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Entries for February 2008

February 29, 2008

The brave new world of finance-14: The next bubble?

(For previous posts in this series, see here.)

In this final post in this series, I want to look at what might be the next bubble looming on the horizon.

In his article The next bubble: Priming the markets for tomorrow's big crash (Harper's Magazine, February 2008) Eric Janszen says that the total value of real estate, if priced according to historical growth rates, should be about twelve trillion dollars. But the real estate boom drove the prices up to about double that, to twenty four trillion. If this is truly a bubble phenomenon and real estate values drop to what they should be historically or even below, suddenly twelve trillion dollars worth of assets would have essentially vanished into thin air.

It may not be that catastrophic. As has been pointed out elsewhere, real estate prices have not dropped that precipitously as yet (and in some areas of the country have not dropped at all) and some are speculating that it won't. Such people argue that while prices have declined from the peak, that it has now reached a new equilibrium and will not sink further. I think we won't know for sure which is the case for a couple of years, until all the dust settles from the subprime crisis and all the losses have been tallied. At present, there is considerable guesswork as to the full extent of the losses, both real and potential.

But there is a serious danger that the subprime losses can trigger a recession or even a depression and both the government and the business sectors are trying to find ways to stave it off.

Janszen argues that to make up for the losses generated by the subprime crisis, the financial sector is already gearing up to generate, and thus benefit from, the next bubble sector. What area of business would make a good candidate for the next bubble? Based on recent history, Janszen says that it has to meet certain criteria:

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed not by billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

He looks at various possible candidates for the next bubble, such as the health care, pharmaceutical, and biotechnology industries, and finds each one problematic for various reasons. He thinks that the only sector that meets all the criteria is alternative energy, because it is one of the few sectors big enough to serve the purpose. He thinks that this is already in the process of being "branded" as the next big thing.

Riding the wave of the environmental movement and people's concern about the future of the globe, he says we are going to see immense investment by the government in alternative energy sources (nuclear, hydrogen, geothermal, solar, hydrogen, ethanol), not because of any deep environmental concerns, but because it will enable the government to subsidize the energy industry by the tens of trillions of dollars necessary to make up for the disappearance of the assets incurred by the collapse of the real estate bubble.

He predicts that we will soon start seeing highly increased hype for various forms of alternative energy and companies that deal in them will start going public, issuing stock and cashing in on the hyped-up interest in this area, just the way internet startups did a few years ago. Janszen also points out that Al Gore has joined the big venture capital firm of Kleiner, Perkins, Caulfied & Byers that was involved in the IPOs of Google and Amazon. Thus despite the initial skepticism Gore received from traditional business and media when he raised the alarm about global warming, he may turn out to be useful to them as the poster boy for the new alternative energy bubble. Joshua Frank also raises questions about the support that the energy industry (including nuclear and coal) are giving Obama and what they might be expecting in return.

I must say that initially I was skeptical about Janszen's fingering of alternative energy as the next bubble but more recently I have seen disturbing reports that he may be on to something. President Bush, John McCain and Congressional Republicans are now talking enthusiastically about the virtues of alternative energy and green technologies, even while ridiculing the notion of global warming and strongly resisting efforts at conservation. President Bush, for example, now talks up hydrogen-powered cars and solar and wind power as the way of the future, even as he opposes far more direct energy conserving measures such as raising fuel efficiency standards for cars and trucks.

Like many other people, I am very worried about the long-term health of the planet and in favor of reducing our consumption of all resources, including oil. One has the sense that the tide is turning on this issue, that more and more people are beginning to think that we cannot go on consuming resources at the current rate. It is very disturbing to think that the government-industry-Wall Street complex will hijack the general public's very real concern and cynically use it to siphon yet more vast amounts of public money into the hands of private investors and speculators, the way people's support for home ownership was used to pump up the profits of those financial institutions involved with real estate.

The next president will play an important role in determining whether we have real conservation efforts or are merely going to create an alternative energy bubble, and we clearly need to watch developments carefully.

POST SCRIPT: Will Tim Russert denounce and reject his ties to Stalin?

Yesterday, I wrote about Tim Russert's appalling performance as moderator of Tuesday's debate. General J. C. Christian is worried about what might happen if Tim Russert's tortured logic in linking Obama to Farrakhan is applied to Russert himself.

February 28, 2008

The rise of Tim Russert and the decline of journalism

I watched the Democratic primary debate held in Cleveland on Tuesday. It was the first debate I had watched live so far during the primary season. Who do I think won? I think such questions are meaningless. These kinds of debates are not meant to provide that kind of result.

But the losers of these debates are quite easy to pick: they are usually the moderators. What I hate about these debates is not the candidates' performance (they actually come off quite well) but the moderators, who come across as preening and vain and self-important, and who seem to think that the debates are all about them.

And of that breed, there is no doubt that Tim Russert is the most obnoxious. No one epitomizes all the problems of modern journalism better than him. His shtick is really wearing thin. He often makes it a point to refer to himself as just a 'blue-collar boy from Buffalo', as if that makes him an outsider, just like you and me, a regular, working class guy like his daddy, so that we will overlook the fact that he is a well-connected Washington insider, a consummate Villager, someone who is completely at home with the moneyed-classes that rule the country.

Russert also practices a really tedious form of 'gotcha' questioning by trying to find some contradiction between a politician's past statement on some issue and their current position. He usually frames this by saying, "On June 14, 1987, you said . . . but then last week you said . . ." and then sits there with a smug expression, as if proud of himself for having done all that research into the candidates speeches and writings.

Of course politicians change their positions, as do we all. Sometimes that is the most reasonable thing to do. As economist John Maynard Keynes responded when questioned about his own change of position on some issue, "When the facts change, I change my mind. What do you do, sir?" Russert does not seem to really care if the alleged switch is on a major issue or a minor one, or whether the switch was justified because of a change in circumstances, or what the full context of the quote was. His entire goal seems to be to take the candidate by surprise and make them look awkward.

As Josh Marshall over at the excellent Talking Points Memo (which should be a must read for any serious follower of politics) says: "The standout performance of last night was Tim Russert's repeated tirades at the candidates for not answering his clownish questions. So we thought we'd string all of Tim's gonzo moments into one tight reel. Let's all repeat together, "I'm rough enough, I'm tough enough, and doggone it, people like me!"

Being the target of an interview ambush by Russert is like being attacked by an angry chicken: it is alarming at first before you realize how ridiculous he is.

In general, Russert seemed to be ruder to Clinton than he was to Obama, interrupting her repeatedly, but Russert's lowest point was when he had to resort to really tortuous logic to link Obama to Louis Farrakhan and demanded to know what he ws going to do about it. Sadly, Hillary Clinton used that question to do reinforce Russert's absurd line of questioning and it then devolved into a contest to see who could pander more to Israel and the Jewish vote.

Again, Josh Marshall in a post titled Russert's Lowest Moment (and that's saying a lot) says it all:

I discussed this in the live debate blog. But I think it's worth going back and watching Russert's run of shame here. I would say it was borderline to bring up the issue of Farrakhan at all. But perhaps since it's getting some media play you bring it up just for the record, for Obama to address.

That's not what Russert did. He launches into it, gets into a parsing issue over word choices, then tries to find reasons to read into the record some of Farrakhan's vilest quotes after Obama has just said he denounces all of them. Then he launches into a bizarre series of logical fallacies that had Obama needing to assure Jews that he didn't believe that Farrakhan "epitomizes greatness".

As a Jew and perhaps more importantly simply as a sentient being I found it disgusting.

What was the point of Russert's line of questioning? Why such questions make no sense is that if you look in the weeds hard enough, you will find all kinds of people supporting each and every candidate. What does that prove about a candidate? Nothing really, because people support candidates for a variety of reasons, some substantial and some trivial, some positive and some negative. If you as a reporter find an unusual source of support, that say a serial murderer has said he really likes McCain or that anti-Muslim Christian bigots are supporting Huckabee or that some KKK members are supporting Clinton, those things by themselves do not reflect on McCain or Huckabee or Clinton and they should not feel obliged to renounce each and every instance of such support. If that was a requirement, then people opposed to a candidate could create all kinds of mischief and distraction by getting people to say they support the candidate they actually oppose, and then watch the candidate be forced to waste time and energy renouncing such support.

When you see candidates receiving statements of support from any person or group whom you think is beyond the pale, what you have to do as a reporter is to see whether the candidate has, by word or action, suggested that they share the values of those professing support for them. If you can't find any such instances, then that is the end of the story.

But simply picking out someone you dislike and using their statement of support for a candidate to demand that they formally reject such support seems to be aimed at casting negative aspersions on a candidate. It is lazy and shoddy journalism, but exactly the kind that Russert practices.

Another of Russert's grandstanding tactics is posing the absurd hypothetical in order to catch candidates off-balance. In the debate, Russert asked Clinton and Obama what they would do if they withdrew US troops from Iraq and then found that al Qaeda had come roaring back in that country and taken over. Would they send troops back in? Clinton, to her credit, slapped Russert down and said the question was one that was hypothetical and not worth answering.

But why stop there, little Timmy? Why not ask the candidates what they would do if Russia and China form an alliance with al Qaeda to try take over the entire Middle East, and use that as a base to invade Pakistan? Or what they would do if an alien spaceship suddenly appeared and asked them to take the aliens to their leader? I am sure that you can get your crack research staff to think of something even more fantastical.

These kinds of hypotheticals are just plain silly because they are so far removed from reality. Candidates should not have to spend time thinking about what they would do in all the possible situations, and they should refuse to answer such questions. Presidents, of course, have entire teams of people whose job it is to study hypothetical scenarios and review the various options available to them. But leaders keep those hypotheticals under wraps because to discuss them in public is as self-defeating as thinking out loud about your future moves while playing a chess game.

The only time to publicly discuss a hypothetical is when you want to use it to influence the other party's actions, to exert some kind of pressure. The president can say, for example, that if the Iraqi government were to take action A, then the US would have to seriously consider doing action B. The point of such a hypothetical is clear: it is to signal to the Iraqi government that it should seriously consider not taking action A.

To me, people like Tim Russert represent the decline of journalism. He may not be the worst example (it is hard to beat Fox News for really bad journalism) but the fact that he is considered by many to be one of the best is a sign of how bad things are. Such people have turned me off watching TV news altogether. I seriously considered not watching the debate because I knew in advance that I would get irritated by Russert

I often think we would have much better candidate debates if they were moderated by college students who are policy debaters or Model United Nations participants. They usually are more serious and better informed and less smugly self-important.

POST SCRIPT: Interview on radio

I will be interviewed on a call-in program on radio on Saturday, March 1 from 10:00-10:30am (Eastern time). The program is called Situation Awareness and the host is Hans Meyer. This program is a FreeWorldRadioNetwork.net production, part of Blog Talk Radio.

I was contacted because the host had seen some very early blog posts of mine that dealt with those people I called Third-Tier Pundits (i.e., people like Ann Coulter, Jonah Goldberg, Michelle Malkin) who are very silly people who have little useful to say but spend a lot of time saying it. The topic will be expanded to a general look at how the media (especially punditry) operates these days.

I will be interviewed for the first 15 minutes and the next 15 minutes will be Q&A with listeners. The call-in number is (646) 478-4821. You can listen-in and download the podcast of this and other shows here.

February 27, 2008

The brave new world of finance-13: The new bubble cycle

(For previous posts in this series, see here.)

Karl Marx famously argued that capitalism, while being remarkably resilient in overcoming problems and capable of releasing enormous productive capabilities, also carries within itself the seeds of its own eventual destruction because of its incapacity to accept an equilibrium state. Capitalism requires that companies have to push for continuous expansion and growth and this leads to the creation of monopolies and instabilities that inevitably result in crashes. I never quite understood that aspect of the Marxist critique of capitalism. After all, why couldn't a company, once it had developed a good product and business model, just continue to plug away at a steady rate of manufacture and sales and profits? Why did it need to grow and expand in size in order to survive? I know that it cannot simply stay the same since developments and competitors will leave it behind. I can understand the need to improve products, even change the product line, and increase efficiency. But why must there also be an imperative to increase market share and profit margins, which often means that one must take actions that are harmful in the long run? Is it caused by simple greed? It seems to be too simplistic to ascribe human emotions as drivers of macro-economic behavior.

Maybe the economists among my readers can explain the theory behind why this drive for growth and increased profits is an intrinsic part of the capitalist system. But there is no question that as a purely empirical matter, the drive for growth in market share and profits seems to be an inexorable law of capitalism, played out over and over again. One sees it in action everywhere, especially these days, as I have already discussed in reference to the newspaper and book publishing industries.

Stockholders demand it. And when I say stockholders, I am not referring to some evil anonymous entities. They are often us, indirectly. The managers of our own mutual funds, pension funds, and other retirement accounts are often the very people forcing the changes that I have identified as deleterious, and they are doing it in our names, in order to increase our wealth.

And therein lies the problem. When the people calling the shots in a business have little or no connection to the workings of the business itself, it seems like a recipe for disaster. Stockholders have only a marginal interest in the long-term health of the company they own. They can bail out at any time and as long as they recoup their investment with a tidy profit, they have no concerns about whether the company they abandoned goes bankrupt, leaving thousand of people, the now-unemployed workers and the communities that depended on them, badly scarred. The classic 1989 documentary Roger and Me that catapulted Michael Moore to prominence told the sad story of the rapid decay of his hometown of Flint, Michigan because of the decision of General Motors to shut down its production plant there and shift production elsewhere.

It seems to me that the current American economy is in terrible shape in a fundamental way although it seems to be doing reasonably well if looked at superficially. As a result of outsourcing and the rise of foreign production centers, the US is producing a smaller and smaller share of tangible goods for the world's markets. Where the US seems to be growing is in the financial sector, the business of making money from money. But that seems to me to be a highly risky development. The more separated you are from the underlying source of your business, the more risks you run of creating 'bubbles', where entities are created that take on a life of their own.

I have written before of the tulip, Beanie Baby and dot-com bubbles. In an article titled The next bubble: Priming the markets for tomorrow's big crash (Harper's Magazine, February 2008), Eric Janszen argues that we seem to be entering a new era of business, where bubbles are a routinely recurring feature. Whereas in the immediate aftermath of the earlier big bubbles, financial regulators took steps to prevent repetition and those steps usually worked for decades, he says that things have now changed. Instead of the normal market cycles of growth and compression, the basic economy seems to have shifted to a fundamentally bubble economy, where one period of runaway and artificial growth in one sector is immediately followed, after it crashes, by runaway and artificial growth in a different sector. So the dot-com bubble was followed in less than a decade by the current real-estate bubble. And during these periods of growth, a few people in the financial and banking sectors make huge amounts of money and when the crash inevitably follows, governments are expected to pick up the pieces and to help the individuals who are the collateral damage.

Janszen's suggestion that we are seeing a fundamental shift in business cycles from the tradition growth-and-compression to a bubble-and-bust one is truly disturbing since the people who end up getting buffeted and damaged the most by such big swings are ordinary people and taxpayers, not the big financial interests who cause the turbulence.

Next: What will be the next bubble?

POST SCRIPT: Encouraging news

A recent Pew survey suggests that more people are beginning to turn away from organized religion. (Click on the graphic labeled 'Multimedia' partway down the article for the detailed numbers.)

More than a quarter of adult Americans have left the faith of their childhood to join another religion or no religion, according to a new survey of religious affiliation by the Pew Forum on Religion and Public Life.

The survey also indicates that the group that had the greatest net gain was the unaffiliated. More than 16 percent of American adults say they are not part of any organized faith, which makes the unaffiliated the country's fourth largest "religious group."

In the 1980s, the General Social Survey by the National Opinion Research Center indicated that from 5 percent to 8 percent of the population described itself as unaffiliated with a particular religion.

In the Pew survey 7.3 percent of the adult population said they were unaffiliated with a faith as children. That segment increases to 16.1 percent of the population in adulthood, the survey found. The unaffiliated are largely under 50 and male. "Nearly one-in-five men say they have no formal religious affiliation, compared with roughly 13 percent of women," the survey said.

The rise of the unaffiliated does not mean that Americans are becoming less religious, however. Contrary to assumptions that most of the unaffiliated are atheists or agnostics, most described their religion "as nothing in particular."

I suspect that despite saying "nothing in particular", many of those people are on the path to atheism or agnosticism but are hesitant to acknowledge it to themselves or to others, knowing how negatively such people are viewed.

February 26, 2008

The brave new world of finance-12: The consequences of the primacy of shareholders

(For previous posts in this series, see here.)

As I discussed in the previous post, the instability caused by shareholder demands for steadily increasing rates of return infects every area of business for the worse. Furthermore, the law requires of management that businesses be run purely for the benefit of its stockholders. While this is meant to prevent management from acting negligently or even fraudulently to enrich themselves, it also has the effect that even an enlightened management has to be very careful about taking measures that are (say) motivated by concern for the environment or by the needs of its employees or the community in which the business is situated. Unless those actions can also be justified as leading to greater stockholder value, the stockholders have a legal right to accuse the management of acting illegally and to sue to demand changes.

In his book Collapse which looks at how societies destroy themselves by destroying their environments, Jared Diamond argues that despite the awareness by some corporate executives that their actions are damaging the environment, and their personal unhappiness with doing so, they feel that their hands are tied. They have a legal duty to do whatever it takes to maximize the stock price, whatever the consequences.

It is easy and cheap for the rest of us to blame a business for helping itself by hurting other people. But that blaming alone is unlikely to produce change. It ignores the fact that businesses are not non-profit charities but profit-making companies, and that publicly owned companies with shareholders are under obligation to those shareholders to maximize profits, provided they do so by legal means. Our laws make a company's directors legally liable for something termed "breach of fiduciary responsibility" if they knowingly manage a company in a way that reduces profits. The car manufacturer Henry Ford was in fact successfully sued by stockholders in 1919 for raising the minimum wage of his workers to $5 per day: the courts declared that, while Ford's humanitarian sentiments about his employees were nice, his business existed to make profits for its stockholders. (p. 483)

This may be changing. Defining exactly what is in the best interests of a stockholder can depend on what kind of stockholder we are talking about, as is illustrated in the abstract of this paper:

The traditional wisdom is that management should serve the interests of the corporation and the stockholders who own it by maximizing stockholder wealth. But a significant number of legal scholars argue that management duty should be more broadly construed to include other constituencies (stakeholders), such as employees, creditors, customers, suppliers, and the community at large. The broader view of management duty means that management has more discretion and that stockholders will seldom have recourse if management fails to maximize profits. Nevertheless, many states have adopted so-called other constituency statutes permitting management to consider such other interests.

The difference between the two views of management duty depends on how one defines a reasonable stockholder. If management duty is measured by the interests of a diversified stockholder, management's duty is to maximize profits even at the risk of bankrupting the firm. If management duty is measured by the interests of an undiversified stockholder, the duty is to maximize profits and to minimize risk. Because rational investors diversify, most commentators have assumed that fiduciary duty should be construed as if owed to a diversified stockholder. The thesis here, however, is that (i) it is impractical to measure fiduciary duty by reference to diversified stockholders because management itself is often a significant undiversified investor in the business, and (ii) diversified stockholders will, in any event, prefer management to behave as if it owes its duty to undiversified stockholders.

(A 'diversified' stockholder is one who has investments spread over a wide range of businesses (so that any one of them going bankrupt has negligible impact), while an 'undiversified' stockholder is one who invests only in that one company. The reason that the Enron bankruptcy devastated many of its employees more than simply losing their income is that they had all been encouraged to invest all their retirement funds in Enron itself, thus making them undiversified)

We see another aspect of this problem being played out with outsourcing. At some point, the only way that some manufacturing companies can keep raising profit margins is by abandoning their production facilities in the US and moving offshore where labor costs are lower (often because the workers are cruelly exploited and even child labor is used) and environmental protection requirements are less costly to meet. This happens even if the product being manufactured in the US was selling well. But in the long run, moving production offshore means that fewer people in the US are earning good incomes, the community in which the facility used to be located suffers economic trauma due to a reduced tax base and increased unemployment, and as a result the long-term domestic market for goods will shrink.

Thus we see a reversal of Henry Ford's realization that in the long run it was better for him to pay workers well, not just because they deserved it and it was a good thing to do, but also because otherwise they would not be able to afford to buy the very cars he was producing. Management who think like Ford risk being forced out of office by stockholders, because the latter demand that labor costs be made as low as possible, even if that means shifting production overseas, so that they can increase short-term profits and thus raise stock price. The negative impact of such actions would only be felt much later and by then the savvy diversified stockholders would have divested themselves of that company's stock and moved on. Thus the fact that down the road the market for the company's products would shrink is not a luxury that the modern CEO worries about. The phrase "in the long run" seems to have vanished from our current business lexicon, to be replaced by the next quarter's profit margins.

Next: The new bubble economy cycle?

POST SCRIPT: Taking political action to the streets

Attempts by those in power to suppress voting by the groups that they think are opposed to them are nothing new. In the state of Texas, which has a long history of such attempts, the Republican controlled government situated an early voting center seven miles away from Prairie View A&M university.

The students responded with a great piece of political theater. They marched en masse all the way to the polling place on the first day that early voting was allowed shutting down the highway while they did so.

With that one move, they got a lot of media attention, highlighted the issue of voter suppression, and seemed to have a lot of fun doing so.

February 25, 2008

The brave new world of finance-11: The changing emphasis of business

(For previous posts in this series, see here.)

The problem with the modern business world, as I see it, is that it is no longer enough that a company be successful in the traditional sense of steadily producing revenues in excess of expenditures. That model of a successful business is considered hopeless naïve these days. What investors want is not steady profits but a steadily increasing rate of return on investments and this is leading to chronic instability.

Let me give an example. Suppose I start a business that returns a 20% profit on my investment. That is a nice return, allowing me to provide good salary and benefits to employees, reinvest something in the company to improve the product, expand and improve the product, and so on. You would think that if I could continue to produce roughly 20% profits every year, I would be having a good company. After all, I am employing people, producing useful things, and making a reasonable amount of money. And as long as the company is privately owned by me, that might be true.

But things are very different if I take my company public and sell stock to investors. You would think that the stock market would also recognize and reward such a solid, stable, company by increasing the value of its stock. You would be wrong. Although my rate of profit might enable me to pay fairly good dividends to the stockholders, that is not enough to raise the price of the stock. If the CEO of such a company says that he expects the profits next year to be the same as the current year, the company stock will tank. What the stock market wants to hear is that you will increase the profit margin each year. So 20% profit in one year means that you have to produce (say) 25% the next year, and 30% the next year, and so on. And the stockholders want to see you take steps now to make that happen in the future. This immediately sets up an unstable situation. One simply cannot sustain such a runaway rate of growth without creating a negative impact in other areas. This is why we see companies that are making huge profits still cutting back on their work forces and squeezing salary and benefit concessions from their employees in their desire to drive up profit margins.

There are some businesses that could be very stable and profitable, but become unstable under the peculiar and voracious demand to raise profit margins. Newspapers are a good example. In most American cities these days, one daily newspaper has a monopoly. This makes for a stable market and a potentially stable, or even slowly rising subscription base, which is what is used to set advertising rates. It is true that the rise of the internet and things like Craigslist has eaten into much of their once hugely profitable classified advertising market. Old timers like me can remember the days when the Sunday classified section was of a monstrous size, often equal to the rest of the paper combined. Those days are long gone, perhaps thankfully given the waste of newsprint, but newspapers have survived that loss and most daily newspapers make healthy profits of around 20%. In fact, the average profit margin of newspapers is greater than the average profit margin of businesses as a whole. If they were allowed to remain that way, they could function quite nicely, putting out a good product. But that can only happen with privately owned newspaper companies. With public companies, the demand by stockholders to raise the rate of return is slowly destroying them. They cannot keep raising advertising rates or subscription prices or subscriptions by sufficiently large amounts to meet the demand. They are thus forced to cut costs and this is usually done by targeting the biggest expense and that is reporters, particularly investigative reporters.

One person who used to work for The Philadelphia Inquirer writes: "When I worked there as a staff writer, in 2000-01, I watched in disbelief as the paper let many of its best people go, to appease the cost-conscious Wall Street investors. Space for local coverage kept disappearing, and the suburban newsroom where I worked took on a graveyard-like atmosphere, with three or four abandoned desks for every one that was occupied."

Thus newspapers end up gutting the main reason for their existence. So while profits may rise in the short run, the quality of the newspapers tends to go down in the long run, leading to an eventual decline in readership, leading to loss of revenue, and thus calls for more cuts. We see this happening right now with the Los Angeles Times, where the editor abruptly resigned because he was asked by the publisher to slash the size of the news staff in order to cut costs. Previous editors quit for the same reason.

Another industry that is in decline, not because of any intrinsic problems but because of the demand for rising rates of profits, is the book publishing industry. This industry used to contain a variety of niche publishers who would put out their own lists of quality fiction and non-fiction and manage to make a small but respectable profit, even while taking chances with new and untried authors. But the takeover of these houses by the big public conglomerates has resulted in the same kinds of pressure to increase the rate of return. But the book market is not very elastic. There is simply a limit to the number of books that a person can read in any given year and the number of readers is generally stable. A phenomenon like Harry Potter may occasionally expand the overall readership size, drawing in new book buyers, but those things are rare. So how does one raise revenues dramatically? By abandoning niche markets, forsaking quality literature or risky new writers, and instead trying to identify the next blockbuster, the next Da Vinci Code. But again, this leads in the long run to deterioration in the overall quality and diversity of the books that are published.

The February 2008 issue of Harper's Magazine has a nice article Staying awake: Notes on the alleged decline of reading by novelist Ursula K. Le Guin where she challenges the assumption that the reason that the book publishing industry is suffering is because people are poorer readers now, and argues that the unreasonable profit demands of big publishing companies is what is destroying the book publishing industry.

Next: The consequences of the primacy of stockholders

POST SCRIPT: Some religious people never learn

The state of Florida has revised its science standards and for the first time, has included the word 'evolution' in it. (Welcome to the 19th century, Florida!) But of course some religious people were upset, as they always get the heebie-jeebies when the word evolution rears its head. So to mollify them, the wording was changed to refer to the 'scientific theory of evolution'.

The irony in this story is that the religious people thought that this was somehow weakening evolution, when it is in fact strengthening it. To call something a scientific theory is to give it high praise. How clueless can they get?

February 22, 2008

Is there any hope for Obama?

In the previous post, I pointed out the surprisingly strong early backing that Obama has received from Wall Street, which raises the obvious question: Why would Wall Street invest so heavily in him? One reason is that the business sector always covers its bets so that whoever wins, they have ties to them. But another major reason is that the pro-war/pro-business interests in the US cannot get all that they want from Republican administrations. The Republican Party is too closely identified in the public mind with big business to overcome the public's suspicion that they always are seeking to enrich the big moneyed interests at the expense of the poor. Some of the desires of big business can only be met by Democratic presidents and Congresses, who have managed to convey the impression that they are the party of 'the little guy', and thus can neutralize some of the suspicions and do things that Republicans cannot.

Thus many government actions that big business interests sought, like the deregulation of airlines, trucking, and railroads were done by a Democratic president, Jimmy Carter. It was also a Democratic president Bill Clinton that was able to push through the anti-labor NAFTA and the anti-poor 'welfare reform' legislation. A Republican president would have met stiff opposition if he had tried to do any of these things. It was also Clinton who signed off in 1999 on the repeal of the Glass-Steagall Act which was passed in 1933 in the wake of the Great Depression to prevent banks from overinvestment in the stock markets. The act created a firewall between commercial and investment banking activities, and banking and investment interests had chafed at the restrictions. The repeal of this act in 1999 is partially responsible for allowing the reckless behavior of the banking sector in the current subprime mortgage crisis where the boundaries between traditional safe banking activities (such as issuing mortgages) and more risky and speculative activities (such as investing in the stock market) became obliterated.

So what might Wall Street want from a President Obama that they are willing to invest heavily in his candidacy? One possible reason is Social Security. Wall Street has for a long time tried to get its greedy hands on the massive amounts of money that exists in the Social Security trust fund. At present those funds are invested in government securities. The financial people on Wall Street would love to see that trust fund 'privatized', meaning that the money could be invested in the stock market. Such a huge amount of money entering the stock market would make stock prices soar, making the big investors immensely wealthy, and would also generate vast amounts of money in commissions to the big brokerage houses and investment banks as these huge sums of money traded hands repeatedly. The scale of the transactions would dwarf even the subprime amounts.

When Bush was re-elected president in 2004, he announced that the big goal for his second term was to privatize Social Security (although he called it 'reform' since the word privatize evoked a strong negative reaction). To try and achieve this goal, he repeatedly tried to scare people by saying that the fund was going broke and that the present generation of young people would pay into the system but not get anything out when they retire and that something drastic (i.e., privatizing) needed to be done to save it. This was, and is, a lie. As I will discuss in a future post, more sober economists have pointed out that the Social Security trust fund is in quite healthy shape and could be made even more solvent far into the future with just minor tinkering.

Bush failed spectacularly in his attempts to panic people into privatizing Social Security because of fierce opposition to his plans, opposition that was fueled by well-founded suspicions that what he was really interested in was not the long-term health of Social Security but merely to enrich Wall Street interests. Bush has quietly shelved that policy ambition in his lame-duck administration and no longer talks about it. But it would be a big mistake to think that Wall Street has also shelved its plans. They think big and long-term, and the Social Security prize is huge. I suspect that they think that a President Obama, being seen as progressive, might be able to push through the kind of Social Security changes they want. These changes will, of course, be euphemistically called 'reforming' or 'saving' Social Security, instead of the more accurate 'looting'.

To be fair, Obama has said he opposes privatizing Social Security and has (rightly) called for the lifting of the current income cap on the payroll tax (a move that Clinton opposes). But by talking about a Social Security 'crisis' that needs major action to rescue it, he is adopting the rhetoric of those who are urging privatization and that is dangerous because it can create be used to fuel a sense that something drastic needs to be done. This should be countered vigorously.

Economist Paul Krugman takes Obama to task on this issue:

Lately, Barack Obama has been saying that major action is needed to avert what he keeps calling a "crisis" in Social Security — most recently in an interview with The National Journal. Progressives who fought hard and successfully against the Bush administration's attempt to panic America into privatizing the New Deal's crown jewel are outraged, and rightly so.

This is why voting someone into office is never enough. You have to keep an even more vigilant eye on your person especially after they have been elected and keep their feet to the fire to make sure that the special interest groups that swarm like ants all over the federal government don't hollow out your candidate, leaving him or her just an empty shell of campaign promises.

Both Clinton and McCain are touting their own "experience", that they are people who rely "not just on words, but on work" but I am not sure this is a winning strategy for either of them. Voters don't seem to get too excited about the message "Vote for me. I will work hard" or "Vote for me. I have been around for a long time". To my mind, the absurd charge by Obama's opponents that he is "inexperienced" could well be his best and most appealing quality to voters, because that means that there has not yet been enough time for him to be completely enmeshed in the web that is spun around politicians by the war/business interests, and in which milieu both Clinton and McCain are completely at home. Thus there are some small grounds for hope that it may not be too late to rescue Obama from the clutches of the pro-war/pro-business and Wall Street interests.

But the sad truth is that we are now at the very point in American electoral politics that the ruling pro-war/pro-business party strives to reach as soon as possible, where the remaining candidates with any chance of winning do not differ greatly on major policy issues, and the voters are encouraged to get excited about some hot-button issues (which you can be sure will come up soon), or minor differences, or their styles and other trivialities. This makes voters forget that their real policy choices are very limited and that, in effect, the presidential election is over as far as substantive issues are concerned.

That does not mean that one should not vote. McCain will be a truly awful president, though he may not plumb the record-breaking depths of Bush who currently has an astonishingly low 19% approval rating according to one recent poll, and keeping him out of the Oval Office is a worthwhile goal. And in that particular respect, Obama has a decisive advantage over Clinton since recent surveys suggest that Obama has a better chance of beating McCain than Clinton does. This may be because, as one commentator said, "Clinton divides the left and unites the right, while Obama unites the left and divides the right." That is an obvious oversimplification, but is valid enough to be significant factor.

But I always find it depressing that I am usually forced to end up voting on the basis of who is the least-worst candidate, never for the one that holds any really promise of winning on a platform of real change.

So although I do not usually vote in primary elections, come Tuesday, March 4, 2008, I will vote for Barack Obama in the Ohio primary, basing my decision on the hope that he is not already corrupted beyond redemption.

POST SCRIPT: Combating the negative myths about Canadian health care

One of the big propaganda efforts in the US has been the way the Canadian single payer health care system is falsely denigrated in order to perpetuate the lie that the US has the Best Health Care System in the World, when in actual fact it is bloated, expensive, wasteful, inefficient, inadequate, and corrupt. (See here for a series of posts on health care.)

Earlier I linked to the first of a two-part series by Sara Robinson that combats the myths about the Canadian system.

The second part is now online.

February 21, 2008

The problem with Obama

Given my concerns about Hillary Clinton, one might think that I would be an enthusiastic Barack Obama supporter, but at this point I must say that I am somewhat underwhelmed by him. I have not been bowled over by his alleged charisma, perhaps because I almost never watch TV, preferring to read about events instead, and charisma is hard to convey with the printed word. I definitely prefer him to Clinton, but on many issues, it is hard to tell them apart. But the key difference with Clinton is that I think that Obama (unlike Clinton or McCain) is not (yet) completely in the maw of pro-war/pro-business party that rules the country, although the process by which those interests swallow up political leaders and turn them into zombie-like creatures that do their bidding seems dangerously far advanced in his case.

The first time I saw Obama was when I casually tuned in to watch a bit of the 2004 Democratic convention and happened to chance on him making his keynote speech. It was impressive. He seemed fresh and idealistic and was speaking about the things I cared about. Hence I had high hopes for him when he was elected to be a US Senator a few months later, in the fall of 2004.

Obama's record as an Illinois state senator had been quite progressive. As Ken Silverstein wrote in his article Barack Obama Inc.: The birth of a Washington machine in the November 2006 issue of Harper's Magazine:

During his first year in the state senate—1997—he helped lead a laudable if quixotic crusade that would have amended the state constitution to define health care as a basic right and would have required the Illinois General Assembly to ensure that all the state's citizens could get health insurance within five years. He led initiatives to aid the poor, including campaigns that resulted in an earned-income tax credit and the expansion of early-childhood-education programs. In 2001, reacting to a surge in home foreclosures in Chicago, he helped push for a measure that cracked down on predatory lenders that peddled high-interest, high-fee mortgages to lower-end homebuyers. Obama was also the driving force behind legislation, passed in 2003, that made Illinois the first state to require law-enforcement agencies to tape interrogations and confessions of murder suspects. Throughout his campaign for the U.S. Senate, Obama called for social justice, promised to "stand up to the powerful drug and insurance lobbies" that block health-care reform, and denounced the war in Iraq and the Bush White House.

But his record since becoming US senator has been less than stellar. He seemed to actively seek to ingratiate himself with the Washington powerbrokers, even going so far as to choose the execrable Joe Lieberman as one of his mentors. (If there is one thing that Al Gore did that I will never forgive, it was raising Lieberman's national profile by choosing him to be his running mate in 2000. Thanks to that, Lieberman has become, like McCain, a media favorite and we are subjected endlessly to their self-serving, self-righteous, and self-aggrandizing pontifications. In Lieberman's case it is also delivered in a whining, unctuous voice that reeks of smugness.)

Silverstein documents the decline of Obama after he was elected US senator.

Yet it is also startling to see how quickly Obama's senatorship has been woven into the web of institutionalized influence-trading that afflicts official Washington. He quickly established a political machine funded and run by a standard Beltway group of lobbyists, P.R. consultants, and hangers-on. For the staff post of policy director he hired Karen Kornbluh, a senior aide to Robert Rubin when the latter, as head of the Treasury Department under Bill Clinton, was a chief advocate for NAFTA and other free-trade policies that decimated the nation's manufacturing sector (and the organized labor wing of the Democratic Party). Obama's top contributors are corporate law and lobbying firms (Kirkland & Ellis and Skadden, Arps, where four attorneys are fund-raisers for Obama as well as donors), Wall Street financial houses (Goldman Sachs and JPMorgan Chase), and big Chicago interests (Henry Crown and Company, an investment firm that has stakes in industries ranging from telecommunications to defense). Obama immediately established a "leadership PAC," a vehicle through which a member of Congress can contribute to other politicians' campaigns—and one that political reform groups generally view as a slush fund through which congressional leaders can evade campaign-finance rules while raising their own political profiles.

Former Wall Street analyst Pam Martens, writing in the February 1-16, 2008 issue of the newsletter CounterPunch, points to the courtship and embrace by Obama of major Wall Street financial interests.

Seven of the Obama campaign's top 14 donors consist of officers and employees of the same Wall Street firms charged time and again with looting the public and newly implicated in originating and/or bundling fraudulently made mortgages. . . These seven Wall Street firms are (in order of money given): Goldman Sachs, UBS AG, Lehman Brothers, JP Morgan Chase, Citigroup, Morgan Stanley and Credit Suisse. There is also a large hedge fund, Citadel Investment Group, which is a major source of fee income to Wall Street. There are five large corporate law firms that are also registered lobbyists; and one is a corporate law firm that is no longer a registered lobbyist but does legal work for Wall Street. The cumulative total of these 14 contributors through February 1, 2008, was $2,872,128, and we're still in the primary season.

Martens points out that Obama has not been shy about serving Wall Street interests when called upon to do so. He joined with Republicans in 2005 to pass the "Class Action Fairness Act" which was highly desired by the financial sector because it eliminated the option for people to file class action law suits in state courts, often the only remedy for individuals fighting giant corporations. As Martens says, the legislation was the result of "five years of pressure from 100 corporations, 475 lobbyists, tens of millions of corporate dollars buying influence in our government, and the active participation of the Wall Street firms now funding the Obama campaign." (We should always be wary of legislation that uses loaded words like 'fairness' in the title. It is almost invariably propaganda rhetoric designed to disguise its true intent, which is that the legislation serves the opposite ends that the word implies.)

The Act was opposed by fourteen state attorneys general who wrote: "State attorneys general frequently investigate and bring actions against defendants who have caused harm to our citizens. . .In some instances, such actions have been brought with the attorney general acting as the class representative for the consumers of the state. We are concerned that certain provisions of S.5 might be misinterpreted to impede the ability of the attorneys general to bring such actions." The legislation was also opposed by the NAACP, Lawyers Committee for Civil Rights Under Law, Human Rights Campaign, American Civil Liberties Union, Center for Justice and Democracy, Legal Momentum (formerly NOW Legal Defense and Education Fund), and Alliance for Justice.

But Obama happily sided with Wall Street, even making a floor speech supporting the legislation.

Next: Is there any hope for Obama?

FISA extension

In a surprising show of independence, the House of Representatives let lapse last Saturday the law that gave the government broad unsupervised spying powers on people. The US Senate led by Harry Reid had, as usual, rolled over for the White House and passed the bill.

The House ignored the standard dire "the sky is falling" warnings by Bush and his authoritarian allies that not agreeing to do whatever he wanted was helping the terrorists. Bush even threatened to call off his Africa jaunt and stay and push for passage if the bill was not passed but when his bluff was called he quietly backed off and went to Africa with his tail between his legs.

It was suspected that what the government really wanted was a provision in the bill that gave retroactive immunity from prosecution to phone companies that had illegally tapped the phones of US citizens. Those companies are currently facing multi-billion lawsuits.

Mark Fiore has a nice animation on the issue.

February 20, 2008

The potential Clinton vs. McCain nightmare

(Due to the unexpected importance of Ohio in the primary process, I am pre-empting the economy series for three posts on the elections.)

Back in November 13, 2006, when Wisconsin's US Senator Russ Feingold announced that he would not run for the Democratic nomination for president, I wrote the following:

"With Feingold's departure from the race, we are headed closer to a nightmare scenario in 2008 where the two factions of the pro-war/pro-business party will send their most cynical and opportunistic and unprincipled representatives to vie for the presidency: Hillary Rodham Clinton and John McCain. The pundits will love them because they play the game according to the debased rules they understand, where the only things that matter are strategy and tactics, and principles are irrelevant."

Now that the primary season is well underway, at least half of my prediction seems to have sadly come true, with John McCain almost certainly being the Republican nominee. It seems like only Barack Obama can prevent the full nightmare from occurring. The Ohio and Texas primaries on March 4 and the Pennsylvania primary on April 22 will play important roles in deciding who the eventual Democratic nominee is.

If it is eventually Clinton vs. McCain, one can look forward to the nauseating spectacle of the Villagers in the media fawning over McCain, completely buying into his self-aggrandizing pose of being a 'straight talker' and 'maverick' and 'independent', and completely ignoring his actual record which clearly shows that he is a rabid war-monger, someone who panders shamelessly and is willing to reverse policy positions if it is expedient to so do, and one who toes the Republican party line 88.5% of the time, much higher than the average of 80%. For reasons that are unfathomable to me, the Villagers seem to adore McCain and give him a pass on all these things.

As Duncan Black says:

McCain's a skilled politician who is good at telling members of the media - and interest groups - what they want to hear. He's good at making them think he agrees with them on whatever issue they happen to care about, and even though he almost never follows up with any coherent action or leadership on these issues, he has flattered the chattering classes by validating their Very Wise Positions and appealing to their intellectual vanity. Then when Saint John McCain is forced by Circumstances Beyond His Control to change his position, everyone involved feels very sorry for poor John McCain. Elites have contempt for those rubes known as "voters" so it pains them when voters force their sainted John McCain to do all of these bad things.

Our elite discourse is run by shallow easily flattered fools.

John McCain also shows every sign of having a highly authoritarian mindset, similar to the current Bush-Cheney regime. His repeated use of the grating phrase 'my friends' in speeches, and even 'my friend' when he is talking to one person in interviews or in a question-and-answer setting, is a dead give-away of a person who is patronizing the listener. He clearly thinks very highly of himself and looks down on other people. If he is elected president, we can look forward to more contemptuous treatment of anyone who opposes him, and whining and scaremongering to try and always get his way, the kind of behavior that has characterized the present administration.

The coverage of Clinton will also be awful but in a different way. There is something about Hillary Clinton that rubs some of the Villagers in the media the wrong way. Maureen Dowd and Chris Matthews and the entire Fox News network seem to get positively unhinged by her. This instinctive reaction causes them to obsess over the most absurd things. We can expect to see the Villagers focus negatively on personal issues and trivialities, her laugh and her looks, her clothes, her family, the old scandals, and so on.

My problems with Hillary Clinton are for reasons that are very different from that of the Villagers. I really don't care about her personal characteristics except insofar as they affect her policy positions. My concern is that she has shown herself to be completely willing to do the bidding of the pro-war/pro-business interests. She is favored by the lobbyist and business groups and seems quite capable of even starting wars just to show that she can be 'tough'. Her votes on Iraq and Iran are ominous, showing that she is an eager follower of the neo-conservative agenda of going to war with those countries and others in that region.

She is also completely in the embrace of Wall Street and other financial interests. Her health care plan during Bill Clinton's presidency became a nightmare because from the beginning she sought to protect the interests of the health insurance companies, the very cause of the problem. Recently in her campaign speeches she has started adopting some of John Edwards' rhetoric about class and railing against Wall Street interests dominating government, but her record shows that this is utterly disingenuous. She has been a loyal servant of those very same interests and they are backing her now.

I have never seen any indication that she (or her husband for that matter) has any core principles, things that she will never give up because she believes in it too strongly. It seems like every principle, every policy position, is negotiable in the service of gaining power. They raised 'triangulation' to an art form. She, like her husband, is ruthless in the pursuit of power, so do not be surprised if she and her surrogates start using all manner of innuendo and dirty tricks against Obama if the race for the Democratic nomination continues to be close and she is in danger of losing. She knows that at the age of 60, this is her only chance to be president as she will be considered too old for the job in 2012 or 2016, so brace yourself for some really tough campaigning from her. The age standard is much laxer for men. McCain will be 72 in August but not much is being made of that.

Both Clintons also have a history of using people for their own ends and betraying even close and loyal friends (Lani Guinier, Peter Edelman, and Vince Foster immediately come to mind) to further their own ambitions or to make deals with their political opponents. I think that both Hillary and Bill Clinton have shown themselves to be shrewd tacticians but political cowards.

As you might guess, I am not going to be voting for Hillary Clinton or John McCain in the Ohio primary.

Next: The problem of Obama

POST SCRIPT: Strange values

The people of Denmark are considered the happiest people on Earth, and have this strange notion that there are other things that are more important to happiness than money. Of course they are crazy. They have been driven insane by living in a socialist hell where they get free health care, government-paid maternity and paternity leave, education is free for all the way through college (and students are even paid to go to college), and they get subsidized child care as well.

When will the Danes wake up and realize that all these things are worth giving up in exchange for giving a very few people the opportunity to make obscene amounts of money, just like we do in the US? The US ranks 23rd on the happiness scale, by the way.

February 19, 2008

The brave new world of finance-10: Who's to blame?

(For previous posts in this series, see here.)

As is typical with bubbles, people involved at all levels of the subprime mortgage debacle seemed to deliberately shut their eyes to any negative information, as if they thought that wishing things were just peachy would make it so. As long as nobody looked too closely at the structure, no one would notice that it was a house of cards, and the good times would continue forever. But they never do. The house of cards always collapses.

(Some observers have pointed out that it may not be completely accurate to call the current subprime crisis a bubble. In classic bubbles, the prices of the commodity fall precipitously to their pre-bubble values or even below. This has not happened yet with home prices but the crisis is not yet over. The behavior of the principal characters in this drama, however, exhibit all the qualities of those involved in previous bubbles.)

Who is to blame for this situation? To be sure, there is enough blame to go around.

It is true that some of the homebuyers were outright dishonest, colluding with brokers to fake documents and income in order to pass a cursory scrutiny before getting the money to buy houses they could not afford. And it is true that some of these homebuyers acted with almost unbelievable ignorance and even stupidity about what they were getting into when they signed the papers to buy their homes. The Cleveland Plain Dealer had an excellent series on the foreclosure crisis by Phillip Morris and one story featured a man with a well-paying job who lost his home because he did not keep up with his $1,200 monthly mortgage payments. Meanwhile he was spending $40 a day on the lottery, hoping to strike it rich!

But apart from the criminal and the almost criminally stupid, it is true that many people buying homes in these go-go times should have suspected that things were too good to be true, that it was unlikely that many of them could actually afford the houses they bought. And yet, the dream of owning their very own home for the first time must have been powerful enough that they were willing to believe the promises of brokers and bankers, who were merely using them to enrich themselves. We also live in a time when people are told that living beyond their means, spending money they might not have 'stimulates the economy' and is thus a good thing.

We now see a backlash, with some policymakers blaming these buyers for the mess they find themselves in. But apart from those who willingly participated in fraud, such attacks are unfair. Buying a house is an enormously complicated affair, beyond the comprehension of most people. Although I am fairly literate and numerate and reasonably savvy regarding personal finance, I recall being overwhelmed by all the legalistic documents that we had to sign when we bought our house. I could understand the key points, but there were pages and pages of detailed jargon that we were assured were standard boilerplate language. I recall thinking how easy it would be to be swindled by the bankers and other people involved in the process. I had to trust that they were acting in good faith. Has it come to a point where we each have to have a lawyer and accountant with us when we enter into any reasonably major transaction?

Homebuyers are largely dependent on the honesty of the professionals who they think are acting on their behalf. As Duncan Black (aka blogger 'Atrios') says:

The inability of the Republican lizard brains to even fake the slightest bit of empathy or sympathy for those experience economic troubles, or in fact to even restrain from outright hostility, is rather fascinating.

That isn't to say all of those in foreclosures are victims. But there were a lot of people ripped off by mortgage brokers they thought were acting in their interests who instead were pushing them into crappier loans for bigger commissions. When you hire someone whose job you think it is to get you the best loan possible, and their incentives are actually to get you the shittiest loan possible and you are unaware of that fact, there's a wee bit of a problem in the system.

But there were also more sophisticated buyers who were well aware that their mortgage interest rates would soon go up but did not care. They were those who believed in the 'greater fool' theory and saw themselves as smart investors who were planning to sell their property for a tidy profit before the rates rose. And as long as the prices kept going up and demand was high, that strategy would have worked. But as the subprime crisis unraveled and the number of foreclosed houses started shooting up, there was a glut in the market, buyers became more fearful and choosy, and prices started dropping and even the richer, more sophisticated buyers found themselves stuck with properties they did not want. It was cheaper for them to cut their losses and to walk away from their property than to sell it for a huge loss. This constitutes another wave of abandoned home foreclosures.

Sadly, the end is not yet near for this crisis. 2008 will be another year in which many initially low-interest teaser adjustable mortgage rates will rise, leading to another wave of foreclosures due to people's monthly payments rising above what they can afford. About 1.6 million homes were foreclosed last year and this year is expected to bring a similar number. The government and a consortium of six major banks involved in the subprime market announced a plan called Project Lifeline to give homeowners facing foreclosure thirty days more to try and refinance their homes so that they can afford them, but it is not clear if this will work. There are strong fears that this is inadequate.

Next: How did things get this way?

POST SCRIPT: Hype in sports

David Mitchell (one partner of That Mitchell and Webb Look) makes fun of the nonstop breathless hype by sports announcers, where every upcoming game is made to sound momentous. Here he is talking about English football ('soccer' in the US).


February 18, 2008

The brave new world of finance-9: Two case studies of destroyed communties

(For previous posts in this series, see here.)

Up to now, I have been looking somewhat generally at the problems created by the collapse of the subprime mortgage market: how the problem was created and the scale of the problem. But to really appreciate how it worked and its impact on actual people, one can look at two case studies, in Stockton, CA and Cleveland, OH.

CBS's 60 Minutes had a report on the community in Stockton that showed how the pyramid scheme worked:

Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.

And yet, these loans were marketed aggressively. As Jim Grant, a leading expert on credit markets said: "When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides." Little or no attempt was made to verify ability to pay.

Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I,'"

Almost all of the people involved in the transactions made good money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.

Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.

"At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says.

It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.

All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.

Some unsophisticated buyers actually wanted to live in the houses they bought but did not realize that after a year or two the monthly payments would skyrocket out of their range. They consist one group of defaulters, and these people are overwhelmingly low-income or middle class. Cleveland's Mount Union neighborhood was one such community hard hit by these dreams destroyed, as this news report describes:

The streets are empty. Trash rustles down the road past rusted barbecues, abandoned furniture, sagging homes and gardens turned to weed.

This is Mount Pleasant, a neighborhood in southeastern Cleveland ravaged by the subprime mortgage crisis roiling the United States.

Faded "for sale" signs sit in front of deserted houses. The residents are gone, most after being evicted for missing their mortgage payments.

For county treasurer Jim Rokakis, the greed of the banks is to blame for this man-made disaster.

"All you needed was a pulse to buy a house. Some loans were written with no money down, no proof of buyer's incomes. They did not even check what people were saying. Most of those folks were jobless," he said in an interview.

The Mount Pleasant community, he said, "was the perfect storm: poor folks, unemployed and a desire to get a piece of the American Dream."

I have shown this clip by comedians John Bird and John Fortune on the subprime mortgage crisis some months before, but it is worth seeing again because it captures precisely the way the crisis occurred, the cavalier attitude of the banking and financial sectors to the way they used other people's money, and how the whole house of cards was built on illusion and hype.

Next: Assigning blame

POST SCRIPT: Causing and taking offense

Bill Maher explains why he is not afraid of offending religious sensibilities.

February 15, 2008

The brave new world of finance-8: The end of the housing dream

(For previous posts in this series, see here.)

The real estate boom fueled by the easy availability of subprime mortgages was a classic pyramid phenomenon, entirely dependent like all such phenomena on an endless stream of new buyers coming along willing to pay the inflated prices. When the crash came, as it inevitably does with all schemes that are based on expectations of permanent and rapid price increases, it turned out to be financially advantageous for many people who had taken these loans to declare bankruptcy and simply abandon their homes and walk away, since the money they owed was often more than the house was worth. Some became homeless as a result, but others who had bought these properties more as investment vehicles did not fare too badly. Many had put no money of their own as down payment so they had essentially rented the houses for a few years, often at below market rates.

But when the crash came, the repercussions extended far beyond just the actual homeowners. The mortgages sold in the secondary markets had been bought by those who bundled up a lot of them into aggregated units, with the impressive name of SIVs (Structured or Special Investment Vehicles) that were then bought and sold like other commodities in the securities market. The links to the value of the actual pieces of land on which these securities were supposedly based became more and more tenuous and even disappeared. In fact, the ownership of the actual properties is now so murky and obscure that cities like Cleveland are finding it hard to find out who actually owns the mortgages on abandoned properties, in order to get them to pay for their maintenance and upkeep. As a result the city has sued twenty one investment banks that dealt in these SIVs, trying to recoup the losses that the city is incurring as a result of all these defaults and the resulting abandoned and decaying properties that are further driving property values down.

The bundled mortgages were grouped into different classes of SIVs, depending on the supposed risk of default. The price of the different SIVs then became primarily determined not by the actual value of the properties of which they are made up (that link to reality was severed early on) but by the ratings that these SIVs received from the appropriate credit rating agencies. Those ratings are supposed to reflect the actual risk of default of the mortgages in the bundles, and are supposed to be assigned on the basis of careful scrutiny of the mortgage portfolios. That did not happen. The rating agencies gave higher ratings than the creditworthiness of these mortgage bundles deserved, thus making these SIVs seem more valuable than they were. (The ratings agencies themselves are now under scrutiny for this practice by investigators, as people seek to find out who is to blame for the debacle.)

Meanwhile, bond insurance agencies like Ambac, MBIA, and FGIC that normally insure safe municipal bonds against the unlikely possibility of default decided that that was not providing enough profits and eagerly looked to expand their operations into the booming subprime mortgage market. They started underwriting these SIVs in the event of default, based on their inflated values and credit ratings. This caused the supposed financial wizards who buy and sell these kinds of securities based on their ratings (since they rarely know what the securities actually contain) to bid up the prices of these supposedly 'good' investments.

The transfer of SIVs became like the children's party game of passing the cushion, where these securities rapidly changed hands, their prices rising because of the commissions paid, their inflated credit worthiness ratings, and the underwriting by supposedly reputed insurance agencies. When the music stopped and the prices dropped, those investment banks left holding the SIVs suddenly found no buyers for their rapidly depreciating assets. The top investment banks in Wall Street have already sustained losses of $120 billion because of the losses in their subprime mortgage portfolio, and the story is not nearly over.

Now that many of these SIVs are almost worthless, the insurance agencies that underwrote them are also at risk of going bankrupt, since they insured these securities against losses. Their own credit ratings are being downgraded, which can be disastrous to their ability to obtain new business.

So we see a domino effect, with the losses incurred by the deflated SIVs hitting the investment banks, the credit agencies that gave them undeserved ratings, and the insurance agencies that backed these securities without sufficient case reserves. In addition, we have the homeowners who have lost their homes due to foreclosures, the cities that have to deal with the blight of abandoned homes, and the schools and cities that have lost tax revenues due to the drop in home prices. The fallout is also affecting those homebuyers who had good credit (i.e., 'prime' borrowers). As a result of the subprime crisis, banks are tightening credit and raising interest rates on even those people with good (i.e. 'prime') credit and now some of them are facing foreclosure and bankruptcy, so the subprime label for the crisis is becoming a misnomer. The scale of the disaster has still not been fully felt by the general public.

We are now seeing the government scrambling to provide subsidies to these companies, either by lowering interest rates enabling them to borrow money more cheaply to cover their losses or by giving them loans or trying to arrange consortiums for financing their losses, and other forms of subsidy. The British government, for example, has invested $26 billion in Northern Rock Bank when that bank's mortgage based assets sank in value, and is considering giving it even more. Similar bailout measures are being proposed in the US.

Like many rich people who praise the virtues of capitalism and are quick to condemn giving welfare to poor people saying that it is 'socialism' and rewards bad behavior, the investment banks and insurance industries are totally shameless when it comes to demanding that the government bail them out when they themselves get in trouble and are in need because of their own greedy and reckless behavior.

Next: Two case studies in disaster

POST SCRIPT: Doctor House is Dr. Yahweh

"Religion is a symptom of irrational belief and groundless hope."

February 14, 2008

The brave new world of finance-7: The subprime mortgage debacle

(For previous posts in this series, see here.)

The current so-called subprime mortgage crisis is a result of a real estate boom fueled by a combination by ignorance, greed, lax standards and oversight, and outright criminality.

Unlike art or precious stones, in the case of a house, the value can be determined within a fairly narrow range. Knowing the neighborhood, the size and state of repair of the house, historical pricing patterns, etc., one can assess the value of a house fairly accurately. Barring sudden unforeseen events such as finding oil on the property or the discovery that some major new construction is going to occur nearby, or that the house has been built on a toxic waste site, the price of property tends to be fairly stable and predictable.

When it used to be the case that the banks that loaned you the money to buy a house held on to the mortgage themselves, there were built-in checks and balances to prevent the unrealistic pricing of homes. After all, foreclosing and selling a house is a costly and tedious business that banks would like to avoid, so it was in their own interest to ensure that the buyer could afford the house so that default was highly unlikely. It was also in the bank's interest that the house was being bought at a reasonable price, with a down payment, so that the bank was lending substantially less money than the house was worth so that they could sell it easily in the unlikely event of a default. That was indeed the case when we bought our own house nearly twenty years ago. There were careful checks of the title to make sure the ownership was not challenged, a valuation of the home by an independent appraiser to make sure we were not paying too much, and we had to demonstrate, using tax returns and the like, that we had the steady income that we claimed we had and that it was sufficient to pay the mortgage. The fixed-rate mortgage payments themselves were high enough so that they covered the interest and also part of the principal, so that the money we owed the bank steadily decreased over the time of the loan.

But those days are long gone. Now the banks that loan you the money to buy your house resell your mortgage within days in the secondary market. Since the banks that initially provide the money for the house purchase do not hold on to the mortgage but quickly sell them, this does not require them to look too carefully into what they are financing. Indeed it is better not to do so at all, since the banks make their money at the point of transaction, so that the more mortgages that pass through their hands, the more money they make. This lack of close scrutiny also encourages the emergence of unscrupulous mortgage brokers who make their living on the basis of the number and value of the mortgages they broker between buyer and bank. Hence it is in their interest to obtain as many mortgages as possible for as high a value as possible. This encourages them to inflate the prices of the houses being bought and sold (in which they are aided by appraiser accomplices) and to inflate the incomes of the buyers so that they become eligible.

In order to make even more buyers eligible, buyers with poor credit histories (i.e., those labeled 'subprime') were also offered adjustable rate mortgages with no down payment and low teaser interest rates for the first few years so that they could afford the payments, at least initially. Furthermore, they were offered mortgage deals in which the monthly payments were interest only (in which case the money owed never decreased) or, incredibly, did not cover even the interest, so that as time went by the borrower owed more money, not less. The net result of the latter practice was that the value of the mortgage often exceeded the value of the house by substantial amounts.

Why would buyers accept such terms? These practices enabled them to afford to live in a more expensive house than was otherwise possible for the few years during the initial low-interest period and they thought they could sell and move on before the higher rates kicked it. Those who hoped to make the house their permanent home could hope that they would be either earning more money in the future to make the higher payments affordable or were told that they could refinance to a fixed rate mortgage at better rates in a year or two, before the low initial interest rates ended.

As a result of all these dubious lending practices, more people became 'eligible' to buy more expensive homes and home prices naturally started going up as a result of the increased demand for them. As long as the real estate market was booming and prices were rising, overextended buyers felt they always had the option of selling the home at a higher price than what they bought it for, thus paying off the mortgage loan with a tidy profit left over. Everyone would be happy. As a result, no one was looking very closely at the underlying value of the properties. There was no incentive to do so, and in fact it was discouraged. Why do that and destroy the dream?

Next: The end of the dream

POST SCRIPT: Lewis Black gives TV executives some good advice


February 13, 2008

Everybody should be converting: The sequel

There was a fascinating discussion in the comments section on the post Everybody should be converting that I encourage everyone to read. I was going to reply in the comments but it got too long (my usual failing) and I thought it merited a new post that pre-empted (once again) the series on the new economics.

What took me by surprise was the challenge to my assertion that religions, by their very nature, asserted a set of beliefs that implied the primacy of each one over its competitors, and thus implied a duty by its adherents to convert others to its beliefs. Of course, whether any one individual chose to proselytize or not and if so, how one set about doing it, was a matter of choice. But I said that one could hardly fault anyone who took their religion seriously enough that they tried to persuade others to join. Hence I could not understand what the fuss was about Pope Benedict XVI's revision of the Good Friday prayer and Ann Coulter's remarks about the need to help Jews and other non-Christians "see the light" (as it were) and convert to Christianity.

The response in some comments that modern "liberal" versions of Christianity were more like a lifestyle choice, that one picked one that meshed with one's own way of life and was congenial to one's own personal philosophy, was eye-opening for me. As I understand it, there is usually a core set of beliefs that each religion adheres to and one affirms a belief in those doctrines during the process whereby one becomes a member of that religion. To see what belonging to a religion implies, one should look at the affirmations of belief that one has to make before one can be converted to a new religion.

For example, if one wishes to become a Muslim, then one has to accept certain doctrines, which includes a statement of primacy over other religions, such as: "[Islam] is a religion as well as a complete way of life which requires submission to the Will of Allah and obedience to the laws of Allah alone as set down in the final of the revealed Books of Allah, the Holy Qur'an. Islam, in fact, is the direct relationship of a Muslim with God Almighty."

A similar requirement to accept Judaism to the exclusion of all other religious faiths and practices is obligatory when one wants to convert to at least some forms of Judaism. At the very least, it requires a rejection of the idea that Jesus is the Messiah or divine in any way.

The statement of belief for Christians can be found in the baptism and/or confirmation process they go through as children or adolescents, which I went through as well. Such affirmations of belief are also routinely required in the liturgy at each worship service for Christian denominations. In Christian churches, one sees this in the Apostle's Creed or the related Nicene Creed, one of which is usually said by the congregation at every communion service. The former says:

I believe in God the Father Almighty, Maker of heaven and earth.

And in Jesus Christ his only Son our Lord; who was conceived by the Holy Ghost, born of the Virgin Mary, suffered under Pontius Pilate, was crucified, dead, and buried; he descended into hell; the third day he rose again from the dead; he ascended into heaven, and sitteth on the right hand of God the Father Almighty; from thence he shall come to judge the quick and the dead.

I believe in the Holy Ghost; the holy catholic Church; the communion of saints; the forgiveness of sins; the resurrection of the body; and the life everlasting.

What Catholics and Protestants generally agree upon is the following:

Both Catholics and conservative Protestants generally agree on some major theological matters, like the existence of angels, Mary's virgin conception; Jesus' sinless life, incarnation, crucifixion, bodily resurrection, and his imminent return of Jesus to Earth in the second coming; Heaven, Hell; the Trinity, and the deity of Jesus. They agree that his execution brought about atonement -- the potential to bridge the gulf between humanity and God caused by sin.

This is a pretty powerful set of beliefs that one affirms each Sunday. It was because of my inability to accept these things that I left the church. I just could not bring myself to make these assertions, even though I was completely comfortable with the lifestyle of the liberal Methodist church I belonged to, liked the people there, and agreed with its approach to many social justice issues.

It is true that in many churches there is no explicit call to evangelize (although Jesus (Mark 6:10-12) does encourage his disciples to do so), but my point was that if you believe all the things that are stated in (say) the Apostle's Creed, one is saying that Christians have a special relationship with god, just the way that Muslims and Jews say they have a special relationship too. Surely that message is an important one that should be shared with non-believers?

Since Protestant Christians can usually switch between denominations and join new churches without formal conversion practices or a renewed public statement of beliefs, that may make it easier to think that joining a church is a lifestyle choice, without any doctrinal commitment. But I think that is misleading. It arises because almost all the Protestant churches share a common set of doctrinal beliefs, making transitions appear to be non-doctrinal. This funny sketch by the BBC comedy series That Mitchell and Webb Look illustrates this point.

The vicar in this sketch is a particularly nasty person but his point is that joining a religious organization is different from joining a book club where all that one is looking for are companionable people. Joining a religious organization carries with it a real intellectual cost and requires a commitment to a set of doctrines that usually includes, at a minimum, a rejection of all other religious doctrines.

The novel Life of Pi tells the story of a little boy in India who wanders through his city and happens to come across congenial priests in the neighborhood Muslim mosque, Hindu temple, and Christian church. He studies each religion with its priest, finds them all attractive for different reasons, and unbeknownst to the other priests or even his family, considers himself a member of each religion. Each priest considers the boy to be an exemplary member of that particular religion, who attends religious services regularly and shows proper devotion. The comedic showdown occurs when Pi is walking with his family in the park and by coincidence, encounters all three priests as well. Everyone is shocked and disapproving of his membership in the competing religions, much to Pi's chagrin and puzzlement.

Of course, I realize that there are some religions (like the Unitarians) that are specifically geared towards people who simply want to be part of a community of like-minded people seeking some sort of spiritual companionship and which do not assert a set of doctrines that require allegiance or exclusivity. But those are exceptions. Most religions do not allow (or at least frown upon) their members being simultaneously members of competing religions. They see themselves as being right and the others wrong at least on one (and usually more than one) important doctrinal issue. And as such, it makes sense to try and bring other people in, to convert them.

February 12, 2008

The brave new world of finance-6: Greed and bubbles

(For previous posts in this series, see here.)

One can never underestimate how the power of greed, the thought of making a lot of money quickly, can cause otherwise rational people to lose their senses. A friend of mine works for the white collar crime division of the Cleveland police and he can tell story after story of sensible middle-class or wealthy people, the kinds who could be your neighbors, who are professionals and cautious in most of their dealings, becoming the victims of some racket run by charming men and women. These people often did not even need the money they thought they would quickly make. In each case, it was greed that overcame their judgment, coupled with the desire to feel that they too are smart investors with access to valuable information that the general public did not know. Conmen and conwomen know exactly how to prey on such people.

Greed is also what fuels bubbles. The so-called 'dot com' craze of the late 1990s is within recent memory of most of us, where privately-held internet companies would go public and sell stocks, whose values would then skyrocket literally overnight. Initially some people made a lot of money and this soon attracted more naïve investors who assumed that the good times would always last. But they never do and in 2000 the inevitable crash came, wiping out nearly 80% of the paper value of people's investments.

While most of us are not the kinds of financial high rollers who get invited to participate in such IPOs (Initial Public Offerings), it is easy to get sucked in by the general enthusiasm and try and get in the game later, when the savvy investors have already made most of the money to be made. It may be hard for us to comprehend how people could get so unhinged that they forget the basic rules of investment and fall prey to speculation. But I can see how other naive people like me could easily get sucked in and invest their savings thinking that there was easy money to be made.

As economist Burton Malkiel says in his chapter on bubbles in his book A Random Walk Down Wall Street (1999):

Not all investors in the bubble companies believed in the feasibility of the schemes to which they subscribed. People were "too sensible" for that. They did believe, however, in the "greater fool" theory – that prices would rise, that buyers would be found, and that they would make money. Thus, most investors considered their actions the height of rationality as, at least for a while, they could sell their shares at a premium in the "after market," that is, the trading market in the shares after their initial issue. (p. 43)
. . .
The consistent losers in the market, from my personal experience, are those who are unable to resist being swept up in some kind of tulip-bulb craze. It is not hard, really, to make money in the market. . .What is hard to avoid is the alluring temptation to throw your money away on short get-rich-quick speculative binges. (p. 53)

During the dot-com boom in the late 1990s, I would read almost every day of yet another internet company that would have an initial release of stock and of those who bought them finding their investment doubling or tripling within days. Even I had the vague feeling that by not participating in this boom, that I was somehow losing out, that I was falling behind by standing still. I felt a tug, a temptation to 'get in the game'. But I did not actually invest during the dot-com boom because not only do I not understand the stock market, I do not even like the principles on which it works, where bad news for ordinary people seems to mean good news for investors.

For example, I recall the day in July 2005 when terrorists struck the London underground trains, killing many people and causing panic in the financial markets. Brit Hume of Fox News said that when he heard the news, the first thing the occurred to him was that it would be a good day to invest in the stock market, to take advantage of the sudden drop in stock prices due to the tragedy. I was stunned by that shameless display of callousness and greed. I simply cannot imagine thinking like that, to eagerly look forward to tragedy and disaster as opportunities for making money. It seems ghoulish to take advantage, however indirectly, of the misfortunes of others. And so I cannot bring myself to directly 'play the market', as they say, although my retirement accounts are presumably being invested by someone who is playing such games, so my hands are by no means clean.

But it is not only big investors who can fall prey to that kind of hype. If you find it hard to imagine that normally level-headed people could go nuts over things like tulip bulbs, recall the idiotic Beanie Baby craze of the 1990s. The prices of those cheaply made and nondescript toys started rising insanely as certain of those stuffed animals, sometimes for no discernible reason other than a rumor that they would become scarce, suddenly became highly sought after items. Ordinary people started lining up at stores on rumors of their availability and started paying far more than what they could afford for things that they thought would become collectors' items. The idea of an everyday item (a small, mass produced, cheaply made stuffed toy!) becoming a valuable investment vehicle was bizarre. This was such an obvious mass hallucination that I could not believe it was happening before my very eyes. Clearly reality had to prevail at some point and that bubble also crashed, leaving some people with huge quantities of Beanie Babies that they could not sell at even the list prices.

But while the Beanie Baby example was illustrative in the way it caused some people to spend more money than they could afford, it has had nowhere near the devastating impact that the current sub-prime mortgage bubble debacle has spawned. Once again, as with the tulip bulbs or Beanie Babies or the earlier dot-com bubble, the problem begins when the price of an item gets divorced from reality.

Next: The subprime mortgage bubble.

POST SCRIPT: Ricky Gervais in Extras

Comedian Ricky Gervais, who created the original The Office, has a new comedy series called Extras, where he works as an extra and tries desperately to ingratiate himself with the stars in order to get a break or at least a speaking role. This gives the show the chance to have famous actors as guests for each episode.

In this scene, we see him with Patrick Stewart.

February 11, 2008

The brave new world of finance-5: Crystal ball economics and the rise of bubbles

(For previous posts in this series, see here.)

My first real awareness that my understanding of what constituted sound economics and business practices was orthogonal to how Wall Street viewed it came in the 1990s when company after company sought to increase its stock price by slashing its work force, thus increasing its profits (at least in the short term). I recall that the head of Eastman Kodak at that time fought this expectation that he too follow suit. His argument was simple: His company made products that were in demand, was price competitive, and was making good profits. Why should he get rid of good, loyal, experienced workers, the very people who had made the company successful, for no good business reason but merely to drive up the stock price? I thought he made complete sense, which just shows how much I knew. Outraged stockholders quickly organized his ouster and replaced him with a new CEO who did what they wanted, which was to ruthlessly reduce the payroll, in the process throwing tens of thousands of people out of work. But those actions did drive up profits in the short term, and the stock price rose, which is all that Wall Street cares about. The fate of the Kodak CEO was a warning to other CEOs that they had better not even think about putting the long-term health of the company or its employees above the short-term profit needs of the stockholders.

What seems to have happened that is driving this trend is that the line between appearance and reality in the financial sector has become increasingly blurred. For example, it seems to me that a company's stock price should reflect its actual performance. So when it releases its annual report that says how well it did the previous year, its stock should rise if the report is good and fall if the report is bad. But that is not the way it works anymore. We are told sagely by analysts that what Wall Street cares about is not the data-based present (what some of us like to call 'reality') but expectations for the future. The measure that is used to determine stock price is how the report compares with what 'experts' and 'analysts' predicted it would say. What determines a stock price now is what analysts expect will be its profits in the future. We have moved from reality-based economics to crystal ball economics.

And therein lies the problem. It seems to me that the more one is separated from actual data, the more shaky the structure becomes. Once you shift the focus away from actual data to predictions about what future data will be, you have started playing a different game, that of appearance and expectations, and this can swiftly spiral out of control, where prices can start to rise based on unrealistic expectations, and then the rise itself seems to retroactively give substance to the expectations, which in turn fuels expectations of even greater rises, which causes even greater price rises, and so on. In short order, one has an accelerating price spiral where the relation of the price to the actual value of the commodity has been severed.

In some cases, fixing the actual value of a commodity is not easy and the price does become the value. This is true where rarity is an important factor is setting the price, such as in gold and precious stones. Art is another such commodity. Clearly the value of a painting by Rembrandt is not based on the raw materials used and the hours he put into its creation.

But apart from such specialized situations, in most situations we do have a rough idea of how much something should rationally be priced at based on some measure of underlying value, such as the cost of raw materials and labor, the cost of similar items in the market, and historical price patterns. When the prices of such things start outstripping the underlying value by wide margins, then we are heading for trouble because of the creation of 'bubbles'. As Eric Janszen defines it in the February 2008 issue of Harper's Magazine (p. 39): "A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. . .A better, if ungainly, descriptor would be "asset-price hyperinflation" – the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away."

The most famous historical example of a bubble (perhaps because it seems so extreme now) was the tulip bulb craze of 1636 where the price of tulip bulb 'futures' (i.e., the price expected in the future) skyrocketed, with reports of a single bulb selling for as much as a fashionable house and garden in Amsterdam! The problem with such bubbles is that they are like a Ponzi scheme in which the really savvy investors who get in early make a lot of money. The later people make money only as long as the prices keep rising rapidly because of the arrival of new investors (also known as 'suckers') willing to buy at inflated prices, thinking that prices will continue to rise. The need to maintain the illusion of unstoppable growth makes people reluctant to prick the bubble by bringing it into contact with reality, by asking awkward questions about the actual value of the commodities being bought and sold. But of course, rapid price increases are unsustainable and it is only a matter of time before the madness passes. In the tulip bulb bubble, by 1637 people started realizing that these tulip bulb prices were unrealistic and that they had been had. The tulip bulb market then came crashing to the ground, and people left holding these future contracts took a devastating financial hit.

The South Sea bubble that crashed in 1720 was another example of where stock prices rose wildly, and the rise itself fueled expectations of future rises, thus leading to an out-of-control spiral, again followed by a crash.

The Florida real estate boom and bust of 1926 was yet another example of a bubble where land prices sometimes quadrupled in a single year, driven up by speculators and naïve investors who felt that the only way prices could go was up and were thus willing to pay almost anything thinking they could make a future profit.

Next: More recent bubbles

POST SCRIPT: Mythbusting the Canadian health care system

One of the big propaganda efforts in the US has been the way the Canadian single payer health care system is falsely denigrated in order to perpetuate the lie that the US has the Best Health Care System in the World, when in actual fact it is bloated, expensive, wasteful, inefficient, inadequate, and corrupt. (See here for a series of posts on health care.)

Here is the first part of a series that combats the myths about the Canadian system.

February 08, 2008

Everybody should be converting

(I am taking a short break from the series of posts on economic issues. They will continue next week.)

Earlier this week, Pope Benedict XVI issued a replacement for the traditional Good Friday prayer and it has riled up some Jewish groups. Part of the new prayer says: "Let us pray also for the Jews that the Lord our God may illuminate their hearts and that they also may acknowledge Our Lord Jesus Christ." This new prayer was considered less offensive to Jews than the old one because the "old text prayed for, in Latin, the conversion of the Jews, calling on God to deliver "that people. . .from its darkness" and to remove the "blindness" "

Nevertheless, the new prayer is still considered offensive. "Rabbi David Rosen, director of inter-religious affairs for the American Jewish Committee said that although he was pleased that the offensive terms were removed from the prayer, he still objected to the new prayer because it specified that Jews should find redemption specifically in Christ."

Abraham Foxman, national director of the New York-based Anti-Defamation League, also was disturbed, saying that he was "deeply troubled" that the intention to petition God for Jews to accept Jesus as Lord was kept intact.

To me, within the framework of religion, both the old and the new prayers make perfect sense. Clearly Catholics (and other Christians) believe that Christianity is the one true religion. Otherwise why would they be Christians? Many also believe that those who do not "accept Christ" in some form or other are not going to heaven, or at the very least are going to find some obstacles in their way to getting there, and at the very worst are going to find their post-death experience very nasty indeed. Therefore it is actually quite humane on their part to pray that Jews (and Hindus and Muslims and Buddhists and atheists) will also "see the light" and become Christians. As Rev. James Massa, executive director for interreligious affairs for the U.S. Conference of Catholic Bishops, points out, the prayer should be understood in the essential Catholic view that "all people come to salvation through Jesus Christ."

Similarly, when Ann Coulter caused outrage by saying to talk show host Donny Deutsch (who is Jewish) that it would be better if everyone became Christian, she was being consistent with believing in the virtues of her own religion.

DEUTSCH: That isn't what I said, but you said I should not — we should just throw Judaism away and we should all be Christians, then, or —
COULTER: Yeah.
DEUTSCH: Really?
COULTER: Well, it's a lot easier. It's kind of a fast track.
. . .
COULTER: We just want Jews to be perfected, as they say.
DEUTSCH: Wow, you didn't really say that, did you?
COULTER: Yes. That is what Christianity is. We believe the Old Testament, but ours is more like Federal Express.

Similarly, one would expect that Jews who think their own religion is the right one should be hoping and praying that non-Jews would recant their existing beliefs and believe in the Jewish god. After all, the Old Testament repeatedly tells us that the Jewish god takes a particularly harsh view of those who worship other gods and does not hesitate to dish out all kinds of awful punishments to apostates. So humane Jews should try to prevent people of other faiths from meeting such a fate by getting them to convert to Judaism.

It also makes sense for Muslims to try and convert people to their religion, even if it involves pointing out the deficiencies of other religions.

Since every religion thinks that their god is the right one, they should all be trying to convert each other, out of purely humane impulses, just so that everyone would be worshipping the 'right' god, according to them. To do otherwise would be a sign of callous disregard for the fates of people's immortal souls.

In fact, those who use Pascal's wager as an argument that atheists, just to be on the safe side, should profess belief in god should also advocate forcible conversions, since they clearly think that their god prefers even a cynical, self-serving statement of belief in god to principled disbelief.

The present situation, where people seem to think that politeness demands that we refrain from claiming superiority for their own religion, seems (within the framework of religion) contradictory. After all, religious people presumably think that their faith is the most important thing in their lives, so why be so reticent about it? Like the many debates we have had during the primary elections, why not have debates as to which religion is the best and which god is the right one to be worshipped? If we can spend so much time and energy in selecting a mere president, surely we should be willing to do at least as much for something as important as the ultimate fate of people's immortal souls?

I for one would enjoy listening to public debates as to why any one religion is better than the others. In fact, the logical thing would be for religions to run advertisements on TV to try and persuade people of other faiths to switch, kind of like the Mac vs. PC spots. It would be interesting to see Madison Avenue wrestle with how to do the religious equivalent of "Tastes great!" versus "Less filling!"

So let the games begin!

POST SCRIPT: Perhaps Mitt should have converted

I showed this clip last month but I am repeating it because of Mitt Romney's decision to suspend his campaign. Pat Condell pointed out that childhood indoctrination of religion is so strong that even though Mitt Romney must have known that his Mormon beliefs might be the one thing that might doom his candidacy for the office he craved, he still clung to it to the end, even though he had changed his stance on so many other issues.


February 07, 2008

The brave new world of finance-4: From social being to consumer

(For previous posts in this series, see here.)

In the last post, I suggested that sending out checks for $600 to each taxpayer, especially those who don't need it, and then encouraging them to waste it, hardly seemed like a coherent economic plan. Such a policy can only be understood as a subsidy to the business sector disguised as a benefit to individual taxpayers. We are merely conduits through which money is given by the government to Wall Street.

It was not always the case that governments responded this way. The US has met greater social and financial challenges before and responded quite differently, most notably the WPA (Works Progress Administration) program, begun in 1935 to get the country out of the Great Depression of 1929. "[T]he WPA provided jobs and income to the unemployed during the Great Depression in the United States. The program built many public buildings, projects and roads, and operated large arts, drama, media and literacy projects. It fed children, redistributed food, clothing and housing…About 75 percent of WPA employment and expenditures went to public facilities and infrastructure, such as highways, streets, public buildings, airports, utilities, small dams, sewers, parks, city halls, public libraries, and recreational fields. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 buildings, and 700 miles of airport runways. Seven percent of the budget was allocated to arts projects, presenting 225,000 concerts to audiences totaling 150 million, and producing almost 475,000 pieces of art."

But those were days in which the collective good was more valued. Can you imagine that they even thought that spending money to provide cultural enrichment to the general public was a good thing? How quaint! Nowadays, we sneer at such an approach. What is considered good is not to have people be able to go to a library or a park or to enjoy a concert or play, but to get them to go to shopping malls. Nowadays, people are urged to not see themselves as part of a community, a social fabric, a collective. We are taught to see ourselves as 'consumers' whose only purpose is to accumulate private goods. When did that strange word 'consumer' come into vogue as a means of describing people? Its popularity is a symptom of how we are expected to see ourselves as merely voracious organisms, a species of bacteria, whose purpose is to eat up products to make the business sector happy. These days the purpose of a 'stimulus package' (as it is euphemistically called instead of the more accurate 'let's all waste money together' plan) is to serve as a subsidy to business. The government wants people to use the money to buy junk they don't need.

The notion that I, as an individual, have an obligation to spend money to 'stimulate the economy' strikes me as insane. I do not have to do anything of the sort. I have no obligation to goose up the economy by spending myself into the poorhouse, just because it is good for the stock market. As I see it, my obligations are to work productively, be a good citizen, serve my community, live within my means, and save for my family and the future – the kinds of things that Benjamin Franklin would have approved of. It seems blindingly obvious to me that the less I spend on unneeded goods and services, the better it is, both for my own financial health, the health of the community, and the long-term health of the planet. And yet, every muscle of government and business propaganda seems to be aimed at convincing people of the opposite. In a way one can understand that. When one is trying to convince people to so something that goes against common sense, one has to pull out all the propaganda stops. Thus the news media report with approval, and even glee, if people go on shopping sprees at Christmas. They are thrilled to tell us about people maxing out their credit cards buying gifts for all and sundry. They are downcast if people decide not to spend money they can't afford.

The government is even being urged to call the $600 check a 'bonus' rather than a 'tax rebate' since studies indicate that people think of a bonus as 'free money' and are thus more likely to spend it, whereas a rebate is seen as your own earned money being returned to you, and is thus more likely to be saved.

The sad thing is that some people have actually bought into this notion that their proper role is to serve as engines to drive the consumer economy. In interviews, I hear people actually blather on about how they feel they should immediately spend their $600 refund check so that the economy benefits. They have swallowed the whole bogus story, hook, line, and sinker.

It seems clear to me that we have ceded control of the economy to the worst elements of the financial world, by taking it away from those who see it as serving the long-term well-being of people by encouraging sound business practices, and handing it over to people whose main goal is use money to make money, a financial pyramid scheme that depends upon the collusion of the government, a few big industries, and the financiers and other money people of Wall Street. We see now the government essentially using the money of ordinary people to bail out (and thus essentially reward) the scandalously risky behavior of the financial sector that has been driven by greed.

British comedians John Bird and John Fortune show in this satirical interview how the banking and finance sectors recklessly siphon away people's money for their private benefit, confident that if things go badly wrong (as they have) the government will bail them out using public funds. The Northern Rock they refer to is the big British Bank that got into trouble due to the current subprime mortgage crisis and had to be bailed out by the British government.

Another example of how the government's priorities are to maintain the profits of a few at the expense of the financial health of the many can be seen in its attitude to single-payer health insurance plans. There is absolutely no question that this would be not only provide overall better health services to the public at lower costs, but would also be hugely liberating for business. (See here for earlier posts dealing with this issue.) The employer-based health care system has to be the biggest albatross dragging down American business competitiveness. And yet, the stranglehold that the health insurance, pharmaceutical, and medical industries have on our government, and the huge profits made by them at everyone else's expense, means that the current system continues without even a serious challenge to its existence, even as the economy gets dragged under. The ruthlessly exploitative health care industry has been helped in their efforts to preserve their lucrative cash cow by the Villager propaganda, endlessly repeated, that America provides the Best Health Care in the World and that Americans would never support a single-payer system. These are all completely unjustified assertions, but they are repeated unquestioningly.

Next: The rise of the 'bubble economy'.

POST SCRIPT: Flight of the Conchords

Those two wacky musical comedians give a quick summary of the Lord of the Rings.


February 06, 2008

The brave new world of finance-3: The 'free money' stimulus package

(For previous posts in this series, see here.)

Clearly I am not the only one that thinks that current fiscal and monetary policies are not only unsustainable but also immoral and that their priorities are completely out of whack. French President Sarkozy, following the discovery of the speculative trading and fraud that resulted in losses of $7 billion at one of France's largest banks Societe Generale, also called for an end to this mad, reckless way of thinking, where short term profits trump everything else.

"The point of a financial system is to lend money for economic activities, which, in turn, generate profits," Sarkozy told a gathering of French nationals at the French embassy [in India].

"It is not to go and speculate on different activities which create enormous flows and profits in a few hours," he added.

"If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realise that (we need) to insert a bit of wisdom into all these systems," the president said.

Because of fears that the US is headed for a major recession, we currently have the Bush administration and the Congress planning to pass a 'stimulus package' to stave that off. A major recession would undoubtedly be a bad thing for ordinary people since it is likely to result in many people losing their jobs, creating widespread hardship. But the current plan seems to be to for the government to spend $150 billion by mailing checks for $600 to each taxpayer, plus an additional $300 per dependent child.

Sending checks to people does not seem to me like a very coherent plan. What is even more bizarre is that the government (and stock market investors) are really worried that people will use this money in a responsible way, by paying their bills, repaying loans, reducing their credit card debt, or putting the money into savings for their retirement or their children's education. What they want people to do is to behave irresponsibly, by immediately rushing out and spending the windfall money on items they don't need, like plasma TVs or other high-priced consumer goodies.

Giving poor people a check for $600 will undoubtedly help many of them stave off some immediate disaster and even hunger. Many people are just one paycheck away from going cold or becoming homeless. But instead of urging people to use this small windfall to avert an immediate crisis and regain their financial footing, the government is actually encouraging people to spend the money on more junk, to indulge in just the kinds of reckless consumer behavior that caused many of them to fall into deep debt in the first place. After scolding people for living beyond their means, we are now encouraging them to do just that. As Bob Park writes sardonically, but accurately:

In case you didn't notice, your 401k is shrinking. Don't worry! President Bush has a plan: send a check to every family in America. People are supposed to spend it on the shoddy merchandise they didn't buy at Christmas. Where is the money coming from? From taxes we paid to end Iraq's WMD program. It worked perfectly; there is not a WMD to be found in Iraq. No one could think of anything except war to spend the stimulus money on (like maybe health insurance for children, or fusion energy, or the International Linear Collider) so Congress agreed to the President's plan to write everyone a check. After decades of public-service announcements telling people to save, we can now expect to be told the opposite. So much for the laws of economics. The program would be more environmentally friendly if they cut out the middleman. Instead of every family, send checks to every business. Operating on a government subsidy would free business from the need to produce more useless crap to sell.

Do such policies make any sense? We have a country in which the infrastructure is crumbling and many people are hopelessly in debt, unable to even pay their mortgages or credit card bills. Why are we encouraging them to get into even more debt by buying things they don't need or can afford? Is this any way to run the world's largest economy?

Furthermore, while I can understand giving really poor people some money, what is the point in giving middle-class and rich people a one-time payment of $600? I personally don't want or need $600. If given it, I will save it to meet some future need. Giving people money and urging them to spend it frivolously seems to me to be equivalent to dropping currency notes out of helicopters and hoping something good comes out of it. Surely there are a lot of other things that could be done that would produce benefits while putting the money into circulation?

I can think of lots of worthwhile ways of spending $150 billion that could have long-lasting and beneficial effects. I would much rather see that money being used for the collective good. How about refreshing decaying urban areas by creating parks and public recreation areas for people? How about improving water and electricity services to deprived rural areas? How about creating a system of low-cost satellite health clinics staffed by paraprofessionals to provide better early care to people, the way that many countries do? How about hiring people to do the many things that need to be done to improve our communities?

Is indiscriminately giving large numbers of people relatively small sums of money the best plan that our great financial brains can come up with?

Next: Past experiences with combating recession

POST SCRIPT: The moral hazard myth

One of the reasons that the US has an insane crazy-quilt health care system, and the source of weird arguments used against universal single-payer health care schemes, is the strong belief among health care economists that providing easy access to health care creates a 'moral hazard', where people will abuse this benefit.

In this New Yorker article, Malcolm Gladwell demolishes this myth.

February 05, 2008

The brave new world of finance-2: Further indicators of insanity

(For previous posts in this series, see here.)

The current weird situation in which the stock market rises on what you or I might think is bad news can also be seen with labor figures. When reports are released that unemployment is low (which ordinary people would think is a good thing), the stock market tanks. When unemployment figures rise, the stock market also rises. Why? We are told that if unemployment is low, that means that workers are in demand and thus have more clout in negotiations and their wages are likely to rise. Again, you and I might think it is a good thing for working people to be earning more. But for investors, this is bad because rising wages means lower profits for companies and an increased possibility of rising prices, which means the possibility of inflation, which means that the Federal Reserve might raise interest rates to reduce the money supply and thus lower the risk of inflation. And we know the love affair that investors have with low interest rates. Hence the stock market goes down.

All this may be perfectly rational behavior within the weird world of finance. But to me there is something profoundly disturbing, immoral even, about an economic value system that is so committed to low interest rates that it even cheers on news that by any measure is not good for ordinary people. As Barbara Ehrenreich writes yesterday: "So thoroughly is the economy decoupled from ordinary experience that according to a CNN poll, 57 percent of Americans thought we were already in a recession a month ago. Economists may complain that this is only because the public is ignorant of the technical definition of a recession, which specifies at least two consecutive quarters of negative growth. But most of the public employs the more colloquial definition of a recession, which is hard times. And -- far removed from whatever happens on Wall Street, the Nikkei, Dax, or the curiously named FTSE -- most Americans have been living in their own personal recession for years."

You or I might think that it would be desirable to have an economy in which almost everyone was working and putting money away in savings for their future and the future of their children. But such a scenario seems to give the financial sectors and investors in Wall Street nightmares. And unfortunately, they are the ones who seem to control monetary and fiscal policies.

We seem to be living with a financial system has lost touch with human needs.

Why is it that our sense of what is a healthy economy has been overturned? One reason is that the US economy has switched from one that was dominated by the manufacturing sector (i.e., where companies actually made and sold stuff like steel and cars) to one that is dominated by the co-called FIRE sector (finance, insurance, and real estate).

The US is rapidly ceasing to be the country that makes things that people in other countries want to buy. The US has been running up huge trade deficits since 1970, with the rapidly increasing deficit in goods exported to other countries failing to compensate for the (small) surpluses in the services sector.

The FIRE sector, rather than actually manufacturing goods, essentially uses money to make more money and this change in activity has profound consequences. One negative consequence of the dominance of the interests of the financial sector over the general economy is that economic policy seems to be now driven to serve the needs of investors, not actual manufacturers. As a result of the desire to placate the Wall Street investors, we now have a situation where the goal of the Federal Reserve seems to be not to maintain the long-term health of the nation through careful management of long-term fiscal policy, but to shore up the value of the stock market in the short term.

We saw this desire to placate Wall Street brutally on display just recently. The week ending on Friday, January 18 had seen stocks plunge worldwide on reports of further massive losses incurred by American financial institutions due to the sub-prime mortgage debacle (more on that fiasco later). Monday, January 21 was the Martin Luther King holiday in the US where the exchanges were closed but stocks dropped sharply that day worldwide, and dropped again on Tuesday, January 22 in the far east before the US markets opened on Tuesday morning. Everyone was braced for a massive plunge in the stock market when the US markets opened on Tuesday. But in an effort to prevent this, the Federal Reserve did something it very rarely does, and that was to have an emergency conference call among its governors and decide to slash interest rates by a huge amount (0.75%) before the US markets even opened, as an emergency move on a day when it does not usually make changes in interest rates. This news struck me as a bad sign, that the Fed thought the situation was serious. But the stock market responded with cheers, because low interest rates make money cheaper to borrow and this enables financial speculators to make even more money. The only thing Wall Street loves more than low interest rates is a surprise lowering of interest rates. Then on Wednesday, January 30, at its regular meeting the Fed lowered the interest rates again by another 0.5%. The Dow Jones stock index, which had been in negative territory, suddenly shot up nearly 300 points within an hour of the announcement, before sinking back into negative territory.

To me, the Fed taking such remarkable and dramatic steps meant that they thought the economy was in serious trouble and heading for recession. Recessions are awful things, shutting down companies and throwing lots of people out of work. But for Wall Street investors, all that seems to matter is lower interest rates, whatever the cause. They are already putting renewed pressure on the Fed for further and deeper cuts in interest rates since the last one did not really work as far as they were concerned and merely kept the status quo. They are circling like wolves, essentially demanding that the Fed lower the rates even more, perhaps by even larger amounts. If the Fed does not keep lowering rates, the stock market is likely to decline. We seem to have reached the stage where it is taken for granted that the main role of the Fed is to please Wall Street investors by keeping stock prices high by manipulating interest rates. As long as they do that, the long-term health of the economy seems to be ignored.

Next: The crazy 'stimulus package' – Get your free money here!

POST SCRIPT: The lobbyists' preferences

See which candidates have garnered the support of lobbyists.

February 04, 2008

The brave new world of finance-1

One topic that I have tended to avoid in my blog posts is the subject of economics. This is because the 'dismal science' is one of those subjects where I feel a little out of my depth. Whereas I can make sense of events in many other areas of everyday life, even to the extent of making modestly successful predictions about what should occur, behavior in the world of business and finance tends to defy my expectations. For a long time, I thought this was due to my weak understanding of the basics of economics. But now I am wondering if it is because the economic world is, frankly, crazy.

I am beginning to worry that the modern US and global economy has become untethered from reality or even basic common sense. French President Nicolas Sarkozy seems to share my alarm when he recently said that we now seem to have a global "financial system which is out of its mind and which has lost sight of its purpose."

Let me start out by admitting that I am old-fashioned when it comes to basic economics and finance. My understanding of those topics is similar to Benjamin Franklin's Poor Richard's Almanac proverbs, which extol the virtues of hard work, thrift, and prudence. The basic ideas that Franklin advocates – live within your means, don't waste time on too much frivolity, avoid spending money on things you don't need, save for the future – are things that I understand and basically try to follow. They still make sense to me as a means of ordering my personal finances.

Although I am not, and never have been, a businessman, the basic idea of business - investing money in producing some product or offering a service, and charging for those things at a price high enough to make a profit that is at least slightly above what one might earn from simply putting the money in a bank and earning interest on it – is again something I understand.

But those kinds of attitudes seem to be hopelessly out-of-place in the brave new world of modern high finance. My awareness that I don't understand modern finance is on display with the way that the stock market actually performs compared to the way that I expect it to perform. Again, I think I understand the basic idea of stocks. If a company needs to raise money to improve or expand its business, one option is to borrow it, another is to sell stock to the public. The public that risks its money this way gets rewarded if the company invests that money well and continues to make profits which gets returned to the stockholders as dividends. Also a company that is efficiently and well-run and produces goods and services that people desire is a company that becomes more valuable over time and that more people will want to own stock in, thus driving up the stock price and benefiting the stockholders even more.

Thus its stock price should be a gauge of the health of a company and the stock market should be a gauge of the overall health of the underlying economy and the companies that make it up. If a country has many companies that are producing goods and services of value that are sought, then the stock market indices should go up, and vice versa.

That is my admittedly naïve understanding of the world of business and personal finance. It is something I understand.

But as far as I can see, the world of business and finance is now topsy-turvy, with causes and effects becoming blurred or even interchangeable. The stock market seems to be acting independently of the underlying economy. Rather than its stock market being an effect, reflecting the basic health of a company, high stock prices are seen as good in themselves, even if that is obtained at the cost of driving a company into the ground. The actions of company management now seem to be increasingly driven by the desire to drive up the stock price, even if this might mean harming the long-term health of the company. And even government policies seem to be aimed at keeping stock market prices high rather than in ensuring that the underlying economy is sound.

Take for example the news released on Monday, January 28th that new housing starts had slumped dramatically. This was widely seen as yet another sign that the economy was slowing down and that activity was declining, perhaps the precursor to a recession. In other words, it was a sign of a seriously ailing economy. And yet the stock market shot up that day, as if this was the best news. Why? The ubiquitous financial analysts who can explain anything after the fact said that this was because investors felt that such bad economic news would cause the Federal Reserve to slash interest rates once again very soon, and stock market investors passionately love low interest rates above all else. This is because low interests supposedly make other forms of investments such as bonds and money market and certificate of deposits less competitive, and thus more people will divert their money from those areas into the stock market, driving up demand. Thus lower interests rates means that we can expect stock prices to rise in the future, making them a good buy now. This thinking is what raised the stock prices on such a bad news day. Furthermore, low interest rates make it cheaper for businesses to borrow money, enabling them to have more money to expand their operations, thus resulting in growth in the future. Since the stock market is supposed to reflect the future, not the present, bad economic news like the drop in housing starts was seen as a good thing.

Next: More signs that modern financial world is out of synch with the real world.

POST SCRIPT: Fame

The highly versatile Stephen Fry (actor, director, author) has his own blog with a nice essay on what fame is like for the famous.

February 01, 2008

Emotion, belief, and reality

In the film Contact, the scientist Ellie Arroway who discovers the ETI signal (played by Jodie Foster) is an atheist/agnostic who has a romantic relationship with a theologian Palmer Joss (played by Mathew McConaughey). The film's creators were clearly trying to strike a middle ground between these two competing views, presumably to not alienate any potential audience segment. So they tried to soften the agnostic implications of the novel by trying to find a way to put religious beliefs on a par with science. To do so, the film essentially resurrects the convenient (but dubious) argument that science deals with the physical world while religion deals with the spiritual world.

In one scene, Arroway explains to Joss why she does not believe in god. She says it is because there is no evidence of his existence. At that point, he asks her whether she is certain that she loves her late father and she says she does. Then he asks her to prove it. Of course she can't and he looks triumphant, as if he had made a brilliant insight.

I hear this argument a lot and it frankly puzzles me. As a justification for believing in god it makes no sense at all. The argument seems designed to make the point that there are things that are real whose existence we cannot prove and that god is of this nature. But as a justification for believing in god, it is silly. The fact that the smart scientist Arroway does not promptly destroy Joss's argument shows how far the filmmakers were trying to strike a middle ground between belief and non-belief.

I think of 'love' as the label we give to a complex mix of physiological and neurological phenomena that occur in our bodies and brains as a result of particular kinds of interactions that we have with other people in specific emotional contexts. So it is 'real' in the same way that other emotions like anger, pride, sadness, etc. are real. We can relate the emotion to actual physical phenomena.

But why is this an argument for the reality of god? All it implies is that when we talk about 'belief in god,' all we are saying is that it too is just a label we give to a 'complex mix of physiological and neurological phenomena that occur in our bodies and brains as a result of particular kinds of interactions that we have in specific emotional contexts.' If this is what people mean by believing in god, then I would agree with it. After all, there is no doubt that when people experience something they like to call 'spiritual', there will be some corresponding physiological changes in their bodies, as there is for any emotion.

But we cannot extend this to assert that just because our bodies experience a real physiological change due to a belief, that therefore the thing we believe in has a reality and existence apart from us. Just because belief in god is a real experience does not mean that god is real. It would be like arguing that the love (or whatever emotion) I feel for someone or something, because it is real to me, therefore also exists independently of me.

POST SCRIPT: Common single blue-eyed ancestor

The idea of descent with modification is central to Darwinian evolution, and it implies that as we go back in time we can expect to find common ancestors (sometimes just a single one) in which some feature originally appeared. This feature can grow in the population and spread even if it provides no specific survival advantage. But its rate of growth is much slower than if it had even a small selective advantage.

Machines Like Us reports on how researchers have concluded that the blue-eyes that some people have can be traced back to a mutation that occurred in a single ancestor who lived 6,000 to 10,000 years ago.

The mutation of brown eyes to blue represents neither a positive nor a negative mutation. It is one of several mutations such as hair colour, baldness, freckles and beauty spots, which neither increases nor reduces a human’s chance of survival. As Professor Eiberg says, "it simply shows that nature is constantly shuffling the human genome, creating a genetic cocktail of human chromosomes and trying out different changes as it does so."