I've been reading the debates touched off by Julian Sanchez's post on "a systematic trend toward "epistemic closure" in the modern conservative movement".  I'm nervous about wading in because almost anything I say is bound to offend someone I like.  I'm especially sensitive--perhaps oversensitive--to the way that anything I proceed to say about conservative people outside the northeast runs the risk of sounding a lot like that fifties moderate whose work one occasionally comes across:  "Of course, I just love negroes--they're all so musical and I don't know how I'd get my house cleaned without our Bessie.  But why can't they be a little more patient about this civil rights mess?"

I actually think there are a bunch of questions packed into this discussion which haven't been necessarily very clearly delineated:  there are overlapping conversations about the conservative base, the conservative wonketariat, and the conservative poltiical leadership.  The one I'm most interested in is the conservative intellectual environment, so that's mostly what I'll talk about, though they are all connected.

Weirdly, the word I keep coming back to when I read a lot of these discussions is "privilege".  It's a word I get a huge amount of flack for using, from my conservative readers; and I've no doubt that I am going to inspire any number of bitter and angry rants from the other side for daring to apply it to a movement which is (overwhelmingly) majority white.  But I nonetheless think that this might be a useful concept to describe a lot of what I'm reading.




Conservatives are, not to overlabor the obvious, marginalized in the cultural elite, even though they are powerful in the political elite.  (At least some of the time, anyway).  Obviously there's been an enormous amount of ink shed about why this is, but my experience of talking to people who might have liked to go to grad school or work in Hollywood, but went and did something else instead, is that it is simply hogwash when liberals earnestly assure me that the disparity exists mostly because conservatives are different, and maybe dumber.  People didn't try because they sensed that it would be both socially isolating, and professionally dangerous, to be a conservative in institutions as overwhelmingly liberal as academia and media.

It's actually fascinating to watch the inversion of liberal and conservative positions on this one.  Liberals essentially seem to be saying that hey, they don't all get together in the tenure committee and agree to deny any conservatives tenure.  I believe them!  But I'm not sure why they think this means that the disparity is therefore not a problem.  As I wrote years ago, somewhere, I doubt many bank hiring committees in the fifties got together and voted not to hire any negro bank managers.  Yet, somehow, they didn't hire any negro bank managers.

Why not?  Because things like social networks, subtle bias, and tacit norms about what constituted the boundaries of acceptable traits in bank managers did all the work for them.  And I doubt they got many black applicants, because after all, why on earth would you bother?  Better to try to start a small business, or get a job as a Pullman porter, where you had a realistic shot at making a decent income.  A poll of black high school students would probably have indicated a very small number expressing ambitions to fill jobs that realistically simply were not available to non-white, non-male candidates.  But this is not evidence that there is something different about blacks that makes them not want to be successful corporate executives.

It is equally maddening that conservatives understand this about potential conservative graduate students, but not about potential black CEOs--and yes, I think this remains a problem today.  I'm not sure that affirmative action is the answer, but that's a different post.

So while I completely agree that there is no one-to-one equivalence between right and left, as Ta-Nehisi writes, I'm considerably less sure about what that implies.  First of all, I think Ta-Nehisi overstates his case to some extent:

In this specific case, the trouble is that the right's quackery is not merely peddled by it's fringe, but by some of its most prominent members. During the 2000 campaign, George W. Bush didn't dispatch a couple of junior functionaries to Bob Jones University, where interracial dating was literally banned at the time, he dispatched himself. In 2002, it was not a small time junior congressmen who asserted that things would have been better under segregation, it was the highest ranking Republican in the Senate. 
In 2005, it was not merely a fringe group of party activists who called for interference in the Terri Schiavo case, it was the Republican president of United States. It was---yet again--the highest ranking Republican in the Senate dispensing a neurological diagnosis on a woman in Florida, from his office in Washington.
In 2007, when Trent Lott announced his resignation from the Senate, it was not merely state party officials claiming the good senator had been railroaded, it was his Republican fellow Senators. During the 2008 race, it was Mike Huckabee, runner-up for the presidential nomination of his party, who claimed to not believe in evolution.

Ta-Nehisi neglects to mention that it was also the Republicans who kicked Trent Lott's butt out of the leadership for saying those things--as they should have.  And while I am in absolutely no way defending Bush's campaigning at Bob Jones university, I think it has to be noted that Barack Obama didn't send some minor campaign functionary to attend the church of a minister who was saying some pretty whacked out things; he sent himself.  Every Sunday. 

I don't think that this made him unfit to be president, and I stand by what I wrote at the time.  But I don't think you can tar Bush with the one while giving Obama a walk on the other . . . at least, not when the topic is "Our favorite fringes".  And the same goes double for conservatives who gave Bush a walk, then attacked Obama.  I'm willing to cut Jeremiah Wright a little more slack because white bans on interracial dating seem to me to be obviously more dangerous than the racial anger of a man who grew up on the wrong side of segregation.  But he is very definitely a member of the fringe, and I certainly hope Obama wasn't endorsing all his ideas by attending his services.

It's obviously no surprise that the lunatic BS of our own side doesn't strike us nearly as forcefully as the absolutely appallingly unforgiveable wingnuttery of the opposition.  But I think this goes beyond that--and in a way that is important to understanding Jeremiah Wright, and the angrier right wing talk radio hosts.  I am sure both would be appalled by the comparison, but the point here is not to draw moral equivalence between them; it's to point out how power dynamics work.

I expect I'll get a derisive response from liberals at the thought of explaining what I see in the current Republican party thusly, given that the party tends to be strongly identified with the racial majority of the country.  But privilege is not binary; it's contextual.  Again, to state the obvious, you can be privileged on one dimension, and a victim of privilege on another  Being a member of the white upper middle class does not protect me from male privilege.

The point is that when one group has privilege, and the other doesn't, the response isn't symmetrical, a fact that the dominant group tends to spend a lot of time remarking upon.  The out-group is angrier, and prizes its group identity--"conservative"--over weaker affiliations like "journalist" or "sociologist".  The angrier the out-group gets, the more uncomfortable and hostile the dominant group gets . . . which, of course, makes the out-group even angrier.

The dominant majority further reinforces the effect because membership of "journalist" or "sociologist" comes to be defined by "not having a strong allegiance to groups such as 'conservative'."  Which further weakens conservative ties to those professional identities.

That's why you have black newspapers, and Jewish magazines, and Irish arts centers, but no "Bland:  The Magazine of the American White Middle Class".  The dominant group doesn't enforce its group identity the way the out-group does.  It doesn't have to.  It gets to decide what constitute the acceptable modes of behavior, sources of authority, and ways of knowing.  The privileged group doesn't need its own institution specifically devoted to advancing its interests.  All it needs is a sigh, and a sneer

This is the core of privilege: for the dominant group, it is passive, while for the minority it is an active experience.  If you're a nice liberal urban media professional, you do not do anything to enjoy the perks of affinity with all the other nice liberal urban media professionals.  And you don't have to renew your membership in the white male club in order to enjoy the many professional benefits of belonging.  Only for the people who have to choose between identities does it require any thought.  The dominant group can assert and enjoy power without even knowing it is doing so.  So instead of cutting the out-group a little slack because of the problems created by exclusion, the tendency is to be less charitable because it's hard to see their plight, or identify with them.  If you're enjoying all the passive benefits of privilege, the anger, and the strong lust to reinforce group identity, seems, well, kinda crazy. Maybe morally wrong.  But definitely crazy.  And most of us are not driven to positively engage with the insane . . . or with people who think we are insane.

I think this explains a lot of what I see on Fox News, and also, what I see from liberals who are enraged by it. 

This has practical importance for the conservative movement right now, and especially (to return to my area of greatest interest) for the intellectual core of the movement.  Conservatives created their own institutions because it was hard to get traction within the existing ones: not only did they feel excluded from academia and the media and entertainment spheres, but to add insult to injury, they could not convince the dominant group that this was due to anything except the inherent superiority of the dominant group.  So, like other such excluded groups, they created  their own papers, magazines, and think tanks to mirror the universities and newspapers that seemed increasingly closed to them after World War II. 

But while ideologically driven journalism and policy work can be excellent, it's also in some ways inherently problematic.  I'm enough of a fuddy-duddy to think that journalism and academic work should not be subordinated to political goals--that indeed, one's political ideology should be driven by the sort of questions asked by journalists and academics. But if you are at an explicitly mission-driven institution, these goals will always be in tension, even if you agree with the mission.

I've never worked at either a liberal or a conservative political magazine, but from the outside, those tensions don't seem noticeably less at one than the other--you don't see liberal think tanks doing a lot of studies on "Teacher's Unions:  Major Obstacle to Improving Urban Schools" or liberal magazine articles titled "More Abortions:  The Unfortunate Side-Effect of Legalization". But I think there is a difference, which is driven by that unhappy dynamic between in-group and out-group.  To wit: conservatives at political institutions find it hard to get hired by non-ideological institutions. 

It is not impossible to go from conservative ideological media to the elite mainstream press, and indeed people have done it.  But the people I know who have managed are noticeably moderate.  They also tend to be absolutely brilliant, rather than merely solid reporters who really know their stuff--particularly if they are something other than the house conservative on an otherwise liberal opinion page. The political and technical standards for graduates of the Washington Monthly or Harpers do not seem to be quite that high.  (Don't get me wrong, it's still very high--but they don't have to be "the best liberal journalist in [insert city name here]").  So it becomes incredibly risky for even a talented conservative to buck the group consensus. 

The other problem is that both sorts of enterprises are dependent on donors who often have specific goals in mind--to paraphrase Noah Millman, they want work that shows how great vouchers are, not work that suggests how to fix the schools.  Academics have somehow managed to perpetrate a great scam--they get people to donate money to fund all sorts of research they don't agree with, just because those people have fond memories of the buildings where the research is taking place.  This is to the general benefit of society, but since these places aren't particularly conservative-friendly, the right has had to build institutions based on more . . . motivated . . . funding sources. 

Don't get me wrong; I think the donors to think tanks do an enormous amount of good.  But that funding model almost definitionally means that important kinds of work . . . broad based general inquiry with no clearly predictable results . . . is hard to get done.

This is not to say that conservatives are all close minded and liberals are all just bastions of tolerance and clear-thinking.  One need only read the comments threads of any of these posts to find unbearably smug folks congratulating themselves on how fortunate it is that all the crazy, unreasonable and ignorant people really are all on the other side . . . an assertion that is self-refuting. 

But most of the people on the right that I know think that there is a real intellectual crisis there . . . and to the extent that there are parts of the right I like and agree with, I am also worried.  The Reaganite cold-war coalition for tax cuts and military spending just isn't cutting it any more, and I'm seeing less and less interesting and original work on other sorts of policy.  Oh, I get a lot of great stuff illustrating why government solutions don't work . . . but I'm not getting much stuff telling me what does.  Except for tax cuts and vouchers, I mean. 

There are exceptions.  But when I look back at the bold experimentation of the Reagan era, I am deeply envious.  I see a lot more work devoted to preserving those gains than to striking out in new directions.  And I see huge energy funneled into rallying the base.  Not by doing anything, mind you . . . just by repeating how outraged we all are at the latest government failure.

Julian diagnoses this as the collapse of geography, but while I think this is possible, I'm not sure it works by forcing people in disparate areas to confront the pluralistic values of other locations.  The opposite, perhaps:  it's easier to find the people who agree with you, and just the people who agree with you, which reinforces the worst tendencies of both the dominant and the minority groups.  I think there's a lot of merit to Julian's argument for certain issues, like gay marriage, where this simply is a question of pluralistic urban values versus the geography-induced consensus culture of a small town.  But it doesn't explain how feelings about tax hikes and health care.

What might explain it is that the new communications strategies mean the out-group is finding it easier to reinforce its own counter-identity.  Being descended from one of America's more numerous and storied out-groups, I see the benefits of that--but also the considerable drawbacks.  And in the case of conservatives, I think it's a real problem for a political moment that demands some fairly innovative solutions to some really deep problems we're facing.  Okay, we don't want a VAT.  But where is the workable plan for closing the budget deficit, given the political and practical constraints of existing entitlements?

Conservatives used to spend a lot of time complaining about the liberal media--and indeed, I have occasionally joined them.  But it now strikes me that this was basically very healthy for the right.  Everyone in the movement was frequently and forcefully confronted with the best the opposition had to offer; they could not be content with preaching to the choir.  They were muscular--and liberals flabby--precisely because liberals didn't really understand what they were up against.  Now it looks to me as if conservatives are often voluntarily putting themselves in the same cocoon.

(On a side note, this implies that liberals are not doing themselves any favors when they allow themselves to get genuinely enraged about the existence of Fox News.)  

All that said, I'm conscious of how limited my perspective is.  Limited in time, because the present almost always seems either much better or much worse than the past; we airbrush away all the little speckles.  It may be that I think the conservative movement was more vibrant in the past because I'm collapsing decades of people and their work into a smaller time frame--the way many people imagine that the Fitzgeralds and Hemingway and Gertrude Stein and Dorothy Parker all sort of lived in one flat in Paris.  And limited in scope, because let's face it:  I live in Washington DC.  I grew up on the Upper West Side.  The only people I know in small towns are a few relatives.  My perception of what is happening there is mostly mediated by a media that, umm, is pretty liberal and almost definitionally, not living in small towns of a conservative bent.

But I don't think it's just that.  The Republican party is not putting forward bold new ideas; it's energy lies in thwarting the Democrats' policy plans, and doing more tax cuts.  No matter how much I would like to see many of those plans thwarted, I don't think this is enough.  And some of the fault has to lie with the intellectual centers--the think thanks, the magazines--which don't seem to be delivering a core of new ideas that they can take to voters. When I look at the institutions of the right, it seems to me that a lot of time is spent reassuring itself about what is already believed, rather than challenging itself to find innovative new directions to take the movement--or even better describing the problem.  Too much Fox News, not enough God and Man at Yale.  I think I understand, institutionally, why this is happening--and I think mainstream institutions have to bear some of the blame.

And yet, who cares who's to blame?  The New York Times cannot fix the problems on the right.  Only conservatives can do that. 

I suspect I'm going to provoke an angry reaction from many quarters with this post--particularly from think tankers and journalists at ideological outlets who will tell me that I've missed a whole bunch of important work.  But this is not an attack on think tanks, or on political magazines--my fiance works for a political magazine, for which I held the deepest respect long before he joined the staff.  And there is great work coming out of a lot of think tanks on any number of fronts.  The problem from my perspective is that the right is doing a better job of engaging with itself, and its own anxieties, than of engaging with the broader intellectual culture--which is allowing the intellectual culture to once again turn its back on the right.  That makes it harder to create new ideas that have traction--and by extension, harder to advocate for the good ideas they already have.

Whales and humans linked by ‘helpful grandmothers’ BBC

Extinction of Woolly Mammoth, Saber-Toothed Cat May Have Been Caused by Human Predators Science Daily (hat tip reader John M)

Tibetan Adaptation to High Altitude Occurred in Less Than 3,000 Years Science Times (hat tip reader John M). I think I’ve seen similar findings for Peruvians in the Andes.

When the scientific evidence is unwelcome, people try to reason it away Guardian. Some of you no doubt are familiar with the studies mentioned, but a nice recap nevertheless.

Is Julia Gillard the new Bob Hawke? Larvatus Prodeo

The Glittering Prizes: War Crime Continues to Pay Chris Floyd

Jobs and Democrats, Tobin Harshav, New York Times. The article blurb on the first page: “Not even liberal bloggers believe the White House spin on the economy.” Um, I must confess I avoid, as much as I can, “liberal bloggers” who buy the Team Obama party line. John Mauldin, along with others, shredded the ugly aspects of today’s report, 362,000 jobs added in the birth/death adjustment (with the BLS insisting jobs are being added in respectable numbers in hospitality and construction) and the drop in unemployment a function of the departure of discouraged workers from the labor pool

Almost Surreal in its Delusions Michael Panzner

ECRI Weekly Leading Index Growth Lowest In 13 Months Ed Harrison

Biggs Cuts Stock Investments by Half as Risk of Recession Grows Bloomberg. This is funny, I recall Biggs being very bullish when the S&P was higher, see Barton Biggs Says U.S. Stocks Oversold, Sees ‘Big Pop`: Video (May 27, S&P at 1068) and Biggs Sees Buying Opportunity on Overblown Europe Fears: Video (May 20, S&P at 1071)

Protestants Can’t Trade Paul Kedrosky. Hah! Explains a lot.

Obama’s public touch grates with business Financial Times

Hedge-Fund Lending Draws Scrutiny Wall Street Journal

Market Microstructure and Capital Formation Rajiv Sethi

BP: the inside story Financial Times. This is intriguing, and there is no way of telling how much is BP spin versus a reasonably realistic account. The intriguing bit is the story contends that BP really did not know how bad the leak was early on and it really did believe the top kill would work. Those are awfully convenient, from a liability standpoint, but they could actually be true, and if so, this says that BP was a company massively unaware of the limits of its capabilities.

Antidote du jour:

Andy Grove, who lead Intel to dominance of an extremely competitive, risky industry, has a very important opinion piece at Bloomberg (several readers pointed to it, including John M, dr, Crocodile Chuck). He makes a series of points that are the polar opposite of the de facto US industrial policy, of the naive view that the US can have a viable society based on “knowledge workers”, rentiers, and service industries that depend on their earnings. Sadly, my Washington contacts tell me that the belief that the US cannot compete in anything other than financial services is deeply entrenched there, no doubt fed by media stories that draw misleading inferences from appealing-seeming case studies (see this New York Times story and Richard Kline’s able shredding in comments yesterday here and here for an example)

One thing American businessmen have utterly lost sight of is the importance of providing employment. The focus on “maximizing shareholder value” when shareholders are on the very bottom of the liability side of the balance sheet, not merely legitimates but extols screwing other stakeholders to the extent management can pull it off (and management, suborned via stock-related compensation, has gotten very good at doing just that). By contrast, in Japan, entrepreneurs like Konosuke Matsushita are revered not because they got rich, but because they created good jobs for many people.

Only some of Grove’s stature could poke such a stick in the eye of visibly floundering conventional wisdom that nevertheless remains firmly entrenched because it serves those at the top of the food chain very well (it doesn’t hurt that his piece is exceptionally well argued). My only quibble is that he unintentionally supports the fiction that we don’t have industrial policy in America. Following the money demonstrates the reverse; tax breaks, subsidies, tariffs, and what issues are front and center tell you who the favored children are, including financial services, Big Pharma, the sugar industry, and real estate. And this isn’t as radical an idea as he intimates. Australia, which ranks above the US in the Heritage Foundation’s dubious Economic Freedom Index (the Heritage Foundation clearly never had an encounter with the ATO, which makes the IRS look like pussycats), has very clear priority industries. For instance, its Commonwealth Scientific and Industrial Research Organisation (CSIRO) is one of the world’s biggest science organization and is focused around priority industries for Australia, with its main divisions being information sciences, energy sciences, agribusiness, manufacturing and minerals, and environment (the latter is involved both in new tech and minimizing adverse consequences of current industrial activities).

Please do read this thoughtful article in full and discuss in comments (if you have trouble with the Bloomberg link, as I did, please try here).

Brad DeLong asks:

When would it be time to judge the Irish experiment in preemptive fiscal austerity to be a failure, Tyler?

The immediate question is whether Ireland had a choice in the first place.  When it comes to total external debt, private plus public, Ireland is in one of the most desperate situations.  (Be careful, though, some published figures include financial institutions to which the Irish government has no real liability and thus overstate Irish external debt by quite a bit).  Ireland doesn't have the same flexibility as do Germany and the United States, nothing close to that.  Read this article for an estimate of the change in primary fiscal balance required for Ireland; it's scary and doesn't indicate a lot of flexibility, which supports the conventional wisdom on Ireland, from the OECD, the European Commission, from Ireland itself, and arguably you add the IMF to that list as well. 

Furthermore, Ireland as a small, open economy experiences a relatively high degree of fiscal leakage.

By the way, you shouldn't simply assume that the initial fifteen plunge in gdp was due to fiscal caution; Ireland was after Iceland perhaps the most overextended country in the crisis.

Here's a Morgan Stanley analysis of Ireland, which basically suggests "it's complicated."  It also suggests a reasonable chance the current strategy will work out OK.  It is complicated, and the mere fact that spending is a component of national income accounts doesn't mean that more spending is always a good thing. 

Ireland in fact has done a negative fiscal stimulus.  Earlier, Ireland made the mistake of joining the Eurozone.  See also this study of Ireland, 1987-89, an earlier decisive and successful fiscal adjustment, in the days of the Irish Punt.  The Euro today makes matters harder for Ireland, yet that doesn't imply they have greater license to spend today, in fact it can imply the contrary.

Paul Krugman pointed out that the fiscally tighter Ireland did not have a better CDS price than the more wishy-washy Spain.  Yet Ireland has a bigger external debt problem, may be less protected by "too big to fail," is a smaller nation, and has less control over its destiny; the (roughly) equal price may reflect what is a superior Irish effort.  In any case, Spain is hardly a walking advertisement for not going the Irish route.

The Irish also hope that whatever output they "leave on the table" today, they can make up with Solow catch-up growth.

If you would like to read a brief on behalf of Irish stimulus, try this.  The author admits that Ireland would have to significantly raise corporate taxes, a former linchpin of its growth (whether you think that efficiency-enhancing or international rent-seeking, it is still true).  Is it worth it?  How much would such a policy damage Irish growth and credibility?

Kevin O'Rourke also has good but scattered writings on the topic of Irish stimulus.  His first preference is greater fiscal federalism within the EU.  Last month he also wrote that, lacking such a reform, Ireland had no choice.

This June, Irish consumer confidence hit a three-year high.  Here's one estimate that wages have been falling four to five percent a year, and will continue to fall, plus the Euro has been falling.  You could argue there has already been an adjustment in the twenty-five percent range.  None of that is proof of recovery, but there are some green shoots.  Here is the very latest report, indicating that economic growth may be resuming; admittedly it's just a forecast from the government.  Exports are showing growth and retail sales are rising slightly.

The Irish Times reports today: "For the first time in three years, there are now more reasons for hope than for despair.  This week a raft of indicators, when taken together, give grounds to believe that the foundations of a jobs-generating recovery are falling into place."

Do interpret that with extreme caution.  For various debates, follow The Irish Economy blog, including in the comments.

On these critical questions, in the pro-stimulus for Ireland posts, I don't see a level of detail which would rebut these quite mainstream, not-emanating-from-the-gamma-quadrant opinions -- that the Irish did more or less the right thing in a very unpleasant situation. 

The Irish experiment remains an open book.  In the meantime, it's simply not true that the pre-emptive austerity advocates are committing some kind of economic malpractice.  Three years out from now, let's compare Ireland to the other PIIGS.

The stress tests conducted on 19 large American banks by the US Treasury in 2009 were an amazingly effective exercise in salesmanship and sleight of hand. Banking industry experts, including Bill Black, Chris Whalen, and Josh Rosner, dismissed the process as mere theatrics: too little staffing and not enough “stress” in the economic forecasts and loss assumptions (particularly on second mortgage). My pet peeve was that the banks ran the tests on their trading books using their own risk models, the very ones that had performed so well in preparing them for them in the runup to the crisis.

But the Treasury’s Tinkerbell strategy worked. If they could create enough confidence, if they could get enough people to applaud, the banks would live – at least for a while. The spectacle of daily coverage in the business press of the tests, including the howls-on-cue from the banksters, outraged by supposedly-unreasonable demands the Administration, created the impression that Something Was Being Done. And the Treasury did get one critical bit right: it had a credible process for making sure the banks would be able to plug any capital shortfall it identified, and that was by having able to have the government pony up the money to fill any shortfall they identified that the banks couldn’t fill on their own.

Imitation is the most sincere form of flattery. The ECB and European bank regulators are copying the US playbook for the stress tests, with results for 100 banks expected to be released around July 23. But the European authorities seem to have failed to understand why the US effort worked. The first was that Team Obama is particularly good at PR, and it used those skills to full advantage. Despite considerable evidence otherwise, it got the press to convey the message that the tests were tough, and the banks really were sound. Second, Geithner & Co. had a kitty they could draw on.

By contrast, the Europeans have been simply dreadful at the optics of their various rescue operations, with disarray and disagreements covered extensively by the media. Admittedly, this exercise is being conducted by bank regulators, so it is likely to be more cohesive, but “more cohesive”, with a process involving agencies in different countries, may not be cohesive enough. And “show me the money” is a major problem. The reason for this exercise is concern over possible sovereign debt losses. Who is going to back up the banks at risk? Um, sovereign states, admittedly ones not considered at risk of default (France and Germany), but whose ability to bail out their own banks is limited for practical and political reasons.

A story in today’s Financial Times provides confirmation of the skeptics’ concerns:

After another fast-moving news week, as it emerged that about 100 European institutions will be included in the tests – four times the size of the original group – some bankers are confident that the expanded programme will reveal that much of the banking sector is healthier than investors think…

But big questions remain about how rigorous the expanded tests will be, particularly with respect to the sector’s exposure to Greek, Spanish and other eurozone sovereign debt

Institutions will be asked to disclose their total sovereign debt holdings, and the tests will now include a loss rate or so-called haircut of about 3 per cent on all eurozone sovereign debt investments, according to several sources.

Let’s see how this all stands up. Eurobank exposure to Club Med sovereign debt is roughly $900 billion (note this excludes debt to eastern Europe, another possible source of tsuris). A 3% loss on that is $27 billion.

Ahem, let’s take a more skeptical view. Eurobank holdings of Greece’s government debt is $190 billion. Williem Buiter, now chief economist at Citigroup and a bit of an expert on sovereign default, estimated the haircut on a Greek restructuring at 20% to 25%. But S&P later downgraded Greece, and remarked:

At the same time, we assigned a recovery rating of ‘4′ to Greece’s debt issues, indicating our expectation of “average” (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The ‘AAA’ transfer and convertibility assessment is unchanged.

Yves here. Do the math. Even if you assume the low end of Buiter’s now-charitable estimate, banks will take losses on Greece alone of $38 billion, 41% greater than the level provided for in the stress tests. If S&P is nearer to the mark, the losses will be $95 to $133 billion.

And the more Greece takes new loans before its debt is restructured (a restructuring or default looks inevitable; no country in the modern era has ever had this high a percentage of debt to GDP in a currency it does not control paid its creditors in full), the worse off the banks that hold debt now will be. The new loans will be senior to the current debt, which means the writedowns on the now-outstanding sovereign debt is likely to be high.

Analysts are discussing which banks will need to raise capital:

Friday’s edition of the Financial Times reported the expectation among bankers that the likes of Spain’s Banco Popular, and Monte dei Paschi and Banca Popolare di Milano in Italy were likely candidates for capital raisings.

All three said they had no capital-raising plans. Banco Popular said it was one of the best capitalised banks in Europe, with a core tier one capital ratio of 8.8 per cent.

BPM said its core tier one ratio was 7.9 per cent. Like tier one, core tier one ratio is a measure of capital strength.

At the same time, there were suggestions in Spain that policymakers were considering going further than counterparts elsewhere in Europe, increasing the required ratio for passing the tests in an effort to boost the confidence value of the exercise.

The FT took note of investor doubts:

News of the tests’ increased rigour has not fully eased concerns about transparency.

“The stress test idea is a shambles,” said one senior analyst in London.

“The whole thing is a complete joke.”

He said that the market’s expectations of securing meaningful disclosures through the tests were so low that any useful information would be a welcome surprise. “Ironically you might just get a boost if there are any decent disclosures at all,” he said.

Maybe the Europeans will pull a rabbit out of the hat, but the odds do not appear to favor them. John Gapper, in a comment on the stress tests, is doubtful:

Even some of those who in principle support the idea of banks being honest with investors are worried about the forthcoming European bank “stress tests” – successors to tests on US banks last year. “I have a horrible feeling that this will turn out to be an exercise in damaging confidence,” says one bank analyst….

The worst case is that southern European banks, loaded with bonds denominated in euros, will turn to governments for relief and trigger another sovereign debt crisis. Spain, which is trying to solve a crisis among its cajas – regional savings banks – is a potential victim….

he tests were certainly a turning point in confidence in Mr Geithner himself, who had suffered a rough few months in the job. Whether it turned the tide for banks is less clear; the US stimulus and other measures to restore consumer and business confidence were large factors.

In addition, European banks’ problems are more intractable and complex, and probably less amenable to a quick fix. For one thing, there was little question last year that the US could afford to rescue banks if it had to, whereas European governments are now heavily in debt.

Furthermore, European banks have inherent funding problems that their US and Asian counterparts lack – they are far more reliant on wholesale markets. US and Asian banks cover their loans with retail deposits, while Barclays Capital estimates the ratio of loans to deposits at European banks to be 120 per cent.

This leaves these banks vulnerable to a liquidity crisis…

Europeans do things in one way and Americans in another; Europe believes in discretion while the US likes openness even at the risk of embarrassment. We will soon find out if European banks can be salvaged by American methods and we had better hope so.

Precisely.

Every once in a while I come across an article, like the Washington Post report that follows, which seems almost surreal in its delusions.

Not only does the author take it for granted that we are in a "recovery" -- a dubious assumption, at best -- he also asserts that jobs are being "created" without noting the fact that many more have been and are being destroyed.

Then there is the notion that the President's policies have averted "disaster," which, to me at least, seems based on the fact that those who rolled the dice and lost when the bubble burst did not have to suffer the consequences of their actions (because they were bailed out with taxpayer funds).

Even worse, the author seems entirely sympathetic to the assertion that the Administration has found it hard to come up with the right solutions because of partisan politics and "the suspicions that some Americans harbor about an activist government." Sorry, isn't Washington's failure to do what it was supposed to in the first place one reason why people are wary about letting bureaucrats and politicians become even more involved in their lives?

There's plenty more wrong with "Economic Recovery Not Yet Reaching Americans, Middle Class Task Force Chief Says," but I'll leave you to judge the rest for yourselves:

A poster-size replica of the cover of "The State of Working America" hangs behind Jared Bernstein's desk in the Eisenhower Executive Office Building, next to the White House.

The memento is from Bernstein's former life at the pro-labor Economic Policy Institute, where he co-wrote a series of reports about the increasingly uncertain terrain confronting the nation's workers. It is also a reminder of the Main Street sensibility he brings to a White House economic team that's top-heavy with Wall Street experience.

In the administration's first year and a half, the team has helped pull the U.S. economy from the precipice. The federal government passed a massive stimulus plan, and President Obama pushed through far-reaching health-care legislation that proponents say will expand coverage and control costs. The administration is also close to a financial regulatory overhaul.

Economic growth, however shaky, has returned. The nation is again creating jobs, and the stock market has regained much of the value it lost in the dark days after the financial collapse of late 2008. Yet the unemployment rate hovers at the highest level in 28 years, and wages remain flat.

"Is the economic recovery really reaching the American people?" said Bernstein, Vice President Biden's top economic adviser. "And the answer to that is: Not yet."

It is a sentiment Obama himself has expressed, even as he credits his economic policies for averting disaster. But now the administration faces an even more daunting task: translating growth into shared prosperity.

Bernstein, 54, has pondered that challenge for nearly two decades, and as executive director of the administration's Middle Class Task Force, his job is to address it.

He said the reasons the middle class has not fared well in the modern economy are complicated. Increased globalization, technology, diminishing bargaining power for many workers, reduced unionization and slack in the labor market all share responsibility, he said.

While Bernstein thinks he understands the problem, he acknowledged that forging a solution is difficult, given the unrelenting political opposition and the suspicions some Americans harbor about an activist government. Complicating the picture is that the economy often moves in ways that challenge old assumptions.

Just before Obama took office, Bernstein co-wrote a report projecting the likely impact of the administration's $787 billion stimulus bill. The report accurately projected the legislation's effect in cushioning the economic contraction. But employers cut many more jobs than the administration or forecasters anticipated. The unemployment rate crested at above 10 percent, not at the report's predicted 8 percent.

"It tells you that employers were going to squeeze as much as possible from workers," Bernstein said.

'Different orientation'

Bernstein followed an unusual path to a job where he helps brief the president and vice president several times a week. A graduate of the Manhattan School of Music, he worked first as a bass player, sometimes gigging with famous musicians in Greenwich Village nightclubs. He gave that up for social work in hopes of addressing the chilling depravation that seemed to be everywhere. "I remember walking over homeless people to get to work," he said. "That was a symptom that something was very sick in society."

He went on to earn a doctorate in social welfare at Columbia University before going to the Economic Policy Institute. There he helped document the plight of working Americans who found themselves with fewer guaranteed pensions, increased job volatility, skimpier raises and more inequality. Bernstein found that his economic ideas meshed with those of Obama. After the election, Biden summoned him to his Delaware home for an interview to be his top economist.

"Jared has a history of seeing economic policy through the lens of low-income and middle-class Americans," said Lawrence Mishel, president of the institute. "That is a different orientation than some others" in the administration.

'Economic recipe'

Although some of Obama's economic advisers -- particularly National Economic Council Director Lawrence H. Summers and Treasury Secretary Timothy F. Geithner -- are often viewed with suspicion because of their past Wall Street connections, Bernstein says he has not had an ideological conflict with them. "This notion that there are deep Wall Street sympathies somewhere on the economic team is just completely absent, and I am involved in the high-level discussions," he said.

The test the team now faces is how to nurture the fledgling recovery and channel it into the lives of everyday Americans. Recently, Obama has called for more stimulus, money aimed at saving hundreds of thousands jobs in cash-strapped states. But Congress has balked, saying the nation cannot afford the debt. That frustrates the administration.

In the short term, Bernstein said, the economy needs stimulus, followed by budget discipline and then efforts to subdue health-care costs in the long run.

"That's the economic recipe," he said. "But the political recipe is much more challenging."

1. Barry Eichengreen is on Twitter.

2. Germany's "literature houses."

3. Is some art simply too complicated?

4. Just give money to the poor.

5. Human evolution in Tibet.

6. Oezil the German.

He writes to me:

While dogmatism seemingly requires balance so do most of life’s activities mental or otherwise. Show me the adventurous eater or traveler and I will show you a stick in the mud reader, investor, dresser. Show me the wide-eyed dreamer in one area and the odds are she or he has an anchor to windward somewhere else, if only what they wear to work or play. Human beings who are wildly adventurous in one area, say sports, tend to dine on hamburgers, but think they are adventurous in all things.  he same applies to free thinkers who are downright sodden when it comes to design. The chance takers forget they also have their safe sides. We tend to huddle with like chance takers, somehow our security blankets are seldom shared.  

I am likely to bring up such points, especially to some of my colleagues who think of themselves as non-conformists.  

There's not really much bright side to today's job numbers:  a hefty drop in unemployment, but…



Employment - Unemployment - Private sector - Labor force - Census

They're invading New York's commercial spaces



New York - United States - New York City - Metro Areas - Business and Economy

I don't agree with everything in this paper, but it's the best case against a VAT that I have seen to date.

...the tax is not a good fit for the United States. It taxes a base that has traditionally belonged to state governments, its introduction would bring with it intergenerational inequities, it has a cumbersome administrative structure that would impose large compliance and administrative costs, and it would slow economic growth. Because of slower economic growth, tax revenues from existing tax bases will fall if a VAT is introduced. 

If you're wondering, as an alternative he favors a mix of spending cuts and, if needed, increases in the income tax.

‘Sea monster’ whale fossil unearthed BBC

Canadian, Please YouTube (hat tip Marshall Auerback)

On Average, Charter Schools Are About Average Matt Yglesias

Factory Jobs Return, but Employers Find Skills Shortage New York Times. Notice the somewhat bizarre stand of employers. I can seem them upset at not finding workers with sufficient math skills; that’s an educational issue. But they are also caviling about not finding workers who can “can operate sophisticated computerized machinery, follow complex blueprints.” Is this REALLY a workforce issue, or an unwillingness of employers to provide on the job training, which used to be the norm? Having said that, a separate issue is the abysmal failure of our educational system, particularly in its indifference to vocational training.

‘One in ten’ UK graduates unemployed BBC

The Little, but Real, Effects of Unemployment Mike Konczal

Strategies for “Success” in Afghanistan Ann Jones, TomDispatch

BP’s Gulf Intercept Well Ahead of Schedule With 600 Feet to Go Bloomberg. Encouraging, but they need to hit an itty bitty target for the well to work.

France Calls Google a Monopoly New York Times

Fed Made Taxpayers Junk-Bond Buyers Without Congress Knowing Bloomberg

Late Change Sparks Outcry Over Finance-Overhaul Bill Wall Street Journal. So tell me why, exactly, corporate users should get away with not putting up reasonable margin on derivatives contracts. And the Journal fails to add that most large corporations treat Treasury as a profit center. In other words, these companies do more than just hedge.

ECB avoids disruption as banks repay funds Financial Times

As the EU squares up to bankers and their bonuses, where does that leave the City? Telegraph (hat tip reader Swedish Lex)

Davidowitz: Credit Crisis “A Gigantic Ponzi Scheme, Lies And Fraud” Ed Harrison

Cash calls expected as Europe’s banks face tests Financial Times

Early warning indicators and the global crisis: New evidence Jeffrey Frankel and George Saravelos Vox EU

Habitat For Humanity Among Top U.S. Homebuilders Huffington Post

Myths of Austerity Paul Krugman

Middle class families face a triple whammy Edmund Conway, Financial Times (hat tip reader Swedish Lex)

Antidote du jour:

By Marshall Auerback, a portfolio strategist and fund manager

Wolfgang Munchnau is right. Only a closer union can save the euro. In the longer term, it will be necessary to put in place a permanent fiscal arrangement through which the central euro zone authorities distribute funds to be used by member nations. Ideally this should be in the hands of the equivalent to a national treasury responsible to an elected body of representatives—in this case, the European Parliament.

But politically, this is a non-starter, particularly in today’s environment. Germany in particular would only accede to a “United States of Europe” run on German lines, in effect making the euro zone a “United States of Germany” or, at the very least, a European Union with strongly German characteristics.

Enter the European Central Bank: With little fanfare, the ECB has been responding to the EMU’s solvency mess by conducting large-scale bond purchases in the secondary market (which, unlike direct purchases of government debt, is not contrary to the Treaty of Maastricht rules) for the debt of the EMU nations. As Bill Mitchell has noted, it is remarkable how little press coverage this has generated, but despite saying there would be neither be bailouts, nor unsterilized bond purchases, the ECB is now buying huge amounts of PIIGS debt to ensure the funding crisis in the EMU is contained. Given that this substantially reduces the insolvency risk, this is probably a wise policy, although it does little to address the underlying design flaws in the system which we have discussed before.

But there are fundamentally anti-democratic overtones in the action. Perhaps financial coup d’etat is too strong a characterisation, but there is no question that ECB is now by far and away the most powerful institution without peer in the EMU. As Mitchell argues, “they stand between the system collapsing or muddling through. And they can force austerity onto citizens throughout the member nations but never face the judgement of the voters.”

Which is why we think that questions about the success of the ECB’s alleged sterilisation policy is besides the point: the ECB is finally responding to the euro zone’s potential solvency mess by conducting large-scale bond purchases in the secondary market (which, unlike direct purchases of government debt, is not contrary to the Treaty of Maastricht rules) for the debt of the EMU nations.

The Eurocrats, who have always found democracy to be antithetical to “sound economics” and “good policy”, now have the opportunity of using this crisis to ram through their vision of Europe, which is fundamentally anti-labour and pro capital.

In economic terms, this action is the same as Warren Mosler’s proposed revenue sharing proposal, although it is not done on a per capita basis, and is potentially rife with moral hazard, since it can theoretically mean that the biggest spenders – who will issue the most government bonds, which can then be bought by the ECB in the secondary market – are rewarded However, the ECB can eliminate this moral hazard problem simply by indicating to miscreant countries that it will refuse to buy their debt in the secondary markets if it does not continue to adhere to “responsible” fiscal policy. By embracing this quasi-fiscal role, the ECB in effect becomes the “United States of Europe”. The ‘distributions’ the ECB will make will be via buying enough national government debt in the secondary markets to keep the national governments solvent and able to fund their deficits, at least in the short term markets.

The reality, then, is that the ECB has become the political arbiter for fiscal decisions made by each of the euro zone national governments. If the ECB determines that any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent. And soon the bureaucrats who run the ECB will realise that the non-sterlisation of the bonds doesn’t create inflationary pressures and they will keep doing it, as they will find it to be a very powerful tool to keep national government spending plans which they don’t like in check. ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable, even if fundamentally undemocratic.

The austerity measures which will be enforced (and thereby secure the tacit backing of Germany) will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed. With the ECB in effect backstopping the bonds of the national governments, it facilitates the latter’s ability to secure funding again in the market place via renewed bond issuance.

With currency stability developing and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro substantially higher against the US the dollar earlier this year might reassert themselves as private portfolio preferences shift back toward the euro, especially as the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is now in place. Dollar aversion could well be heightened by renewed fears of a double-dip recession in the US.

If we were to hazard a guess, we would suggest that euro denominated risk assets would outperform US assets for the balance of this year. Another possible investment outcome in the short term is a potential fall in the price of gold (the positive price action until recently has hitherto acted as something akin to “euro vaporisation insurance risk”) As the perceived euro insolvency/evaporation risk diminishes, gold holders who bought on this basis could well shift their money back into euros.

Power, then, has shifted inexorably to the ECB, presumably under substantial influence of the national government finance ministers (ECOFIN), as the ECB directly or indirectly moves to fund the entire banking system and national government. deficits. This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national government. deficits they allow. There has been increasing evidence in the last few weeks or so that suggest that the public deficits across the EU are propping up demand just enough to stop a depression scenario. Growth in Europe though extremely weak is positive, exports are picking up (for now), and there is some evidence that the falling euro will continue to help the external sector.

But the actions of the ECB are neither politically desirable, nor sustainable over the longer term. The conflict will remain the money interests in Europe who put currency strength as a priority, versus the exporters who favor currency weakness. The consensus will be that unions and wages in general must be controlled, which will create ongoing social turmoil. That’s not a great environment, especially in the “new normal” of subpar returns on financial assets.
.

The Financial Crisis Inquiry Commission grilled Goldman chief operating officer Jonathan Cohn and CFO David Viniar this week, with today’s session focusing on AIG, and in particular, whether Goldman’s collateral calls were abusive and damaged the insurer.

Readers know that I have perilous little sympathy for Goldman. However, it is important that investigations focus on matters likely to hit pay dirt. And despite the sabre rattling at the New York Times and various websites on the matter of Goldman’s collateral marks, we think the ire is misguided, and this is one of the few cases where Goldman’s defense is sound. By contrast, the Commission missed other smoking guns.

To recap: Goldman, like other major dealers, had bought credit default swaps from AIG to hedge against some CDO exposures. The case against Goldman, in simple terms, is:

1. Goldman was overly aggressive in marking down the CDOs it had insured with AIG. Remember, the bigger the losses reported on the CDOs, the more cash AIG would have to pony up to Goldman

2. Goldman’s actions contributed to AIG’s demise.

Tom Adams, a former monoline executive, and I have performed considerable, in-depth examination of the AIG CDS on CDOs that were bought out by the Fed at par (the CDOs wound up in a vehicle called Maiden Lane III). We debunked this thesis, presented in a New York Times article, in February:

There is a wee problem with this account. Goldman’s marks were proven correct. With the benefit of hindsight, most players, particularly AIG, were in denial….

In late 2007 and early 2008, the monolines were facing similar issues to AIG….The rating agencies not long afterwards started downgrading AAA asset backed securities CDOs, verifying the “aggressive” position [monoline short Bill] Ackman and Goldman were taking.

The story also repeats the AIG/Fed flattering claim that these CDOs have “rebounded.” We’ve discussed long form in other posts that given the continued, serious deterioration in the underlying mortgages, this notion is simply not credible. The decay in credit quality across the portfolio is severe, and there has been no “rebound” in prices of severely distressed CDOs….

The jig was up for AIG by January of 2008 and the debate was only one of timing, not of what the actual outcome would be. Coincidentally, Ambac, FGIC and XLCA were downgraded in January 2008 directly as a result of high expected losses in their CDO portfolios. Any case against Goldman for aggressive marks against AIG by the SEC or other parties would have take the market environment into consideration. Across the board, CDOs were causing losses and downgrades for the people who insured them. It therefore makes plenty of sense that Goldman would be requesting more collateral for their exposure with AIG.

Yves here. So why were the other AIG counterparties more generous in their marks than Goldman? They held considerable CDO inventory. If they were the packager and had marked down their AIG positions, they’d have to provide similar prices to any customer who had bought a long position in the same CDO from them. And more important, they might be required by auditors or regulators to reduce the prices of similar CDOs, which would result in losses.

While this line of inquiry looks illadvised, others have been neglected. Why has no one questioned any of the banks of the absurdity of relying on guarantees from the monolines and AIG? Insurance on subprime was rife with what traders call “wrong way risk”: if you needed to collect on your insurance policy, the very events that would lead you to put in a claim would be likely to damage the guarantor. (Goldman would assert it did recognize the risk and had bought CDS on AIG, but that is also flawed: as we saw, an AIG default was a probable systemic event. Those contracts suffered from wrong way risk too). Put more bluntly, the idea that you could hedge subprime risk, particularly on the scale Goldman could likely have inferred was taking place, was almost certain to result in non-performance on the insurance. Did this occur to Goldman’s vaunted risk management operation? It might be revealing to follow that thread.

The Independent highlighted another missed opportunity:

As well as diffusing the spat with the FCIC, Mr Cohn provided new numbers that he said proved the bank did not “bet against its clients” in the market for mortgage derivatives as the credit crisis unfolded, as has been alleged…..

He said Goldman had reviewed all the mortgage securities and derivatives it had created since December 2006, following fraud charges levelled by US regulators earlier this year. It underwrote $47bn (£31bn) of residential mortgage-backed securities and $14.5bn of collateralised debt obligations, and took short positions on the products – which would rise in value if the products fell – of less than 1 per cent of their value.

“During the two years of the financial crisis. Goldman Sachs lost $1.2bn in its residential mortgage-related business,” Mr Cohn told the panel. “We did not ‘bet against our clients’, and the numbers underscore this fact.”

Yves here. This smacks of being the sort of artwork that is technically accurate in its detail, but misleading in the picture it presents.

The role of a financial firm is to facilitate commerce, by helping companies raise money, by allowing investors and savers to deploy funds. But they have lost sight of their role, and many of their activites at best have no social utility and at worst are extractive and destructive. For instance, short sellers have a useful role to correct the pricing of instruments that were created for legitimate uses. But no one until recently would have considered creating positions anew to serve the interests of short sellers was a good idea. It is pouring talent and capital into purely speculative activities. Bear Stearns, far from a vestal virgin, refused to work with subprime short John Paulson to create synthetic CDOs that would enable him to bet against subprime bonds cheaply.

Now let’s look at Cohn’s remarks. They aren’t just a little misleading, they are a lot misleading.

1. Cohn isolates Goldman’s shorting in 2007 and 2008. But Goldman’s Abacus program, which was designed for the firm to establish short positions, started in 2004. Goldman had insured 5 2004 and 2005 Abacus trades with AIG, along with 22 2004 and 2005 CDOs structured by Merrill, 9 2004 and 2005 CDOs structured by other banks, and 2 of its own 2005 cash CDOs. So the roughly $15 billion that Goldman made from AIG is expressly excluded from Cohn’s presentation.

2. The comparison is further misleading by comparing its activity over a period of time (underwriting over a two year period) versus its short position that was presumably measured at a single point in time

3. What does “short positions on the products” mean, exactly? Technically, if you take down the short sided of a synthetic CDO, you have short positions in tranches of subprime bonds and other assets. If you only kept the short side on particular RMBS in that CDO, not all, you are arguably not short the CDO, but short some bonds. Similarly, Goldman may also have used the ABX or the TABX indices to establish short positions, so it could be taking a view against the market without being short the specific transactions it was pedalling.

4. Pray tell, how was this “less than 1%” arrived at? The dollar amount of the short position was CERTAIN to be small because Goldman used credit default swaps. The cost of establishing a short position was only 100-140 basis points until spreads started blowing out at the end of 2006 (and they tightened again in March 2007). The proper comparison would be the notional amount insured versus the cash position.

The FCIC also bears other signs of being badly unprepared, witness this exchange reported in the Huffington Post (hat tip reader Francois T):

The panel created to investigate the roots of the financial crisis escalated the government’s assault on Goldman Sachs on Thursday, criticizing the Wall Street firm for failing to turn over basic documents and accusing it nearly lying under oath.

For a second consecutive day, the bipartisan Financial Crisis Inquiry Commission reiterated its request for additional data from Goldman, namely figures regarding the firm’s derivatives activities. And for a second consecutive day, Goldman’s top executives demurred.

“We generally do not have a derivatives business,” David Viniar, Goldman’s chief financial officer, told the panel Thursday under oath.

Goldman Sachs holds more than $49 trillion in notional derivatives contracts, making it the third-largest derivatives dealer among U.S. banks, according to first quarter figures from national bank regulator the Office of the Comptroller of the Currency. The commission has found that Goldman is a party to more than 1 million different derivatives contracts, Commissioner Brooksley Born disclosed Thursday.

“We don’t separate out derivatives and cash businesses,” Viniar clarified under questioning. The derivatives units are “integrated” into the firm’s cash businesses, making it difficult for the firm to isolate its derivatives data, he said.

In January, the panel asked Goldman chairman and chief executive Lloyd C. Blankfein for a breakdown of the firm’s revenues and profits from its derivatives activities. He said the firm would comply. The commission reiterated that request Wednesday and Thursday.

Viniar said the firm doesn’t “keep” records outlining its revenues from its derivatives dealing.

“I am very skeptical that you can’t measure these revenues and profits,” Born told Viniar. “I urge you to provide us with this information. It’s been about six months we’ve been asking for it… and it makes one wonder also why Goldman has the incentive or impetus not to reveal this information.

“You’re suggesting you don’t give it to your regulators. You don’t put it in your financial reports… so you don’t give it to the market… [or to your counterparties],” Born continued. “And you’re refusing to give it to us. I hope very much that we will see this very shortly.”

Viniar took exception to that last comment.

“Commissioner, again, we’re not refusing anything,” Goldman’s chief financial officer said. “We don’t have a separate derivatives business.”

Viniar then said that Goldman isn’t alone in not breaking out its derivatives-specific revenues and profits.

Born quickly shot back.

“They don’t,” Born, the nation’s former top derivatives regulator, conceded. “But some other firms have provided us with that data when we’ve asked for it, and Goldman Sachs hasn’t.”

Phil Angelides, the panel’s chairman, could barely contain his incredulousness.

“Are you telling me you have no system at your company that tracks revenues or assets of contracts, and liabilities and payments under contracts?” Angelides asked. “You have no management reports, no financial reports that track these contracts?”

“I’ve never seen one,” Viniar responded. Pressed further, Viniar added that the firm doesn’t track these things because it’s “not meaningful.”

Viniar again was asked to provide the data.

Yves here. I have to tell you, this is a ridiculous line of questioning. What the hell is the FCIC trying to get at? There is NO SUCH THING as a “derivatives business”. This in fact illustrates how financial services lobbyists have managed to muddy policy debates, to the advantage of the industry, by lumping a lot of disparate activities under the derivatives banner.

Goldman no doubt has commodities futures businesses, FX and currency swaps, and corporate and asset backed credit default swaps activities. I’m sure it also engages in stock and bond index and futures trading in a number of markets. I’m a big believer in knowing what questions you are trying to answer when drilling into data, and I see no utility in having an aggregate figure across these activities.

And some firms do manage the cash and derivatives businesses of related businesses on an integrated basis. In particular, it appears from the voluminous Goldman documents released by the Senate that Goldman ran its cash and synthetic CDO packaging business from the same business unit. This would not be unusual.

Now the flip side is Goldman clearly does have transaction level information and could no doubt provide analyses to address specific FCIC questions . But it isn’t clear at all what the FCIC wants. This reminds me of the sort of exercise I’d fight tooth and nail as an associate at McKinsey, because it was a complete waste of client time and money, that of simply taking whatever data the client had and cutting it various ways to see if anything emerged. It would provide a lot of charts for a progress review, and if it produced any insight, it was completely random and could have been arrived at much more cheaply with a more deliberate approach.

So as much as Goldman is a deserving target, the FCIC appears to be quite overmastered by them, in part due to insufficient preparation (a function of insufficient budget, staffing, and unrealistic deadlines) and lack of well honed interviewing skills on behalf of its commissioners.

The very excellent Sandor writes to me:

From a maximum utility point of view, who's the right team to root for in the 2010 FIFA World Cup (TM)?

The off-the-top-of-head first order model seems something like

num_native_fans * (joy_of_native_fans_upon_winning -
misery_upon_losing) + num_foreign_fans * (joy - misery),

where the second term is probably negligible compared to the first,
except maybe for Uruguay and Paraguay.  The "joy" term probably is larger the longer it's been since the team won?  But maybe the misery is less for teams that have never gotten far---wouldn't Ghanaians be
pretty thrilled with a loss in the semifinal?

What are the second order and higher effects?  Germany's lost productivity from a long tournament run is worth more in absolute terms but maybe less in utility terms?  Do we need terms for foreign anti-fans?---I've heard a surprising number of people express extreme anti-Germany and anti-Brazil feelings, the former for past crimes, the latter for general arrogance.

I'm attracted to the Netherlands and the two 'Guays, which are probably the lowest three in utility terms.  Maybe I'm just a misanthrope.

Does Derek Parfit like football?

My view is that a Brazilian victory does the most to maximize happiness, although I worry about the effects on second-order violence.

If you wish to rationalize the victory of a small country team, try the argument that too many young people invest career time in becoming athletes.  By having a small nation grab the glory, this wasteful effect is minimized.

Working as the only analyst in a small broker dealer means you occasionally get some interesting projects.  There are many hucksters out there, and if they drop by your bitty broker-dealer to run their deal, skepticism, not hope, is the proper reaction.  “Why are we the lucky ones?” should be the skeptical question.

Anyway, here are three responses that I gave to my bosses over a four month period on deals that were brought to them.  Names have been obscured where possible.

Project 1

This was a deal that attempted to securitize life settlements, i.e. life insurance policies where the owner has sold off his interests to a third party.  The biggest problem was all of the money sucked out of the deal that would not be invested to earn a return.  Here is what I wrote:

Dear Boss,

Notes on the deal

I have read the Overview and the Private Placement Memorandum [PPM], and have scanned everything else.  Here are the main points:

1. The key page of the entire document is page 18 of the PPM.  In it we learn: the zeros get a 4.07% return, but the collateral has to earn 11.72% net of fees in order to make this deal pay off.  Also, 65.52% of the proceeds go to other than investment purposes.  Why so large?  (As an aside, this yield is at a discount to Treasuries.  An equivalent length treasury zero yields 4.55%, AAA Aid to Israel – ~5%.)
2. The continuing fees are hefty – Servicing 1%/year of Face?  Origination – 1%/month of the Matured Policy Increase Amount [MPIA - essentially a measure of cash flow profitability]?  Administrative expenses as well to third parties.  I can’t tell how big those are, or how much the collateral would have to earn to make the bond pay off.
3. The residual value guarantor, AAACO, is not in good shape.  The central bank of CN has taken over the assets and liabilities for now, but it does not seem that they have guaranteed the liabilities permanently. They are rated “B” by AM Best – not a sound rating.  On taking over the group that owned AAACO, S&P said that it was a big enough rescue that they might have to downgrade CN from its A rating.  They have since reaffirmed the rating as stable, but Moody’s now rates CN as Baa1.
4. The residual value policy doesn’t do much if there is a modest deviation from perfect performance by the originator or servicer, the policy won’t pay.
5. We don’t have all of the documents, such as the Blocked Account Control Agreement.  But beyond documents, we don’t have any sort of cash flow analysis.  How are they going to earn so much on so little invested capital?
6. We don’t have any data on the life policies, insurers, etc.  Some insurers fight life settlements.
7. The Overview dramatically oversells the virtues of the deal.  Many of the things it lists as protections are weak.  Points 3 and 5 are the same points, but it makes them sound different.  Further, CN do not own AAACO, they have it in a form of semi-receivership.  If they did own it, AM Best would give it a better rating.
8. BBB is the actuary, but she owns the originator and the servicer. [Origco & Servco]  She is not bound to continue with the deal till maturity if it gets originated (she will be 75 herself then).
9. Servco and Origco have defaulted on prior deals, and they weren’t able to get enough interest on the first deal to make it work.
10. Origco is basically broke.  They have assets of $500K, and liabilities of $2 million.  The assets are receivables from Servco.  Servco owes $16 million that it can’t pay off either.
11. Origco and Servco do not use accrual accounting.  They could not pass a GAAP audit.  Even with accrual accounting, they would not be a going concern.
12. Origco and Servco have existing default judgments against them, and no way to pay them.
13. If Servco or Origco default, the residual value policy does not pay.
14. Servco and Origco have no significant staff.  If this gets originated, there will be a significant risk as they staff up.   They also don’t have licenses.  This is not a bond, it is seed stage venture capital.
15. They have had run-ins with the SEC, Texas Securities Commission, and Securities Division of North Carolina.
16. The notes are deemed equity for tax purposes, which seems aggressive to me.

If you want, read page 18, and scan the risk factors section of the PPM (pages 19-57).  It is my belief that this is something that we don’t want to get mixed up with, at any price.  I can understand why no underwriter wants to take this on, and why they are looking to smaller broker-dealers.  But if you want to look into this further, have them forward to me their cash flow analyses.  I can’t imagine how they get this to work.

I have this phrase that I use sometimes, “Holding my nose as I hit the delete key.”  That is when something smells so bad, the odor can even travel over the Internet.  This feels like the attempt of some desperate people who are deeply in debt, and need one “grand slam” to bail themselves out of debt
and have a happy retirement.

Postscript: this deal not only did not get done, but the boss apologized for bringing it to me.

Project 2

This was a case where someone was willing to offer us $5 million in capital if we gave them $1 million.  What an altruist!  Not.  Yes, the value of shares if you could sell them all at the “last trade” was worth $5 million, but the company was basically a warrant on the success of a technology, and the balance sheet was horrendous.  This is what I wrote:

Dear Boss,

This doesn’t smell good.  Here’s my commentary, together with excerpts from their recent 10-K and 10-Q:

$6250 Stock Trading Volume per day

Negative earnings, cash flow, and net worth.  Little to no liquidity – huge negative net working capital.

1-100 reverse split

Auditors comment for 2008 10K: The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 11 to the consolidated financial statements, the Company has a significant working capital deficit, has recognized significant operating losses in each of the years in the three year period ended December 31, 2008, and will need significant amounts of investment funds to fully develop its oil and gas leases. Management’s plans in regard to these matters are described in Note 11. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company currently has three full-time employees.

Risk factor: The Company has incurred net operating losses since 1997. However, the Company currently has operations that provide working capital. The Company is also seeking further project based financing to develop its existing projects. There is no assurance that the Company will be able to secure adequate financing to fund those operations.

High compensation to management for not much of a company.  $5 million in 2008.

The Company failed to timely file a current report on Form 8-K upon the occurrence of the Default Notice and Acceleration Notice under the Credit Agreement with CCC, and the July 22, 2008 Limited Forbearance Agreement pursuant to which Gas Rock agreed to refrain from pursuing remedies for a limited time.

NOTE 7 – Note Payable – CCC CAPITAL LLC

The Company entered into an advancing term credit agreement for $30,000,000 on April 13, 2006 through its subsidiary DDDa, LLC with CCC Capital, LLC to fund the purchase of the EEE Field in GGG Oklahoma. This agreement was increased to $50,000,000 on April 2, 2007. The balance at December 31, 2008 was $13,423,221, net of debt discount of $41,077, and the Company paid interest of $1,957,294 for the year ended December 31, 2008. The note is secured by all of DDDa’s assets and certain personal assets owned by EEE, CEO of the Company. DDDa’s assets are cross-collateralized on a $3,469,000 loan made by CCC Capital, LLC to FFF, a related party. This loan is currently in default, with interest only payments being made.

On April 9, 2008, CCC delivered to the Company a Notice of Events of Default and Unmatured Events of Default (“Default Notice”) under the Credit Agreement. Due to these claimed Events of Default, interest under the Credit Agreement began accruing at the Default Rate of 15% and 100% of DDD’s Net Revenues were applied to Debt Service and other Obligations as of April 9, 2008. On April 16, 2008, CCC delivered to the Company a Notice of Acceleration (“Acceleration Notice”) under the Notes due to the continuing claimed Events of Default under the Credit Agreement. The Acceleration Notice declared the amounts due under the Note to be accelerated and due and owing in full as of April 16, 2008.

On July 22, 2008, CCC, DDDa and FFF (“FFF”, and together with DDDa, the “Borrowers”), entered into that certain Limited Forbearance Agreement, pursuant to which CCC agreed, subject to the terms thereof, to forbear from pursuing remedies under the Credit Agreement and Notes in respect of the Events of Default claimed as of that same date until the earlier of (i) November 15, 2008 and (ii) the date that CCC gives DDDa notice of any additional payment default under the Credit Agreement. FFF is controlled by the Company’s CEO and is a guarantor of the DDDa Obligations under the Credit Agreement. CCC is also a lender to FFF under an Advancing Term Credit Agreement (the “FFF Credit Agreement”, and together with the Credit Agreement, the “Credit Agreements”.

The Forbearance is subject to the following conditions to be fulfilled:

1) On or before November 15, 2008, (i) the Borrowers must repay all Obligations (as defined in the Credit Agreements) or (ii) DDD must have entered an agreement for the full or partial sale of the EEE Field, the proceeds of which would fully repay the Obligations owing under the Credit Agreements, and such sale shall close and repayment of the Obligations shall be made by December 31, 2008;

2) If the Obligations are not repaid by November 15, 2008, DDD must assign a 5.0% net profits interest in the EEE Field to CCC, effective as of November 1, 2008. The form of this assignment and the potential assignments discussed in paragraph 3, below, will be substantially in the form of the Conveyance of Net Profits Overriding Royalty Interests, attached as Exhibit A to the Forbearance Agreement;

3) If the Obligations are not repaid by December 15, 2008, DDD must assign an additional 1.0% net profits interest in the EEE Field to CCC, effective as of December 1, 2008, and will assign to CCC an additional 1.0% net profits interest each subsequent month if the Obligations are not repaid by the 15th of such month;

4) DDD shall escrow one 5% net profits interest conveyance and five 1% net profits interest conveyances to ensure it’s delivery of any potential obligations under paragraphs 2 and 3, above;

5) Any and all Net Proceeds (as defined in the Forbearance Agreement) from any equity issuance, refinancing, or asset sale will be applied first to outstanding fees and expenses of CCC, second to the accrued and unpaid interest on the Notes, and third to the outstanding principal balances on the Notes; and

6) The Borrowers must ensure that its hydrocarbon purchasers make payments relating to any of CCC’s overriding royalty interests in the EEE Field directly to CCC.

NOTE 11 – Going Concern

The Company has reported operating losses aggregating $9,877,016 for the two (2) year period ended December 31, 2008. At December 31, 2008, the consolidated balance sheet reported a working capital deficit of $23,887,172. The Company must raise significant amounts of cash to pay its current liabilities and to provide investment funds to continue development of its oil and gas leases. There can be no assurance the Company’s management will be able to secure funding.

David here: There is little assurance that an immature development stage company like this will ever be worth anything.  I am no expert on hydrocarbons but this company is overindebted, and it is likely that debtholders will own the assets within a year or two, and equityholders get nothing.

DDD shares would not, not, not be an asset to our firm.

Postscript: 6 months later, the stock worth $5 million is worth $300,000.  And will be worth zero soon.

Project 3

Another life settlements securitization.  The originator seems to be honest, but is using the securitization to get a cheap commercial mortgage loan.  What I wrote:

Dear Boss,

I’ve read through the whole document.  Here are my thoughts:

Summary Notes

The officers of the company have no experience at all with life settlements.  They do have some experience with multifamily housing.  They are using a life settlements securitization to facilitate loans for their multifaqmily housing expansion plans.  To me, that is pretty convoluted.  Why not simply go out and borrow the money?

I realize the offering memorandum is preliminary, but there are several things that need to be clarified:

• Need to see the financials of the GGG enterprises
• Correct address for their website.
• Who is HHH Capital Management?  Can’t find them – the portfolio managers.
• Need fees, policy data, and expected cash flows
• What are they doing to source portfolio 2?
• Need actuarial projections
• Exactly what are the trusts receiving as collateral for the loans?  I need pro-forma financials on the property(ies) to be developed…
• Where are the related party transactions?
• If this deal is 3x overcollateralized, where does the excess money come from?  Who is the equity, and what are their motives?

That’s all for now.  Looking forward to more data.

After the response, I wrote:

Dear Boss,

I realize the offering memorandum is preliminary, but there are several things that need to be clarified:

I have three tentative conclusions (with questions):

1.      The largest asset is a 9 year fully amortizing 2.7% loan on the $40,000,000 to the sponsoring company.  It is a hidden source of profit to them, but the full amortization makes the loan more secure, it they can make the first few payments.  That said, they would need 12% cash flow on the loan to make the payment, and where will they get that?

2.      The deal would need a 6.1% return on the Life policies to get a Treasury yield on the certificates.  8.0% return to get T+100.  15.75% to get T+500.  What would it take to sell these notes?

3.      There is a low probability of full payment of principal.  A margin of $25 million on a $250 million principal payment is skimpy, and in my opinion, decidedly not investment grade.  I assume these aren’t going to be rated, right?

And I have additional data needs:

4.      Who is HHH Capital Management?  It looks like a new firm – do they have the ability to do their part?

5.      I need fees, policy data, and more detailed expected cash flows. Where is Appendix B?

6.      How were the life expectancies calculated?  That’s hard to do right.  Second opinions?

7.      I need actuarial projections, with considerable detail. That would mean a copy of the JJJ review.

8.      Exactly what are the trusts receiving as collateral for the $40 million loan?  Pro-forma financials on the property(ies) to be developed… And, I would need to see the financials of the GGG enterprises.

I think this deal will prove hard to complete.

Postscript: we went further with this group than the other two, but when faced with my data requests, the originator gave up.

After this happened to me, I talked with an investment banker who is local, and has many contacts like mine.  He commented on how small broker dealers get hit up with slick pitches, any one of which if accepted, could destroy the broker-dealer.  The trafficking of blocks of life settlements is endemic, and is a search for what lemming has the lowest discount rate — has mis-estimated the risks.

He also mentioned how these groups toss around big names as those that will buy the senior certificates.  I experienced that myself.  Kuwaiti Investment Authority, indeed.

So, in four months time, I kept my firm from making dumb decisions three times, any one of which might have severely damaged or destroyed the firm.  What did I get get for my efforts?  The best thing of all: gratitude from my bosses, and knowing that I did my best for those that hired me, protecting the interests of all stakeholders of the firm.

Skepticism is a necessary aspect of investing, particularly as the complexity level rises.  Aim for simplicity, and put safety first in your investing.  It is easier to protect value than to try to earn back losses from mistakes.

To phrase it another way — in order to work through these deals, I had to read through over 1000 pages of data.  Don’t let the multiplicity of words dull you to the risks that exist.  Even for small investors I would say avoid complexity.   Where there is complexity, there is a much higher risk of loss, almost always.  Stick to simple investments, and let the complex stuff be bought by experts, who will turn away most of the charlatans.

When a CEO has a major foot in mouth episode, it’s usually the result of uncontrolled candor. And today’s outburst by GE CEO Jeffrey Immelt appears to be true to form.

According to the Financial Times, the GE cheiftan said some less that politic things about China and Obama at a private gathering which his operatives tried to characterize as being taken out of context. Yeah, right. His commentary so typifies what you’d expect from the top executive of a large multinational (and major financial firm to boot) that it’s hard to see his remarks as anything other than a reflection of his views. They happen to be ugly because they represent American corporate arrogance writ large.

From the Financial Times:

Jeffrey Immelt, General Electric’s chief executive, has launched a rare broadside against the Chinese government, which he accused of being increasingly hostile to foreign multinationals…

“I really worry about China,” Mr Immelt told an audience of top Italian executives in Rome, accusing the Chinese government of becoming increasingly protectionist. “I am not sure that in the end they want any of us to win, or any of us to be successful.”

Yves here. This is almost comical. A US corporate executive thought the Chinese officialdom was supportive of their business goals? China is out for China, period, and that is a stance that that the US would be well advised to emulate, rather than being brainwashed (or bribed) into thinking that the interests of large multinational are aligned with national goals.

I may sound like a complete Luddite, but I have LONG questioned the wisdom of foreign firms locating factories in China and exposing themselves to the risk of piracy, counterfeiting, and other forms of technology transfer. This is an authoritarian country where organs are harvested from prisoners who are still alive. Given how brutal they are to their own citizens in the name of preserving state authority and perceived national interests, the only reason for them to play nice with foreign companies is if they think the arrangement benefits them, not because they give a rat’s ass about their health. It would not be impossible for them to seize assets (with trumped up charges) but Chinese businessmen are sufficiently skilled at stacking the deck to suit their interests that such crude measures are unlikely ever to prove necessary.

Consider this commentary in the Asia Times, in a review of Poorly Made in China: An Insider’s Account of the Tactics Behind China’s Production:

Chinese manufacturers cut corners wherever they can, from product quality to factory equipment and maintenance. They unilaterally change product and packaging specifications to trim costs. They raise prices after the deal is signed, leaving the importer to absorb the added cost. They reproduce their customers’ products for sale at higher margins in other markets. With support from government, bankers, and networks of fellow manufacturers, they conduct manufacturing and customer relations as a game, treating the other party as a patsy not a partner, playing for the short term of making an extra penny at the risk of product quality but also taking a long-term, multidimensional outlook that outflanks the hapless customer….

For Chinese manufacturers, a deal with an importer can be desirable even if it doesn’t appear profitable. Reasons range from domestic counterfeiting opportunities to status to customer contacts (for disintermediation – cutting out the importer to deal direct with retailers) – to cash flow or capital (secured by an enlarged plant) for other investments. While most small importers are playing checkers, focusing on profit on each contract, Chinese manufacturers are playing chess – and playing to win – Midler says.

Yves here. Now this extract describes the situation facing firms contracting in China, not major manufacturers like GE setting up operations in the country. But step back a second and look at the ruthlessness of the tactics, the routine cheating and the willingness to sacrifice short term profits for the long game. Immelt and his ilk, no doubt seduced by too many meeting and dinners with government officials who told him what he wanted to hear, was unwilling to to consider that a big globe spanning company could be played like a rube, used when he was valuable and squeezed when he had served his purpose. After all, isn’t that how almost all Big Co’s behave? But they act so wounded when the table are turned on them.

Immelt’s diatribe on Obama verges on childish:

Mr Immelt also had harsh words for Barack Obama, US president, lamenting what he called a “terrible” national mood and expressing concern that over-regulation in response to the global financial crisis would damp a “tepid” US economic recovery. Business did not like the US president, and the president did not like business, he said, making a point of praising Angela Merkel, Germany’s chancellor, for her defence of German industry.

Yves here. This tactic by big business, to howl over trivial, cosmetic reregulation as if it were rape, illustrates how they believe they should be in the driver’s seat and government and the public at large should fall into line. Look at his distorted logic: the recovery is going to be “tepid” (actually, we should be so lucky as to have it be as warm as “tepid”) and the national outlook is sour because we are still working through the aftereffects of a massive credit bubble, with GE profiting handsomely from helping to create this disaster. But no, let’s airbrush out the real cause, the utter recklessness of financial services firms around the world, and shift blame to Obama.

And who cares if Big Business likes Obama? I dimly recall that the major corporate interests of their day hated Teddy Roosevelt and FDR, both now considered to have been fine leaders, and were quite fond of Calvin Coolidge and Herbert Hoover, both of whom rate among the ten worst presidents. So being popular with businesses may well be a negative performance indicator.

It would be nice to see Immelt’s pique as a sign that major companies are finally being called to heel by governments, but the indignities GE has suffered are too minor to warrant such a hopeful conclusion. His reaction is reminiscent of a spoiled toddler who has had a few toys removed from his well stocked playpen.

,

I'm afflicted with my fair share of behavioral foibles. In fact, I readily admit that I'm a sucker for a point-of-view -- on the economy, at least -- that dovetails neatly with my own (i.e., confirmation bias), even though prudence suggests I should probably be paying more attention to those with an altogether different perspective. Still, when the individual featured in the following Yahoo! Finance Tech Ticker video, "Howard Davidowitz: U.S. Economy 'Is a Complete Disaster,'" offers his insights on what is going on, his proven willingness to bet against the crowd and call a spade a spade usually has me listening with both ears:

The U.S. economy is in shambles and Americans will continue to see high unemployment and lower living standards in the years to come, Howard Davidowitz tells Henry and Aaron in the accompanying clip. 

Davidowitz lays much of the blame for the economy's woes at the feet of the Obama administration, which he calls "the worst of my lifetime."

Obama "Mr. Mass Destruction"

Davidowitz says that the key to Obama's success is his ability to sell his policies to the public. He can confidently read from a teleprompter and appear competent and in control, when in reality, "it's one big bag of empty words," Davidowitz says of Obama's messages.

Davidowitz contends that the President's spending, including the health-care bill, is creating massive deficits that will take the U.S. years to dig itself out of.  "He is Mr. Mass Destruction," Davidowitz says of Obama. "I mean he is a human destroyer. This guy has spent his way into oblivion and we don't have a budget. He is surrounded by a bunch of complete incompetents, led by himself. "

Housing Gloom

As far as the actual economy goes, Davidowitz's chief concern is the strained state of the housing market, from which the bad news continues to pour in. According to Davidowitz, Americans are facing an $8 trillion negative wealth effect from the bursting of the housing bubble.

"We're talking about some serious money here," Davidowitz exclaims. "I mean this is a complete disaster and that's why we are going to have a double dip. We're guaranteed a double dip in housing."

Small Businesses and Unemployment

Davidowitz says that the job market is also in ruins, noting for every new job there are six applicants. As a result of the intense competition for positions, employers can offer lower wages. Young people entering the work force today can expect to make less money in their lifetime than previous generations.   

Considering the majority of new jobs are created by small businesses, Davidowitz argues that new regulations governing loans to small businesses are only making matters worse -- both for the entrepreneurs and the millions of people out of work.

"We have this insane new regulation," Davidowitz says. "Community banks will not even be able to fill out the forms. They'll pack up and quit. They're already underwater. Commercial real estate is still terrible."  

The Future a Massive Struggle

Asked whether he thought the U.S. would experience another Great Depression, Davidowitz said the coming years will look more like Japan today vs. the U.S. in the 1930s.

People will be making and spending less money and the nation as a whole will be dealing with the consequences of the deficit, he says. "We are in a struggle, day by day it's ugly. At the core, when we look at our debt, we are going to have to deal with it."

A few months ago, while other analysts claimed that the economy would continue to follow a V-shaped recovery path, Davidowitz seemed out of step by insisting the nation's problems were still dire. Regardless of what you think of his message or style, Davidowitz's doom and gloom outlook now appears much more credible.

All through the health care reform process, I noted that there are four pillars upon which the…



Insurance - Health care - New York - Massachusetts - United States

This is a wonderful short video by RSAnimate based on a talk by radical, as in Marxist, sociologist David Walker.

For those who recoil, Marx was the first to take note of the propensity of capitalism towards instability. By contrast, neoclassical economics, which has dominated policymaking in advanced economies, posits that economies have a propensity to equilibrium, and that equilibrium is…full employment! Marxists also look at long term trends in corporate profitability, and because Marxists use that as an important framework, it seems to be verboten as a line of inquiry in other schools of economics. Weird.

I found this talk to be engaging. Hope you like it. Hat tip reader Don B, via the New York Observer:

Or you can watch Harvey’s full lecture: