handle the cooking and the majority of the cleaning.  My wife simply does not cook.  It's not something that she has ever been good at, and we've both come to accept that I'm better at preparing a meal than she is.  She's limited to the microwave.

That doesn't make me more or less of a man.  It just means that I've identified my strengths relative to hers, and we've assumed responsibilities accordingly.  My wife is far better than I am at identifying with the emotions of our nieces and nephews.  She has a capacity for empathy that eludes me.  I'm cognizant of how they feel, but I rarely understand the full reason for why they feel that way.  I'm logical and analytical in my approach to life.  I discard emotions if they seem counterproductive to the end goal of facilitating a solution.  I might be upset about spending $800 to replace a heater core, but emoting in the repair shop lobby won't accomplish anything.  Screaming through the phone at the Pep Boys manager who didn't flush my coolant system properly beforehand was productive: I received a check in the mail for nearly $300, which I then used to offset the cost of the current repair.  I'm calculating in how I display or reveal my emotions.  If it handicaps my position, I keep a stiff lip and blank expression.  If it advances my position, I let my anger fly.  It's called self-control.

My wife simply wants to emote because she feels better if she can express matters in emotional terms.  The only advancement she seeks is a personal catharsis.  She has her ends, and I have mine.  In observing a good many men and women, I'd say the divide between my wife's use of emotion and my use of emotion is nearly-not completely-universal.  I have no ideological reason to say this.  It's just what I've observed and capitalized on time and time again in my personal interactions.  Emotional intelligence takes on many forms, and my particularly masculine way of approaching such issues does not make me a chauvinist or an über-male.

I don't adopt Shane's view of gender because I'm not Shane.  Shane's son expressed an interest in a purse, and Shane, exercising his rights and prerogatives as a father, purchased a purse for his son as a gift.  If my son expressed an interest in a purse, I'd view it as a just another step along the path for him.  I wouldn't view it as the emergence of some latent homosexual or transgender impulse.  I was fascinated by my mother's purse as a boy, because it held a bunch of shiny things I didn't get to often examine or play with.  The element of the forbidden made her purse and its contents irresistible.  The end result was an overturned purse and a scalded ass.

One of my other friends told me that his father would allow him to play with newly purchased firearms for a time before putting them away.  In doing so, the father removed the mystique and replaced with a sense of ordinariness.  As a result, my friend never went into his father's firearms as a child.

I believe a man's role is to stay calm, cool, and collected when faced with matters out of the ordinary.  If my son wants a purse, I'm not going to panic.  There are two possibilities: either he's fascinated by something out of the ordinary, or his ordinary includes a purse.  Either way, what's it to me?  He's my son, my flesh and blood, and anyone who has a problem with him being himself or examining a purse out of curiosity will face my wrath as his father.  People need to learn to shut up about matters that aren't their concern.  It's my role as a father to deal with the issue as I see fit, and I don't see the purpose in making my son feel like a freak for curiosity or his own individual quirks and traits.  I'll love and protect him physically regardless of who he is or who he grows up to be. That's a father's responsibility, and a man's role in relation to his children.  My wife will deal with emotions and catharsis and empathy, and I'll deal with teaching my son that he has to occasionally put on or take off a mask for his emotions, to control them in a setting in order to arrive at his desired result.  People will not mess with my child because of the way I carry myself and the lengths I will go to in responding to any harm they try to inflict on my child.

Insofar as my son comes to me asking which purse to wear with which outfit, I'll refer him to his mother. I don't know.  I'm the last person you want to get fashion advice from, because I shop the clearance rack at Academy Sports and Outdoors or the semi-annual sale at Men's Wearhouse.  I'm perfectly comfortable with who I am.

In regards to race, I just don't care.  I'm an Irish-Indian-French-African mongrel hybrid.  And that's just what I'm aware of from talking to my mother, who tried tracing the genealogy of our family back many generations.  I identify as a human being.  I'm proud of being Irish to some extent, and I do aspire to one day live in Ireland, but I'm not an individual who's going to thump you in the face with his Irish-ness on a daily basis.  If you asked me, I'd tell you.  I'm not ashamed of who I am or where I'm from.

I don't wear shamrocks and drink green beer because I think doing so is silly.  I drink Guinness because I like Guinness Draught.  I'm not making a racial statement or an ideological declaration.  To be quite honest, I enjoy making my own six-pack at the World Market and trying a variety of new beers from time to time.

I have a good friend here at law school who views everything through a prism of race.  She is completely cognizant of race, hers and that of others.  My personal view is that her perception is, well, perception.  She's obsessed with race to the point of being a functional neurotic.  She feels uncomfortable in the presence of white people, but she's comfortable being around me.  She refers to "them" while sitting across a table from me as though she's oblivious to the fact that I am one of "them," technically speaking.

I know race is a reality.  I know that there are problems arising out of racism, especially with law enforcement, because I've been in Benz with a black driver when he was pulled over by a police officer. We were within the speed limit, and his driving wasn't erratic.  He was a black man in a Benz.  After proof of license, registration, and insurance were presented, we were ordered outside of the vehicle, which was then tossed by the officer and his peers who arrived on the scene to assist with the unarmed black guy and his white passenger.

I know that the officer thought that a young black male didn't typically drive an S-class Benz.  That wasn't probable cause to pull us over, but we were pulled over regardless.  After a half-hour, we were sent on our way with a warning about the front driver's side turn signal.  We pulled into a gas station, and I stood in front of the car while my buddy flipped it on.  It worked perfectly.

I know young black men resent being viewed by white people as a potential threat.  I know because I've talked with my friends, and I've heard them recount the nuances of race: a clutched purse as they walked by a young white mother pushing a stroller with her free hand, the downward looks of older white people as a group of young black men walk by, the suspicious gazes of gas station clerks as they walk in to grab a soda before paying for their gas.  It's hurtful to be assigned blame or unjust suspicion, to be looked at not for the content of your character but for the color of your skin.

So what?  How in God's name does any store owner know the content of your character merely by your entry into his store?  How does a retail clerk?

I've heard my good friend talk to me about her paranoia, and how she feels the need to overcompensate with niceties around white people in order to ensure her viability as an attractive employee with law firms when we graduate.  I think that her views are ridiculous and unfounded in reality.  I've asked her if she's ever been arrested or harassed by the police.  Her answers were in the negative.  She's always qualified her remarks by saying that she knows people who have been harassed or arrested by the police, to which my rejoinder has been phrased in the form of a question: "Well, did they do anything to justify the police harassing or arresting them?"  Her affirmative answer is always delivered with a laugh.

I don't have problems with the police because the police have no reason to bother me.  I don't engage in illegal behavior.  I don't go around acting questionably or suspiciously.  I give off an air of indifference to the police when they're around me.  They're irrelevant.  I don't look at them, I don't pump my brakes when an interceptor changes lanes to get behind my vehicle, and I don't switch lanes immediately in response.  I have a clean conscience and no reason to care.

Do I like the police?  Not really. I'm not all that inclined to call the police if and when I have an issue.  I don't view having a report filled out as a solution.  I don't blame the police; I just recognize that there are more expedient methods of dealing with problems that arise.  If somebody comes into your house and threatens you, shoot them.  Whip their ass.  If somebody tries to take your property, take it back.  I've gone to the house of an individual who took my belongings and I have physically reclaimed what was mine.  No police were ever called, and truth and justice prevailed.  The worst thing that's ever happened was a busted lip.  I don't deny the efficacy of violence because I've seen too much evidence to the contrary.  Violence works, especially when you're dealing with criminals.  In point of fact, force and violence are the language you have to speak with people who rape, kill, steal, and threaten the lives, liberties, and property of others.

Most individuals who have issues with the police are either guilty of actual wrongdoing, or they're individuals caught up in the ridiculous plethora of laws we have in this country that criminalize virtually everything.  Race is sometimes a factor, but if you've got a clean conscience and no reason to care, the police really can't do anything to you beyond temporarily delaying your progress to a destination.

This brings me to my final point, which is why I am a libertarian minarchist and capitalist.  I grew up poor in lower Alabama.  No one expected me to amount to much of anything, and my poverty was obvious to my peers and teachers.   One of my teachers didn't believe I could write as well as I could because I didn't come to school from one of those good families who sent their progeny to school in Nikes and Guess jeans with the designer wristwatches and what not.  She accused me of plagiarism, but she had no evidence beyond a hunch.  She was later forced to admit that her fellow teacher had informed her that there were sophomores in high school English who couldn't write as well as I could, and that she had no direct proof that I had plagiarized anything.  This was important, since I sat up front in class and had written the essay in dispute while she was sitting less than ten feet away from me.

I recognized that a lack of capital was the defining characteristic of my situation.  Everyone has rights, but without capital, you have no means of enforcing those rights.  Everyone has race, and gender, and religion...we have substrates and subsets here, there, and everywhere, but at the end of the day, if you bathe in greenbacks, no one really cares what your color, race, or sexual orientation is.  I aspire to power based in economic advantages, founded on capital and money, because I recognize that only then will my rights be unfettered and un-infringed.

I believe in natural rights, philosophically speaking, but from a practical standpoint I recognize that I am surrounded by the implements and constructs of positivism and statism.  The only way to fight back against the encroachments of statism and positivism is to accumulate some form of strength they can't overcome.  To me, that strength is capital.  There is no greater sin in our society, no greater disadvantage that enables racists and bigots to exploit you and impose their will on you, than poverty and a lack of capital.  I'm a libertarian minarchist and a capitalist precisely because I don't want to see one paradigm of bigotry prevail over my ultimately laissez-faire attitude towards gender and race.  You can carry a Louis Vuitton purse all damn day long as a man, so long as you have money and a .45 to deal with any potential adversaries.  I believe in free markets for economics and morality, and while I won't personally be carrying a purse anytime in the near future, I don't have an issue with any man who does.

We live in a free and open society.  I am prepared to say that my views of freedoms rooted in economic power and self-determination ought to prevail, because the only way to beat back bigotry and deny it a superior position from which to oppress you is to have more money and more power than the bigots.  I don't trust the state to protect me.  States can be seized and appropriated by narrow interests, and if the bigots get their hands on the state, they can do whatever they like if we invest the State with unwarranted power.  The answer is individual power, individual capital ownership, and individual self-determination. The sort of power we hesitate to invest with the State ought to be willingly ceded and invested with individuals on a day to day basis.  That's right, I said it.  If it seems extreme, it's because I'm a freedom loving extremist who aspires to one day own his own tank and fully automated fleet of fighter jets and unmanned drones.  Second Amendment, all the way.

If I'm right-wing for believing this, then I'm damned proud to be right-wing.  I have the courage of my convictions, and the willingness to stand on my own if everyone else disagrees with me.  While I am traditional in my views of what a man's role is and what a woman's role is, I'm ultimately informed by pragmatic necessity: I cook because I don't want to starve or eat horrible tasting food.  I wash clothes because I don't want my coloreds bleached or my whites colored.  This doesn't mean that I'm a gender-confused or bigoted man.  It means that I have good food and clean clothes, and a relatively harmonious relationship with my wife.

I think many people who examine these issues do so from an ideological standpoint that isn't married to reality, but is instead rooted in ideological theory.  Patrimony, schmatrimony.  White power the end of the day, people are people, and you have to give people a basic level of respect and conduct yourself towards other with decency in order to qualify as a decent individual yourself.  Don't be an ass.  Respect the life, liberty, and property of others, and demand that they respect yours as well.

My good friend the racial neurotic may not agree with me, but she knows that I love her regardless of her skin color.  I look at her the way I look at everyone else: as a human being.  So long as you're respectful towards me, I'll be respectful towards you.  I've had a whole menagerie of friends from all walks of life, with a wide array of sexual predilections and personal quirks.  I've been friends with transvestites who walked around on stilts in pride parades, and I've had good friends who were gay.  I never once changed who I was to accommodate their sensibilities, and I never once asked them to be less of a tranny or less of a gay man or woman to accommodate my sensibilities.  It would have been absurd for me to do so.

Chameleons can change their colors, but they can't stop being chameleons.  That's the point, isn't it?  We look at all of the areas in which we diverge without ever stopping to consider that at the end of the day, we're just chameleons with different color schemes who can't get around the basic reality of our existence as chameleons.  Be a human being, and treat others of your kind with respect and decency.

That's my libertarian view on these matters.

Ground Control To Major Moore

Michael Moore has enjoyed quite a time of late, expropriating the events in Wisconsin to call for a quixotic uprising whereby college students walk out of class today at 2 p.m.  How this demonstrates any political pull is beyond comprehension, since most college students will walk out of class on Thursday of their own volition in order to start an early-and long-weekend of drinking.

Moore also called for the arrest of the 400 richest Americans, as though that would actually happen.  And what are their crimes?  Well, Oprah Winfrey makes bad television, if my input counts for anything, and George Lucas deserves derision and possibly even capital punishment for his crimes against the Star Wars saga in the prequel.  But arresting the other 398 individuals simply for belonging to a Forbes list seems a bit much, unless you're high-school educated documentary filmmaker with a propensity for shading facts or omitting inconvenient information.

Not surprisingly, the conservative blogosphere has lit up with criticism of Moore's remarks.  Moore isn't all that relevant, he's just a loud and rather fat man with a penchant for making outrageous comments.  He's shrewd in the sense that he understands the relationship between publicity and success.  But beyond that, Moore doesn't have a great deal of substance.

He's a convenient devil for the right to punch at, and to get worked up about.  However, the right might well recognize that Moore and others are merely a diversion.   We might consider in the conservative and libertarian camps that devoting our energies to the likes of Michael Moore is counterproductive to our long-term goals.  We might also recognize that Michael Moore is the best thing we have going.

He is so sublimely ridiculous as to be almost a satire of himself.  At varying points in his career, Michael Moore has called for a boycott of Connecticut (the state survived, barely), Arizona (still trucking along), donations for the Islamic community center near Ground Zero (talks about moving it are ongoing), along with various other initiatives that haven't amounted to much.  The very worst thing that can happen for a liberal is to have Michael Moore open his mouth on your behalf.  He is one of the most effective weapons the Republican Party has, certainly more effective than Sarah Palin.

Ground Control can radio Major Moore all they like, but there is no reining in the truculent globular one.  The man may one day float like a blimp if his mouth closes long enough to hold in the hot air, but for now, his leakage is our gain.  Sit back and enjoy the futility!  Go, Mike, go!  

Tuesday, March 8, 2011

Climategate: Ongoing Revelations

The Daily Caller's recent Mike Horner piece details the failure of Penn State to interview a key witness to the coverup of Climategate, a former Penn State employee by the name of Eugene Wahl who now works for the federal government.  Simply put, even though Wahl was in a position to confirm or deny whether or not his Penn State colleague Michael Mann had instructed him to destroy emails, Penn State never once asked Wahl any questions.

You know Michael Mann as the individual who came up with the Hockey Stick graph, but Mann deleted emails at the behest of University of East Anglia climatologist Phil Jones, who asked him via email to delete any emails sought by investigators and journalists under the United Kingdom's Freedom of Information Act.  Jones also requested that Mann contacted Eugene Wahl in order to compel Wahl to do the same thing.

What Climategate has revealed is that science is in the back pocket of industry, and that the narratives that typically underlie environmentalism are fraught with disinformation.  Climate change and carbon trading markets have never been about reducing pollution; instead, they have been initiatives mounted by energy companies to develop new trading markets and platforms through which phantom profits could be generated and ginned up.  The credits themselves are utterly meaningless, controlled as they are by either regulatory agencies or legislatures that can easily be lobbied to expand or constrict the supply of carbon credits according to the dictates of industry lobbyists.  What is significant about the credits is their potential for securitization, and the potential for the securities built on credits to be re-insured by credit default swaps and the like.

The estimates of a carbon market run at around $160 billion annually, but the reality of the matter is that the potential for notional valuations based on derivatives could be many, many times more than the market value of the carbon credits themselves.  While companies could trade the credits and the derivatives built out of those credits, the simple truth is that the overall amount of carbon being emitted would be affected negligibly if at all.  The larger issue with air pollution from energy companies and industry would go unchecked and unaddressed

Additionally, while there might be an additional layer of cost added to energy, that layer of cost would be externalized to consumers in the form of higher prices and to labor in the form of lower wages.  The cost to business would be little if anything. Corporations exist to externalize costs in order to drive up margins and the dividends to shareholders that flow from those increased margins.  

In the end, the net result of a carbon market would be the emergence of energy companies that are too big to fail due to their massive exposure to the securitized carbon credits they trade.  Coupled with the likely exposure of banks and hedge funds, this could be the new paradigm in financial crises.  And for what?  There would be little if any real reduction in air pollutants, to say nothing of water pollutants.  The end result would the creation of wealth ex-nihilo from carbon credits that have little value apart from a government mandate, along with ever higher levels of pollution.

Penn State cleared the scientists involved with Climategate of any wrongdoing or impropriety in its review, which was supposedly comprehensive and independent.  As we now know, Penn State's review was nowhere near comprehensive, which calls into question the independence and credibility of its investigation as a whole.  And what is more, it calls into fresh question the manipulated data sets of Phil Jones and his colleagues, and the foundation Phil Jones' research formed for global warming.

Let me be clear: global warming either is real, or it isn't.  There is no in-between.  What I would personally say as someone with a concern for the environment is this: a good deal of our energy policy and our environmental policy is built on narrative myths with no basis whatsoever in reality.  We are polluting the air we breathe and the water we drink.  When fish have anti-depressants in their systems as a result of what we are flushing down the the toilet, there's a problem.  We know that the automobile emissions and emissions from smokestacks contain environmental pollutants that contribute to respiratory ailments, and we know that the energy industry has a long-documented and oft-lamented habit of leaching carcinogens into the groundwater supply and the soil of communities that surround power plants.  Common sense tells us that being able to set fire to your tap water is not a good thing, but that's exactly what homeowners who live next to fracking operations can do.  Recent developments in Arkansas have led to a fracking company suspending operations after its operations were linked to increased seismic activity in the surrounding area.  That's right, fracking has been linked to increased incidents of earthquakes.

We know that there is a problem, and we know from decades of obfuscation and subterfuge that energy companies are not willing to make a good faith effort to be part of the solution as a general rule.  We know who the worst violators are, and the bottom line is that these companies should not be allowed to operate if they can't adhere to the law and establish a baseline regard for safety concerns.  I would single out British Petroleum, which by and large has the worst safety and environmental compliance record of any energy company in America.  The simple fact of the matter is that BP ought to be stripped of its license to operate in every state in America to send a message to energy companies that willful, wanton, and repeated floutings of the law and basic safety principles will not be tolerated.  Forget a massive torts award, or a public flogging.  I'm talking a total ban from transacting business and conducting operations in America.

I am generally not a fan of increased government regulation, and I will be upfront and say that I am a global warming skeptic.  But I'm also a fan of law and order, and when a company willfully violates the law and disregards safety in order to maximize profits, I don't want that company operating in my backyard.  I don't want that company operating the Gulf of Mexico or along the coastline of my home state of Alabama, because I've fished those waters and know a good many men and women who earn their living from those waters.

The ongoing revelations of Climategate ought to be summed up as follows: global warming, which has little if any basis in independently verifiable scientific data thanks to Phil Jones' destruction of the temperature data, is little more than a diversion from the actual problems of air and water pollution that can be verified.  We ought to be dealing with those problems, and with the culture of corruption and willful disregard for the safety and well-being of human beings that manifested itself in BP's Deepwater Horizon oil spill.  There are actual measurable achievements that can be made to combat pollution and advance environmental concerns, and the first step that could be undertaken to demonstrate the depth of our commitment to environment safety and corporate responsibility is as follows: the banning of British Petroleum from the U.S. insofar as operations and sales are concerned.  States are not required to issue business licenses to companies that exemplify a sociopathic disregard for the health, safety, and welfare of the communities in which they operate.  It's time to send a message, in stentorian chorus, that here in America, we are serious about defending our environment and promoting ethical and moral behavior on the part of our businesses by stripping businesses that disregard basic values of the ability to operate.

I am generally a laissez-faire individual, but it is time to confront companies like BP head on about their repeated failures in safety and environmental compliance.  If we do not do so, we have effectively established the precedent that BP's competitors who do conform to the law and operate ethically are operating at a disadvantage by doing so while BP makes a cynical cost-benefit analysis on fines and sanctions versus potential profits.  That's not a precedent we want to set.  It's time to for us to restore some sense of focus and sanity to our energy policy, and to stop chasing non-existent crises down a rabbit hole while allowing BP and others to go unchecked in their creation and abetting of very real crises with stunningly large human and economic implications.  

Libyan Soldiers Shot for Refusing to Kill Rebels

Monday, March 7, 2011

Economic Delusions


            We are living in a bubble of information, a self-perpetuating loop of information that feeds back on itself in a chorus of congratulatory idiocy as bankers, hedge fund traders, and government regulators all rush to declare the world economy on the precipice of recovery.  There is only one problem: not only have the world’s financial institutions and governments failed to resolve the existing problems, they’ve also managed to create new problems ex-nihilo.   

            Chief among those problems is the emergence of new markets in trading valueless assets like credit default swaps, even though the swaps are insuring non-existent debt.  That’s right, banks and hedge funds are trading swaps on non-existent debt.  The specific example would be the $40 billion of GM’s debt that was canceled in bankruptcy, yet banks and hedge funds continue to trade the swaps attached to that debt as though it is relevant and has some value.  Without the underlying debt, there’s nothing to insure and no chance in hell that anything will be paid out, because debtors can’t default on a canceled debt. 

            This is the economy we live in today.  This is where the value is coming from, and it’s absurd and utterly counterproductive.  And what is more, if you refer to the pricing of swaps on sovereign debt, you see that the price is totally disconnected from reality.  Over the past week, the price of swaps on Portugal, Italy, Ireland, Greece, and Spain’s 5-year bonds plunged dramatically, even though nothing about those countries merited any improvement whatsoever.  These countries have stunning unemployment, overwhelming regulatory and political gridlock that makes it impossible to solve any of their systemic economic problems, and the banks within those countries are still engaged in the same leveraged risk-taking that led them to the brink of total annihilation.  Default is inevitable, and the only question is whether the rest of the European Union intends to be dragged into the maelstrom. 

            Given the lines of credit extended to each of these countries, and the implicit guarantees of bailouts from France and Germany they operate under, there is little reason to believe that Europe is anything other than a financial and fiscal tinderbox.  Investors simply aren’t regarding reality when they drive the price of insuring European debt lower across the board.  All of this is occurring with the European Central Bank making noises about raising interest rates, which means that servicing the debt of these countries will be exponentially more expensive.  The cost of swaps attached to their debt ought to be skyrocketing as a result, but it isn’t because no one is facing the reality of the situation. 

            In the United States, last Friday saw the 50 state attorneys general in concert with various federal regulatory agencies send a 27 page document out to banks outlining a new code of conduct for banks as they modify mortgages.  There are no fines or punishments defined for violating the code of conduct, which ultimately reduces the document to a toothless suggestion.  What is more, what no one wants to acknowledge is that after $23.7 trillion in loans, guarantees, and bailouts, the banks are still insolvent. 

            Simply put, the banks aren’t capitalized sufficiently to deal with real credit deterioration.  As their credit lines continue to collapse due to the fact that their customers do not have the money to pay their bills, banks are simply fudging their numbers quarter to quarter to produce huge profit numbers out of losses.  When the next year comes, the banks then revise their previous quarters downward to reflect reality.  This is how 2009’s final quarter swung from $914 million in reported profits to $1.3 billion in losses.   

            In June, the Federal Reserve will be concluding the second round of quantitative easing; and combined with the nonsensical jobs reports indicating an unemployment rate of below 8.9%, itself the product of statistics that are more notable for what they don’t count as opposed to anything that is counted, the Fed’s likely hike of interest rates will lead to severe repercussions.  You need two things to jumpstart an economy: cheap money and cheap energy.  We can afford neither.  By exempting food and energy prices from the basket of items used to compute inflation, the Fed has magically conjured up an inflation rate of under 2%, but the simple truth is that actual inflation is above 8% and rising. 

            Additionally, quantitative easing has not generated jobs or consumption here, but it has caused banks to bet on commodities and flood emerging markets with the liquidity generated by the quantitative easing efforts. The net result has been a bubble of staggering proportions, as U.S. dollars combine with currencies in emerging markets already ginned up by domestic stimulus efforts to put overseas markets on crack.  This is why food is so expensive abroad, and combined with the weather events of the past few months, it’s why food in foreign markets will continue to explode in price. 

            It’s also destabilizing from a geopolitical standpoint.  People in the Middle East and North Africa don’t have a problem with despots, unless those despots can’t provide them the means to eat and survive.  Gaddafi and the rest of the autocrats who have presided unchecked for the past three decades are finding that their people have limits: if they can’t eat, they’re going to die anyway, so what do they have to lose? 

            But what no one wants to acknowledge is that everything in the world economy from the stock markets to the price of commodities to equities is fundamentally unmoored from reality.  We currently have 727 million barrels of oil reserves in the United States.  Additionally, we have expanding oil production from the Bakken field in North Dakota, which has received estimates ranging from 1.6 billion to over 500 billion barrels of recoverable oil.  It seems that estimates vary with the party in the White House, so it is virtually impossible to know exactly how much oil can be recovered from this particular field, but it seems to safe to approximate the amount at the following: a lot.  We are the third largest producer of oil in the world, and were it not for idiotic regulations that stifle on-shore and offshore oil production, we’d be producing a lot more.

            In essence, the reason behind the recent spike in oil prices and the lead-up to the spike is simple: speculators.  Yes, speculators, who provide no other service beyond one that takes the fluctuations of a market and magnifies them exponentially higher.  Don’t believe me?  Take a look at the following chart, from the testimony of Edward Krapels before a Senate subcommittee:

           Now, take a look at the spread between gross market values and notional amounts.  That's the power of derivatives, and it's why we can't unravel the mess that our economy is in at the moment.  And who drives the derivative market? Why, financial institutions and speculators!  We can't do what is the national interest today because rather than unraveling the gross market amount, we've instead put ourselves in the position of unraveling the larger notional amounts.  However, unraveling or backstopping those amounts is simply impossible from a mathematical standpoint.  

          The simple truth is that derivatives are harmful and even lethal to the economic self-interest of human beings, and so long as they are allowed to flourish at the levels represented above, you will have price swings and wild fluctuations that are completely disconnected from underlying fundamentals.  The valuations attached to underlying assets defy any reality-based attempt at comprehension.  

          One can argue that market capitalization is divorced from assets in the case of Google, Microsoft, and Apple, all of whom have tiny amounts of physical capital in comparison with their market caps.  The difference is rather obvious: Google, Microsoft, and Apple are not built on physical capital, but rather intellectual capital.  Google's search algorithms and advertising penetration are extremely valuable and can easily be connected to the valuation of Google by investors.  It is the same with Microsoft, which has dominated the market for operating systems to a level that gives it a virtual monopoly over the world's personal computers.  Its source code and its licensing are of an immense value.  Apple has built a brand around its products, not to mention a near monopoly on music downloads via iTunes.  The point is that there is some tether to an underlying fundamental set of facts that justifies the valuations of these companies, but there is no such tether to underlying fundamentals that justifies the notional values of derivatives in comparison to the underlying assets that form their base.  

          There is no intellectual property, no licensing, no know-how or technical aptitude, nothing at all that can be used to tether the valuations attached to derivatives to some underlying set of facts that justify the valuation.  A mortgage is a mortgage, a house is a house, and there will never be a way to jump from $21.5 trillion in mortgages to $165 trillion derivatives built out of those mortgages.  What you have are paper bets on whether or not the value of the houses and buildings will go up or down, and the bets by themselves are not worth a damn thing.  

          Is it any wonder, then, that the market behaves as it does, given its dependence on the phantom valuations that derivatives inevitably lead to?  The economic delusions of the present day, built as they are on manipulated statistics, do not conform to any logical foundation.  There is no real connection between the market amounts of derivatives and the underlying assets, and there is no basis for believing that expunging the world market of derivatives will be the end of society as we know it.  What will perish are the banking institutions that have built fraudulent balance sheets out of securitized paper, because their foundation is little more than sand.  For society as we know it to survive, derivatives in their current form have to be abolished.  Until they are, economic delusions will persist on ever-larger scales.