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Entries for April 2009

April 30, 2009

Possible models for newspapers

As a result of the financial pressures that all papers face, my local newspaper, the Plain Dealer has adopted the cost-saving strategy of cutting back on national and international coverage and op-eds, focusing more on local news and sports. The paper is now a lot thinner with the sports section now the largest, and sports news often dominates even the front page.

Is this a bad thing? Some time ago I would have said yes, especially since I rarely read anything in the sports section beyond the first page. It would have signified the further dumbing down of news. But now I am not sure. The coverage of local news seems to have got better and more interesting, and many people do care passionately about sports and can't seem to get enough of it, so the paper is now perhaps finding a niche. The paper's regular stable of local and syndicated op-ed columnists is unbelievably vapid so the reduction assigned to them is not something I mourn. In fact, I hardly ever read them, unless they publish the occasional new voice.

But are these kinds of changes sufficient to save newspapers? If not, what can they do to survive?

It is almost certain that newspapers will be forced to go exclusively to the web. The hardcopy model is simply too wasteful of resources to justify continuing it, even if it were financially viable. In doing so, they will save a lot of money on the production costs of newsprint, ink, and gas and other distribution costs, although this will also result in many people losing their jobs.

But newspapers cannot simply transfer the existing paper into a web form. They will also have to make other drastic changes to survive. It seems likely that they will have to transform to a much leaner format, using reporters only for hard news, leaving the soft features to the many other outlets that cater to those needs. Newspapers will also have to develop news niches, rather than trying to provide something for every member of the family, from children to retirees.

Newspapers may depend more on free-lancers and 'citizen journalists', people who see their role as seeking and giving the news organizations information to work on. Maybe newspapers will also shift to a not-for-profit model like public radio and TV that manages to provide news of sufficient quality that people are willing to subscribe or donate money to keep it going. By not having to meet the insatiable demands for increased profits, they will be more able to maintain a state of equilibrium.

News gathering organizations can survive in an online journalism format. There are already some models in place, like the excellent Talking Points Memo and the not-so-good Politico. They do a mix of original news reporting along with analysis. TPM has also depended on citizen journalists, regular readers that it deploys to either read through large document releases for information or to get information scattered all over the country that it then pieces together to see patterns. The latter method was what enabled them to break the story about the politicization of the US Attorney's office by the Bush administration

But most online news organizations still depend for their raw material on traditional reporters doing traditional work for traditional organizations. If newspapers disappear altogether, where would we get the basic news? TV and radio may be able to partially fill that void, except that cable news has shown itself to be pathetic, devoting most of its time to pointless blathering, hyping, and scaremongering. But I do not think there is cause for panic. Wherever there is a need and a niche, people will fill it. When it comes to politics, there are enough people who care passionately enough about it that they will do the work that is necessary. In fact, we might actually get better reporting because only those who really care about getting at the truth will be willing to get into the news business, so will have real news reporters rather than the current glut of news personalities.

We will probably have fewer reporters covering formal staged events like press conferences, official trips by the president, etc. Those things rarely generate any actual news but they cost a lot in that they require reporters to just hang around and follow dignitaries on a permanent basis. Reporters might shift to doing things that are cheaper but more likely to produce real news, like carefully reading official reports and statements.

Newspaper reporters have a valuable role to play in a democracy. Trained investigative reporters who can get information, sift through it to get at the kernels of truth, and present that in an understandable form to the public are essential, though in practice their performance in the US has been pretty mediocre. I would prefer to see a system where reporters are able to do a better job than one in which they are eliminated. But the delivery method is not what is important. What is important is that whatever new model of journalism emerges, it breaks free of the current incestuous relationship between news organizations, politicians, and big business, each supporting the interests of the other, while the interests of the general public gets ignored.

The losers in this shift will be those people who do not have internet access, who will be totally dependent on TV and radio for their news.

POST SCRIPT: Alternative news sources

Once you shift to the internet for your news, it becomes imperative that people be able to descriminate between good sources and unreliable sources of news. Paul Craig Roberts gives some recommendations for diversifying your news sources that I largely agree with.

People who have access to television services that provide English language foreign broadcasts, such as Iran’s Press TV, Russia Today, or Al Jazeera, can get get [sic] news and insights from those parts of the world demonized by the US media. [You can get many world TV and radio news services for free by downloading Livestation.]

The BBC World Service still reports facts while covering itself by providing the views of the US, UK, and Israeli governments.

Both the Asia Times and Israeli newspapers, such as Haaretz can be read online in English. There are other such newspapers, and all of them provide information that Americans will never see in their own media. Any American newspaper that was as truthful about the Israeli government as Haaretz would be closed down.

The only US print source with which I am familiar in which some honest reporting can be found on a regular basis is the McClatchy papers.

Whatever model emerges, we all have to become more connoisseurs of a wide range of news and analysis, rather that depend on just one or two sources.

April 29, 2009

Skyhooks and cranes-2: Replacing skyhooks with cranes

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

Darwin's big idea of natural selection essentially removed the necessity for skyhooks. According to natural selection, complex things could and did emerge from simpler things and hence we no longer need to invoke skyhooks to explain how they came about. Instead we now have 'cranes' that can do all the lifting we need.

Daniel Dennett in Darwin's Dangerous Idea (1995) uses the metaphor of the cranes used in building construction to contrast with skyhooks. Cranes are devices that can lift things, just like skyhooks can, but they are not magical devices that suddenly appear out of the sky. They are real, we know how they are built and where they come from, and they are planted on solid ground. Furthermore, small cranes can be used to build bigger cranes that can in turn be used to build yet bigger cranes and so on, until we end up with some really powerful cranes that can do amazing and, to the untrained and unobservant eye, may appear to be skyhooks and do seemingly magical things. But the wonderful thing is that they come about naturally.

Dennett argues that in the evolution context, cranes are natural processes that speed up the process. Starting with the simple and basic process of natural selection, increasingly sophisticated organisms have appeared over time that act like cranes, enabling even more complex life forms to be created even more quickly. In other words, we have evolutionary cranes creating even bigger, more efficient evolutionary cranes.

For example, the evolution of DNA likely started with point mutations at single locations. But once that produced organisms that were capable of reproducing sexually, the process of gene swapping that occurs during the process of meiosis (by which the sex cells that contribute to reproduction are created in the testes and ovaries) has led to much faster genetic changes and more rapid evolution than could be obtained using point mutations alone. So sexual reproduction is a powerful evolutionary crane.

Natural selection favors those systems that can evolve faster because they are more adaptable to changes in the environment, so that the rate of change of systems increases with time. In other words, evolution speeds up. Massimo Pagliucci suggests that "natural selection may favor the evolution of particular molecules (called "capacitors" of evolution), or arrangements of gene networks, that make it easier for a population to evolve in response to new environmental changes."

All these processes eventually resulted in the emergence of human beings who have language and science and technology and thus can be considered as yet more powerful cranes because we are now able, through our ability to significantly control our environment and with genetic engineering technology, to create new organisms that would have taken a long time to come about by themselves without our presence.

Thus we humans are not only the product of work done by other cranes, we ourselves serve as cranes for future development. As Dennett says:

Vast distances have been traversed since the dawn of life with the earliest, simplest self-replicating entities, spreading outward (diversity) and upward (excellence). Darwin has offered us an account of the crudest, most rudimentary, stupidest imaginable lifting process – the wedge of natural selection. By taking tiny – the tiniest possible – steps, this process can gradually, over eons, traverse these huge distances. Or so he claims. At no point would anything miraculous – from on high – be needed. Each step has been accomplished by brute, mechanical, algorithmic climbing, from the base already built by the efforts of earlier climbing. (p. 75)

To me this is an amazing and exciting thing to conceive, that we have the power to explain life without invoking skyhooks, if not in all its details now, at least in principle. But not everyone shares this sense of excitement at the ever-increasing explanatory power of science. In particular, many people (and not all of them are religious) are uneasy about the idea that we humans, with all our sophistication, are also simply the end products of this mechanical algorithmic process. They simply can't wrap their minds around the idea that there is nothing at all, no vital essence or soul, that is unique and makes us human, not even our minds or our consciousness or our sense of morality. While we have some qualities (like language) that distinguish us (at least partially) from other species, there is not a single thing that we humans possess that could not have come about through the same algorithmic processes that also produced slugs or worms or a leaf.

This can be hard to take for those who have a sense of superiority about the human species. Darwin's theory so completely undercuts the basis for believing that humans are possessed of some quality that is not the product of the Darwinian algorithm that it distresses people and many have tried to find ways to suggest that it is incomplete. As Steven Pinker says, "People desperately want Darwin to be wrong . . . because natural selection implies there is no plan to the universe, including human nature." (Steven Pinker, How the Mind Works (1997), p. 165)

Next: The intelligent design skyhook

POST SCRIPT: From bacteria to humans in four minutes

In the space of four minutes, Richard Dawkins gives an overview of the sweep of evolution from bacteria to our common ancestors with apes.


April 28, 2009

Newspapers in crisis

As someone who grew up in Sri Lanka, a country that has a strong newspaper-reading ethos, I feel a sense of regret at what seems to be an irreversible decline in the fortunes of daily newspapers. Growing up, my family subscribed to two morning newspapers and two evening newspapers each weekday, and three papers on Sundays, if you can imagine that. Wherever I have lived I have had a daily subscription to the local paper.

For almost all my life, I used to have a rigid routine in the mornings. I would start the day by getting a cup of coffer and reading the newspaper for national and world news. If for some reason the paper was not delivered, I felt disoriented without my fix of news the first thing in the morning.

But with the arrival of the internet it is usually the case that I already know what national and international news the paper is likely to contain. So lately my habits have shifted to reading the paper in the evening, more as a form of relaxation, and to get mostly local news and the comics. There is no urgency anymore to read the paper as soon as it comes. My attitude to it is more like towards a magazine. In fact, I could probably do quite well without the paper, and I continue to subscribe more out of habit and a vague sense of loyalty to preserve what I used to consider a valuable institution.

The next generation clearly does not have the same habits as I have, for the same reasons that caused me to change my own habit. Neither of my daughters subscribes to their local newspapers although they both live in cities (San Francisco and Philadelphia) that have large metropolitan dailies. They, like their peers, are getting their news from the internet and do not have the sense that if they do not read the daily paper that they are missing important information. Because they are so networked with others, their attitude seems to be that if the news is important enough, it will find them without them having to seek it out. This attitude is a nightmare for newspaper publishers. Editor & Publisher published data yesterday that average daily circulation had dropped severely in the last six months for the top 25 newspapers, except for the Wall Street Journal, which was flat.

This is largely the reason that newspapers are in trouble. Hardly a day passes without a story about some newspaper somewhere in the nation going into bankruptcy or making cutbacks in reporting staff or reducing the number of pages or the number of days they publish. It seems fairly clear that newspapers are finding it difficult to survive, though in some cases this is due not so much to decline in readership as to bad financial decisions or bad management or just the unrealistic profit expectations of their stockholders.

While I used to think that continuing to subscribe to the daily paper was a worthy attempt on my part to preserve an important institution, I became aware of the generational shift in attitudes when my daughter came home for a few days and she noticed me reading the paper. She said, "So, you still support the killing of trees, I see." I had not thought of it like that, but she had a point. In many ways, publishing a newspaper, with its vast daily consumption of paper and ink and gas for transportation, to produce something that is then immediately thrown away, is a huge waste in resources, something that the next generation is more keenly conscious of.

Going completely online would be the environmentally friendly thing to do. On the surface, it might seem that simply putting the paper on the web and charging a subscription might work. But the revenue models are not there yet to support such change. Only part of a newspapers' revenue comes from subscriptions. Newspapers depend heavily on advertising and a big problem for the newspaper is the decline in classified advertising due to people shifting to free outlets on the internet like Craigslist for that purpose. The internet is the perfect vehicle for classified advertising because it strength lies in its ability to link people up with like minded people, buyers with sellers, employers with employees. Newspapers will never regain classified advertising.

Furthermore, people are used to getting information free on the web and are unlikely to pay much for web subscriptions to newspapers. I pay $250 for daily delivery of my paper and definitely would not pay that for online access to the same material. But that does not mean people are not willing to pay for content. For example, I am willing to donate money to websites like Antiwar.com and to my local NPR stations because they provide good quality information. I am also willing to pay subscriptions to get online newsletters. But in each case, it is because these sources provide information that I cannot easily get elsewhere and would be sorry to see disappear. I do not feel that same strong sense of affiliation with my local newspaper. If it went completely online but otherwise remained unchanged, I would likely stop reading it and probably would not subscribe.

Those newspapers that have experimented with charging for online content (like the New York Times putting its columnists behind a pay wall called Times Select) found their readership declining and gave up the practice. I could have predicted that. As I have said before, the old-style columnists are mostly useless and the only reason people read them is because they come bundled up with the rest of the paper. Did the publishers think that many people would actually pay to read the fatuous musings of Thomas Friedman and Maureen Dowd?

Next: Possible models for newspapers

POST SCRIPT: Comics on the plight of newspapers

The comic strips Pearls before swine and Non sequitur highlight the problems with having both print and online versions, with the latter being free.

April 27, 2009

Skyhooks and cranes-1: Why skyhooks are appealing

I occasionally meet people who, knowing something about my interests with science and religion, say something like "I am not religious but I am skeptical of the theory of evolution." These people are often well-educated but not biologists or archeologists or paleontologists or anthropologists, so it is unlikely that they have done any kind of scholarly study of the evidence in favor of evolution and found it wanting. Their skepticism of evolution seems to spring from a different well.

When questioned, it usually turns out that the major reason for their doubts is that we live in a world that has an amazing array of diverse and complex organisms. If one doesn't closely into the science and mathematics of evolutionary theory, it can seem quite incredible that all this could have emerged by purely natural causes. So for some people, skepticism about evolution arises purely from a sense, a gut feeling if you will, that it is highly unlikely that life arose in the unguided way that evolution proposes. Just last week I had a discussion with a professor of chemistry who argued in precisely this way, that he could not imagine that all this could have come about without some kind of guiding intelligence, and what could that be but a supernatural agency of some kind?

I have argued before that evolution by natural selection, though unguided, is very far from something that happens purely by chance. While it is chance that produces the variations, the process of natural selection is highly focused. Furthermore, people's intuitions about probability are notoriously poor, and people should be wary of placing too much weight on them.

The other major source of discomfort is that people cannot properly conceive of very long timescales, especially the hundreds of millions of years that are involved in evolutionary processes. Things that are unlikely over shorter time periods can become likely, even inevitable, if you wait long enough, but people have no real feel for that. For example, we all know that the chance of winning a big lottery prize is very small. But if I were willing to play for a very, very long time, the probability of my winning becomes very high, almost inevitable. But of course, the amount I would have bet would be almost certainly be much more than my winnings and I would be long since dead anyway, so the whole exercise would be pointless. But our tendency is to take the probability over our short lifetimes, and erroneously assume it remains the same over very long time scales.

But even allowing for that, there is something strange about the theory of evolution being singled out for skepticism. After all, all manner of small probabilities and long time scales are involved in the Big Bang theory, involving the way that the primordial matter coalesced to form the stars, planetary systems, and galaxies. Why aren't people similarly skeptical about how the Earth and our Solar system came into being? Some religious fundamentalists, of course, do argue that god created everything and reject pretty much all of science, but I am not talking about them. I am talking about people who have no problem accepting scientific theories of how the entire universe came to be, but yet remain unconvinced that scientific theories can explain how all of life came into being.

There is another possible reason for this focused skepticism against evolution. The Big Bang is a spectacular thing to visualize. There is a magnificence to it that is commensurate with the importance we attach to something that happened at the very beginning of time. But the theory of evolution is the very opposite, saying that life in all its grandeur came about very slowly as a result of a vast number of tiny little plodding steps, each too small to observe. There is no arresting visual image that we can seize upon.

Daniel Dennett's book Darwin's Dangerous Idea (1995) says that the basic idea of Darwin's theory, that everything is a product of an algorithmic process, a simple set of rules mindlessly applied, is what many people find hard to accept.

Among the controversies that swirl around us, most if not all consist of different challenges to Darwin's claim that he can take us all the way to here (the wonderful world we inhabit) from there (the world of chaos or utter undesignedness) in the time available without invoking anything beyond the mindless mechanism of the algorithmic processes he proposed. (p. 74)

As a result of this skepticism, people have consistently, over time, invoked what Dennett calls skyhooks as explanations. A skyhook is defined as an "imaginary contrivance for attachment to the sky" that can be used for lifting things easily. The skyhook concept is similar to the deus ex machina ("god from a machine") literary device used by inferior Greek dramatists to suddenly swoop down and lift their characters out of a tight spot. So a skyhook is basically a mysterious and advanced mechanism that can be invoked as an explanation. The existence of skyhooks as explanatory mechanism leads naturally to an acceptance of the existence of a designer, since someone had to have created the skyhook.

The search for skyhooks has historically taken many forms. In the early days, skyhooks were used to explain the appearance of every species. This was the theory of 'special creation', popular up to Darwin's day, where god (the ultimate skyhook) created species to fit into the various ecological niches. As time went by and science explained more and more of what was previously inexplicable, the number of skyhooks needed as explanatory devices has decreased, but never gone away.

The 'God of the Gaps' that I have written about earlier is a manifestation of this desire for skyhooks.

The idea of skyhooks is seductive and is what draws many of us in to believing in a creator, especially when we are young. It is a form of magical thinking that all young children find attractive and which is what makes believing in a god easy.

But why do people continue to feel the need for skyhooks as adults when there are other good explanations?

Next: Replacing skyhooks with cranes.

POST SCRIPT: The appeal of skyhooks for children

In this interview with Jonathan Miller, Richard Dawkins says that as a boy he accepted the need for skyhooks for the creation of life, before he discovered that the theory of evolution solved the problem, and the sense of intellectual freedom and liberation that it generated.


April 24, 2009

American oligarchy-7: What needs to be done

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

So where does Barack Obama fit into this picture? We saw him strike various populist themes during the campaign. But it should be clear from the people he has surrounded himself with on economic policy that he too is completely subservient to Wall Street interests. In fact, populist and supposedly liberal Democratic politicians like Bill Clinton and Barack Obama are far more useful to Wall Street in many ways, because they hide their subservience to Wall Street better. Liberal watchdogs tend to let down their guard and thus allow these politicians to give away the store in ways that Republicans, with their naked greed, would find hard to get away with.

For example, we saw how Bush's dangerous plans to privatize Social Security (which was highly desired by Wall Street because it would have directed a huge gusher of money their way to gamble with) were stymied by strong popular opposition. We need to be equally vigilant when Obama talks of 'reforming' Social Security to make sure that he is not trying to achieve the same results using different language. It seems already clear that Obama's health care reform plans are aimed at further enriching the parasitic health insurance industry, by pushing for universal coverage while not allowing the single-payer option to be considered.

Glenn Greenwald points out that while Obama has talked a good populist game against Wall Street, he has at the same time steadily subverted any real attempts to curtail its power and perks.

It was Obama, in the wake of various scandals over profligate spending by TARP firms, who pretended to ride the wave of populist anger and to lead the way in demanding limits on compensation. And ever since his flamboyant announcement, Obama -- adopting the same approach that seems to drive him in most other areas -- has taken one step after the next to gut and render irrelevant the very compensation limits he publicly pretended to champion (thereafter dishonestly blaming Chris Dodd for doing so and virtually destroying Dodd's political career). And the winners -- as always -- are the same Wall St. firms that caused the crisis in the first place while enriching and otherwise co-opting the very individuals Obama chose to be his top financial officials.

Worse still, what is happening here is an exact analog to what is happening in the realm of Bush war crimes -- the Obama administration's first priority is to protect the wrongdoers and criminals by ensuring that the criminality remains secret.

As much as he campaigned against anything, Obama railed against precisely this sort of incestuous, profoundly corrupt control by narrow private interests of the Government, yet he has chosen to empower the very individuals who most embody that corruption.

This may be disillusioning for those who saw Obama as the knight in shining armor riding in to Washington to usher in a new era of clean government. But the signs were there long ago that Obama was hopelessly enmeshed in the same networks of influence peddlers as the previous administrations, and I warned back in February 2008 that we should not expect too much from him except on a few social issues.

Ken Silverstein wrote a prophetic article titled Barack Obama Inc.: The birth of a Washington machine way back in the November 2006 issue of Harper's magazine about Obama's rapidly growing links to Wall Street.

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).

[Mike] Williams [vice president for legislative affairs at The Bond Market Association that represents Wall Street firms] subsequently set up a conference call between Obama and a group of financial-industry lobbyists. That, too, went well, and in June of 2004, Williams helped organize "a little fund-raiser" for Obama at The Bond Market Association. "It wasn't just the financial community. There was a broad cross-section," he said of the 200 or so people who turned out. "There was overwhelming support, not just people from associations giving $2,000 but from individuals who just wanted to meet him, giving smaller contributions."

It's not always clear what Obama's financial backers want, but it seems safe to conclude that his campaign contributors are not interested merely in clean government and political reform. And although Obama is by no means a mouthpiece for his funders, it appears that he's not entirely indifferent to their desires either.

Consider the case of Illinois-based Exelon Corporation, the nation's leading nuclear-power-plant operator. The firm is Obama's fourth largest patron, having donated a total of $74,350 to his campaigns. During debate on the 2005 energy bill, Obama helped to vote down an amendment that would have killed vast loan guarantees for power-plant operators to develop new energy projects. The loan guarantees were called "one of the worst provisions in this massive piece of legislation" by Taxpayers for Common Sense and Citizens Against Government Waste; the public will not only pay millions of dollars in loan costs but will risk losing billions of dollars if the companies default.

In one of his earliest votes, Obama joined a bloc of mostly conservative and moderate Senate Democrats who helped pass a G.O.P.-driven class-action "reform" bill. The bill had been long sought by a coalition of business groups and was lobbied for aggressively by financial firms, which constitute Obama's second biggest single bloc of donors.

All of this has forged a political culture that is intrinsically hostile to reform. On condition of anonymity, one Washington lobbyist I spoke with was willing to point out the obvious: that big donors would not be helping out Obama if they didn't see him as a "player." The lobbyist added: "What's the dollar value of a starry-eyed idealist?""

So what can we, the people, do? We must not abandon the electoral process because of disgust at the way the rules have been rigged against us. People matter, candidates matter, and elections matter. On balance, it is better to have an elected official sympathetic to your position than one who is hostile. But we have to stop putting our trust in people, thinking that what matters is getting the "right" people, "our" people, in power, and that then they will do the right thing, at least from our point of view. We have to stop thinking that the labels 'liberal' and 'conservative', Democrat and Republican, signify anything other than where a candidate stands on a few social issues. We should stop spending so much time trying to figure out who the 'good' people are and who the 'bad' people are and instead focus on what they actually do.

Strong moneyed forces will constantly try to get elected officials to act against the interests of the public. Hence it is more important to look at the actions of elected officials, to support and praise those that are good and not hesitate to criticize, even strongly, actions that are wrong, irrespective of party or ideological labels, whether they are done by "our" people or "their" people. It means paying attention to and supporting those watchdog groups that keep track of important issues.

This means not getting distracted by the sideshows put on for our benefit by the media and political leaders, usually around social issues. Those are all smoke and mirrors. Right now there is genuine and widespread anger about what people see as the looting of the public by powerful interests. This is dangerous for the oligarchy and there will be attempts to deflect this anger away from the real culprits. The silly tea parties promoted by Fox News (a reliable water carrier for the oligarchy) are one such attempt at distraction, trying to make people think that raising the marginal tax rate from 36% to 39.6% and thus raising the taxes of those earning above $250,000 is the problem. As a result we had the bizarre spectacle of people being persuaded to protest that their taxes were being lowered, unless the people attending the tea parties constituted the top 2-3% of income earners.

In the case of financial issues, there is only one weapon that the public has to stop the relentless looting of the public treasury, and that is to be loud and vocal and demand that elected officials, even if (and especially if) we see them as "our" people, act in the public interest.

POST SCRIPT: Still waiting for Mr. Smith

In the classic film Mr. Smith Goes to Washington, James Stewart plays an idealistic person who goes to Washington as a US Senator and confronts the corruption he finds there. Sadly, Barack Obama is no Mr. Smith.

April 23, 2009

American oligarchy-6: The victories of the oligarchy

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

In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Former chief economist of the IMF Simon Johnson lists the fruits of the collusion between both political parties and Wall Street interests.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

  • insistence on free movement of capital across borders;
  • the repeal of Depression-era regulations separating commercial and investment banking;
  • a congressional ban on the regulation of credit-default swaps;
  • major increases in the amount of leverage allowed to investment banks;
  • a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;
  • an international agreement to allow banks to measure their own riskiness;
  • and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

Just examine that list for a moment. Did you hear about any of those important actions while they were being carried out? Were there front page news reports and commentary on them? Loud arguments? Highly publicized congressional hearings? Fierce partisan debates? When all that was going on, was there any attempt at informing the public of the potential consequences of these wide-ranging decisions? Of course not. The chances are that during those times our attention was focused on Monica Lewinsky, Terri Schiavo, gay marriage, Chandra Levy, Valerie Plame, and the like. This is why observing politics has to be like watching a magician. If you look at what your attention is being drawn to, you are missing what is actually happening. The real action takes place in obscure committee hearings, at the regulatory bodies, in private meetings between members of government and the heads of the financial firms, over lunch and dinner and on golf courses.

Did you notice how in the fall of 2008, as we lurched daily from crisis to crisis as one big firm after another like Merrill Lynch and Lehman Brothers fell, we were presented by the Treasury and Federal Reserve officials with 'solutions' to the problems that had been worked out seemingly overnight involving the taxpayer-subsidized purchase of one major institution by another that involved hundreds of billions of taxpayer dollars? The only way that consensus could be reached so quickly and smoothly on such major actions was if there had always been collusion between the government and the financial firms involved and they saw their interests as one and the same.

Simon Johnson continues:

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that.

Johnson says that the same remedies that the IMF routinely gives to developing countries in similar financial crisis should also apply to the US. But they are not, because the American oligarchy is immune to the pressure that the IMF can put on oligarchies in other countries. The American oligarchy is not responsible to anyone.

As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization… Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process.

This may seem like strong medicine. But in fact, while necessary, it is insufficient.

Then Johnson gets to the crux of the problem and what must be done. When reading it, remember that Johnson is a centrist technocrat, not some ideologue, and his understanding comes from dealing with many countries that have gone through financial crises.

The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy. (my italics)

But the IMF is not going to give this advice to the US because the US oligarchy, through the US government, pretty much dictates IMF policies.

The only way that the oligarchy will be broken is if the public demands it.

Next: Barack Obama's role

POST SCRIPT: God as CEO

When you look at god's actions as revealed in the Bible, you realize that he is not very good at strategic long-range planning, preferring to go for cheap and popular gimmicks. But not to worry! His apologists know how to explain away all the absurdities and contradictions.

(Thanks to Machines Like Us.)

April 22, 2009

American oligarchy-5: How Wall Street builds its power

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

In the previous posts, we saw how people with connections to big Wall Street firms like Goldman Sachs are everywhere in government, especially in key economic policy-making positions, so that whichever party wins, their interests are protected and advanced.

In his article in the May 2009 issue of The Atlantic magazine titled The Quiet Coup, Simon Johnson explains how firms like Goldman Sachs have carefully cultivated their power structure.

[T]he American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Recall that once in a while, a maverick like Brooksley Born gets into a position such as head of the Commodity Futures Trading Commission, where she could be a thorn in the side of the oligarchy. I described how the oligarchy was able to marginalize her and neutralize her efforts and force her to leave. To make sure that that does not happen again, they then put their own people in that slot. As Glenn Greenwald points out:

More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

And of course Obama nominee Gensler was confirmed in his post without a single dissenting vote in the Senate Agriculture Committee, a perfect example of bipartisan subservience to Goldman Sachs and Wall Street.

POST SCRIPT: Stephen Colbert's anti-gay marriage ad

A group called the National Organization for Marriage has put out an ad opposing gay marriage. Stephen Colbert thinks that ad doesn't go far enough and ups the ante.

The Colbert ReportMon - Thurs 11:30pm / 10:30c
The Colbert Coalition's Anti-Gay Marriage Ad
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April 21, 2009

American oligarchy-4: How oligarchies work

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

Simon Johnson is a professor at MIT's Sloan School of Management. He used to be the chief economist at the International Monetary Fund and in that role had to deal with many countries in financial crisis and had plenty of experience with oligarchies. He is hardly an ideologue. In fact, he calls himself a 'centrist technocrat', which is the kind of person that these international financial institutions usually have in their technical divisions. But yet he has no hesitation in identifying the current financial crisis in the US as caused by the same kind of oligarchies that he encountered in his dealings with developing countries in crisis. In a must-read article titled The Quiet Coup that appeared in the May 2009 issue of The Atlantic magazine, he describes how oligarchies work and how they end up ruining the economies of countries.

The problem is that because these oligarchies exert such enormous influence and power over their governments, they feel that normal market forces and business constraints that restrain lesser players do not apply to them. Hence they take much greater risks and when disaster strikes, as it inevitably will, they then turn to their friends and clients in the government to bail them out. This is exactly what has happened in the US.

Johnson says that when a crisis hits, countries come to the IMF for assistance. While the proximate causes of each country's crisis differs, the ultimate causes all have a depressingly similar pattern that could be traced to the existence of an oligarchy. He says that while the economic solutions to each crisis are not hard to figure out, the biggest obstacle to recovery is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms.

In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets)… But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.

He says that while people can identify various proximate causes for the collapse, "these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside."

Ultimately, it comes down to power. Who controls the government? The financial oligarchy in the US started running the country during the Reagan years and have continued to do so throughout all the administrations since. They prefer to do their work quietly behind the scenes while public attention is focused elsewhere such as on abortion or gay marriage or immigration or other hot-button social issues.

What the current crisis has done is threaten to rip the veil and expose how the government is really run and for whose benefit. When that is exposed, the people can rise up in angry protest so it becomes imperative to close the curtain again, to say that the problem is over, things are back to normal, nothing to see here, move along now. This is why they are rushing through major policies involving trillions of dollars practically overnight, so that they can claim that everything is back to normal. What they want to avoid is a close examination of what caused the crisis and what steps should be taken to prevent future ones.

Part of this strategy is to distract people with other issues. So you will see a concerted effort to exaggerate foreign policy issues or even create absurd events like the recent silly tea parties to protest the rise in the marginal tax rates for the highest income to 39.6%, although the new tax polices affects only raises the taxes of people earning over $250,000. Fortunately, the religious right or Christianist element in society seems to be in decline so the usual reliable standbys for distraction such as homosexuality, abortion, stem cells, and the like do not seem to be effective. People seem to be too worried about retaining their own job and homes to care about these other things. Even the frenetic cheerleading by Fox News (a faithful servant of the oligarchy) was unable to whip up more than lukewarm interest in the tea parties.

What Simon Johnson says is that there is a quiet power struggle going on behind the scenes between the government and the financial oligarchy to see who runs the show. In an interview on Fresh Air, Johnson says that the big financial firms like Goldman Sachs and JP Morgan Chase are already chafing at the restrictions placed on them by virtue of having received funds under the TARP (Troubled Asset Relief Program), and have publicly announced that they want to prematurely pay it back, though they are not going to pay back the billions that were secretly channeled to them via AIG.

(Incidentally, it has just been revealed that Edward Liddy, the head of AIG when it did the secret channeling of billions to Goldman Sachs, has $3 million stock in Goldman Sachs stock, received as compensation for serving on Goldman's board before he moved to AIG in September 2008. We see that it is all a nice and cozy quid-pro-quo relationship. The phrase "conflict of interest" means nothing to these people. They see the role of the government as being to serve their personal interests and that of their companies.)

Johnson says that this is a test of power. If the government caves in and lets them get out from under TARP, it will mean that the oligarchy definitely is calling the shots. If the government can resist, then it means that people have a chance of regaining control.

I think Johnson is too sanguine to think that there is still a struggle for control between Wall Street and the government. I think that Wall Street won a long time ago and the real 'struggle', such as it is, is to find ways to once again hide their domination of the people elected to allegedly represent us.

POST SCRIPT: Trailer for 10 things I hate about commandments


April 20, 2009

American oligarchy-3: Welcome to the club

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

It is not just Geithner who is a slave to Wall Street interests. Key economic advisor in the Obama administration Lawrence Summers, although he comes from academia, is also enmeshed in that world. In just 2008 alone, Summers received $5.2 million from the hedge fund firm D. E. Shaw. Mind you, he was still a full-time professor at Harvard at that time, so this was for just part-time work. (Jonathan Schwarz breaks down the links to all his financial dealings.)

Summers also received $135,000 as a speaking fee for two speeches given at Goldman Sachs, the company that has been, and continues to be, a huge beneficiary of the bailout. (Recall that the previous Treasury Secretary Henry Paulson and before that Robert Rubin also used to head that same firm). At that time, Summers was already heavily involved in the Democratic campaign and it was clear that he would be a major player in either the Obama or Clinton administration. So Goldman Sach was likely buying "insurance" or, as Glenn Greenwald says, paying an "advanced bribe", making sure that a friendly face would be in a major decision making position in the new Democratic administration, since they could not pay him once he joined the administration.

Here's another examination by David Sirota of the close-knit and like-minded people from both parties who control economic policy.

At the top is Lawrence Summers, the director of Obama's National Economic Council. As Bill Clinton's Treasury secretary in the late 1990s, Summers worked with his deputy, Tim Geithner (now Obama's Treasury secretary), and Clinton aide Rahm Emanuel (now Obama's chief of staff) to champion job-killing trade deals and deregulation that Obama Commerce Secretary-designate Judd Gregg helped shepherd through Congress as a Republican senator. Now, this pinstriped band of brothers is proposing a "cash for trash" scheme that would force the public to guarantee the financial industry's bad loans. It's another ploy "to hand taxpayer dollars to the banks through a variety of complex mechanisms," says economist Dean Baker—and noticeably absent is anything even resembling a "rival" voice inside the White House.

This financial oligarchy makes sure that those who are not with the program of letting the big financial firms have unfettered control over the economy get shut out of power. The story of Brooksley Born, former head of the Commodity Futures Trading Commission, is illustrative. She describes how her efforts in the 1990s to bring the wild derivative markets that caused the current crisis under regulation was vigorously opposed and defeated by a coalition of Alan Greenspan (then head of the Federal Reserve), then Treasury Secretary in the Clinton administration Robert Rubin (who used to head Goldman Sachs), and Lawrence Summers. Her story shows the bi-partisan nature of the protection given to Wall Street's interests.

As chairperson of the CFTC, Born advocated reining in the huge and growing market for financial derivatives. Derivatives get their name because the value is derived from fluctuations in, for example, interest rates or foreign exchange. They started out as ways for big corporations and banks to manage their risk across a range of investments. One type of derivative—known as a credit-default swap—has been a key contributor to the economy's recent unraveling.

Back in the 1990s, however, Born's proposal stirred an almost visceral response from other regulators in the Clinton administration, as well as members of Congress and lobbyists. The economy was sailing along, and the growth of derivatives was considered a sign of American innovation and a symbol of the virtues of deregulation. The instruments were also a growing cash cow for the Wall Street firms that peddled them to eager takers.

Ultimately, Greenspan and the other regulators foiled Born's efforts, and Congress took the extraordinary step of enacting legislation that prohibited her agency from taking any action. Born left government and returned to her private law practice in Washington. (my italics)

Speaking out for the first time, Born says she takes no pleasure from the turn of events. She says she was just doing her job based on the evidence in front of her. Looking back, she laments what she says was the outsized influence of Wall Street lobbyists on the process, and the refusal of her fellow regulators, especially Greenspan, to discuss even modest reforms. "Recognizing the dangers . . . was not rocket science, but it was contrary to the conventional wisdom and certainly contrary to the economic interests of Wall Street at the moment," she says.

All this occurred during Bill Clinton's administration during which Republicans controlled both houses of Congress for most of the time. So the concept of 'divided government' applies only as long as Wall Street interests are not involved. We see that all these people from across the political spectrum, so-called conservatives and so-called liberals, Democrats and Republicans, united to give Wall Street a free hand by removing restrictions from the financial institutions and thus sowed the seeds of the current crisis, showing how the financial oligarchy maintains continuity even though political parties come and go.

Alan Greenspan was such a die-hard Ayn Rand devotee that he even told Bonds that he did not think there should be any laws against fraud because the market would take care of things. We saw how well that turned out. The problem is that in an oligarchic system as currently exists, market forces only apply to powerless people. When the markets turn against the big financial interests, they have the power and influence to get the government to use taxpayer money to bail them out. Oligarchies never lose unless there is a popular revolt.

POST SCRIPT: The need for strong oversight

Jon Stewart has an excellent two-part interview with Elizabeth Warren, chair of the Congressional Oversight Panel on TARP (Troubled Asset Relief Program), who has been charged with overseeing the current bailout.

Part 1 explains what is going on now and part 2 explains clearly how we got into this mess and what we need to do in the future.

Part 1:

The Daily Show With Jon StewartM - Th 11p / 10c
Elizabeth Warren Pt. 1
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Part 2:

The Daily Show With Jon StewartM - Th 11p / 10c
Elizabeth Warren Pt. 2
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Economic CrisisPolitical Humor

My concern is that because Warren seems to be honest and smart, she may be seen as a thorn in the side of the oligarchy which will try to make her serve as the usual window dressing to make it look as if there is accountability when in reality there is none. It seems clear that she is already being slowly frozen out of the information loop by the Obama administration. I wonder how long it will be before she quits in frustration, like Brooksley Born.

April 18, 2009

Comment deletion

For some reason that I cannot figure, the last half-dozen or so comments disappeared, including some of my own. My apologies.

April 17, 2009

American oligarchy-2: The fraud on the American people

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

Obama's nominee to be chief performance officer, Nancy Killefer, had to withdraw her nomination following the revelation that she had a mere $946.69 lien on her property in 2005 for failure to pay taxes ($298 in unemployment compensation for household help, $48.69 in interest, and $600.00 in penalties.) This was a fairly trivial issue.

Health and Human Services nominee Tom Daschle had to also withdraw over the failure to pay a much larger amount of $140,000 in taxes but there was a faintly plausible case of ambiguity there. I was glad Daschle withdrew for a different reason, because he is completely enmeshed with all kinds of lobbying interests.

So why was Timothy Geithner able to beat his far more serious problems and become confirmed for the position of Treasury Secretary? Because Obama and the Democratic leadership wanted him badly enough, and so did the Republicans. Why? Because he will continue the practice of subordinating the interests of the US to the financial oligarchy. It is not hard to see why he was favored by Wall Street and thus secured his nomination fairly easily despite his tax problems.

This New York Times article relates how Geithner fought to protect the interests of the big banks during internal debates on how to handle the financial crisis. Economist Michael Hudson explains why the big Wall Street players wanted Geithner to succeed Paulson as Treasury Secretary. "[T]he Obama-Geithner recovery plan is basically an extension of the Bush-Paulson plan – yet more giveaways to financial insiders, with a view to concentrating the U.S. banking system into a cartel of just a few large banks."

The recent plan adopted by Geithner has the government putting up at least 85% of the money to buy these mortgage-backed assets of dubious value, with private investors putting up just 15%. If the assets rise in value, the profits are split 50-50. If the assets lose value, however, the government bears the brunt of the losses. So Wall Street gets the upside and the taxpayer gets the downside. Economist Michael Hudson calls it a scam and explains why this plan was greeted with such enthusiasm by the banking sector.

Suppose a bank is sitting on a $10 million package of collateralized debt obligations (CDOs) that was put together by, say, Countrywide out of junk mortgages. Given the high proportion of fraud (and a recent Fitch study found that every package it examined was rife with financial fraud), this package may be worth at most only $2 million as defaults loom on Alt-A "liars' loan" mortgages and subprime mortgages where the mortgage brokers also have lied in filling out the forms for hapless borrowers or witting operators taking out mortgages at far more than properties were worth and pocketing the excess.

The bank now offers $3 million to buy back this mortgage. What the hell, the more they bid, the more they get from the government. So why not bid $5 million. (In practice, friendly banks may bid for each other's junk CDOs.) The government – that is, the hapless FDIC – puts up 85 per cent of $5 million to buy this – namely, $4,250,000. The bank only needs to put up 15 per cent – namely, $750,000.

Here's the rip-off as I see it. For an outlay of $750,000, the bank rids its books of a mortgage worth $2 million, for which it receives $4,250,000. It gets twice as much as the junk is worth.

The more the banks holding junk mortgages pay for this toxic waste, the more the government will pay as part of its 85 per cent. So the strategy is to overpay, overpay, and overpay. Paying 15 per cent is a small price to pay for getting the government to put in 85 per cent to take the most toxic waste off your books.

Another economist Dean Baker explains the real purpose of these plans. "Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives."

Others economists have voiced their concerns. In an interview with Bill Moyers, William K. Black, a professor of economics and law with the University of Missouri, alleges that a massive fraud is being perpetrated on the American taxpayer. As Raw Story summarizes:

In an explosive interview on PBS' Bill Moyers Journal, William K. Black, a professor of economics and law with the University of Missouri, alleged that American banks and credit agencies conspired to create a system in which so-called "liars loans" could receive AAA ratings and zero oversight, amounting to a massive "fraud" at the epicenter of US finance.

But worse still, said Black, Timothy Geithner, President Barack Obama's Secretary of the Treasury, is currently engaged in a cover-up to keep the truth of America's financial insolvency from its citizens.

Black goes on to also describe other shenanigans.

Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?

The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.

Geithner is just the symbol of the oligarchy. Bill Moyers concludes, and Black agrees, "that people in power, political power, and financial power, act in concert when their own behinds are in the ringer."

More on that in the next post.

POST SCRIPT: Our Goldman Sachs dominated oligarchy

The Daily Show With Jon StewartM - Th 11p / 10c
Clusterfu#@k to the Poor House - Goldman Sachs' Connections
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April 16, 2009

American oligarchy

If there is one thing that the current financial crisis has revealed, it is the stranglehold that the big financial interests have on the American government. From the beginning it has been clear that the same interests that caused the financial crisis are the ones that control both the Bush and Obama administrations and that they are making sure that they are the ones who benefit most from the various high-cost "rescue" and "stimulus" packages that have been floated. Nowhere is this more clearly displayed that the way in which the Obama administration is slavishly adhering to satisfy the needs of the major financial interests on Wall Street.

This will be unwelcome news for those Obama fans who thought their candidate would be different. So far Barack Obama's administration seems to be acting consistently with the model that states that the US is run by a pro-war/pro-business one party oligarchy with two factions that differ only on some social issues.

Exhibit #1 is Timothy Geithner, the current Secretary of the Treasury. He was one of the many Obama nominees who had problems with their past tax payments. But Geither's case was the most serious because it was clear that he was not paying taxes in a manner that suggested willful deception. There is no way that he could not have known that he was doing something wrong by not paying his Social Security or Medicare taxes while he was at the International Monetary Fund, unless he is such a financial idiot that he should not be Treasury Secretary. The Wall Street Journal describes the problem:

As an international body, the IMF doesn't withhold taxes for U.S. citizens, and employees are responsible for paying their taxes. The IMF pays employees additional tax allowances to cover federal and state income taxes, and the employer's portion of payroll taxes.

Mr. Geithner prepared his own federal-tax returns during the first two years he worked at the IMF, 2001 and 2002, according to the Senate Finance Committee report.

"The IMF informs U.S. employees about their tax allowance and what it covers and doesn't cover -- and that includes paying your payroll taxes," said Michael Mussa, a former IMF chief economist, who is now at the Peterson Institute for International Economics. "The IMF doesn't leave this out."

An IMF booklet on taxes, which Mr. Geithner told the Senate panel he received, instructed employees that "you pay the employee's share of U.S. Social Security taxes."

Mr. Geithner's quarterly tax-allowance payments also included a statement of what the money was to be used for, and had an entry for "SE tax" -- meaning "self-employment" taxes. In a wrinkle in U.S. tax law, U.S. citizens at the IMF pay Social Security and Medicare taxes as if they were self-employed. Current and former IMF officials said that U.S. officials widely understood "SE tax" to mean payroll taxes."

I, like Geithner, do my own taxes and there is no way that you can do that without knowing what 'SE tax' means. I have been paying self-employment taxes (to cover Social Security and Medicare) every year on the small extra income I get from book royalties and consulting and speaking fees. It is quite simple and straightforward.

Current and former IMF officials said the fund provided numerous warnings to U.S. employees about payroll taxes. According to IMF documents released by the Senate Finance panel, Mr. Geithner regularly received information about his tax obligations.

Mr. Geithner didn't make any Social Security or Medicare tax payments on his income during the years he worked for the IMF, though he did pay income taxes. After the Internal Revenue Service audited him in 2006 and discovered the payroll-tax errors, Mr. Geithner corrected them for 2003 and 2004. Only after Mr. Obama picked him for Treasury secretary last fall did Mr. Geithner pay the Social Security and Medicare tax he owed for 2001 and 2002.

So even after being audited and having paid back taxes for two years, he did not pay for the other years even though he must have known that the same problem existed there. To me, this was such an egregious act that Geithner's nomination should have been rejected. But he was confirmed quite easily, which immediately indicated to me then that he was a faithful servant of the oligarchy and that he would faithfully serve Wall Street interests.

As veteran investigative reporters Don Bartlett and Jim Steele said :

The reason we said that Geithner’s was far more egregious is this. He signed a piece of paper acknowledging that he owed both taxes while he was employed by the IMF. He then collected the money from IMF to pay the taxes. Now, most of us, you know, the payroll taxes are withheld. We don’t get reimbursed for those taxes. It comes out of our own pocket. But Mr. Geithner not only signed a paper acknowledging he owed taxes, he collected money to pay the taxes and then didn’t pay them and pocketed the money. This is why it was far more egregious for him and why—you know, the New York Times demanded that Tom Daschle withdraw, and he did. But the same demand was not put on Mr. Geithner.

If this was a real two-party system, you would think that the Republicans would jump at this chance at embarrassing the incoming president by highlighting the faults of his important cabinet pick. But in a one-party oligarchy, it is the interests of the oligarchy that must be served first and Republicans know that.

A number of senators, including Republicans, continued to express their support for Mr. Geithner. "These are not the times to think in small political terms," said Sen. Lindsay Graham, a South Carolina Republican. "He has a great résumé."

Yes, he certainly does. A resume that screams that he will do Wall Street's bidding, and what's not to like about that?

POST SCRIPT: The other side of piracy

Johann Hari of the London Independent says there is another side to the pirate story that we are not being told.

In 1991, the government of Somalia collapsed. Its nine million people have been teetering on starvation ever since – and the ugliest forces in the Western world have seen this as a great opportunity to steal the country's food supply and dump our nuclear waste in their seas.

Yes: nuclear waste. As soon as the government was gone, mysterious European ships started appearing off the coast of Somalia, dumping vast barrels into the ocean. The coastal population began to sicken. At first they suffered strange rashes, nausea and malformed babies. Then, after the 2005 tsunami, hundreds of the dumped and leaking barrels washed up on shore. People began to suffer from radiation sickness, and more than 300 died.

Ahmedou Ould-Abdallah, the UN envoy to Somalia, tells me: "Somebody is dumping nuclear material here. There is also lead, and heavy metals such as cadmium and mercury – you name it."

At the same time, other European ships have been looting Somalia's seas of their greatest resource: seafood. We have destroyed our own fish stocks by overexploitation – and now we have moved on to theirs. More than $300m-worth of tuna, shrimp, and lobster are being stolen every year by illegal trawlers. The local fishermen are now starving.

This is the context in which the "pirates" have emerged. Somalian fishermen took speedboats to try to dissuade the dumpers and trawlers, or at least levy a "tax" on them. They call themselves the Volunteer Coastguard of Somalia – and ordinary Somalis agree. The independent Somalian news site WardheerNews found 70 per cent "strongly supported the piracy as a form of national defence".

No, this doesn't make hostage-taking justifiable, and yes, some are clearly just gangsters – especially those who have held up World Food Programme supplies. But in a telephone interview, one of the pirate leaders, Sugule Ali: "We don't consider ourselves sea bandits. We consider sea bandits [to be] those who illegally fish and dump in our seas." William Scott would understand.

Did we expect starving Somalians to stand passively on their beaches, paddling in our toxic waste, and watch us snatch their fish to eat in restaurants in London and Paris and Rome?

The whole article is worth reading for its history of how pirates arose in the 17th century as a reaction to the extreme hardship and cruelties suffered by sailors in the merchant and regular navies of that time. Rather than being thought of as evildoers, they were initially seen by the general public as romantic heroes, rebels against oppression. Their transformation in the public mind into senseless and savage bandits was the result of a concerted propaganda campaign by the British government.

April 15, 2009

Financial frauds-6: The danger of having an oligarchy

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

In a provocative article, Pulitzer Prize-winning war correspondent Chris Hedges warns that those people who have elite educations often make the biggest blunders because they have been trained to think highly of themselves, and thus become less reflective and more overconfident.

These institutions [i.e., elite prep schools and universities], no matter how mediocre you are, feed students with the comforting self-delusion that they are there because they are not only the best but they deserve the best. You can see this attitude on display in every word uttered by George W. Bush. Here is a man with severely limited intellectual capacity and no moral core. He, along with Lewis "Scooter" Libby, who attended my boarding school and went on to Yale, is an example of the legions of self-centered mediocrities churned out by places like Andover, Yale and Harvard. Bush was, like the rest of his caste, propelled forward by his money and his connections. That is the real purpose of these well-endowed schools -- to perpetuate their own.

Barack Obama is a product of this elitist system. So are his degree-laden cabinet members. They come out of Harvard, Yale, Wellesley and Princeton. Their friends and classmates made huge fortunes on Wall Street and in powerful law firms. They go to the same class reunions. They belong to the same clubs. They speak the same easy language of privilege and comfort and entitlement. They are endowed with an unbridled self-confidence and blind belief in a decaying political and financial system that has nurtured and empowered them.

These elites, and the corporate system they serve, have ruined the country. These elite cannot solve our problems. They have been trained to find "solutions," such as the trillion-dollar bailout of banks and financial firms, that sustain the system. They will feed the beast until it dies. Don't expect them to save us. They don't know how. And when it all collapses, when our rotten financial system with its trillions in worthless assets implodes, and our imperial wars end in humiliation and defeat, they will be exposed as being as helpless, and as stupid, as the rest of us.

Hedges is perhaps too pessimistic, sweeping, and apocalyptic. At least I hope so, as otherwise we are done for. There are genuinely clever people who go to these elite schools. They are not the problem. The problems are those who suffer from what William Deresiewicz, a professor of English at Yale, called 'entitled mediocrity'. i.e., people who see themselves as smart merely because of their background and privileged opportunities and not out of any personal achievement. He takes elite universities to task for having lost sight of their mission and becoming instead essentially narrowly focused trade schools, although the trades students are being prepared for are the professions.

When elite universities boast that they teach their students how to think, they mean that they teach them the analytic and rhetorical skills necessary for success in law or medicine or science or business. But a humanistic education is supposed to mean something more than that, as universities still dimly feel. So when students get to college, they hear a couple of speeches telling them to ask the big questions, and when they graduate, they hear a couple more speeches telling them to ask the big questions. And in between, they spend four years taking courses that train them to ask the little questions—specialized courses, taught by specialized professors, aimed at specialized students.

Since the idea of the intellectual emerged in the 18th century, it has had, at its core, a commitment to social transformation. Being an intellectual means thinking your way toward a vision of the good society and then trying to realize that vision by speaking truth to power. It means going into spiritual exile. It means foreswearing your allegiance, in lonely freedom, to God, to country, and to Yale. It takes more than just intellect; it takes imagination and courage.

Among the elites there is also a clannishness, a willingness to shield their own from the barbarians at the gate, i.e. ordinary people. You can see it in the way that the Obama administration is seeking to avoid taking any action against those members of the Bush administration that have been involved in the most outrageous acts of criminality and violations of the constitution, such as torture, war crimes, warrantless wiretapping and the like. The Obama administration is trying to impose even greater secrecy than Bush did and fighting the efforts of those who want openness and investigations of wrongdoers. Such acts (lawlessness and the closing of ranks to cover them up) are the signs of an oligarchy.

It used to be the case that Americans would laugh at the 'banana republics' of South America as countries where ruling elites would violate laws with impunity, confident that even their supposed political opponents would protect them because of their common class interests. And yet, on April 7, Peru became the first country to convict a former democratically elected head of state for ordering killings and kidnappings by his security forces. Alberto Fujimori was sentenced to 25 years in prison.

We could learn something from the so-called banana republics.

POST SCRIPT: Why I don't watch TV news

It looks like TV news is as almost as pathetic in England as it is here.

(Thanks to Earth-bound Misfit.)

April 14, 2009

Financial frauds-5: The problem with smart people

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

Many of the people who were swindled by Madoff were those who suffer from what William Deresiewicz, a professor of English at Yale, calls 'entitled mediocrity'. These are people who see themselves as smart merely because of their background and formal education and not out of any actual achievement. In a recent article in The American Scholar titled The Disadvantages of an Elite Education, Deresiewicz reflects on his own rising self-awareness of the limits his privileged education has created.

I never learned that there are smart people who don't go to elite colleges, often precisely for reasons of class. I never learned that there are smart people who don't go to college at all.

I also never learned that there are smart people who aren't "smart."

The second disadvantage, implicit in what I've been saying, is that an elite education inculcates a false sense of self-worth.

There is nothing wrong with taking pride in one's intellect or knowledge. There is something wrong with the smugness and self-congratulation that elite schools connive at from the moment the fat envelopes come in the mail. From orientation to graduation, the message is implicit in every tone of voice and tilt of the head, every old-school tradition, every article in the student paper, every speech from the dean. The message is: You have arrived. Welcome to the club. And the corollary is equally clear: You deserve everything your presence here is going to enable you to get. When people say that students at elite schools have a strong sense of entitlement, they mean that those students think they deserve more than other people because their sat scores are higher.

It's no coincidence that our current president [George W. Bush at the time of writing], the apotheosis of entitled mediocrity, went to Yale. Entitled mediocrity is indeed the operating principle of his administration, but as Enron and WorldCom and the other scandals of the dot-com meltdown demonstrated, it's also the operating principle of corporate America.

It is this smug self-assurance of one's own smartness that leads these people to fall prey to those who know exactly how to play on their weaknesses. Recently a hedge fund manager Andrew Lahde decided to retire after he had made enough money to live comfortably for the rest of his life, and he had some harsh parting words about the kinds of people that made it so easy for him to be so successful at making money. He said that the so-called 'smart people', who had a high opinion of themselves that was not based on any real achievements, were the easiest ones to take advantage of.

I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy only ended up making it easier for me to find people stupid enough to take the other side of my trades.

Lahde was making money at these people's expense legally but the people at the losing end were the same kinds of people who were swindled by Madoff.

America prides itself on being a meritocracy, that people get to the top by virtue of their ability and hard work. It is not clear if that was ever really true but there are definitely reasons to doubt it now. It is true that there are no legacies of a feudal system like a formal aristocracy and inherited titles. But we do now have in place a system that seems to perpetuate a ruling class. Wealthy people have created a system whereby they can send their children to elite primary and secondary schools and colleges (often starting with elite pre-schools!) where they move around largely with people like them and develop the contacts that, coupled with their parents' network of business and social relationships, enable them to get onto the fast track of business and government. So we end up with a self-perpetuating elite.

What we have now is a one-party pro-war/pro-business form of government controlled by a wealthy elite that sees its role as preserving the privileges of the already privileged.

America has become an oligarchy, and that is not a good thing because it is usually a sign of impending collapse.

Next: The dangers of being ruled by an oligarchy.

POST SCRIPT: Telling the truth about religion

British comedian Marcus Brigstocke riffs funnily, but accurately, on the violence and hate and demands for special treatment that permeates the three so-called Abrahamic religions (Judaism, Christianity, and Islam) and the so-called 'moderate' religious people who are its enablers, something that I have said before.


April 13, 2009

Financial frauds-4: Bernard Madoff's scam

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

While Bernie Madoff has pleaded guilty to various charges of fraud, what he actually did has not yet been unraveled and who else was involved not revealed, though all the signs are that it was a pyramid, or 'Ponzi', scheme in the classic tradition, pretending to have a business that made money while merely taking money from newer investors to pay off the obligations to the older ones.

As with Charles Ponzi and Allen Stanford, there had been clues long before that Madoff was running some kind of fraudulent scheme, but those who suspected it were not sure exactly what. As long ago as November 2005, Harry Markopolos, an investment hedge fund manager and derivatives expert, sent a confidential report to the Securities and Exchange Commission, the supposed watchdog agency, saying that based on his analysis Madoff could not be providing his returns legitimately. In his report, Markopolos listed 29 red flags about Madoff's operation.

As Eamonn Fingleton, a former editor for Forbes magazine and the Financial Times, explains in the CounterPunch newsletter of Feb 1-15, 2009:

Markopolos' interest had been first piqued as far back as the 1990s, when colleagues told him of this amazing fund manager who was ostensibly using a conservative options-based hedging strategy to generate consistently superlative returns. As an options expert, Markopolos quickly determined that what Madoff was claiming was impossible (in this conclusion, he was joined by many Wall Street authorities, not least analysts at Goldman Sachs). Either Madoff was faking or he was pursuing a quite different investment strategy, in all probability a shady one, known as "front-running" (more about this in a second). At a minimum, Madoff was a liar.

What is front running?

Front-running refers to the practice by brokers of exploiting privileged knowledge about future buying and selling by large financial institutions to make private profits. A typical instance might start when a broker receives a big order from an institutional investor to buy shares in, say, IBM. This is more or less guaranteed to send the price shooting up, and if the broker can nip in seconds ahead with an order for his personal account, he or she is guaranteed an almost certain, risk-free, and instantaneous profit. Front-running is pandemic on Wall Street and, as Madoff's more sophisticated investors realized, almost no one was better placed to profit from it than Madoff.

So this is the scheme that Madoff led his investors to suspect that he was carrying out. While it is technically illegal (since it involves using insider knowledge), it is not uncommon because it is hard to prove and prosecute. What aroused Markopolos's suspicions is that, as in the case of the Ponzi and the Afinsa/Escala business models, while it was superficially plausible, the returns being provided implied a scale of operations that simply was not possible. But only people who understand the business model being used and do the calculations realize this. As Fingleton writes:

[A]fter years of piecing together information from a wide variety of mainly private sources, however, Markopolos became convinced that front-running was not the explanation. That left only one possibility: Madoff was running the biggest Ponzi scheme in history.

But others had also had their suspicions aroused, though they did not make them public.

For years, [Madoff] had been pegged as an outright Ponzi artist by Goldman Sachs and Credit Suisse, for instance, and he was blacklisted also at Deutsche Bank, Merrill Lynch, and UBS. Indeed, as far back as 1991, CounterPunch contributor Pam Martens, in her capacity as a Wall Street broker had told him she was on to his game and had so advised a client.

The business media and the regulatory agencies also dropped the ball. Markopolos' now famous dossier was also given to the investigative reporter John R. Wilke of the Wall Street Journal. As Fingleton says:

It is hardly an exaggeration to say that, on the strength of an afternoon's research, a good reporter could have worked up any one of Markopolos' points into a cracker of a front-page story. Taken as a whole, the dossier represented the biggest "career development opportunity" any journalist has been handed since Deep Throat delivered the goods on Richard Nixon to Woodward and Bernstein a generation ago.

And yet, nothing happened. Neither the SEC nor the Wall Street Journal picked up on Markopolos's investigation. Even the New York Times, which had to have been aware of all the worried whisperings about Madoff that were circulating in the elite social circles that their own editors inhabited, did not investigate or reveal these misgivings until after the scandal broke. Why?

Infected by the "greed is good" virus that has ravaged political discourse for nearly three decades, American financial regulation has now become so corrupt and incompetent that it would embarrass a Third World kleptocracy. What is news – at least to those who lack independent sources of information – is that top American editors and reporters now seem no more willing to tackle wealthy and well-connected crooks than their avowedly venal and cowed peers in, say, Jakarta or Harare.

This is what Jon Stewart excoriated Jim Cramer for in the now famous interview. But Cramer was merely a pathetic minor representative, a circus clown, of the financial reporting industry. The sickness runs deep. Consider the recent decision by Andrew Rosenthal, editorial page editor of the New York Times, to publish an an op-ed piece by one Daphne Merkin saying that there were no "victims" in the Madoff case since "no one was holding a gun to anyone's head, saying sign up with Mr. Madoff or else.". It is certainly true that some of the investors who gave Madoff money were driven by greed. But who is Daphne Merkin? In her piece she coyly says parenthetically that "I did not know Mr. Madoff nor did I invest with his firm, but have a sibling who did business with him."

But as that excellent blog Talking Points Memo pointed out, there is far more to this connection.

That sibling is Ezra Merkin, the financier and former chairman of GMAC, who was the second-largest institutional investor in Madoff's funds, losing billions of other people's money. In a civil suit filed this week by New York Attorney General Andrew Cuomo, Ezra Merkin, who collected over $40 million from Madoff's funds, was charged with "betraying hundreds of investors" by lying to them about how much of their money he had invested with Madoff, and by failing to disclose conflicts of interest.

So there were many people who were swindled by Madoff because other money managers like Merkin gave him their money, sometimes despite explicit instructions not to. When TPM contacted Rosenthal to question why the full extent of Daphne Merkin's connections with Madoff was not made explicit and why she was given this platform to mitigate Madoff's crime, he refused to answer, which suggests how complicit the media has become in the face of massive government and financial corruption.

Next: The problem of 'entitled mediocrity'

POST SCRIPT: Biblical torture

The story of Job is one of the weirdest in the Bible, which is quite an achievement when you consider that it is a book full of truly weird stories. God essentially allows the devil to torture an innocent man for no reason other than to prove a point. This animation gives you a quick and accurate synopsis of the story.


April 10, 2009

Financial frauds-3: Introducing Bernie Madoff

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

Bernard Madoff has reportedly swindled investors out of $50 billion of their money. You might have noticed that news stories repeatedly emphasize their surprise that the people who were defrauded were 'smart' people. If you look at the stories more closely, you will find that they do not really specify what they mean by smart. What they point to is that they had a lot of money, lived well, moved in exclusive circles, and attended elite schools. These are the measures that most people use to determine whether someone is 'smart' or not. It seems to be a basic assumption that rich people who have had extensive formal education at elite institutions cannot, by definition, be fools. Hence they must be 'smart'.

But there is a difference between being merely conventionally 'smart' as determined by these measures and being genuinely smart. The biggest suckers are those who have convinced themselves that they are smart but really are not.

I once watched the magician James Randi give a demonstration of his tricks to a group of physicists and he completely bamboozled them. He said that it is really easy to fool people, and the more well educated people are, the more confident such people are of their own cleverness, the easier it is for magicians and other tricksters to take advantage of them.

Madoff seemed to have taken advantage of four psychological weaknesses that such conventionally smart people tend to have. The first is that he provided attractive and steady returns on their investments, but nothing spectacular. 'Smart' people are suspicious of get-rich-quick, something-for-nothing schemes, rightly suspecting that those must be frauds. But here was someone who was providing a slightly above average rate of return of about 10% on investments when the stock market was going up, and still managing to provide good returns when the market was going down. So he was definitely outperforming the market but not by amounts that might make people too suspicious. It seemed plausible that he had some kind of system, although he never said exactly what he was doing that enabled him to be so steady, claiming that doing so would reveal his business secrets.

The second was that he was well-connected, a friend of the elite, a former chair of the NASDAQ stock exchange, a public benefactor. He was a member of the exclusive Palm Beach Country Club where he played golf with many of the people who eagerly sought him out to invest their money. They felt he was one of them, their friend. People tend to trust members of their own class, their own social circle.

Third, he played hard to get so that people were made to feel that he was doing them a favor by taking them on as clients. People sought him out, tried to get their friends to recommend them to him as clients, and sought to curry his favor. And he would turn money and people away, thus increasing his appeal. When people have irrationally set their hearts on achieving a goal, they do not pay attention to the normal warning signs that govern their other actions. (Woody Allen riffs on Madoff's technique and his victims.)

Fourth, and perhaps most significant, was that he gave people a wink and a nudge that the system he was using was perhaps not quite legitimate, that he was skating close to the edge and using insider knowledge that may have come with being former chair of NASDAQ, and that other people, those ignorant poor saps, were being exploited in order to give them their returns. So those who invested with Madoff felt that they were also financial players, that they were on the same side as him, making money at the expense of suckers like you and me.

These very rich people have no problem with people who take money from those less well off, since they often do so themselves, both legally and illegally. That comes naturally to them. What they found shocking was when it was revealed that Madoff's targets were themselves. Madoff was playing a classic con game, taking advantage of rich and greedy people's willingness to take unfair advantage of people poorer than themselves.

It is the same psychology that was used by the small-time conman to lure the big-time gangster into the con in the classic film The Sting. If you have never seen this Paul Newman-Robert Redford film, you have missed a treat. Here is the classic poker scene from it.

Next: How Madoff ran his scam.

POST SCRIPT: What we need is more sports!

The Onion News Network reports on plans to expand the NCAA playoffs to 4096 teams.

April 09, 2009

Financial frauds-2: The original Ponzi model

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

Following up on yesterday's post, Charles Ponzi's scheme used the fact that a person could legally buy postal coupons in one country using the currency of that country, but in the denomination of the currency of another country. If you mailed the coupons to the other country, the recipient could then exchange the coupons in their post office for stamps.

In 1920, after World War I, the British and German currencies lost value compared to the US dollar. But since postal coupons were based on fixed exchange rates set in 1907 by the International Postal Union and were thus based on a higher value for those currencies, Charles Ponzi saw the chance for a scheme that would work by sending money overseas to buy coupons for American stamps that had greater value than the amount he had sent, and having the coupons shipped back to him. As economist Michael Hudson says, "An American penny could buy foreign stamp orders that could be converted into six cents in U.S. stamps, for a 500 per cent profit."

But there was a catch.

The problem was that it would take a truckload of such postal orders to make serious money. A million-dollar investment would involve a hundred million penny coupons – which then would have to be converted into stamps and sold in competition with the U.S. Post Office, presumably at a discount, mainly in immigrant neighborhoods.

This shipping of such huge numbers of coupons from one country to another, and then trying to sell the stamps on the street to get back cash, would have involved hard work and been tedious. So what Ponzi did was simply tell investors that this was his business model for making money, but not actually carry it out.

Focusing on the principle of arbitrage rather than such laborious implementation, Ponzi explained that he could make a 400 per cent gain after expenses. He promised that investors could double their money in 90 days, pretending to take due account of the costs and shipping time from Europe to America.

Ponzi, like every other perpetrator of such schemes since, took advantage of that aspect of human psychology, especially common among greedy investors, that as long as they are getting the interest rate on their money that they were promised, they would not inquire too closely into the details of the business, being satisfied with vague generalities that gave them something plausible to believe in.

Ponzi had noticed this trait much earlier when he had worked at as a teller at a bank that attracted investors by paying higher interest rates than their competitors and used that money to invest in real estate, expecting those prices to rise. When the real estate market took a downturn and their investments went bad, the bank went bankrupt. But while they were making money, the bank's depositors were quite happy, a scenario that should sound depressingly familiar to people today.

Ponzi promised to double his investors' money every three months and he delivered, at least at the start. What he did was to pay on schedule to the early investors, who spread the word that this was a good investment. More investors gave money, which Ponzi used to pay the promised interest to the earlier investors. As long as increasing numbers of new investors (or to use a technical term, "suckers") were coming in with new money, he could pay off the earlier ones, thus creating a pyramid of investors, the ever-growing large base supporting payoffs to the smaller group closer to the top.

When his Securities Exchange Company paid early investors the high returns he had described, they spread the word to others. Ponzi’s inflow of funds rose from $5,000 in February 1920 to $30,000 in March, and $420,000 by May. By July an estimated $250,000 a day was flowing into his firm, mainly from small investors who let their book credits build up rather than taking out their money. Some people put their life savings into the plan, and even borrowed against their homes.

Like other frauds, Ponzi spent money lavishly on himself, living well, buying a mansion, and even bringing his mother over from Italy. And Hudson points out that like the Ponzi schemes of today, there were enough clues that he was running a racket if only financial reporters and investigators took the trouble to look for them. In each case, there were a few people who had stumbled upon the fact that the sheer volume of transactions that would have to be involved to generate such returns did not, and could not, match the reality, and that hence there must be some racket going on.

The financial reporter Clarence Barron (publisher of Barron’s) noted that if he really had invested the money as he told his investors he had done, Ponzi would have had to purchase 160 million postal reply coupons. Yet the post office reported that few were being bought at home or abroad, and only 27,000 were circulating in the United States.

There were similar clues that shady dealings were going on in the Escala/Afinsa stamp fraud of 2006, if only people were willing to look into the actual workings of the business.

The denouement came shortly after Lloyd’s of London withdrew from a 1.2 billion euros policy to insure Afinsa’s stamps. One of its experts noticed that if $6 billion really had been invested, it would have bought up all the investment-grade stamps in the world many times over. The fact that stamp prices did not reflect any such extraordinary buying implied that few bona fide stamp transactions occurred at all, and there had been a massive over-billing.

The same is true for the fraud perpetrated by Allen Stanford, which began to unravel when a Venezualan financial analyst looked into Stanford International Bank (SIB) as a favor to a friend who was thinking of investing in it. "No matter how hard he tried, he could see no way in which SIB’s business model could produce the returns that it claimed to or fund the dividends that it was continuing to pay its investors."

Bernard Madoff's scheme was similar, as we will see tomorrow.

POST SCRIPT: Quote

"There are two novels that can change a bookish fourteen-year old's life: The Lord of the Rings and Atlas Shrugged. One is a childish fantasy that often engenders a lifelong obsession with its unbelievable heroes, leading to an emotionally stunted, socially crippled adulthood, unable to deal with the real world. The other, of course, involves orcs." (From Kung Fu Monkey.)

April 08, 2009

Financial frauds-1: Introducing Charles Ponzi

Recently there have been two major fraud scandals in the US, one perpetrated by Bernard Madoff and the other by Allen Stanford, both based on so-called 'Ponzi' schemes. These exploded on the financial world as big surprises. But there was a similar huge scandal that took place in 2006 but since its impact was felt mostly in Spain, the media here did not give it much publicity, though doing so might have alerted people earlier as to what Madoff and Stanford were up to. Economist Michael Hudson gives the background on the Spanish fraud.

The Spanish scheme involved the trading of rare stamps by a Spanish holding company called Afinsa that bought up a New Jersey stamp auction firm and combined it with a Spanish auction firm to create Escala, the third largest auction firm in the world, after the much better known Sotheby's and Christie's. Their business model was to buy and sell rare stamps for dealers and collectors, making money on safeguarding and curating the stamps while also making profits on the transactions. Since the prices of rare stamps seemed to be always going up, they were able to promise and deliver to investors steady rates of return of 6% to 10%, higher than government bonds and much of the rest of the market, and thus convince investors to put money into the company.

But in May 2006, Spanish police raided the firm and on examining the books, found that the stamps they purportedly had either did not exist or were of much lower value than claimed. The firm was accused of running a pyramid or 'Ponzi' scheme.

So exactly what is a Ponzi scheme? Hudson recapitulates the original scheme by Charles Ponzi that has inspired a particular kind of fraud that will be forever associated with his name.

Charles Ponzi was a poor Italian immigrant who arrived in the US in 1903. His stated business model was based on what is called 'arbitrage'. This is where a person takes advantage of a difference in the price of something in two different markets separated by either space or time, so that if one buys in one market and sells quickly in another market for the higher price, then one makes a profit, often without the nuisance of even having to take possession of the item being bought and sold. (True arbitrage, where the buying and selling is done simultaneously in two different places, is only possible in modern times and with deals that can be transacted electronically, such as securities and currencies and other similar financial products.)

People do this with foreign currency trading if they can predict which way the value of a currency will go. Suppose that at some time a US dollar and a British pound are at parity, meaning that they have equal value. You could buy a dollar with one pound and if the pound later depreciates so that it now trades at two pounds to one dollar, then the dollar that your original pound bought can now be used to buy back two pounds, giving you a 100% profit.

The financier George Soros is supposed to have hugely increased his fortune by betting that the value of the British pound would go down. He sold so many pounds for other currencies that the market was actually influenced by his actions, with other traders thinking that he was betting on something that would actually happen and they also started selling their pounds, causing a run on the currency and driving down its price, and creating a self-fulfilling prophecy.

The catch with this kind of trading is that the differences in trading values in the two markets are usually very small, especially over short time periods and, because of fees and other costs, ordinary people cannot make money from it. One has to be a trader oneself and thus avoid the commissions or have a lot of money to invest in order to make money. But a hundred years ago in Ponzi's time, there existed something called postal coupons that enabled an investor to make money on what seemed like a sure thing.

Postal coupons are no more (I think) but they were common when I was a student and were essential back in the days when buying and selling foreign currencies was not easy or if you lived, like me, in a country that did not allow you to convert your local currency into foreign ones.

The problem the coupons solved was this. Suppose that you needed someone in another country to mail something to you but you had to pay the cost of postage. One way was to send money to the recipient to cover the cost of stamps. But this meant that either you or the recipient had to convert your local currency into the foreign one, which could be a nuisance or even, as it was in my case in Sri Lanka, impossible except in the black market.

Postal coupons were created to solve this problem. You could legally buy such coupons in your own country in your own currency but in the denomination of the foreign currency to cover the cost of stamps in the other country, and then mail the coupons. The recipient could exchange the coupons in their post office for stamps and mail your package to you.

What Ponzi did was take advantage of the fact that the exchange rate at which postal coupons were valued badly lagged behind the exchange rates of currencies, enabling him to take advantage of the difference.

Next: How Ponzi's original scheme worked.

POST SCRIPT: Why not calculate the budget on an abacus?

Why is it that members of Congress, during their debates, still prepare large posterboard charts that are then mounted on hard backing and placed on easels? Do they think they are still in middle school? Haven't they heard that there are things called computers? Projection systems? PowerPoint? Is there some arcane rule that says that Congressional aides must waste their time producing huge charts that might have just one word or one number? The members of Congress using this seem to think that this produces some kind of dramatic effect when all that it indicates is the sense that the speaker is out of touch.

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April 07, 2009

Religious dogmatism

The Catholic Church, like other rigid religious belief structures such as Orthodox Islam and Judaism or fundamentalist Christianity, does not hesitate to draw lines in the sand, to state clearly what is allowed and what is not, and then follow that policy wherever it leads, even if it leads over a cliff. In the face of derision they are willing to hold on to their position for decades, even centuries, before quietly conceding that they were wrong.

For example, when they decided that Church doctrine required the belief that the Sun orbited the Earth, they pulled out all the stops to force people to oppose the Copernican model, in 1616 banning the teaching of the heliocentric model and in 1633 putting Galileo under house arrest and forcing him to recant his view under threat of torture by the Inquisition.

Of course, that didn't work, with even Catholics rejecting that absurd policy. The church quietly reversed that position only hundreds of years later, in 1992 when Pope John Paul II lifted its edict of Inquisition against Galileo. But the Pope then went on to claim that Galileo may have been divinely inspired, saying: "Galileo sensed in his scientific research the presence of the Creator who, stirring in the depths of his spirit, stimulated him, anticipating and assisting his intuitions." This was a rather pathetic effort to recover some dignity from an embarrassing debacle for religion.

After initially opposing the theory of evolution because it seemed to deny the special creation of humans, it was only in 1996, long after almost everyone had accepted the correctness of evolutionary ideas, that the church again reversed itself. It again tried to salvage some dignity with the Pope saying that there was no problem with accepting the physical-biological basis of evolution, provided you accepted that the soul was divinely created. The Pope did not go so far as to suggest that Darwin too might have been divinely inspired. That might have been a bit too much.

What gets the church (and religious people in general) into trouble is that they enshrine as doctrines beliefs that may have been consistent with scientific knowledge at the time the doctrines were formulated. But science does not stand still. As science advances these doctrines lead to all kinds of contradictions that require religious insititutions to backtrack, something they are loathe to do.

For example, the business of the soul gets the church tangled up in knots because the church says that human life is sacred because god both creates and inserts the soul into the fertilized egg at the very moment of conception. That may have seemed clear enough until one starts asking what happens to the soul if the embryo fails to implant itself in the uterus and the pregnancy is spontaneously aborted? It is now estimated that about five fertilized eggs are produced for every one that leads to a birth. So why doesn't god wait until the egg gets implanted instead of wasting souls?

Or what happens if the fertilized egg later splits into twins? Does god then have to create another soul? Or does the original soul split also? (There is also the uncomfortable implication that god spends all his time watching people have sex so that he can be ready to manufacture a soul at a moment's notice at the appropriate time. Either that or he has set up an elaborate automated system that is triggered whenever an egg is fertilized and that also creates and inserts the soul, maybe using a random number generator system for selecting the soul's qualities. That would free god to do other things, like play golf.)

Based on that doctrine about life and the soul beginning at the moment of conception, the Catholic Church opposes abortion and the death penalty and the use of blastocysts (the stage at which a fertilized egg reaches after about five days when it is a clump of 70-100 cells) for embryonic stem cell research, and the use of anything that has the effect of preventing the fusing of the blastocyst with the uterus wall.

The church also opposes the use of contraceptives. As Pope Paul VI said in his encyclical letter Humanae Vitae, 14 of July 25, 1968, "Similarly excluded is any action which either before, at the moment of, or after sexual intercourse, is specifically intended to prevent procreation—whether as an end or as a means."

Their adherence to doctrine has recently again led the church into controversies such as the recent one when the Pope in Africa said that he opposed the use of condoms even to prevent the spread of AIDS.

Then there was the awful story recently from Brazil about a man who raped and impregnated his nine-year old step-daughter. Doctors said that she was too young to give birth to the resulting twins and so an abortion was approved by the girl's mother and carried out. What did the Catholic Church do? It excommunicated the child's mother and the doctors but exempted the father from that same punishment or any punishment at all.

Needless to say, this has caused an outcry but the church has stuck to its guns. The Church's Cardinal Giovanni Battista Re, head of the Catholic Church's Congregation for Bishops and the Pontifical Commission for Latin America, said that the mother's and doctors' crime was worse than the rape because they aborted two twin fetuses, while the step father did not actually kill anyone. "Life must always be protected, the attack on the Brazilian church is unjustified."

One could make the case that murder is worse than rape, and that since abortion is murder in the eyes of the church, their position is consistent with their doctrine. But when applying doctrine consistently leads you to take decisions that are outrageous on general moral grounds, then perhaps one should re-examine one's doctrine. For example, if the stepfather had used a condom when committing his appalling crime, then even though that would have prevented the pregnancy that led to the subsequent abortion, would the Church then have punished the man? That is bizarre.

The problem with the Catholic Church is that it takes them a long time to realize that when their commitment to a doctrine leads them to decisions that are patently absurd, that it is their doctrine that must change.

It took the church a long time to change its doctrine on Copernican ideas and on evolution. How long will it take them to realize that doctrines that result in opposing the use of condoms, even though it prevents the spread a horrendous disease like AIDS, or that excommunicates those trying to help a child after a rape while not requiring action against the perpetrator, are doctrines that are in major need of revision?

POST SCRIPT: Great moments in religion

Two Israeli newspapers removed pictures of two women in a group photo of the new Israeli cabinet and replaced them with images of anonymous men, because for some religious Jews publishing pictures of women is viewed as "a violation of female modesty", another example of using the bogus exaltation of women as a means of oppressing them. But what caught my eye was this sentence towards the end of the article: "Restrictions include using only Kosher telephones".

There are kosher telephones? Yes, indeedy! It is yet another example of technology being used to find loopholes in Jewish law so that observant people can be pious without inconvenience, in the same way that Certified Sabbath Mode ovens enabled them to eat hot food on the Sabbath.

So apparently these religious people worship a god who is so nit-picky that he gets mad if people close or open an electrical circuit on the Sabbath but is mollified if they find loopholes such as giving a computer chip instructions to do the same.

Amazing.

April 06, 2009

God save us from the Queen

One of the things about America that most endeared it to me when I first arrived for graduate studies was the lack of stuffiness in personal and business relationships. There was an easy informality, casual yet respectful, friendly yet polite, that I liked and found easy to get used to. I put this down to the American revolution, that decided that along with getting rid of direct rule by the English king, they also decided to get rid of all the pomp that went along with the English court. It seemed to reflect a sturdy democratic and republican (small 'd' and small 'r') spirit.

So it always surprises and amuses me that whenever the US president goes to England and meets with the Queen, the media of the very country that inspired the rest of the world to overthrow colonial and monarchial rule, gets into all of a doo-dah at the alarming prospect that the president or his wife will commit some awful faux pas that will embarrass the country because it will reveal to the world that Americans are ignorant hicks who should not be allowed into polite society.

We are not talking about things like the president picking his nose at the dinner table or chewing tobacco and spitting on the carpet. We can take as a given that such things are generally understood to be not done. We are not even talking about making mistakes of esoteric etiquette at formal dinner parties, like which fork to use for what or what one should do with one's napkin after one is done or what one should drink at any given stage of the meal. Although these latter issues are trivial and I do not understand why anyone even cares about them, I am talking about the even more arcane rules of etiquette that involve just the Queen. Apparently one should never turn one's back on her, not touch her, not speak to her until she speaks to you, and so on. If you do any of these things, the journalists covering the event suddenly get transformed into a bunch of Victorian ladies either getting the vapors and reaching for their smelling salts or raising their eyebrows and peering disapprovingly through their lorgnettes with a lot of harrumphing and tut-tutting, saying, "This is perfectly frightful. This will never do."

The hot topic this time is whether Michelle Obama should have touched the Queen and whether their gift of an iPod was appropriate. There was little discussion about the fact that the Queen gave them in return a signed photograph of herself and her husband, which struck me as quite odd. If an American president had done that, the press corps might have collapsed with apoplectic embarrassment.

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But the real question is: Why the hell should anyone care about any of this? Why should anyone else be bothered by the possibility that the Queen will be offended by the violation of some private rule of etiquette? Just suck it up, Queenie baby!

These absurd rules were imposed by the kings and queens of yore because they wanted people to be afraid of them and to grovel before them. The way you keep people off-balance and apprehensive is by making them not know whether they are transgressing a rule or not. And the monarchs of those days had the power to create and enforce rules arbitrarily. Breaking any of the rules could result in them ordering the offender's head to be cut off and placed on a spike for public view. That's how "civilized" the British royalty were. And yet we admire them?

The Queen may be a nice old lady but the respect she deserves is the same as what one should give any other nice old lady, such as the grandmotherly types of one's acquaintance or the cashiers at the supermarket, no more and no less. All this bowing and scraping is unseemly. Who knows, maybe the royal family makes up weirder and weirder rules just to see how far they can make gullible Americans tie themselves up in knots, and then secretly laugh uproariously at their expense afterwards.

Furthermore the British monarchy is a totally parasitic institution, living off inherited wealth that was taken by force from the people, and it should be abolished rather than pandered to. To abide by these arcane rules and not to ignore them or treat them with contempt is to endorse some of the worst legacies of feudalism.

In the unlikely event that I receive an invitation to Buckingham Palace and decide to go, I will not say upon meeting her "Yo, Lizzie, what's shakin?" but I am definitely not going to bow to her or follow any of the rules that somebody decided long ago was the proper way to behave in her presence. I will treat her like I would treat any elderly lady of my acquaintance. I will stand when she enters, offer to shake her hand, and make appropriate small talk. That's it.

The British have been warned.

POST SCRIPT: John Oliver explains why one should not touch the Queen

The Daily Show With Jon StewartM - Th 11p / 10c
The Poisonous Queen
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April 03, 2009

The stem cell issue-2: The ethics

Yesterday, I discussed the science involved in stem cell research. Today I want to discuss the ethics.

The ethical problems associated with stem cell research occur because although the fertilized eggs were not created for the purposes of research but to help infertile couples, since the method of in vitro fertilization for the treatment of infertility has not been perfected, more fertilized eggs are created than can be used to actually generate pregnancies, and the question of what to do with these extra frozen stored embryos is problematic.

If the extra ones are not needed for future implantation in a womb, then the options are to destroy them, preserve them forever, or use them for research. Those favoring stem cell research argue that preserving them forever is not realistic, that they will have to be thrown away eventually, and that using them for research is better than destroying them without any benefit being obtained, even though the resulting blastocyst must be destroyed in order to produce the stem cell lines,

Those opposed to stem cell research (and abortion) have a simple and clear argument: Life begins at the instant when an egg is fertilized, and no human action is permissible thereafter to prevent that egg from being eventually born. So once an egg is fertilized, whether in the uterus or outside, then we have a human life and using a blastocyst for research is effectively destroying life. This is a secular argument, even though many, or even the majority, of those who support it may have religious reasons for their stand, such as the idea that god inserts the soul at the moment of conception when the egg is fertilized. They argue that if such a position requires the preservation of unused embryos indefinitely, then we should do so, however impractical that might be.

Those who support a woman's right to terminate a pregnancy and/or the use of embryonic stem cells for research have more difficulty in justifying their position because drawing a clear line as to when 'life' begins or a clump of cells becomes 'human' is hard. One thing they are agreed upon is that a human being is much more than a fertilized egg or a bunch of cells such as a blastocyst. But where does one draw the line?

One line is that until such time as the fetus can exist independently outside the womb, it is not a human being. Right now that time corresponds roughly to the third trimester of the pregnancy. But as technology improves, that is likely to shift to earlier times. Others argue that any organism (human or otherwise) must have some higher level of capacity, such as a brain, before its life becomes worthy of protection from harm. After all, when it comes to question of death, society seems to have decided that when the brain stops functioning one is effectively dead and one no longer needs to take steps to keep the body alive. And as the Terry Schiavo case tragically illustrated, what we mean by a functioning brain is more than just brain stem functions that maintain basic body processes and some reflexes. It means that the part of the brain, such as memory and cognition, that gives us our personality and makes us who we are must be functioning. Once a person has reached the stage of being in what is known as a 'persistent vegetative state', that person is considered to be effectively dead.

In this debate, both sides usually ignore the need for consistency across species. Why should only human life be so valued? What makes us superior and worthy of special consideration? If life is precious and life begins with a fertilized egg or with higher brain function, then what about the lives of other species? After all, we kill animals, even though they are fully functioning living things with a level of brain function that we would undoubtedly value if a human had it. We even think nothing of eating them after killing them. Why should we have one standard for humans and another for nonhuman animals?

One can take a speciesist position and simply assert as a given that human beings are superior to others and so we have a right to do what we like to other animal forms while treating human life as sacrosanct. But that is hard to justify on general moral or ethical grounds. There is no clear marker that justifies treating humans as special, unless you throw in ideas such as that humans have a soul and other animals do not. This is an argument based on a particular religious viewpoint and should have no place in determining public policy, which should always be based on secular arguments.

In my opinion, the position taken by ethicists such as Peter Singer is the most consistent moral and ethical one, that does not give humans special privileges. They take a utilitarian position, that what one should seek is the minimization of suffering. Since suffering involves sentience, this requires that an organism must have at least some primitive brain function and the development of a nervous system before it can be said to have the possibility of suffering. So it would be acceptable to destroy any system of cells (whether from a human or non-human animal) as long as it has not yet reached the stage where it has the ability to suffer, or it has passed that stage at the end of life.

Even if we do not achieve the high level of consistency that it requires of us, the utilitarian argument that says that what we should aim for is a net reduction of global suffering seems to me to be a workable ethical principle on which to base decisions like these. Hence it is ethically allowable to use embryonic stem cells from a blastocyst (before the cells themselves have reached the capacity to suffer) in order to do research to reduce the suffering of actual living organisms.

Of course, this raises other potential problems that are sure to come down the road. Is it ethical, for example, to deliberately produce blastocysts purely for the purpose of research, as opposed to using those that are the by-products of infertility treatments? If, for example, one wanted to study the early development of a disease that had a genetic basis, would it be ethical to take an egg and sperm from people who have that disease and create a fertilized egg purely in order to study the early onset of that disease or to develop treatments for it?

These are very tough questions but ones that are going to come at us thick and fast in the near future as science and technology inexorably advance.

POST SCRIPT: God will decide if and when and how the world will end

Two days ago, I suggested that religious people make unreliable allies in the battle to save the environment because of their belief in god's plan. Right on cue, we have a member of the US Congress during hearings last week on cap-and-trade policies to reduce carbon emissions, quoting the Bible (Genesis 8:21,22 and Matthew 24:31) to support his belief that the future of the Earth is part of god's plan. Yes, god has our back, based on what he supposedly told Noah after the flood. So don't worry, burn those fossil fuels because Jesus has it covered!

April 02, 2009

The stem cell issue-1: The science

The decision by the Obama administration to reverse the Bush-era policy of banning the use of federal funds for stem cell research has created some controversy. The earlier policy had led to some frustration in the scientific community.

Bush's policy was intended to be a compromise: it banned the use of federal funds for the creation of new embryonic stem-cell lines while allowing scientists to study 21 lines that had already been created. But researchers say those lines aren't diverse enough and they have been eager to study hundreds of other lines, some of which contain specific genetic mutations for diseases like Parkinson's. There have been practical challenges as well. The restrictions forced scientists to use different lab equipment for privately funded and government-funded research; some even built entirely separate lab space. One of the most disconcerting aspects, researchers say, has been the negative effect on collaboration, a hallmark of the scientific process. Researchers supported by private money haven't been able to team up with scientists funded by the government, potentially holding back new insights and advances.

Stem cells are those that have three properties. Unlike most cells like muscle or blood or nerve cells, 91) they are capable of replicating themselves for a long period (making them a valuable source to regenerate the body by replacing cells that die), (2) they are unspecialized, and (3) when they reproduce they can produce either more stem cells or become specialized cells like muscle or nerve or bone (a process known as differentiation). The National Institutes of health has an informative FAQ page on this topic.

The two main kinds of stem cells are the embryonic ones and the non-embryonic ones. The embryonic ones can proliferate for a year or more in the laboratory without differentiating while the non-embryonic ones cannot do so for very long, but the reasons for this difference are not known as yet. The embryonic stem cells are capable of eventually differentiating into any type of specialized cell, and are called pluripotent. Such pluripotent cells are valuable because they can be used to repair tissue in any part of the body as needed. But eventually they need to differentiate into specialized cells in order to perform the functions that those specialized cells carry out in the body. The process by which stem cells differentiate is still not fully understood, but part of it involves interaction with the external environment in which the stem cell finds itself.

Adult stem cells are one form of non-embryonic cells and are found amongst the differentiated cells that make up the tissues of the body, such as the brain and heart and bone marrow, and they are the cells that are used to maintain and repair those tissues by differentiating when needed to produce new tissues. Some adult stem cells seem to have the capacity to differentiate into more than one type of specialized cell though the range is limited, unlike in the case of embryonic stem cells. Such cells are called multipotent.

For example, some multipotent stem cells found in the bone marrow can generate bone, cartilage, fat, and connective tissue. Stem cells taken from umbilical cord blood and the placenta seem to also have multipotent properties and thus in the future it may become routine that a stock of umbilical or placental cells will be taken after every birth and preserved for possible future use. Adult stem cells have some uses but working with them is much more difficult since they are harder to obtain and are less flexible.

To understand the ethical issues involved in using embryonic stem cells, one should be aware that creating embryonic stem cell lines for research requires extraction of cells from the blastocyst. This is the stage reached by a fertilized egg after about three to five days when, after repeated cell division and duplication, there are about 70-100 identical cells in the shape of a hollow ball containing an inner clump of cells. The inner clump becomes the embryo and the outer hollow ball becomes the placenta. When this occurs in the uterus, this stage is reached before this collection of cells gets implanted in the uterus wall. Sometimes implantation does not occur, in which case the pregnancy is spontaneously terminated.

This video explains what stem cells are and how they work.

The embryos from which embryonic stem cells are taken are produced during treatment for infertility when a woman's egg is taken from her body and fertilized and grown to blastocyst stage in a culture outside the woman's body. In the very early days after the egg is fertilized and the cell starts splitting and reproducing itself, all the cells are identical. Embryonic stem cells are obtained from that inner clump of cells and thus the blastocyst has to be destroyed in the process. The cells from a single blastocyst can be used to generate millions of embryonic stem cells that can be divided among researchers, and these are the stem cell 'lines' that are referred to. The cells in a single line are all genetically identical.

While there are promising new ways of creating embryonic stem cells using adult skin cells (called induced pluripotent stem cells), they have their own ethical issues.

Since tissues created from a person's stem cells have the same genetic information as the host, the host body will not reject the implanted tissues as a foreign body, thus overcoming one of the biggest hurdles in organ transplants. While the possibility of growing tissues and entire organs for transplant purposes is often publicized as the biggest potential benefit of using stem cells, there are other more immediately realizable potential uses for embryonic stem cells.

One is that it enables the process by which cells differentiate into their specialized forms to be studied. Another is that by creating cells that have a particular disease, say Parkinson's or Lou Gehrig's, one can observe under a microscope even the earliest stages of the progression of the disease and thus hope to develop better treatments. Another use is to test the effects of drugs on cells before testing them on a real person. That would enable you to see if they are toxic to a particular individual, creating a level of personalized medicine that we do not currently have.

The potential benefits of embryonic stem cells in research are clear, even though it is very early days yet and there is still a long way to go before we can hope to even begin realizing those benefits. The key question is how to balance the ethical concerns involved in using such cells with the benefits.

This question will be examined in the next post.

POST SCRIPT: The Daily Show on stem cells

The Daily Show With Jon StewartM - Th 11p / 10c
Stem Sell
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April 01, 2009

Are religious people reliable allies on the environment?

Evolutionary biologist E. O. Wilson gave Case Western Reserve University's annual Distinguished Lecture on March 3. Severance Hall, the magnificent building where the equally magnificent Cleveland Orchestra plays, was packed for the occasion. It seemed to underscore the community's support for, at least interest in, the theory of evolution.

I had read Wilson's book Consilience; The Unity of Knowledge (1998) in which he urges that we should seek the unity of knowledge, starting with looking for the biological basis of human nature and behavior. Although his talk did not deal with this particular topic (being instead a more general talk about Charles Darwin and his work) I did get to meet him the next day as part of a small group and to discuss some of those ideas.

After his public lecture and in the small group discussion, the inevitable question came up as to whether he thought that the theory of evolution by natural selection ruled out belief in god. In his book, he is clear about what his personal beliefs are.

But the split is not, as popularly supposed, between religious believers and secularists. It is between transcendentalists, those who think that moral guidelines exist outside the human mind, and empiricists, who think them contrivances of the mind. (p. 238)

I am an empiricist, On religion I lean towards deism but consider its proof largely a problem in astrophysics. The existence of a cosmological God who created the universe (as envisaged by deism) is possible, and may eventually be settled, perhaps by forms of material evidence not yet imagined. Or the matter may be forever beyond human reach. In contrast, and of far greater importance to humanity, the existence of a biological God, one who directs organic evolution and intervenes in human affairs (as envisaged by theism) is increasingly contravened by biology and the brain sciences.

The same evidence, I believe, favors a purely material origin of ethics, and it meets the criterion of consilience: Causal explanations of brain activity and evolution, while imperfect, already cover the most facts known about moral behavior with the greatest accuracy and the smallest number of free-standing assumptions. (p. 240)

It is pretty clear that he is a materialist and does not believe in god as popularly conceived. But in his public responses to the question of god's existence, I was surprised that he seemed to duck the question altogether. He avoided giving a direct answer, saying that he was not interested in making pronouncements on this issue because his primary concern is saving the planet and its biodiversity from extinction, and in order to do that he needed allies from the religious communities since they are so large in number.

So Wilson was taking a tactical position, similar to what I described earlier amongst those people who downplay the anti-god implications of science in general and evolution in particular because they seek to form alliances with religious people in their attempts to create support for science and the theory of evolution. Such people, even though they themselves do not believe in god, perpetuate for political purposes the fiction that science and belief in a (non-deist) god are compatible. Other scientists also refrain from pointing out the incompatibility of science with religion out a misplaced sense that the religious sensibilities of people have a special status that we should respect by refraining from pointing out its lack of any empirical content.

But even allowing for that, is Wilson pursuing a good strategy? I think not because I do not think religious people are likely to be consistent and reliable allies on the issue of saving the planet.

The reason is that if you believe in any god other than a deistic one, one cannot help but have a fatalistic attitude towards big questions like the future of the planet. While more sophisticated religious people might believe that god does not micromanage each person's life, all believers in god believe that there is some grand cosmic plan. That is usually why they believe in god after all. How can such a plan not include the fate of the Earth?

I suspect that all religious people must have some sense that the future of the Earth must be part of god's plan, that whether the environment is eventually destroyed by humans or saved is determined by god. This attitude removes any sense of real urgency to personally take steps to deal with this issue.

On the other hand, people who do not believe in god know that only our own policies and actions can make the difference between a premature destruction of the ecosystem and long-term survival. There is no deus ex machina to rescue us.

So if we wish to really get action to save the planet, beliefs in the existence of god will, in the long run, be a hindrance and so Wilson might be better off joining other materialists is seeking to convince believers that god is dead.

POST SCRIPT: Life is a job

Father Guido Sarducci reveals the secret of the meaning of life and what happens to you after death.