Immigration

The blogosphere is alive with talk about the new Arizona law. Megan (with a libertarian argument against the law), Ezra, James Fallows, Paul Krugman yesterday, etc. This issue is going to go away. The lesson we learned last time is that the populace is not going to allow any law that gives a path to citizenship to someone who is here illegally. "Undocumented immigrants?" Sorry fellow liberals, I think this is misleading. They are undocumented because they are illegally here. Here Krugman makes the point that if we want a safety net, we cannot afford to include the whole world. My favorite comment was by a commenter on Fallows blog who points out that the French have a national ID card (as well as Communist China). Do conservatives really want to be like the French?

But just because a number of people who favor the law are racist, it does not mean that there are not good conservative arguments. That is a form of ad hominem argument, one which Leonard Pitts made the other day in the op-ed section. Krugman also engages in superficial type-casting at the end of his piece.

In a similar vein, NBC news last night reported on a new $90,000 prostrate treatment and said it raised ethical problems because not everyone could afford it. A good friend pointed out when I was thinking about health care reform that no one was talking about the big issue: what basic level of health care should be provided to everyone? Money does not grow on trees.

Addendum: I should add that I am not making a comment about this particular law. I have not thought about it sufficiently. Megan makes some very good points about whether everyone would welcome the probable intrusions by police. Others say that what matters is how it is enforced. These seem right. Another question is whether there is a better way. And I don't really understand what people in Arizona experience as a result of illegal immigration. I am just saying that it is unlikely that we will get a national immigration law. There is too much diviseness on the issue. And frankly, I don't think immigration is all that important as a national issue or global issue.

Another addendum: I read somewhere in the Times that conservatives do not favor a national ID card, which partly shows how little I know about "conservative thought." What then? The army on the border? Sounds pretty expensive to me.

Naked Capitalism

I want to give a huge shout out to Yves Smith's blog Naked Capitalism and also to her book Econned. The book is slow reading but it seems essential to me to understand what was going on on Wall Street. Here is a particularly good article on Goldman. The comments are also interesting. And here is a very good article on Goldy by Steve Randy Waldman at Interfluidity.

There are some great books coming out now about the financial crisis and Washington is even getting excited. It is too bad that more people don't really understand this stuff (including said politicians). But I am cheered by the fact that Michael Lewis' The Big Short is now the number one nonfiction bestseller. Jonah Lehrer has a piece today at The Frontal Cortex about psychopathic behavior. The Goldy boys looked like the type to me.

Mainstream media

Are you tired of the simple-minded arguments between the right and the left about mainstream media? The media is liberal. All mainstream media is owned by large corporate interests and so they feed us the capitalist lies that support their infinite greed for profits. Here is a very good article that gets into the very complex reality of the issue. People want to make money and they want to watch interesting stuff. Media content is not so easily analyzed.

Risk Models

It has been quite apparent to me that the ways used by Wall Street to model risk are seriously deficient. John Cassidy states the conclusions from his intended talk tonight on Rational Irrationality. The first person who discussed this stuff and totally blew me away was Nassim Taleb in The Black Swan and Fooled by Randomness (first published in 2004!). Yves Smith has an excellent discussion in Chapter 3 of Econned. Wall Street execs say well, it is a useful tool. This is total bullshit because it doesn't take into account fat tails. If you don't know what that means and care, do some reading. It is about statistics, so some mathematician can correct me if I am wrong.

I do not believe that with all the quants that big firms had employed they did not know this. However, you have to take into account that Black and Scholes who received Nobel Prizes (as my conservative friends point out, so did Barack Obama--I love the guy but Nobel Prize no way) based a hedge fund on these concepts (Long Term Capital Management) which blew up in 1998 and had to be rescued by the Fed. I imagine they ended up very rich despite losing all their clients' money.

I greatly enjoyed see the Goldman boys squirm today. These Wall Street guys make me sick. They were totally disingenuous. Great political theatre.

OCD

Obsessive-compulsive disorder. My wife, who has great insight into human behavior, likes to say I have some OCD going on. I looked it up in the DSM and I don't think so. But maybe I just have OCD with poor insight. I don't see the compulsive part at all, but you be the judge. We are often Strangers to Ourselves (the title of a great book by Timothy Wilson, which was the inspiration for Malcolm Gladwell's Blink, the latter of which I believe was legitimately criticized by Robert Burton in On Being Certain)....(I wish I could remember what that criticism was; this getting old stuff is not for perfectionists.)

Now, OCD personality disorder is another matter. "Shows perfectionism that interferes with task completion." Although I wrote several 50-60 page papers in grad school, I never finished my dissertation. My advisor kept telling me I didn't have to write a publishable book but I didn't really get it. Then I chose a topic that nobody could have written a coherent exposition of, Critical Legal Studies, because the movement itself was incoherent. Oh well. I didn't really want to be a teacher anyway and what else can you do with a philosophy degree?

Maybe that explains getting obsessed with the financial crisis and reading a gob of books and articles on it. Oh yeh, I did that with health care reform, too. Before that it was reading history. At one point, it was my work. Luckily, I didn't really want to be a lawyer, either, so I chose to specialize in one area which had interesting stuff about medicine--disability law. But the good thing about being OCD is that I tried to read everything and figure out everything about it. That is what a real education does. I know many lawyers who never try to figure things out. But they can fool a lot of innocent clients. Kind of reminds me of time-share salesmen.

Golf is another example. I played as a kid and then didn't take it up until age 43. Immediately got obsessed and improved greatly for a period of time before I actually started getting worse (golf is amazing that way). Or skiing. I didn't ski until I was almost 30 but then within a year ended up moving to Utah working in a ski resort and skiing every day. Despite having new skis and boots, I didn't ski at all this year.

Maybe I'll figure this out some day but I gotta go wash my hands.

don't worry, Be Happy

I am done blogging on banking until the political theatre is over. However, you may have reacted to my previous post by wondering how the economics profession gets blamed for anything? The answer is the same as the failure of all social sciences during the positivist phase; they tried to be a natural science. In Econ's case, they got seduced by math. Psychology, which was my original interest in college, until I learned it was about training rats, got sucked into behaviorism. In both cases, it involves leaving out important parts of what they are studying.

Here is a wonderfully pithy review mocking tbe arrogance of Reason in positivist thinking. Glad I gave up analytic philosophy but then I was mediocre at it, although Quine had me seduced for awhile. The real world is way more interesting. This also reflects what bugs me about Richard Dawkins' view on religion. My dear atheist friends: the lesson is to be agnostic. Not only will it better reflect your epistemic position in the world but you will be able to get along with the wonderful theists who actually think, and who make the world a better place.

Here is Jeremy Grantham's newsletter. Pretty wonky but some important insights. To surf the bubble and jump off before it bursts, and then never invest in equities again.

And finally, here is a fun review of a book on Ayn Rand, who also seduced me in my youth. If only Alan Greenspan was more reflective we would all be a lot better off today.

9/18

I vividly remember watching the tv all day September 18, 2008. I had it tuned to CNBC, which I usually can't stand because they are lapdogs of Wall Street. Not to mention composed of obnoxious blowhards. But I was watching the financial sector go bankrupt. It was a combination of horror and curiosity, something like I felt on 9/11/01. We were leaving for Spain in a couple days and every night during the trip I was compelled to turn on CNN International to see what was going on.

As Yves Smith explains in enormous detail in Econned and continues to explain on her blog Naked Capitalism, it was "the greatest theft from the public purse in history." This came at the end of more than 30 years of manipulation of the rules of the game for the financiers, including extensive deregulation greased by a simple-minded philosophy. Not only had the banksters accomplished regulatory capture and capture of all the branches of government (including the law), they accomplished cognitive capture of the population, with the help of the economics profession.

The bill that will pass this weak will be a 1300 page watered-down piece of nothing. We better get used to it. As Yves says, "this campaign has been far too consistent and calculated to brand it with the traditional label, "spin."...Only when we the public are able to call the underlying realities by their proper names--extortion, capture, looting, propaganda--can we begin to root them out."

It is what it is. Have a nice week.

Mr Grumpus

Feeling a little grumpy today. I think it has something to do with the book I am loving now (Econned), which paints a very realistic but hideous picture of Wall Street. I'm quite sure my brain was ruminating on it while I slept. It is probably time for a hike and it is a beautiful day following three very crappy days, including snow yesterday. Tita is working part of the day so I am going to laze around here until she gets home to hike. The Blackhawks game, which is very important with the series tied at 2-2 in on today at 1, but I can't stand to watch tv during the day, especially a nice day, so I am going to tape it and watch later.

Fred the cat was just squawking at me so I gave him some attention and now he is a happy boy, but I anticipate that he will be walking in front of the computer monitor soon. He also loves to sit on something you are reading. They are such little narcissists that they are cute; it's all about them. Reminds me of big bankers and politicians. One good note, however. Robert Khuzami, the new head prosecutor of the enforcement division of the SEC, is apparently a fearless smart guy who has taken on the mob and terrorists despite threats to his family. My fantasy of the lawyer who can't be bought bringing some justice to the world warms the spirit but I will probably be disappointed. We know Goldman Sacks won't go to trial. Too much dirt would come out. I hope the SEC does not settle with them, however. Make them pay the fine and then lets see if we have some criminal proceedings in the works. All the people who have lost their jobs or portions of their retirement savings because of those jerks might get some small satisfaction.

A quote from my new book: "history is the long and tragic story of the fact that privileged groups seldom give up their privileges voluntarily." Do you know who said that? Or here is another one a blogger wrote about Wall Street: "if they were half as smart as they think they are, they would be 10 times as smart as they are."

A bold prediction for the upcoming week of political theatre. The parties will be loudly bickering with each other but eventually will come up with a bipartisan compromise on a watered-down version of the Dodd bill, which will do some good, but which is already hopelessly too weak. The bankers will go home happy and ready to blow up the economy again and the politicians will continued to be hated by everybody.

Addendum April 27: the author of first quote was Martin Luther King.

Global Warming

Keynes famously remarked that in the long run we are all dead. The recent volcanic activity in Iceland should help remind us why. A very powerful volcanic eruption would result in what has become to be known as a "nuclear winter;" that is, the earth would be covered by a cloud of dust so thick that it would cause massive drops in temperature and end most life (some bacteria can survive almost anything), which is also what would happen in the event of a nuclear war. An asteroid collison could do the same thing.

However, eventually the molten core of the earth will cool down, eliminating volcanoes, but putting earth into a deep freeze. The glacier that once covered New York City was twice as tall as the Empire State Building. The entire earth will be covered in extreme cold. Goodbye humans.

Now it seems entirely correct that global warming has been occurring over the last 300 years and it is most likely due to carbon emissions and the destruction of forests so that people can farm (causing a shortage of carbon-dioxide-eating life). In the relatively short run this is going to cause some problems, such as to make my friends' beachfront property uninhabitable.

It is interesting that humans have become a species-loving life form. For most of their short history, most humans never traveled more than a few miles from home and didn't really care what happened to other humans. At some point in the recent past, humans starting forming their identities around being a member of a nation group...really a much bigger tribe. And then within the national identity, shortly after becoming a nation, Americans became followers of political parties. So identifying with a species is really quite a step. And some people can even identify with other life forms. But 99% of every species that has ever existed has become extinct. And we will get there, probably long before the lava cools down. Carpe diem. It may not be around tomorrow.

Addendum: This post should be read while playing The Humans Are Dead by Flight of the Conchords.

Banksters in Jail?

Here is a post on the civil case vs. Goldman Sachs. Here is a post that I think goes toward explaining this complicated mess. And here is an e-mail from a Wall Street insider. I am off to buy Econned.

You know this crap is going to be swept under the rug. Remember the Salt Lake olympics scandal. Never saw the light of day in spite of a lawsuit. And think about this: how much does it cost taxpayers for the FDIC to wind down ordinary failed banks?

Addendum: Not sure why the second two links are not working. Go to Naked Capitalism and read CDO Markets-Rife with Collusion and Manipulation? and E-Mails from Mordor.

Addendum: The FDIC has taken over about 200 banks since the beginning of 2009. The S & L crisis cost taxpayers about 150 billion back in the 80's. I suppose McConnell would call these bailouts. Wonder what the cost of this meltdown will be?

Dodd Not Enough

Mike Konczal at Rortybomb has a useful post today on what we should want from financial reregulation. It is clear that the Dodd bill is not enough. However, the way the political theatre is working out, will we see even a weaker version of Dodd passed with bipartisan support? I can readily see this happening. We need a stronger verions of the Lincoln derivatives bill and the Brown-Kaufman SAFE banking act, and the Volcker Rule (a new version of Glass-Steagall) for three things.

Here is an article by George Soros arguing for much stronger regulation of derivatives. It raises the question once again; what are these things good for? Other than taking money out of one pocket and putting it into another with the possible result that the whole world economy will blow up?

Finally, here is a very good article from Paul Krugman and Robin Wells. Below I quote the conclusion.

Now that the multiple bubbles have burst, there’s obviously a strong case for a return to much stricter regulation. It’s by no means clear, however, whether this will actually happen. For one thing, the ideology used to justify the dismantling of regulation has proved remarkably resilient. It’s now an article of faith on the right, impervious to contrary evidence, that the crisis was caused not by private-sector excesses but by liberal politicians who forced banks to make loans to the undeserving poor. Less partisan leaders nonetheless fret over the possibility that regulation might crimp financial innovation, even though it’s very hard to find examples of such innovation that were clearly beneficial (ATMs don’t count).

Equally important, the financial industry’s political power has not gone away. Banks have waged a fierce campaign against what many expected to be an easily passed reform proposal, the creation of a new agency to protect financial consumers. Despite the steady drumbeat of scandalous revelations—most recently, the discovery that Goldman Sachs helped Greece cook its books, while Lehman cooked its own books—top financial executives continue to have ready access to the corridors of power. And as many have noted, President Obama’s chief economic and financial officials are men closely associated with Clinton-era deregulation and financial triumphalism; they may have revised their views but the continuity remains striking.

In that sense, this time really is different: while the first great global financial crisis was followed by major reforms, it’s not clear that anything comparable will happen after the second. And history tells us what will happen if those reforms don’t take place. There will be a resurgence of financial folly, which always flourishes given a chance. And the consequence of that folly will be more and quite possibly worse crises in the years to come.

Addendum: My use of the term "derivative" here is too simple. A derivative is an instrument whose value depends on a different underlying asset. Futures and options are perfectly good and helpful derivatives. Credit default swaps? Collateralized debt obligations?

Bankster Blogging

Here is a very interesting post by Felix Salmon. Just when I think I have somewhat of a handle on this stuff, it just gets more complicated. I may have to read Yves Smith's book Econned. Her website is Naked Capitalism.

Although Blanche Lincoln's derivatives bill has gotten typified as suprising tough on derivatives, the Times editorial today argues that it does not go far enough and has too many loopholes. And Simon likes the Brown-Kaufman bill which would limit the size of banks. We actually had rule like that in 1994 but the banks have managed to get around it. He also reports that a study has shown that there is no international advantage to a bank over 100 billion dollars.

These sorts of bills are going to be strongly opposed by the big banks. They make a lot of money structuring derivatives. It will be interesting to see how the politics plays out. Nobody wants to cross the populist anger at the bankers.

The complexity of this stuff also makes one realize that we cannot hope that regulators will figure this stuff out. The SEC couldn't even catch the Madoff and Stanford ponzi schemes. When their attorneys routinely move into the banking sector and make millions, it is hard to see even why they will continue to be motivated (although I've heard stuff about the new guy...can't remember his name--Kussomething). Expecting the Fed to regulate the mortgage industry is another pipe dream.

The Bank Bill

I know I said I would stop writing about this, but most of my favorite bloggers are writing about it. And the big question is whether something positive will be achieved. I'm thinking it is coming down to Obama's speech tomorrow night to see what we can hope for.

In the interests of the open exchange of ideas, Paul Krugman and Tyler Cowen (in yesterday's Marginal Revolution) both disagree with Simon Johnson, Mike Konczal and me that we ought to break up the big banks. See also this discussion in today's N.Y. Times.

Roger Lowenstein raises the very good question of what useful purpose is there allowing people to bet through synthetic collateralized debt obligations.

What caused the financial crisis? Large banks and shadow banks, who were in bed with the ratings agencies, demanded more and more mortgages that they could repackage into bonds, to satisfy large investors who did not understand the risks, and so unregulated mortgage originators found new and novel ways to loan money to people who really could not afford to buy homes. When they ran out of mortgages, Wall Street constructed synthetic bonds, which greatly magnified the risks to the system. Fannie and Freddie, who had become private profit-driven entities, but still implicitly backed by the federal government, helped facilitate even more loans. All this was abetted by regulators such as the SEC and the Fed, failing in their jobs.

A few people, such as John Paulson, Michael Burry and Steve Eisman saw the doom on the horizon and bet against the system using credit default swaps. Eventually, the big boys at Goldman and Deutche Bank (led by Greg Lippman) saw the tsunami, too. Most of us were still drinking the kool-aid when it hit.

I lost a lot of money I had invested for retirmenent. A lot of people have lost their jobs. Taxpayers where made to foot the bill for Wall Street risk-taking. Bankers were given large bonuses for phony profits. And on and on. We fixed the system in the 1930's. The fixes over time were worn away by collusion between the banking lobby and Congress and innovations in finance. Time to fix it again.

Addendum: Here the Senate agriculture committee just passed Lincoln's tough bill on derivatives. This article gives an acccount of why and gives me some hope.

Empathy Lesson

Saturday was a beautiful day and I got together with three good friends to walk 18 holes at Bonneville golf course. The course surrounds a baseball field and a tennis center, and both were full. You could hear the crack of a bat and kids cheering at the ball diamond at various times. A road runs through the course and it is a favorite place for bikers, runners and walkers. Everyone was out enjoying the spring sunshine and a person would have to be a curmudgeon not to be infected by the joy.

My right shoulder and arm have been bothering me. I figured I overexerted myself in some silly way, like opening a jar for Tita. These things seem to happen more as I get older. Or maybe it is another residue of all my baseball-playing days. I would never tell the coach that my arm hurt because I never wanted to come out of the game...even when the arm was screaming in pain.

About the back nine everything began to hurt, especially my neck and feet. By the time we were done it felt like I was walking on my foot bones. It felt like my bones hurt. I was also stiff and fatigued. I almost missed the ball a couple times off the tee.

The other thought was that this could be a side-effect of the statins I have been taking. My doc warned me about "achiness." (It is amazing the terms the medical profession has for pain...such as discomfort.) My dad confirmed it for me today. He said that when he was taking Lipitor he got so he couldn't walk up the stairs.

I cannot help but wonder what those people who think we should get rid of Social Security think we should do with the old people and sick people who depend on its financial assistance. Throw them out in the streets?

When I was sick with ulcerative colitis I experienced the worst pain I ever had in my life. Only someone who has felt his intestines spasm knows at all what I am talking about it. Or how it feels to be shitting blood every half hour. Even if we try to empathize with someone else, we can never know what it is like. There are many painful disorders, some of which we somewhat understand the causal process, like cancer and pancreatitis. There are others that we don't. I have no doubt that some people who are diagnosed with fibromyalgia experience extreme pain.

I also found out how easily personality could be altered by brain chemistry when I was taking large doses of prednisone, which made me manic. I would never have slept without some powerful sleeping pills, and those only gave me 3-4 hours per night. And then I experienced clinical depression when I came off it.

Tita was sitting reading the paper this morning with her neck warmer on because she had a migraine, a fairly commom occurrence. I don't know what it is like but I am pretty sure it is not fun. Maybe we all should be a little more sympathetic to those who are suffering and thankful if we are not.

Republican nonsense

Is Mitch McConnell a whore for Wall Street? We will see. If any effort to have a mechanism for winding down big banks is a bailout, or a guarantee of taxpayer assistance, then the obvious answer is to break up the megabanks. But the Party of No is disgraceful. After eight years of George Bush and his minions (who apparently ran the show), they truly have the Audacity of Hype.

But let's get over the notion that bailing out the banks at the time was not the thing to do. In hindsight, we should have nationalized some of them and broken them up, but it was hard to know what to do at the time. Can you imagine all the major banks failing? It would have been a catastophe of enormous proportions. Think Great Depression. A lot of people on the left need to get this, too. This nonissue is a huge roadblock in thinking about how to prevent something similar from happening again. And to protect democracy from big banks.

So Mitch, what is your proposal? Or are you redoing the health care reform strategy? I favored the Wyden-Bennett approach, but instead of supporting some positive reform, the Republicans proposed nothing. Death panels. Socialism. Keep appealing to the idiots in your base and the party will self-destruct as the Democrats did in 1968.

And Tea Party goofballs, please take Econ 101. There are good economic reasons for a stimulus package. We will never have the final word on how effective it was, but your party just made it worse by insisting on tax rebates, the most ineffective measure of all. The Democratic Party stinks, too. But I really don't see how you can rationally see Obama as a terrible president at this point. Looks to me like the Audacity of Hate.

Here and here are a couple good Bruce Bartlett posts that illustrate the stupidity. Check out David Frum, too.

Prove me wrong Mitch.

Addendum: As usual, here is Simon Johnson at Baseline Scenario putting the bank issue best.

Post 100

This is post number 100 in a blog that began as an outgrowth of some discussions about political issues amongst various friends, a couple of which are always talking about this stuff in a very self-assured way, but whose views are 180 degrees apart. So I decided to focus more on current issues, such as health care and the financial crisis. Now I am moving on. It feels like a relief. I spot all sorts of silly stuff in the news, which I now watch with a more disinterested sense of detachment. The silly stuff Mitch McConnell is saying now makes me think that the banksters will come out ahead. The Dodd bill doesn't go far enough but Mitch doesn't even want to go that far. C'est la vie. Politics is not policy.

Apparently, there has sprung up a debate on the libertarian blogs regarding whether the late 1800's were libertarian paradise. David Boaz of Cato rightly pointed out that 1780 could hardly be since we had institutionalized slavery. Here are a couple posts from Tyler Cowen and Megan McArdle on the debate. This paradise lost stuff is silly, as is Bryan Caplan. I'm sticking with Rawls, no matter what common sense tells Bryan. I am not much a believer in "conventional wisdom" anyway.

I am reading Our First Revolution by Michael Barone, which is about the "Glorious Revolution" in England in 1688-89. One is struck by how extremely polarized discussion was along religious lines. Also, he claims that the first political parties were formed in the mid-1600's there, between Tories and Whigs. I would have been a Whig, I think.

How did we get to the political views each of us has today? My political birth began in the late 1960's. I was very anti-establishment. Later, I read and liked Ayn Rand but also read Marx and lots of other political theorists. Even in the late 1980's I was still an idealist who thought that we could promote social justice via class action lawsuits against the government. However, it gradually dawned on me that these had little effect. So I settled on a career helping disabled people who were fighting the government. I could at least point out specific cases where specific people were helped. After a lot of hard work, it turned out to be a decent career. I feel pretty lucky that I actually found a niche in law that I have enjoyed. Most law jobs strike me as incredibly boring or hideously compromised (sucking up to fat cats).

It is a beautiful day. Life is good. Time to hit some golf balls.

Victorian England

I am reading the excellent Daily Life in Victorian England by Sally Mitchell. Queen Victoria ruled from 1837-1901!! The book is about how ordinary people lived. Most people worked 12-16 hours a day six days a week. Children went to work as early as 4 or 5 years old. Millowners made agreements with local authorities in impoverished areas to take orphan children as young as age seven off their hands. Most young people were in full employment by the age of 13 or 14.

An 1832 law doubled the number of men who could vote. An Act passed in 1829 created the first professional police department in London. Before that, citizens took turns acting as constables. The 1836 Marriage Act made it a contract regulated by the state rather than the church. After marriage, a woman had no independent legal existence. She didn't even have the right to tend her children if the husband died. It was required that the husband's will appoint her as the guardian.

They had something some conservatives would have loved. It was called the Poor House. It was where people went who required "welfare." It was set up to disincline people to ask for help. They worked all day, were fed terrible food, etc. Eventually it was discovered that only one-fourth of these people were able-bodied. The rest were sick, the old, the disabled, etc.

I think that if current people really knew what life was like in the past, they would cease glorifying it, conservatives and progressives alike. Unfortunately, not much history is taught in school (at least it wasn't when I was young). And most of that was superficial and more about promoting nationalism rather than truth. Of course, in my high school, the coaches were assigned to teach history. Obviously, it wasn't an important position. On the other hand, maybe it's harder to appreciate history when you don't have much personally.

Here is another interesting fact: of all the people who have reached 65 in the history of the planet, more than half are alive today. Maybe Social Security was an idea whose time had come.

Turning pessimistic

Just finished 13 Bankers. Here is Niall Ferguson's comment:

"Too many discussions of the Great Recesssion present it as a purely economic phenomenon--the result of excessive leverage or errors of monetary policy or algorithms run mad. Simon Johnson was the first to point out that this was and is a crisis of political economy. His and James Kwak's analysis of the unholy intertwining of Washington and Wall Street--a cross between the Gilded Age and a banana republic--is essential reading."

I cannot read any more on this stuff. These guys have connected the dots as well as anyone I have found. So I'm off to other adventures and will sit back and see what the political process, always an ugly tug of war between various interests, does about this. I am not optimistic.

In retrospect, the last line of David Brooks column the other day maybe says it best: "Surely a country with this much going for it is not going to wait around passively and let a rotten political culture drag it down." But that is long run. Short run I do not see it happening. Obama would have to become Teddy Roosevelt.

optimism and banksters

I applaud David Brooks column here on the future of America. The glass is at least half full. Reminds me of Zakaria's wonderful The Post American World. Lots of good stuff around today on the silliness of some progressive stuff on China. Here is James Fallows.

Mike Konczal is becoming one of the more respected bloggers on financial reform. This makes me wonder why republicans are working so hard to prevent derivatives regulation. I smell a ridiculous compromise coming down the road from our politicians. Mike has been subbing for Ezra Klein this week and has been so good I may delete Ezra's link and add Rortybomb.

Finally, here is more Tyler Cowen wisdom on financial regulation. I may just give up thinking and believe whatever Tyler does.

Flying a little low today. Was too excited during the b-ball game to eat, but not to drink. So take the above with more than the usual amount of salt.

Addendum: Not sure why the Konczal link won't work. Check out the post on Matt Taibbi on Ezra Klein's link below.

13 Bankers

I'm now on page 135 (of 222) of this very clearly argued and compelling book by Simon Johnson and James Kwak. Best analysis I have seen so far. Seems that the repeal of Glass-Steagall was to allow Citigroup and Travelers to merge and to allow all the megabanks to get into the investment banking and insurance industries. I am coming slowly around to the conclusion that new regulations cannot work. At the least, they should not be about giving regulators more discretion. Regulators always end up getting captured by the industry. Thus, the solution is to break up the megabanks. They have too much economic and political power and have managed to bend the law to their advantage for too long.

Mike Konczai has a very nice reponse here to Paul Krugman. It is not either-or, regulations or break-up. Do both. But put a cap on size. At the risk of being blunt and boring, I see that as the message of Taleb's elephant story, too.

Johson and Kwak have argued that capital requirements will not work on their blog, and here is a more complicated version of the argument. Basically, megabanks can use accounting rules to hide their debt, which is what Lehman did with their repo 105 accounts. Which is what all the banks did with SIV's. There is a NY Times article today which argues that ultimately what we need is civil liability for such accounting lies.

The story of the move to deregulation is much more complicated than the progressive myth that it is all Reagan's fault. Carter supported it, too, and it worked for the airline industry. Deregulation movements began even earlier and arguments by economists began even earlier than that. John Cassidy captured some of the movement of ideas in his excellent How Markets Fail.

In spite of the fact that laissez faire was an ideology largely adopted by conservatives, which greased the wheels for financial deregulation, every solution that I seem to consider involving greater regulation seems futile, and thus pushes me to a more conservative position. More government won't work. What is needed is the Teddy Roosevelt solution. Megabanks have too much political power and must be broken up to preserve democracy. This also once again points to the fact that the ideology floating around in pop culture is mostly a distraction, as most "news" is noise. We cannot trust the politicians to fix it, nor the Supreme Court. We cannot trust the Fed, either. What is left?

Banksters and Black Swans

"Ward, we all want to be optimistic, that is why we get up in the morning every day even though we know what the end will bring, more taxes." That was a comment to me by a friend. Pretty funny stuff.

The Big Short by Michael Lewis was a page-turner that I had difficulty putting down. About the guys who really foresaw the financial crisis coming (no, not Thom Hartman). Now I have started 13 Bankers by Simon Johnson and James Kwak, who argue that Wall Street is the newest oligarchy and that the big banks need to be broken up, much like Standard Oil was during T.R.'s time. So far, so good. They recognize that Hamilton was essentially right about finance and Jefferson was wrong.

A debate seems to be coalescing around this issue. Here, Paul Krugman thinks this position is wrong and that regulation is what is needed. I find his argument that because small bank failures in the 1930's led to a crisis, it is not "bigness" that counts, not very convincing, just as I find his arguments for taxing Chinese goods unconvincing. Here, here and here are three Johnson/Kwak posts arguing their position. The jury is still out for me, but I am hoping regulation can work.

The unintended consequences of an action or inaction are always difficult to ascertain. My uncle argues that we never should have based a retirement system on the contributions of current workers to previous generations. This may be fundamentally correct. But Social Security is here to stay. I wonder if the principle, though, of fixing the current by imposing upon future generations does not contain a general lesson that we should learn. He thinks people will wake up someday and not be so "greedy." I am more pessimistic about the human condition. People believe that it would be unjust to take away benefits that they have been promised (like Madoff investors?).

Here is another possibly surprising unintended consequence. What if we had not funded the muhjadeen in Afghanistan and Russia still ruled the country? No weapons for crazy Islamist terrorists. No place for Al Qaeda to train for 9-11. No need to be there now.

I am not a big supporter of Thomas Friedman, but I think that here he is on the mark. Why should we expect anything to change in Afganistan or Palestine? Same old stuff. I think Obama's mission is going to fail. I guess the question is what were the real options? There are those who say we should stay until it is fixed. After all, "the surge worked." It seems rational to give it a chance, but I am glad that it is supposedly time-limited.

The Cold War strategies in general have had huge unintended consequences. The U.S. and Russia ended up arming the rebels of the world in their "the enemy of my enemy is my friend" type of thinking.

We truly have great difficulties predicting the future. Maybe this calls for a couple of quotes from Nassim Taleb, who has added a new chapter for the paperback edition of The Black Swan, which is available on-line by going to his website or The Browser at the bottom of this page.

"Second, Mother Nature does not like anything too big. The largest land animal is the elephant, and there is a reason for that. If I went on a rampage and shot an elephant, I might be put in jail, and get yelled at by my mother, but I would hardly disturb the ecology of Mother Nature. On the other hand, my point about banks in Chapter 14—that if you shot a large bank, I would “shiver at the consequences” and that “if one falls, they all fall”—was subsequently illustrated by events: one bank failure, that of
Lehman Brothers, in September 2008, brought down the entire edifice. Mother Nature does not limit the interactions between entities; it just limits the size of its units. (Hence my idea is not to stop globalization and ban the Internet; as we will see, much more stability would be achieved by stopping governments from helping companies when they become large and by giving back advantages to the small guy.)...

I was once selected to be one of a group of a hundred who went to Washington to spend two days discussing how to solve the problems of the crisis that started in 2008. Almost all the biggies were included. After an hour of meeting, and during a speech by the prime minister of Australia, I walked out of the room because my pain became intolerable. My back would start hurting upon looking at the faces of these people. The center of the problem is that none of them knew the center of the problem.

This makes me convinced that there is a unique solution for the world, to be designed along very simple lines of robustness to Black Swans—it will explode otherwise."