It's Still The Economy, Stupid

Thursday, February 26, 2004  

Happy Trails

It's been fun, but I no longer have the time to blog anymore. Work is a higher priority, and a project through March just became a project through who-knows-when. I've been struggling just to post as much as I have the past few months, and haven't been entirely satisfied with the quality or the quantity of posts, nor the amount of time (none) I've been able to browse comments.

I'd like to thank Mary Beth for allowing me to speak my piece here. She's running for the Maine lege, so if you want to contribute, there's a link on her site to donate.

I'd like to thank all the readers here whether you posted comments or not. I'm always lurking around other blogs, so you may see me in the comments when I get riled up. MaxSpeak, Nathan Newman, Brad DeLong, Angry Bear and KOS are the most likely places to find me.

Blogging is tremendously addictive, so I'll probably return to it someday. For now, I'll just return to the background, lurking.
Best wishes to you all and may the stars shine upon the end of your road.

posted by Teddy | 6:49 AM |

Wednesday, February 25, 2004  

The Dilemma

Let's go back to early 2003. Sensible anti-war advocates are saying in so many words, "Yes, Hussein is a bad guy, but if you remove him, there's nothing to hold the country together. WMDs are a red herring. Whether he has them or not, not even Kuwait views Iraq as a threat. Iraqis will view any attempt at intervention, particularly a unilateral, aggressive one as an occupation and fight it accordingly. The rest of the world's terrorists would jump at the chance to go to a chaotic Iraq and take potshots at the U.S. We can't manage a transition. It will turn into a complete clusterfuck regardless of our motives, intentions or methods."

Flash forward to today. Iraq is a complete clusterfuck. Tens of thousands of Iraqis killed. Over 500 of our troops killed and counting, another few thousand injured and counting (but who's counting?). Shi'ite cooperation hinges on two "good cop" / "bad cop"clerics who are demanding elections now - "don't make me break my fatwa off in your ass!" The U.S. is pretty much going to ignore them at their peril. Bob Dreyfuss has the skinny on the "shia fellas":

Time for a reality check. The Shia fellas are not our friends. Before, during and after the Saddam years, Iraq's organized Shiite movements have been backward-looking, reactionary, terrorist-supporting religious fanatics. They've managed to combine their medieval outlook on religion with a slippery ability to make deals with occupying and colonial powers, from the Ottomans to the British to, now, the United States. Their insistence on forcing Iraqis to abide by Islamic law scares many civilized and educated Iraqi Shiites. In fact, Iraq has for many decades tried to develop a secular society, but efforts in that direction have been impeded by fanatics like Sistani and his ilk. The ability of the clergy to mobilize the rabble against progress has been an enormous problem for Iraq since the 1920s. If that's democracy, I don't want any of it.

But now that we're waist deep in the big muddy, we're left with two bad options. The first is that Bush and Co. can try to push toward his puppet election, knowing that Sistani can issue a fatwa urging resistance at any time after June 30 and all hell will break loose. If I were Sistani, maximum impact would be right around early September, because nothing would mess with Bush re-election chances more than the GOP Convention sharing the headlines with chaos and American soldiers dying. Even if the Shi'ites don't run out of patience by then, they can always launch their own October surprise even a week before the election. Bush has no cards here. Bush either starts the process towards a general election immediately or Sistani can start the resistance at a time and place of his choosing. Iraq trumps Bin Laden, because Bin Laden hasn't had the free time to kill any Americans recently.

The other alternative is to cut and run. This is unpalatable for Bush because he's already getting flak from his own party on deficit spending, his Air National Guard duty, and gay marriage. It's no sin to backtrack on promises or waffle on issues, but underlying everything is commitment to leadership through a set of underlying priorities. When a leader starts abandoning clear priorities for trivium, then the F-word starts being uttered. When it starts being uttered by normally loyal supporters, you're in deep doo-doo.

So what to choose? It's a no brainer. Get the U.N. to police Iraq and enforce a timetable for elections. Bring the troops home now. Even conservative priorities should include getting spending under control which, yes, includes the Pentagon, and rolling back at least the dividend and estate portions of the tax cuts. Continuing the occupation of Iraq is unwinnable, and can do nothing but hurt Bush. A Democratic administration will find this out too, so they might as well campaign for withdrawal and turning things over to the UN - with the rebuttal that we have to have priorities. We know what the chief priority is - it's the title of this blog. With the alternatives in Iraq being equally dire, we should choose the least bad and get back to the basics.

posted by Teddy | 2:01 PM |

Kerry on and on and on

While I'm glad some of the Blogosphere Elite have come over to the Edwards camp, it looks like he's only going to be a distant second by the convention, barring some sort of March 2 miracle. Still, he's on the short list for Veep candidates and provides a good electoral counterbalance to Kerry. His political rise has been even more meteoric than Clinton's (who had one term as AG and two terms as Arkansas Governor before running for the highest office). Edwards has had one term in the Senate. At the least, he's the frontrunner for 2008 or 2012 - unlike Clark, Dean and the others, he didn't shoot himself in the foot, and he wasn't an also-ran.

I'm also glad Nader is in the race for the same reason as Cockburn and St. Clair.

Listening to Democrats screaming about Ralph Nader's entry into the presidential race we finally understand the mindset of those Communist dictatorships that used to take such trouble to ensure that the final count showed a 99 percent Yes vote for the CP candidate. It's a totalitarian logic. "Anybody But Bush" chorus the Democrats. But they don't mean that. They mean, "Nobody But Kerry". And if John Edwards wins big in the primaries next week, they'll start shouting "Nobody But Edwards".
What has Nader done since 2000, asked [Robert] Scheer scornfully, albeit stupidly. As Jim Ridgeway points out in the Village Voice, It's been Nader and his groups, not the Democrats, who've spearheaded universal health care ever since Hillary Clinton botched the chance for health reform in the early 90s. It's been Nader and his troops who've kept the searchlight on corporate crime, who raised the hue and cry on Enron, when Democrats were smoothing the counterpane for Lay in the Lincoln Bedroom.

People continue to chide Nader for a "vanity campaign", but without his 2000 contribution, there would be no Dennis Kucinich and maybe not even John Edwards. And I love the way Nader pisses off Democrats. They need to be pissed. So pissed that they won't dare allow the GOP to steal the election. They need to be complaining about Diebold before they mysteriously deliver Ohio to the GOP. If Bush is re-elected, they need to start impeachment hearings for sending the U.S. to war on false pretenses.

And no, I won't be voting for Nader. Personally, I don't think he'll even get 1% of the vote this year, regardless of his polling numbers. Regardless of his principles, which are dead on correct, he simply doesn't have the personality to be President. It's been pretty well established that a number of individuals who worked pretty hard for the man have had major conflicts and fallings out with Nader the individual. There's far too many incidents to ignore, he's just not a fun guy to work with. But that doesn't mean his message should be ignored, particularly now. As he says in his own words:

I think the mistake the Democrats are making when they use the mantra 'anybody but Bush' is, first of all, it closes their mind to any alternative strategies or any creative thinking, which is not good for a political party. And second, it gives their ultimate nominee no mandate, no constituency, no policies, if the ultimate nominee goes into the White House.

And then they'll be back to us. I guarantee you the Democrats, the liberal groups, the liberal intelligentsia, the civic groups that are now whining and complaining, even though they know they're being shut out increasingly, year after year, from trying to improve their country when they go to work every day. And they'll be saying, 'Oh, you can't believe -- we were betrayed. The Democrats are succumbing to the corporate interests in the environment, consumer protection.'

How many cycles do we have to go through here? How long is the learning curve before we recognize that political parties are the problem? They're the problem! They're the ones who have turned our government over to the corporations, so they can say no to universal health insurance and no to a living wage and no to environmental sanity and no to renewable energy and no to a whole range of issues that corporations were never allowed to say no to
30, 40, 50 years ago
. Things really have changed.

It would have been unthinkable just a couple decades ago to try and hack away at Social Security, Welfare, Medicare, health care as an entitlement, union rights, environmental protection, civil liberties, and so on, but these things were well underway before Dubya got into the Oval Office. It's been amazing how easy it has been for CEO's to break their promises to workers on health care and pensions. I have only heard one Dem candidate really say things implying corporations owe their workers and customers more than they do the shareholders. There's another that rails against "corporate subsidies and corporate greed", but few that are seriously proposing restoring the rights and responsibilities that we've discarded or lost.

The next President is going to have to do a whole lot more than just stop the bleeding. They're going to have to stand up for these things and fix these problems, all the while fighting a $500 billion budget gap and a GOP lobbing little green slander grenades at them. I can't see Nader being anything but progress toward restoring this nation's purpose, even though he has no chance of winning.

posted by Teddy | 12:10 PM |

It's a little too late to start acting responsible, Alan

Peter Eavis at theStreet gives us another free article analyzing statements by Alan Greenspan that called for regulation of the lending practice of the three government sponsored mortgage finance companies - Fannie Mae, Freddie Mac, and the Federal Home Loan Banks.

Imagine a country where the most powerful bank regulator in the land repeatedly voices deep concerns about two of the country's largest financial institutions -- but is powerless to rein them in.

That could never happen in America, right? Wrong. Take a look at Federal Reserve Chairman Alan Greenspan's testimony Tuesday before the Senate Banking Committee on government-sponsored mortgage giants, Fannie Mae and Freddie Mac.

The combined lending of these three institutions has increased to around $4 trillion. The amount of derivatives they are party to is unknown. A couple of decades ago, they represented less than 20% of the market for mortgage finance. Currently they now represent over 60%.

They also carry very little in equity to cover losses. Fannie Mae has about $20 billion to cover $2.2 trillion in debt. How fast that can disappear if rates move unexpectedly was demonstrated last year.

In the second half of 2002, Fannie suffered massive losses on closed-out derivatives that arose due to its devil-may-care attitude toward prepayment risk. The company refuses to disclose the size of these losses, but some financial sleuthing indicates that they are huge. Before its accounting scandal, Freddie openly reported closed-out derivative losses. If Freddie can post these losses, Fannie is also able to, but refuses, almost certainly to protect the position of Fannie CEO, Franklin Raines.

The Fannie losses are key to understanding Greenspan's testimony. If interest rates had dropped just a little bit further than they did in 2002, Fannie's equity would've been wiped out.

Think Detox is exaggerating?

Well, as rates fell, Fannie's equity plunged by $10 billion, or 50%, to $11 billion (excluding a gain from a change in accounting) in just two quarters in 2002. Recent numbers indicate that the company is still taking huge bets on rates that could blow up in its face. But the nation's premier bank regulator can do nothing. Except complain, which he did very eloquently Tuesday.

Did I mention that the foreign sector owns about 15% of all GSE debt?

Alan, it's too late to start trying to reign in the GSEs. They grew out of your control years ago. About all you can do now is keep interest rates from rising so the GSEs don't get killed. You can talk about instituting debt ceilings, but there's no way you want to slow down mortgage credit growth (incidentally, the Congressional bill set to regulate the GSE has no such ceiling), because it's the only thing keeping the economy afloat. The only way consumers can keep spending is to refinance their house and pay off their credit cards. This means treasury bonds have to stay below 5%. If they ever threaten to get there, you have to step out and say interest rates are going to stay low forever, so maybe bond traders will relax and bring down rates again.

Everyone knows you're full of BS when you mention the GSEs aren't "government guaranteed". Well, maybe not by the government, but they sure are guaranteed by the Fed. The fact that people aren't in full panic right now means they've seen your wink and nod.

Even the talk of regulation is a joke: the Bush nominee for Director of OFHEO was the freaking head of derivative trading at JP Morgan "the derivative king". When Freddie Mac got busted for misreporting the value of their derivatives, his nomination got dropped like a Brick-ell. But this only means that OFHEO gets placed in regulative limbo. Congress wants a new agency with "more teeth", but they're certainly taking their sweet time setting it up when time is pressing. The reality is OFHEO had plenty of teeth - certain people just didn't like what they had to say.

Nobody wants to stick their neck out and challenge the GSE's, not even you Alan, so I suspect this is just a big serving of CYA. If a GSE were to implode and take the economy with it, you could at least say you warned us, even though you didn't do a thing to stop it. Your responsibility is to make boring speeches and keep interest rates low forever. Get back to work.

posted by Teddy | 8:52 AM |

Monday, February 23, 2004  

Easy Money Madness

Daily Reckoning columnist The Mogambu Guru, who can even make my ranting sound coherent, opines:

Anyway, suppose you, as a successful capitalist swine, hire a hundred guys to make a hundred widgets, and sell the widgets for a dollar apiece, and thus GDP is $100. So far, so good. Then a few days pass, and we wake up with a blinding headache in a strange, seedy little hotel on the outskirts of town with a one-eyed woman who says her name is Darla, and when we frantically call in to the office, we find that you raised the price to two dollars, and you also figured out a way to make widgets with only fifty employees! The hike in price, unfortunately, reduces widget sales by 25%. But GDP jumps to $150! And because you fired half the employees, labor costs plummeted, and the next thing you know Alan Greenspan jumps on an airplane and flies down to visit your factory and give you an award as Proud Poobah of Productivity, which you deserve because productivity has soared. In the old days, it took a hundred guys to make a hundred widgets. Now it takes only fifty guys to make seventy-five widgets, and you doubled the price to more than make up for it. You're a genius!

But unemployment is up by 50%, total sales volume is down, and inflation has soared to 100%. Only a Fed chairman as clueless as Alan Greenspan could possibly only see the upside in this.

...or George Bush.

Peter Eavis has another take on Alan's bout with Credit Inflammatory Disease.

You realize what the head of the nation's monetary system and the most powerful actor in the global economy is doing here? After five years of volatile stock markets, he's asking us to rely on equity prices. As for house prices, they could fall steeply as the credit binge slows down. In fact, Greenspan concedes that the buoyant housing market and boom in mortgage refinancing "are not expected to continue at their recent pace." But, of course, the central banker does not predict what will happen to house prices when that pace slows right down.

Meanwhile, Dan Denning sees something very New Economy in the Japan-China-U.S. financial relationship.

One way to describe the willingness of Asian countries to buy U.S. bonds and keep their currencies weak is to call it what it is: vendor financing. Loaning money to your customers so they can afford to buy your products is a risky proposition, however. So is keeping your currency cheap in order to make your exports competitive, so Americans can buy them on debt. Sooner or later, you either lend more money to your cash-strapped customer, or he stops buying because he doesn't have the resources himself. As a vendor, the sooner you realize this, the sooner you'll stop lending. It looks like the Japanese are beginning to realize that selling to Americans on credit has its own kind of economic blowback. Bankruptcy for the customer, non-performing loans for the vendor. Wasted capital for everyone.

Vendor financing might look toxic and unsustainable, but it can survive surprisingly long when you can just print money to cover any shortfall in cash flow or increase production (which also happens to be your capital for lending). Lucent and its customers thought they had this capacity when the stock market boom made printing money as easy as issuing another 100,000 shares. Unfortunatly, when this was no longer possible, vendor financing crashed and burned. Lucent went from a company with a net worth in the tens of billions, to one that now has a negative book value. Many of their customers haven't been so "lucky". When the vendor runs into financial problems, the borrowers get creamed.

Incidentally, remember when Greenspan was raising interest rates to generate that "soft landing"? Well, the Chinese are may raise interest rates for the first time in a decade. Iceberg ahead?

posted by Teddy | 11:14 AM |

Greenspan presses my buttons yet again

Mr. Magoo sez consumers are managing debt well.


Here's a basic rule for analyzing economic data: if what you're looking at is a ratio, look at the development and the prospects for the things that contribute to that ratio. Not doing so is stupid. It's poor analysis. The ratio tells you nothing without the components - it's like looking at prices without analyzing supply and demand. Unfortunately, it's commonplace in the media today, and the disease seems to have spread to the brain of our Inflationist in Chief.

Greenspan feels consumers are managing debt because their ratio of monthly debt service to income has been stable over the past two years. Yes, the debt portion (the numerator) is now growing at double-digit rates, but that's okay because interest rates have fallen (and just who did that, Alan?) and payments remain constant.

Now, do we really believe that interest rates are going to come down another 5.5%, as Alan cut them the past two years? If so, start borrowing money, because in a couple year's they'll be paying you to do it.

So if a similar drop in interest rates is not feasible, then what happens to the debt-service ratio in the near future? Well, without making any predictions, if debt continues to increase at double-digit rates, I'd say consumers are going to start managing debt a lot less well. If not, they're going to have to borrow a whole lot less money to keep debt service ratios constant. Either is not conducive to our long-term economic health. The economy either gets more fragile and more vulnerable to higher interest rates, or we head toward recession.

And yes, Magoo, we've noticed that debt ratios have risen since the 1940s. There were a couple things called the Great Depression and World War II. Maybe you've heard of them? If I got sick and fell under 100 lbs last year, and then got better and went back to my usual 175 lbs, I wouldn't worry about dieting. But you could say the same thing about me if I ballooned over 300 - he's gained weight constantly since last year. What weight is good and what is too much? Greenspan's "analysis" tells you nothing.

If I wasn't already aggravated by Greenspan, John Snow spoke at the same meeting. Fortunately, his speech was so incoherent I couldn't get mad at it...something about floating down the Ohio river through a field of gardenia bushes.

posted by Teddy | 10:23 AM |