The Agonist - thoughtful, global, timely

Lions, Tigers and Snakes, Oh My!

Tue, 09 Feb 2010 07:48:12 -0800

Any writing I do about Central Asia tends to the more historical and runs away from the contemporary political. Mostly for the reason that the reporting out of the region--I'm not talking about Afghanistan, here--tends to be so bad, so mis- and ill-informed. Take Reuters for example:

Analysts say long-defunct groups like the Islamic Movement of Uzbekistan are regaining force in the impoverished region where ethnic tensions have long simmered under the surface.

"They (militants) are preparing the ground for a long, sustained military campaign in Central Asia," said Ahmed Rashid, a leading Pakistan-based expert on Afghanistan and Central Asia.

And then they go on to give this example or 'terrorism:'

First alarm bells rang in Central Asia last year when Uzbek, Tajik and Kyrgyz troops fought gangs they described as terrorist -- around the time when the security situation in northern Afghanistan deteriorated sharply.

"It does not matter who exactly was behind those attacks. It still means instability, that something's going on," said one Western diplomat. "It is certainly something we are watching."

Of course they cite the defunct IMU of Juma Namangani--he who was killed in late 2001 by a US missile. And they raise the phantom of the Hizb-ut-Tahrir, a millenialist and anti-secular group who aims to reestablish an Islamic Caliphate by peaceful means. HT has never engaged in any form of violence, which is probably why the authorities in the region dislike them so much.

Of course the writer of the story really buries the lede:

"It is the Central Asian regimes that continue terrorising their people," said Taji Mustafa, [the HT] representative in London. "Since the declaration of the West's so-called 'war on terror', Central Asian governments have used it as a convenient umbrella to pursue, arrest and torture their political opponents."

Maybe the media ought to look into that angle?

The Coming Showdown with the Unions

Tue, 09 Feb 2010 05:35:54 -0800

At the center of the current fiscal troubles in Greece, Spain, Portugal and elsewhere in Europe are the promises made by governments to fund union salary increases and pension plans. Unions in Europe are much stronger than they are in North America, and in many of Europe’s less-wealthy countries, governments have chosen over the years to appease union demands even though it meant driving fiscal deficits well beyond the level tolerated by EU rules. Now that these governments are finding it impossible to continue to borrow on global markets without firm evidence that these deficits are going to be brought down, proposals to cut union pay or benefits are being met with strikes by firefighters, police, teachers, farmers, and others.

Do not for a moment think that these problems are not to be found in the United States. The difference here is that the “appeasement”, such as it is, has been concentrated at the state and local level, though the federal government has its share of unfunded promises to workers. The 50 states last year ran up a combined deficit of around $180 billion – coincidentally about the same amount that the US has spent bailing out AIG. The federal government has also helped out the states during this fiscal crisis, by lending them money to continue paying normal as well as emergency employment benefits to laid off citizens. This has averted a real crisis, since states are constitutionally required to plug any annual deficits. The real problems will show up later this year and next when the federal loans run out.

The basic cause of these fiscal problems in the states has not been any sudden explosion of spending, but rather an implosion of revenue. Tax receipts across the nation are down due to the economic downturn. States which rely on property taxes and income taxes have been especially badly hurt, but sales tax revenues have also suffered as consumers cut back on their spending. Municipal tax receipts in most communities are lower, especially for cities and towns which took in a bonanza from property transfer taxes during the housing bubble. Even the federal government has seen a dramatic and unprecedented drop in tax revenues, especially in the area of capital gains taxes. The federal government, unlike other governments, can run deficits and certainly has chosen this route rather than seek out savings from spending cuts.

At least when it comes to state and local deficits, the US is now at the stage where government officials must look at spending cuts, and their only real choice if they want to make a serious dent in these deficits is to focus on union workers, their salaries, their overtime, their work hours, and their pension payments. Unions have been banished from many parts of the private economy, and are to be found only in a few manufacturing sectors like automobiles where they have had a traditional stronghold. But unions remain very strong and well represented in the public sector, as teachers, police, firefighters, mass transit workers, and civil engineers.

There are at least two ways to look at union contributions to the public sector. From the union perspective, workers in state and local government have decent middle class salaries because of the unions. An hourly wage may be in the $25/hr. range for typical employees; managers on salaries can earn $100,000 or more in many large to medium size communities, based on salary scales that are public and mandated by the state or local government. In expensive communities throughout California, for example, without the unions there would be no government employees, because middle class workers cannot afford to live in towns where the average home costs $500,000. Additionally, union members get generous pension benefits, on the theory that they have foregone years of wealth-creating bonuses that would have been theirs if they worked in the private sector. There are, obviously, no stock option plans for government workers.

The other way to analyze unions is from the outside looking in, and here the opportunity for outrage is certainly high. In medium to large cities, the pay scales for managers often dictate a salary of $250,000 or more. Retirement for most workers starts at age 50, with a pension being paid out anywhere from 70% - 90% of income at the time of retirement. These pensions are lifetime guaranties, and they are supplemented by generous health care benefits not typically found in the private sector. Many communities allow “double-dipping” during the last five years of employment until retirement, wherein the worker can take home full pay, full retirement benefits, and full pension payments.

These policies lend themselves to anecdotal horror stories that do not sit well with the average taxpayer in the private sector who has seen their wages stagnate, their benefits cut, their working years extended beyond age 65, and their 401k’s wiped out. Stories appear frequently in the press about the ticket taker at the subway station who is earning $85,000 a year, or the recent case of the Under Sheriff of San Luis Obispo county in California, who has taken home $640,000 a year because of double-dipping allowances (his assistant takes home $340,000 under the same plan).

City managers everywhere are looking to reduce salary scales for government workers, cut back on benefits such as the matching contribution government makes to pension plans, and redefine the government’s authority to reduce staffing (in many cases it is very difficult to downsize union staff). On top of this, these managers are being informed that the union pension plan is now seriously underfunded thanks to massive losses in the stock market, and that the state or local government is legally obligated to make up the difference. In many situations these deficiencies total in the billions of dollars – money that local or state government doesn’t have.

You thus have the making of a classic political and economic battle. Unions are showing up in force at council meetings or state legislatures to protest cutbacks. Teacher strikes are becoming more common, and police and firefighters who cannot strike can at least protest and issue dire warnings of fire fatalities and jumps in crime if services are reduced. On the other side, right wing radio commentators have plenty of anecdotal fodder to deride union featherbedding and egregious benefit packages, and it doesn’t take much to stir up the general electorate against appeasing the unions when so many private sector workers can only dream of guaranteed pensions and health benefits for life. In fact, where the general public often finds itself in these battles is voting down any initiatives to raise taxes in order to meet legal obligations to the unions, the result being that the state has to renege on these obligations in order to balance the budget.

Many states and localities can still try appeasement to avoid nasty run-ins with the unions. Phoenix, Arizona chose to increase tax on food by 2% rather than fire public workers or reduce their pay and benefits. Ironically, this tax falls most heavily on the poor, many of whom work for local or state government in menial but stable positions. When it comes to funding the pension plan deficits, one easy accounting gimmick is to change the long term earnings assumptions of the plan. In many cases these plans already have ridiculous assumptions as to asset growth, often using for the stock portion of the plan an assumption that equities will earn 8% p.a. over time. It takes just a stroke of the pen to declare this assumption to be 10% p.a., so that the plan will magically take care of any deficits by itself with superior performance. Another trick is to authorize plan managers to invest in hitherto forbidden financial instruments like derivatives or commodities, on the belief that the returns are greater in these sectors. They are certainly greater, but so is the risk, and inevitably these desperate attempts to reach for risk are bound to fail.

It is not too difficult to determine the outcome of this fight. States and localities have no choice but to close their deficits, and the taxpayer has no appetite for greater taxes. Therefore the unions will have to accept cutbacks in salaries, wages and benefits; reductions in pension plans (amounting to an outright repudiation of legally-agreed payouts); and the loss of job protection, so that government officials can fire workers much more quickly. There will be nasty strikes over the next few years, and lawsuits aplenty as these cutbacks are enforced, but there simply isn’t the money to continue to pay union workers in government anything like what they have received in the past.

The deflation that has ravaged the pay and benefits of the middle class private sector worker is about to work its damage on the public sector as well. The middle class in the US will shrink even more, as one of the last bastions of protection against rampaging globalization and Republican market orthodoxy succumbs. We can say “one of the last bastions”, but there is still one left, a sector of the economy that isn’t even unionized. That is the pay and benefit programs for the military, especially the officer corps who can retire at 50, slip into a well-paying job in the industrial complex, yet also take home generous retirement benefits. The costs of supporting tens of thousands of these retirees is galloping forward year after year, but this is so far a sacrosanct area that no politician will touch.

Even the Department of Defense may not be able to hold out forever, if economic conditions get really bad (and that is likely to be the case). If so, the concept of retirement with a fixed pension payment will be obliterated in this country, as the US continues on its path of erecting third world standards of pay and benefits for all its workers.

A Poem For Tuesday

Mon, 08 Feb 2010 22:08:46 -0800

Here is one by Peter Spiro:

Cause and Effect

Cause you are poor
You go to public school.
Cause public school is free
You get a lousy education.
Cause you get a lousy education
You are uneducated.
Cause you are uneducated
You are treated with contempt.
Cause you are treated with contempt
You are contemptuous of others.
Cause you are contemptuous of others
You do not abide by the rules.
Cause you do not abide by the rules
You do not have a job.
Cause you do not have a job
You steal.
Cause you steal
You go to prison.
Cause you go to prison
Your life is wasted.
Cause your life is wasted
You are angry.
Cause you are angry
You are dangerous.
Cause you are dangerous
You are a bad effect.

And you are destroyed.

Cause you were a bad effect
Cause you were dangerous
Cause you were angry
Cause your life was wasted
Cause you went to prison
Cause you stole
Cause you didn’t have a job
Cause you did not abide by the rules
Cause you were contemptuous of others
Cause you were treated with contempt
Cause you were uneducated
Cause you got a lousy education
Cause you went to public school
Cause you were poor.

- Peter Spiro

F*#K Vegas

Mon, 08 Feb 2010 13:36:07 -0800

QOTD:

This brings me to the second telling event of last week when President Obama said, kind of off-hand, apropos of the US economic situation, "You don't blow a bunch of cash on Vegas when you're trying to save for college. You prioritize. You make tough choices." Senate Majority Leader Harry Reid (of Nevada) was all over Mr. Obama like a cheap suit for that. I'm sorry that the President didn't slam back the craven Mr. Reid and pull his upper lip over the top of his head. Fuck Las Vegas and fuck Nevada, and fuck all the casino operators in every pulsating gambling venue around this country. The last thing we need is to continue believing that it is possible to get something for nothing, or an industry based on that false principle. I'd go a lot further and shut down legalized gambling all over the USA, send it back to the margins, to the alleys, to the berm between the WalMart and the Target Store, to the basement boiler rooms, to the public bathrooms, to wherever it will be identified as indecent, shameful, and not healthy.

I've never been a gambler and opposed the legalization of gambling across the country for one key reason: it is a regressive tax. Those who can least afford it end up paying for it. So, if you want the lottery to fund your schools, as we did in Texas--and seriously, what the hell kind of mixed message do you we send out kids? Then you make the poor pay for it via lottery tickets.

Why bother getting everyone to pay for it fairly?

It's immoral and shameful.

Blame It On The Czar's Advisers, Not, Of Course, On The Czar

Mon, 08 Feb 2010 11:50:53 -0800

All this gnashing of teeth about the Czar's inner circle is such old news. I wrote about this months ago. But it's certainly easier for Americans to blame the evil advisers of the Czar than accept the fact that the Czar shares their assumptions and ideas.

As I wrote then: "Seriously, this is a narrative trope straight out of Czarist Russia, when the peasants, long oppressed and over-taxed bemoan the fact that their Czar loves them, but is surrounded by evil ministers."

Occam's Razor, the Goodness of Fit, whatever you test you want to use, the bottom line is that Obama's advisers are a reflection of the man. Not the other way around.

Juarez Is Our Future

Mon, 08 Feb 2010 09:43:45 -0800

Excellent piece by Ed Vulliamy in the Guardian UK. He's writing a book about Juarez and the Drug War there and tries to sum it all up:

... certain themes are inescapable: this brutality defines a war very much of its time, the first 21st-century war, because it is, in the end, about nothing. We have lived in a world where Arabs fight Jews, Hutus fight Tutsis, communists fight fascists, Serbs fight Croats, and British and American troops fight Islamist fundamentalists. They do so for a cause, faith or deeply etched tribal identity, however crazy.

But Mexico's war (some do not like calling it a war) has no such purpose. Mexicans are mutilating, decapitating, torturing and killing each other, ostensibly over money and the drug smuggling routes that provide it. But most of the violence revolves around the smaller profits of the domestic market and street corner. It is meted out for its own sake. Yes, there are regional and clan allegiances to the states of Tamaulipas, Michoacán or Sinaloa, but they are fluid and subject to far too many whimsical alliances and betrayals for the war to be compared to, say, tribal conflict in Rwanda.

The utter nihilism at the heart of Mexico's Drug War is shared by many young Americans today. Only our wealth and the insulation that our incredibly vigorous police state provide keep the lid on madness. And we can't afford to keep the clampdown on forever. Nor can we afford to provide gainful, meaningful employment to our young men.

And since the shared vision of our culture -- the "American Dream" of individual wealth with no responsibility to the larger community -- is utterly morally bankrupt, there is no mental barrier hold back evil. The Banksters who rule our society by shamelessly defrauding us all and then squandering the obscene profits on helicopters and high class prostitutes are just more polite versions of the killers in Juarez. They are in fact closer to the heart of the system that is producing the mega-violence in Mexico and profit from it via money laundering far more than any drug kingpin. When the "Masters of the Universe" of Wall Street are our highest vision of success it's just a matter of peeling back the mask to reveal the Death's Head behind the plastic surgery.

With no valid moral guidepost that is compatible with what we know to be true in 2010, we can expect nothing other than hedonism and selfishness, lust and greed and power and sexual violence to consume us all.

Another wise voice is that of the writer Cecilia Ballí, whose ancestors were once great ranchers around Matamoros and what is now Brownsville, Texas. "People say this is all about money," she says, "but it's about money and something beyond money; it's a social performance, a performance of power, of very male power. It's about being someone, a performance in a place and a country where that was not supposed to be possible."

The clock is ticking. Our turn is coming.

He discuses the impotence of traditional politics in the face of the carnage:

Instead, a war that is quintessentially materialist and largely male meets resistance from two quarters that do not belong to conventional politics – religion and women. Though the Catholic church remains equivocal, priests on the ground face down the narcos and have been executed for doing so; rehab centres attacked by the narcos are run by born-again evangelists, often former addicts and gang members themselves.

The women fight as individuals, through organisations and in the home. In this deeply religious country, even the narcos have "sanctified" their war through the nihilistic cult of "Santisima Muerte" – the goddess of death.

After several years reporting from the border, and for the best part of the past year on the narco war, I feel in some way more confused than when I started. Not least because a "post-political" war is only meeting resistance from "pre-political" religion and the clergy – something that baffles a secular mass media always looking for political or military solutions that serially fail.

Note that the battle lines are between the post-modern and the pre-modern. The rationalist, modernist world view of the political activists render them/us utterly helpless in the face of truly nihilistic madness.

We must forge a new understanding of the sanctity of love and life to defeat the evil that is eating us from the inside out.

As Analogies Go

Mon, 08 Feb 2010 07:58:38 -0800

As analogies go, it's decent, but I don't think it's a snug fit:

What we’re getting instead is less a tragedy than a deadly farce. Instead of fraying under the strain of imperial overstretch, we’re paralyzed by procedure. Instead of re-enacting the decline and fall of Rome, we’re re-enacting the dissolution of 18th-century Poland.

A brief history lesson: In the 17th and 18th centuries, the Polish legislature, the Sejm, operated on the unanimity principle: any member could nullify legislation by shouting “I do not allow!” This made the nation largely ungovernable, and neighboring regimes began hacking off pieces of its territory. By 1795 Poland had disappeared, not to re-emerge for more than a century.

Actually, I think our situation is much more analogous to that of ancient Athens. But that's just me.

Cuomo Takes on The Money Party

Mon, 08 Feb 2010 04:12:01 -0800

Bank of America Looks Like First of Many

Michael Collins

"This merger (Bank of America and Merrill Lynch) is a classic example of how the actions of our nation’s largest financial institutions led to the near-collapse of our financial system," said Attorney General Cuomo. "Bank of America, through its top management, engaged in a concerted effort to deceive shareholders and American taxpayers at large. This was an arrogant scheme hatched by the bank’s top executives who believed they could play by their own set of rules. In the end, they committed an enormous fraud and American taxpayers ended up paying billions for Bank of America’s misdeeds."(Image)

New York State Attorney General Andrew Cuomo

Andrew Cuomo's complaint filed in the New York Supreme Court, County of New York against the Bank of America and two former top executives has the potential to push that too big to fail entity off the edge of a very steep cliff. The charges of massive fraud are based on a compelling and exhaustive filing on February 4.

A trial will likely involve testimony by the current Bank of America CEO and President Brian Moynihan against defendants Kenneth Lewis, the bank's former CEO and board chairman, former chief financial officer (CFO) Joseph L. Price, and the bank itself. Price is currently in charge of BofA's credit card division.

The complaint charges fraud before, during and after the bank's merger with struggling brokerage firm Merrill Lynch in late 2008. The fraud cost bank shareholders and citizens billions of dollars. This is the first major case brought against our nation's largest financial institutions. These are the same financial institutions and executives that nearly destroyed the economy.

Cuomo's press release states clearly that Lewis and the bank are examples of a much larger problem. It appears to be a leading indicator of future actions by the New York attorney general. Why else would Cuomo have generalized about institutions (plural) in his statement about this particular case?

If Cuomo succeeds in taking down one of the toughest guys on the block, he'll make a point to the rest of the crew: you're next, get ready to cooperate. Many of the key perpetrators are located in Cuomo's jurisdiction, although Bank of America (BofA) is headquartered in Charlotte, North Carolina. Clearly, there are others in line for some New York style law and order.

Cuomo is joined in this action by Niel Barofsky, Special Inspector General for the federal government's Troubled Asset Relief Program (TARP). TARP provides the billions in bailouts to bogus bankers and corporations. There's a credit line of $23.7 trillion should it be needed for even more bailouts. Ever wonder why you can't get a loan? They've taken all the money.

Charges and remedies

The bank and the two named executives are charged with failing to inform the bank's board of directors and shareholders of the major red ink on Merrill Lynch's books prior to the merger. CEO Lewis, CFO Price, and other BofA officers and professionals chose to hide $16 billion of Merrill Lynch known pre tax losses prior to board approval. That's fraud, plain and simple. Complaint filed by New York Attorney General, Feb 4, 2009

The complaint also charges that the same parties with strong arming the federal government for $20 billion to cover Merrill's debt by threatening to back out of the merger if the money wasn't forthcoming. Then Secretary of the Treasury Henry Paulson and Fed Chairman Ben Bernanke had encouraged BofA to acquire Merrill, apparently without a rider that BofA would get billions in the process to cover their fraudulent business practices.

The lawsuit seeks two overriding remedies. The two named defendants and the entire Bank of America are enjoined from "any conduct, conspiracy, contract, or agreement, and from adopting or following any practice, plan, program, scheme, artifice or device similar to, or having a purpose and effect similar to, the conduct complained of above."

In addition, the defendants and the bank are to "disgorge all gains, pay all penalties and pay all restitution and damages caused, directly or indirectly, by the fraudulent and deceptive acts complained of herein"

These and the other remedies promise a degree of justice and, quite frankly retribution for the mess caused by the defendants. An unnamed and unintended remedy could be serious damage to the good will value of the Bank of America. The spectacle of a conviction of the bank and a former CEO and current division head for fraud would have a devastating effect on public confidence. Too big to fail may be a notion upended once and for all by a guilty verdict.

Witness Lineup – It's Bank of America versus Bank of America

Andrew Caffrey and Todd Wallach of the Boston Globe, hinted that Bank of America president and CEO, Brian T. Moynihan will be a key witness for the prosecution. The Globe article notes that the current BofA chief, "who was involved in negotiations (for the Merrill acquisition) as the bank’s general counsel, was not charged." Later in the same article, they quote Cuomo as saying, Moynihan, "has been candid with our office with respect to the roles he played after becoming general counsel."

Put simply, Moynihan was central to the merger, knew about the fraud, participated in it, but didn't blow the whistle. All of that is established in Cuomo's complaint. He cooperated with Cuomo and wasn't indicted. His name will be at the top of the attorney general's witness list, no doubt.

As if that's not bad enough for the bank, defendant Joseph L. Price, former CFO, is currently heading up Bank of America's credit card division.

Should Moynihan testify, we'll see BofA's current CEO helping Cuomo convict his predecessor of fraud. Moynihan's testimony will also argue for a conviction of his current head of credit card operations. Since Bank of America is charged, we'll also see its current CEO plus the “Relevant Parties” described in the complaint testifying that the corporation was also guilty of fraud. Many of the 35 Relevant Parties named are current or former BofA executives or board members.

Other key witnesses may include Federal Reserve Chairman Ben Barnanke and former Treasury Secretary and TARP architect Henry Paulson, They encouraged the Bank of America - Merrill Lynch merger as part of their efforts to prevent an alleged financial meltdown at the end of the Bush administration..

Charlie Gasparino of the Daily Beast reports that the defense counsel, former U.S. Attorney Mary Jo White, wants the case dismissed. If not, Gasparino says that "one person close to the defense” claims that White will call Paulson and Bernanke to testify. Cuomo has the facts and obviously believes Paulson and Bernanke on the sequence of events leading to these charges. Absent a “Perry Mason” moment by the defense, their testimony holds no surprises or benefits for the defendants. Mary Jo White has little or nothing at this point other than bluster.

Justice for the people?

It's been ten years since Congress and President Clinton freed Wall Street and the major banks to open a big casino on Wall Street. That resulted in ruinous schemes like the real estate bubble. It's been five years since Alan Greenspan told citizens to get an adjustable rate mortgage, cash out the equity in their homes, and jump into the stock market. It's been over a year since Wall Street and the big banks nearly ruined the economy, cost citizens jobs, savings, retirements, and countless other hard earned gains through a variety of no-win schemes sold as solid investments.

Nothing of any importance has been done to regulate the financial industry since the bailouts. Prior to the Cuomo-Barofsky charges, there have been no major cases brought against the perpetrators of our current troubles.

Hopefully, New York Attorney General Andrew Cuomo started what will become an era of accountability for those at the very top. This should be about more than just one case. It's an example of top down accountability.

May the bank, Mr. Lewis, and Mr. Price have the speediest of trials and the absolute maximum penalties should they be found guilty.

They knew exactly what they were doing every step of the way.

END

This article may be reproduced in full or part with attribution of authorship and a link to this article.

Next Monday - Cuomo's Lock Down – The Case in Detail

Complaint filed by New York Attorney General, Feb 4, 2009

Rep. Kucinich Grills Ken Lewis on Fed Emails, June 11, 2009

Rep. Cummings Questions Brian Moynihan Regarding the BofA/Merrill Lynch Merger, Nov 17, 2009

The Saints Have Arrived!

Sun, 07 Feb 2010 21:51:01 -0800

Congratulations New Orleans to a championship well earned! And to fans who, after 42 years of futility, finally got what they most deserved!

Pakistan's Elected Civilian Government Caught Between the Supreme Court and the Military

Sun, 07 Feb 2010 17:39:11 -0800

Good piece in The Hill from Eileen M. O’Connor of the American Committee for Democracy and Justice in Pakistan. She points out that the Zardari administration, for all its own issues, is threatened by both the military and the Pakistani Supreme Court:

the Supreme Court’s decision to overturn the NRO also upheld a controversial article of Pakistan’s constitution, much to the dismay of some of the brave lawyers who took to the streets to defend the court’s judicial independence and integrity last year. Article 62 was conceived in 1985 by General Zia-ul-Haq and declares that members of parliament (which includes the currently elected president, Asif Ali Zardari, and all ministers of the Cabinet) are disqualified from serving if they are not of “good character,” if they violate “Islamic injunctions,” do not practice “teachings and practices, obligatory duties prescribed by Islam,” and if they are not “sagacious, righteous and non-profligate.” Non-Muslims must have “a good moral reputation.”

Relying in any way on such entirely subjective and political standards, such as “Islamic injunctions” and “good moral reputation,” increases polarization in the country and brings into question the political independence of the Pakistani Supreme Court, which those lawyers bravely defended on the streets as critical to the rule of law.

Snowstorm

Sat, 06 Feb 2010 19:45:55 -0800

There is two feet of new snow in my yard right now. This might not sound like much to northerners (like me, originally from Rochester, NY), but for Baltimore this is a millennial blizzard. There were thirty inches in some areas here since yesterday, I heard. It took me an hour to shovel a narrow path from my door to the driveway. The roads are deserted. Even if you can shovel out your car, where are you going to drive? Walking – like having a manual typewriter in the deep woods – reassumes its superiority.

One of the great things about snowstorms, for me, is that they free us of routines from which we lack the will (or sometimes the option) to free ourselves: errands, stores, reporting to jobs, reporting to school, deciding when to be at home and when not to be. All of a sudden, there is no place to go other than places you can reach on your own two feet while swathed in 10 pounds of clothing. Must-do's become expendable. There is no gotta-be-there thing that simply can't wait (unless you're talking hospital emergency rooms). You've got the gift of enforced open time and space, no thanks to yourself, but courtesy of an act of the Universe. Pretty cool.

Today I balanced my checkbook (for me, a revelatory experience), watched three cardinals cast their almost blinding red against the overwhelming white, shoveled, scribbled some notes for a poem I think I'm going to like, ate temple oranges (how come you can only get them for about a month?), burned a bunch of CDs, meditated, and made a snow angel. Man, it felt good to fall backward into the deep snow and lie there, letting it conform to me like some powder-ice-pack Swedish mattress. To a guy with a sore back after an hour of shoveling, the soft cold supporting my lumbar arch felt like heaven. I must have lain there for five minutes grinning and making animal noises.

We need this. Things that step in and say, "stop."

Starbucks Backlash

Sat, 06 Feb 2010 13:17:56 -0800

I remember the early days of the coffee boom, late eighties early nineties when Seattle grunge and the coffee shop atmosphere was all the rage. In San Antonio and Houston a few hip coffee shops popped up. Candlelight in SA and a nice place in the Museum District in Houston. Of course, there was no wifi yet, so they were nice places to order a cup of Joe and curl up with a good book. Or play a video game on my oversized, underpowered laptop with about as much free memory as a gnats brain.

But within a few short years Starbucks stores were popping up on every corner and all the little independent coffee shops were put out of business. The honeymoon with Starbucks actually lasted a long time, considering. But today, I sense the reverse happening. As if there is a large cultural backlash against the mega-corp, no matter how much good they claim to do.

I'm in San Antonio for the day. I pulled up Yelp to see if there were any independents in town. San Antonio is kind of a cultural laggard, but also somewhat of a bell-weather, in the sense that when something happens in San Antonio, it's already happened everywhere else. (I don't notice these things in Austin, as Austin is usually years ahead of San Antonio.) And so, I was very surprised to see a long list of independent coffee houses here. I'm sitting in a pretty classy joint right now. The wifi is free--unlike Starbucks--and the coffee is good. It's a clean, modern looking place, in a kind of anti-Starbucks vein. It's nice to see.

Anyone else notice this happening in your town?

Make Money Reliably Forever Or . . .

Sat, 06 Feb 2010 12:33:01 -0800

From I.O.U.: Why Everyone Owes Everyone and No One Can Pay.:

This is how it’s supposed to work. A well-run bank is a machine for making money. The basic principle of banking is to pay a low rate of interest to the people who lend money and charge a higher rate to the people who borrow it. The bank borrows at 3 percent (say), and lends at 6 percent, and as long as it keeps the two amounts in line and makes sure that it lends money only to people who will be able to pay it back, it will reliably make money forever.

Reliably make money forever! Instead the banksters got greedy, decided that a return on equity of anything less than 25% per annum was unacceptable began their binge of serial acquisitions and soon we all crashed headlong into a crisis.

Me? I'd rather make money reliably forever. Boring is good. Singles win championships and all that. But hey, I'm not a greedy, megalomaniacal, ego-centered fucktard.

Geithner Calls Wang

Fri, 05 Feb 2010 21:12:36 -0800

From tonight's Nelson Report:

SUMMARY: preceding the President's talk to US business persons about the pressing need for China to allow the RMB to be revalued, Treasury Secretary Geithner called his Chinese counterpart, Wang Qishen.

Content of the call? Two versions: from the US, Geithner warned Wang that patience here has expired, and that if China does not launch a solid move toward rebalancing by the end of March, Obama will authorize Treasury to "cite" the PRC for currency manipulation in the twice-annual report to Congress, first due in April.

Chinese version: Wang told Geithner where he could put it, and seemingly threatened a pullback on T-bill purchases, and retaliation on US exports to China.

Discussion, below.

More after the jump.

US-CHINA RMB...on the "one phone call/two countries" chat noted in the Summary, the two versions are not mutually exclusive, since the alleged Chinese response is substantially that made in public in December by Premier Wen.

And as we've reported, senior Treasury officials were in Beijing prior to this week's excitements, relaying US concerns, and putting China on notice that revaluation was now the #1 US econ/finance issue for this year.

Sources now indicate Treasury's "take" on the militant Chinese response reflects one of two things:

Either a) there has been a clear State Council decision not to move and Wen is telling us all about it, loud and clear, or b) China's domestic politics requires a period of strident "remarks" to the outside world before they actually do move, on their own terms, so it will look like it isn't because the
foreigners said to do so.

Sources also indicate Geithner himself was considering going over to Beijing in recent weeks. The Chinese allegedly said, in essence, if you come, we will be forced to embarrass you, so don't come...that won't be good for managing the currency issue.

We'd comment that this point of view, if accurate, is encouraging in the sense that it confirms a continued Leadership determination to not let things slide out of control...and it may also help explain Geithner's optimistic remarks to senators yesterday.

However, sources also report what one calls "a rather furious debate" going on in China at the moment about all this between factions who see themselves as inflation fighters, "vs" the exporters and state planners.

Loyal Readers with insights...please don't be shy.

Our Report items on the currency situation generally prompt a lot of informed response, informed in the sense of coming from real economists and China analysts who really understand this stuff...and not just the politics of it on both sides.

One sample last night, from an anonymous expert, picking up on the "don't push me in public" point:

"Regarding the RMB, it has been in China's macro-economic interest for many years to allow the RMB to float (or at least have a lightly managed float). Trying to manage the Chinese economy while having the RMB tied to the dollar takes away a significant monetary tool from the Chinese government. This has been said to the Chinese several times ever since the currency issue arose and the Chinese have acknowledge this for many years.

Thus, this is certainly no epiphany now and Secretary Geithner is not the first to say it. Also, one of the biggest challenges in engaging with China on the RMB issue is whether raising the issue in a more public and forceful way will either finally convince the Chinese leadership to allow it to float or make them less likely to do so out of concern that they would appear to be bending to the U.S."

And this from another close observer on what might work, or not:

"We should all keep in mind that a Chinese revaluation of 5-10% would solve little. For them, it's about managing hot money inflows. As part of a revaluation, they will unquestionably continue to protect their exports by ramping up subsidies, including the VAT. To be meaningful, a Chinese revaluation would need to be more significant...note Bergsten et al are still talking a possible undervalued range of up to 40% relative to the dollar."

We should note the response yesterday of Heritage Foundation China economist Derek Scissors, who warns/worries that even a revaluation in excess of 40% wouldn't meet Obama's hopes:

"Chris...do we care about exports or net exports (the trade surplus)?

From July 2005 through June 2008, the RMB rose 20% against the dollar. And post-appreciation H108 US exports to China were 90% larger than H105 (pre-appreciation). Success!

But the H108 trade deficit was still 30% larger than the H105 deficit. Is that kind of result going to make the President and, especially, Congress happy? There's no chance the Chinese will proceed with a revaluation big enough to do what Congress wants."

-0-

So summing up on revaluation...this discussion shows why we really need to watch to see if the Administration's financial adults (Summers, Geithner, Volcker, etc al.) advise Obama that the time has come to really go after the RMB as a strategic issue.

Congress has been pushing "currency legislation" for several years, now, and we've often noted in prior Reports that the sort of bill to watch would allow the Commerce Department to push CVD cases calling currency misalignment an "actionable subsidy".

Advocates of that approach predict it would provide far more effective leverage than taking China to the WTO, or citing China as a currency manipulator under U.S. law.

Needless to say, this notion is why we have frequently reported on the "headline risk" vs "real risk" factor in currency legislation. Should Obama become so frustrated with China's pace of action on the RMB that he authorizes a CVD approach, it wouldn't just be Wall Street predicting a firm Chinese response...aka "a trade war".

An concerned observer ruefully concludes:

"But if we want to get this done [get China to meaningfully revalue], we aren't going to get there by 'citing' China in a report to Congress. That's a very ineffective tool, or taking them to the WTO...either action would basically set up an extended 'negotiation' with no real 'teeth'."

OK, (as a lead-in to tonight's "Perspective" by the Peterson Institute's Arvind Subramanian) so what should the Administration be doing?

"More multilateral pressure (not the WTO, but using the G7, G20, APEC, etc.) and bringing together the developing countries, who are really getting hammered by the undervalued RMB (so much for China being a 'champion of the developing world'!), and carefully calibrated bilateral pressure..."

Let's leave last word for tonight to that good Republican lad, Derek Scissors, who adds this "larger" concern:

"The Obama Administration wants to support exports. Not all exporters can be supported; this naturally and inevitably involves picking beneficiaries of government aid. At the same time, the President has declared a desire to dissuade companies from certain other forms of international activity, through tax increases.

There is a huge difference in degree between this and Chinese industrial policy, but is there a difference in kind? The President could support exports by cutting related or general corporate taxes. Instead, he's going to enlarge the government to support exports and enlarge the government again through levies to discourage outsourcing and investment overseas. I can't wait to find out that some of the companies being taxed for their "bad" international activity are also being subsidized for their "good" international activity."

-0-

That Sulphurous Odor of Deflation is Back Again

Fri, 05 Feb 2010 18:38:12 -0800

The specter of global deflation returned to the stock market this week, but you wouldn’t know it from reading the news. The business headlines certainly were full of alarm when the Dow Jones index collapsed from 10,300 to 9,800 in one week. The move up from 9,800 to 10,300 last year – and eventually higher to 10,800 – took over three months. But that is what happens when investors get complacent about the stock market – as they certainly were going into this year. Not one of the analysts quoted by Barron’s or similar publications at the New Year felt the Dow would end 2010 down. For that matter, they still aren’t. We are in a “correction”, as far as the received wisdom goes. A new high for the Dow this year is certain to occur once we get through this necessary cleansing of the market. This too is received wisdom. What you will not read in the business press is that anything serious is going on – the markets are not going to be testing the lows of 2009, much less head beneath 6,600 – the March low for this bear market.

Part of the reason for this confidence in the Dow is the assurance from experts that the US economy is on the mend – it’s just taking time. Most of the commentary about this morning’s unemployment report was sanguine. The unemployment rate fell from 10.0% to 9.7% - a big and pleasant surprise. The economy lost 20,000 jobs, but that was also good news because the three month trend has been improving. Companies added 52,000 part-time workers, which is also positive because that is the step necessary before companies take on full-time employees. The average work week increased as well. Almost all economists who reported on the unemployment data said these are signs of a economic recovery, and that this is how recoveries proceed. Some even said we are in for a dramatic recovery to begin any month now.

These were the same economists who didn’t see the recession coming in the first place, and they didn’t see the economy turning for the better in March of last year. The reason they didn’t see these things is because economists extrapolate from the present to predict the future. They do this because it is very difficult to see a turn in the economy before it happens, and because there is no payoff for predicting such a turn. If you stay with the trend you are more apt to be right month after month until you are utterly wrong, but then everyone else will be utterly wrong and your reputation won’t be harmed.

Only a handful of economists have the guts or stature to buck the trend. The question is, is now the time to buck the trend? Is the US economy, or the global economy for that matter, doing what it has always done in business cycles since the end of WWII, and staging some sort of recovery? Or is something else going on?

For the past two weeks global stock markets seem to be telling us that something else is going on. Stock markets listen to the economists when it pleases them to do so. For most of last year Wall Street inexorably drove higher as each positive bit of economic news came out. The past few weeks, Wall Street has chosen to ignore all this good news and all the positive prognostications of so many economic experts. Exactly what is it that investors see and fear is open to interpretation, and the financial press struggles to put some narrative on to market panics. This week something as innocent as the weekly unemployment claims was used as the excuse for the sell off in New York, though some news analysts said problems in Europe contributed to the declines.

When it comes to analyzing market moves, more often than not the day to day activity is random and not capable of being explained by one particular news item or economic release. It is usually best to focus on long term trends, which is why the developments in Europe really do have some meaning. We should pause, therefore, to put some meaning to these developments if we want to understand where these markets are going.

The problems center around the PIIGS, the cute acronym for European countries in distress (as opposed to those emerging market stalwarts the BRICs – Brazil, Russia, India and China). The PIIGS consist of Portugal, Ireland, Italy, Greece, and Spain, all countries that have public debt to GNP ratios above 10%, when the limit according to the European Union rules is 3%. The limit matters because if you can’t get your ratio under 3%, your currency is supposed to be thrown out of the euro.

Obviously the European Union has no desire to throw any of these countries out of the euro; that would destroy the currency and constitute a massive failure for Europe as a political and financial concept. Just as obviously, the Union has no means of coming up with the hundreds of billions of euros necessary to cover these country's deficits, and worse still, some of these countries are running out of cash necessary to service their government bond issues. Greece tops this list, though Spain and Portugal are not too far behind. The possibility of a default is imminent if some bailout isn’t arranged.

At times like this the governments of Europe would pony up the necessary capital to prevent a default, but almost all the major countries of Europe have already over-extended themselves by borrowing so much to prevent the collapse of their banks. The United Kingdom is so heavily in debt that the Standard & Poor’s rating agency said Britain could lose its Aaa borrowing status. Germany is not so heavily indebted, but it has also made it clear it prefers to keep its borrowing status clean rather than muddy things by helping out profligates like Greece and Italy.

Jean-Claude Trichet, president of the European Central Bank, has been positively schizophrenic, telling the markets one day that there is no money to help out Greece, and then reversing himself the next by promising to arrange some sort of bailout. As of this weekend, he is working on the bailout front and will likely be able to come up with some temporary measure to stave off default next week. Still, watching his dance of exasperation has been unnerving for the markets, which pounded the euro and trashed all European stock markets, the damage extending itself ultimately to Wall Street.

We had a similar scare last year when Dubai defaulted, at least temporarily until Abu Dhabi stepped up in support of some of Dubai's debts. What is happening in Europe, however, is more serious by many magnitudes. Major countries are involved, the credibility of the European Union and the euro are at stake, and most important, what tipped the scale against the PIIGS was the necessity for them to borrow to support their banking industries in 2008 and 2009.

They did this because they felt they had to, and because everyone else was doing it.. We’ve mentioned the United Kingdom, but Japan and China and India have taken extraordinary measures to keep their banks afloat. China has even run the risk of another bubble by funneling hundreds of billions of dollars of reserves to its banks so that they will make loans. This experiment has been overly-successful; a bubble has clearly erupted in Chinese real estate and the government a month ago ordered the banks to cease and desist in their foolhardy rush to lend to anybody for any reason.

The United States of course has been at the forefront of deficit spending to prop up its banks and its economy. The Obama administration announced a record federal budget deficit this year of nearly $2 trillion, five times larger than the deficits being run up to 2007 when the housing bubble was effervescing. Total US debt to GDP is now about 375%, a level not seen even in the 1930's Depression, and a level in excess of the danger zone often cited when countries start heading for default. In fact, Moody’s this week gave such a warning to the US government, saying the Aaa rating of the US is in jeopardy if the deficit is not ameliorated.

What would a reasonable investor conclude when putting all these facts together? First, the risk of default by major countries in Europe is now real. Second, the risk of the lynchpins of the international financial system, like the US and the UK, losing their Aaa ratings is real as well. Third, problems of this nature tend to spread from country to country as investors become wary of the next domino, and seek out the vulnerable for attack. Fourth – and here we come to the heart of the matter – these risks translate into deflation. If a country defaults, the creditors suffer substantial losses which cause them to reduce their own spending. Even if a country avoids default, the belt-tightening that is required is fearsomely deflationary. Major projects are canceled, government workers are fired, pensions are annulled, taxes are raised. All these things contribute to intense pressure on prices and asset values.

A reasonable investor would get a whiff of the 1930's Depression and deflation in the events transpiring this week and last. Such investors would have also seen President Obama and his adviser Paul Volcker attack US banks last week with a serious proposal to dismantle their trading and equity investment arms, speculative activities that contributed greatly to the housing bubble and to the availability of credit. What the Volcker Rules mean in a basic sense is that the economy will not recover anytime soon the credit that was available up to 2007, and that we are all going to have to live with the amount of credit that was available in the 1980s before securitization and hedge funds and derivatives were around. This too is deflationary – massively deflationary, in fact.

Again, the financial press is not talking about these fears because they are, for the most part, inchoate. Investors themselves don’t talk about them because these sort of fears lurk in the back of one’s mind as relics from a time long ago and never to be repeated. So fearsome was the Depression of the 1930s that the average investor bristles whenever anyone brings up the possibility, as if the mere mention of such a calamity will bring on bad luck and perhaps the very disaster being discussed.

The financial markets skirted around Depression talk last year and in 2008 when there was a real possibility of one occurring. Central bankers only felt comfortable talking about it after it appeared one had been adverted; now Ben Bernanke is pleased to remind anyone listening that he prevented a Depression.

Did he? This week saw the first real possibility that he did not. The augurs, in fact, are far worse than those available in 2007 before the financial crisis hit. Then, we were all talking about the collapse of two Bear Stearns hedge funds, which led to problems in all the Wall Street investment firms. Now we are talking about transcendentally bigger problems, problems with the very governments that rescued the financial markets in 2008 and 2009. These problems, and the fears they engender, call into question the economic recovery, and the ability of governments everywhere to stabilize their banking systems and their economies. It is this ability which is now unavailable in countries like Greece, which have truly run out of not just borrowing capacity, but debt servicing capacity. It is an ability which is becoming increasingly constrained in countries like the UK and the US, which are supposed to be the ultimate rescuers of those in trouble. If they themselves are unable to rescue us, God help us all, and God help the stock market, which will look at this month’s market as the last, great selling opportunity.