Economics & Ideas Posted by Zeus, 15 Aug 2007 03:09 am

Externalize Liability, Extort Profit

“Unprecedented” may be the word I might use to describe for the possibility that the Federal Reserve and government apparatchiks will baldly and simply overtly “change the score” on the economic scoreboard to both serve financiers and bail them out of their circular firing squad. [It’s been done in the past but covertly.] Yes homeowners who were duped into buying homes way beyond their means will suffer probable bankruptcy, but they don’t have much to lose in the sense that many didn’t have a down payment and some may have even extracted equity.

Financiers seems to have moved from a pyramid scheme to a game of “hot potato” or perhaps “musical chairs.” So filled with greed and hubris from the massive fees they could charge for every transaction and the cheap money merry-go-round provided by the private Federal Reserve Board, they gave out loans, sliced and diced them, repackaged them and shipped them out…to each other! In so doing they ended up screwing themselves as well as the American public.

Before, in the Depression and during wars, these same financiers and industrialist could stand to gain both power and money by allowing a contraction of supply and a stimulation of misery. But now their books are interconnected and they don’t really have someone to sucker, er, dump their liability on. With so many years of anti-regulatory fervor, and even aiding and abetting straight out fraud, this group of so-called elites must have drunk their own Kool-Aid. Now faced with the prospect of having to experience actual consequences (novel concept, huh), they are looking for Daddy to expunge their proverbial drunk driving arrest.

First they try to pass it off as “helping the little man”… All those poor people going to “lose their homes if you don’t use taxpayer money to bail us out.” Then, when that doesn’t work, they simply say, “liquidity crisis”. The “fundamentals are sound. It’s really about the public’s irrational fear of buying our bullshit, er, products, and we simply need a cash infusion to get things going, you know, like Bush and Co. gave to the airlines: the 20 – 40 billion dollars that went straight into the pockets of upper management.”

How about some other tricks? Did you see them try to get Fannie Mae and Freddie Mac to change their rules to buy Jumbo loans, trying to offload the lemons on the American taxpayer again? “Full faith and credit” should be a phrase banned around these guys.

This is what I mean by extortion. These blokes hold a gun to the head of the American public, all the while claiming only that they want to save that same public. How about putting that gun down and taking a good look at yourself, pals! You are a disgrace. Jim Cramer screams about his poor financial buddies going down. “Lower interest rates, Fed. I don’t want my rich decadent friends to face their due. They have FAMILIES for Christ sake.” So far the American people are refusing to play ball with this rigged game. That may call for overt and drastic measures. These so-called financial elites are so crass and intoxicated with the latitude granted them by their CEO President, it looks like they won’t even bother to rig a few calls in the game or penalize the other team (the American public) unfairly. At this point, it looks like that won’t be enough, they are so far behind. They’re simply going to try to change the score. If they succeed, I have no idea what is going to happen. Will we just accept it? No October Surprise and Crash because a few trillion dollars are simply pumped into the system and the interest rates are lowered? Woo boy.

Why don’t they just get it over with and say, “We need about a half-trillion dollar bailout for our buddies, from you, the taxpayer. If you don’t pay up, you won’t be able to buy a house, we’ll fire your asses, spiking unemployment (because we would have to cut back on costs, naturally), and we’ll generally make your life miserable. Pay up if you want ‘protection’.”

It is not a “decreasing appetite for risk” that is gumming up the works; it’s a system that has been set up to have no consequences and touts the myth of a risk-free profit that is bringing things down. After all, what risk is there in giving out fraudulent loans and then passing them off as AAA rated mortgage-backed securities? I get the profit from transaction fees and sale of the mortgage securities. Some other sucker can take the shaft. Oops! You mean I also used my ill-gotten gains to lend out money to hedge funds (looking for big interest) which are now collapsing and won’t be able to pay me back? But, but, but…

The cannibalism of elites can be very ugly, but they always end up coordinating their game in the end and turning their appetites on the American tax purse. Internalize profits, externalize liabilities. If you have the right men in government, you can even commit open and outright fraud and produce nasty, shoddy work as Halliburton did in Iraq, (by the government’s own assessment), and still get a quarter-billion dollar bonus. “Heckuva job ______ (fill in the blank). You’re one of us.”

All the while that same taxpayer now has extreme strictures placed upon his or her ability to file bankruptcy and come out with a clean slate, even though two-thirds of bankruptcies are the result of real emergencies (failing health, lost job, or divorce), not the fabricated ones of the finance industry. The simultaneous mendacity, contempt, and dependence toward the American citizen is a force to behold. I think the best way we may have of calling their bluff, is simply saying, “no bailout”. They have to take the pain even if that means pain for us.

As a follow-up I think we should get real practical and creative about creating our own circle lending, our own markets (as with farmers markets, etc.) that cut out these non-productive, and indeed, life-draining, parasites. In the words that they no doubt use to condemn the homeless they pass on the way to their high-priced pseudo-profession, “Get a job, a real job!”

Citizen Zeus

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Responses to “Externalize Liability, Extort Profit”

  1. on 15 Aug 2007 at 5:39 am 1. christian h. said …

    The wonders of capitalism. All that surplus has to go somewhere… Securitized mortgages, credit derivatives and their older relatives, all have the same feature: they work well for those Hedge fund managers as long as nothing changes drastically - say, the Rubel gets devalued (remember LTCM?), or the housing market crashes. In Germany, one small industrial bank heavily invested in US mortgage-backed securities has already been bailed out by a state-owned bank, ie, taxpayer money. It’s going to happen here, too. And yes, it’s despicable. Those same people have the gall to preach to us about “personal responsibility” and “accountability”. We should demonstrate in front of their offices with that classic slogan of (the UK anarchist organization) “Class War”: Behold your future executioners.

  2. on 15 Aug 2007 at 6:43 am 2. Kiera PSI said …

    When I read about this in the regular news a few days ago, I was startled into saying “those sons of bitches” right in the middle of the office. Fortunately, I didn’t say “those m-fing sons of bitches” (this barely missed coming out of my mouth), because I am not yet permanent on my job.

    I keep picturing actual physical revolution coming…the White House burned, the nobility - uh, I mean CEOs and their families stood up against walls and shot. If you don’t count the Civil War, we haven’t had a revolution here for 230+ years. I think we’re about due.

  3. on 15 Aug 2007 at 10:12 am 3. JP Stormcrow said …

    And there is the poor baby hedge fund (and private equity) managers who are resisting the attempt to change some of their payments from Capital Gains to Earnings since that raises their tax rate - even though it is not their own capital which has appreciated. (And of course this begs the question of why earnings are taxed above capital gains in the first place.)

    A couple of choice quotes - just to boil the blood:

    Private-equity executives say they never dreamed that the tax status of their payouts would be questioned. “I don’t think that anybody felt it would ever be challenged,” said Scott M. Sperling, managing director of Thomas H. Lee Partners, a private-equity firm. Managers’ earnings are “capital gains in every technical and spiritual sense.”[emphasis added - JP]

    Believe me, if we raise taxes on hedge fund managers we’ll get fewer hedge fund managers. Today, with lots of hedge fund managers trading all the time and keeping markets efficient, stocks are at all-time highs in most nations of the world, and markets are deeper, more liquid and less volatile. With fewer hedge fund managers, markets would shrink, become more volatile and more costly, and tumble from their present highs.

    First they came for the earnings of the hedge fund managers, but I was not a hedge fund manager ….

  4. on 15 Aug 2007 at 10:49 am 4. Seattle said …

    Last April I did my aging parent’s taxes for the first time. I was suprised to see they were surviving on $23K per year in retirement and social security benefits. How could they do that? They own their own home. It really drove home to me the connection between rent/mortgage payments and higher wages, etc. I’d love to be able to make ends meet on $23K per year. In fact, I probably could, if we cut out rent. I’m sure my employer would love to reduce my wages to $23K a year. But I won’t be buying a home so I’ll continue to pay rent. I won’t be buying a home because the average house price in Seattle is now around $335K.

    In the meantime, I am continually amazed that for a certain portion of the human population there is no such thing as “enough”. What sort of insecurity lies behind someone who stives way past the point of practicality to accrue more money?

  5. on 15 Aug 2007 at 10:49 am 5. christian h. said …

    Shock! Fewer hedge fund managers?? How ever would we cope? Seriously, how do you even parody these people?

  6. on 15 Aug 2007 at 11:07 am 6. Zeus said …

    Related to this I posted today to the NYT article, “It Keeps Falling Apart” by Floyd Norris (Aug. 14th). I’ve copied the short article below along with the reader comments. Interesting.
    The problem with the so-called “pundits” is that they live in a dream world, removed from the micro consequences of the macro economy. They use models to make their declarations. The rest of us use real life, a real life impacted by things like the price of oil and houses. I’m not a philistine. I have a Ph.D. and I can appreciate the usefulness of models, especially on something like global warming, but the models these people have been using are constructed almost whole cloth out of their own fantasies in order to serve their own interests. I had the fortune to grow up on a small family farm and I can both recognize the smell manure and appreciate that a “model” of a fence isn’t going to keep the cows in.
    These pundits and so-called elites have learned that perception, no matter how subjectively gamed can move markets and lead to massive profits. Models have helped reinforce a perception of “rationality” and “respectability” in the market place, but the brute reality is, companies like Moody’s have used “models” to rate junk as AAA, and have made hundreds of millions of dollars doing so. Appraisers who are honest about the value of a house aren’t hired, while those willing to inflate are hired. So the reality picture is intensely and systematically gamed from all sides, with increasing ardor and “creativity” to cover up an ever-widening and unsustainable divergence between perception and empirical reality. They want to avoid consequences and the hard conclusion that this is all phantom wealth with no “there” there.
    In a subversion of science and the whole traditional rationale for models, current financial models are made to serve desire instead of predict and describe empirical patterns and events. This is why regulation is needed, and also why it has been neglected in the current anti-science mentality in executive administration, both business and governmental. This is also why profit is a supremely poor indicator of quality of life. If acquired by ill-gotten and deceptive means it can bankrupt and impoverish not only the “little people” like us, but the very clever-by-half gamers whose creativity comes back to haunt come margin call time.
    P.S. Gold ultimately too is based upon perception. You can’t eat it or use it to make houses or clothes. Currency is no longer pegged to it. It’s value rests in its function as a proxy for the “real” because it is a tangible and scarce material. Commodities on the other hand have real value and do, in fact, feed people, etc. not that I am suggesting investing in them. If a real fiasco erupted, stocks themselves, being only signifiers, might not be enough to assert actual control of ownership.
    It Keeps Falling Apart (by Floyd Norris, Aug. 15, 2007)

    If you can keep your head when all about you are losing theirs, maybe you just don’t understand what is going on.
    Wal-Mart’s warning this morning may have provided the clearest indication yet that consumers are cutting back. The idea that the housing market could fall apart without spreading to the rest of the economy looks less and less likely.
    That may be more important in the long run, but today it is the further unwinding of leverage that is scaring investors, and for good reason. Something called Sentinel Management, which invests in futures contracts, wants permission from the Commodity Futures Trading Commission to delay paying back investors. It isn’t clear (to me, at least) what is going on there. But I assume that Sentinel has discovered that the combination of illiquid assets and high leverage can be fatal.
    And that may also be the case at a mortgage REIT named Thornburg Mortgage. It was less than a month ago that Thornburg reported solid earnings and declared a good dividend.
    Discussing “the current credit crisis,” Thornburg’s president Larry A. Goldstone said in the conference call on July 20, “This is not a big surprise to us.” The problems that hedge funds were having with mortgage securities were something that his company could take advantage of, he said.
    No doubt he meant it. He and other insiders bought millions of dollars worth of shares over the next couple of weeks, paying $21 to $26 a share.
    Today, Thornburg appears to be collapsing, unable to roll over its own loans. The shares were halted after they crumbled to below $8. After the market closed, the company said it would delay paying the dividend for a month.
    Mr. Goldstone said that after everything settles down, the company will be back to making mortgage loans, and will make a lot of money doing it. Thornburgh is a “lean, nimble operating company.”
    Perhaps it is. But it is also a highly leveraged one. In this environment, that can be a fatal mistake.

    3 comments so far…
    1.
    August 14th, 2007
    6:55 pm
    I watched the collapsing of hedge funds, mortgage companies going under and the stock market deteriorating, as the DOW its irrational wild springs. Then came a money market fund.
    At first only a couple of hedge funds were in trouble, then others failed. In the beginning only one mortgage company failed, then several collapsed. Is that what is going to happen to money market funds?
    Today on CNNFN one host called this a bank run; thought about that and took it back.
    I fear a collapse. I’m moving our money to treasury bonds.
    — Posted by tom russell
    2.
    August 15th, 2007
    1:20
    OF COURSE CONSUMERS ARE CUTTING BACK!
    It has undoubtedly not been noticed by those sitting in $2,000,000+ or whatever digs in NY and getting paid considerable sums to pontificate for the NYT but consumer reduction in spending has been going on since the summer of 2005.
    We live in a small village that is the heart of a US National Park that gets 1.5 millions visitors a year. The local economy relies upon tourism and cherry farms.
    In 2005, the tourists began spending less on their vacation trinkets and impulse purchases but still came and stayed for 1-2 weeks in $1500+ a week cottages. In 2006, they went to spending not more than $20-25 on knick-knacks and prints and tee shirts; and they stayed in campgrounds for a week, and the rentals of the higher priced cottages dropped by 20-30%. In 2007, gross income for all essential vacation service businesses - restaurants and gas stations - is down 15-18%; and forget souveniors, prints from art galleries and other such things. In 2007, they are not coming and staying for a week - it is now a long weekend on a tight budget.
    The housing market is a large part of it - many would do a refi to pay for the new SUV or the fancy vacation. The housing sales/purchase market is not, however, the only reason. There is also the impact of:
    (1) manadatory 1% payment on principal on credit cards which began in Jan 2006
    (2) higher gasoline prices
    (3) higher heating bills
    (4) rapidly rising food costs because of the ridiculous push for ethanol which is not even as fuel efficent as oil
    (5) less coverage and higher costs for health insurance
    (6) higher prices for all goods due to the rising fuel costs for shipping
    And don’t forget the ARM rates that are resetting on all those refis on and purchases of homes.
    The real estate market in this town went dead over 22 months ago. Nothing has sold except for 3 houses of which 2 were private transactions with no relator, done by word-of-mouth and sold at prices which were affordable by the median income in the village of $49,000.
    The 3rd house which was listed with a relator and sold 2 weeks ago just caused everything on the market to fall by 30%. There are 176 house in the village in 1.2 sq miles so the sale of that house had a huge impact on prices. It was 2nd home for its owners (and those are always priced at more than the locals can afford.) It started on the market 18 months ago and was finally sold when the owners were desperate enough to cut the price in 3 stages by over $125,000 or 29% of the original list.
    Two lots are for sale in the same small development (20 lots with 15 houses built) as the house which just sold with the huge price cut. One is priced at what the owner paid for it. The 2nd lot is priced 29% less although identical to the first as the owner desperately wants rid of it- and it is not selling.
    A local “developer” had the bad timing to put in the roads and do the lot divisions for a 39 unit development; and built 1 spec house. The lots are 1/2 the size of the ones mentioned above and priced 17-75% higher. Needless to say, he hasn’t sold a single one in 20 months. The spec house is 29% smaller than the one that sold and is sitting on 1/2 the land. The developer has it priced within $9000 of the one that sold - and he just took a hit of about of about $110,000 on his asking price since it will never appraise in view of the other sale.
    2 and 4 unit rental properties up for sale are priced at amountw which would leave a negative cash flow every month for a purchaser stupid enough to buy them - and the rents can not be raised because the tenants’ incomes are flat and they can not afford to pay more.
    And this area is about as median in income as it gets when comapred to the rest of the US.
    Welcome to the rest of the country and what 80% of people have to deal with.
    — Posted by Ann Scott-Arnold
    3.
    August 15th, 2007
    2:48 am&
    However despised, disdained and ignored it has been in recent years, there is only one safe haven in this world of fiat paper garbage that we have gotten used to calling money — and that is gold.
    — Posted by Herb Berkowitz

  7. on 15 Aug 2007 at 11:25 am 7. Zeus said …

    I love these comments, y’all, especially about the aggrieved hedge fund managers, shocked, shocked I tell you that they may actually have to pay taxes on the gains they have made on someone else’s money– the same (horrors!) as Joe (or Josette) Six Pack does for actually working his or her tail off.

    “Capital gains… in the spiritual sense?” That is so far over the top, I wouldn’t have used it in a satire, because it seems sooooo absurd, but there it is right out of the mouth of an actual hedge fund manager (and a good reflection as to the level of absurdity of the market).

    These deludites don’t even feel the need to justify their parasitic existence. They are the SAVIORS of the market not its downfall, no, no, no. Without their creative packaging people might actually have a relationship with a lender and might actually own their home instead of a Byzantine paper trail that ends who knows where.

    When deception, deniability, liability, and accountability drive “creativity”, it is no surprise that those that have drunk the Kool-aid think it is “good” that all this maneuvering ends in nothing, pure phantom wealth. Because no can be blamed or charged a crime if there was no real and concrete assets to begin with, can they? (Umm, yes, when you sell the Eiffel Tower for scrap (a classic con in the 19th century), take the money, and leave, that’s called stealing. And yet that is what these hedge fund managers have been doing by leveraging and buying and selling on margin.

  8. on 15 Aug 2007 at 12:10 pm 8. Zeus said …

    Talk about synchronicity. James Howard Kunstler, has a piece that complements perfectly the one I sent in. Except he thinks the Fed can’t do a massive bailout because of international ramifications. I don’t share his assessment. I think things have gotten so bald and so irrational, they may simply say, “damn the torpedoes” full speed ahead. This does raise an issue of both timing and amount of money however. Every time things get “hot”, will the Fed and associated parties simply try to distract people, massage them, pacify them, delude them, defraud them, or flood the market with money.

    It looks like right now they are trying to do the minimum to avert a momentum-gaining panic. But remember the early assessments of the cost of the Iraq War. Wolfowitz said it would cost 50 billion and the oil produced by Iraq would pay for it. Well ten times that later, and oil supplies being sabotaged, where is the consequence? I suspect they may try the same strategy here, 50 –100 billion dollars here and there, mixed in with a lot of disinformation and misinformation and cover-up, that adds up to trillions over the next 5 to 10 years. They’ll arrange extortion schemes with other countries, threatening China, in particular, with causing a Depression here which would turn off the trade surplus. Yes this will cause hyperinflation, and damage the economy, and perhaps lead to a sell-off of U.S. Treasuries, etc. but it will save the financiers and that is what it is intended to do. Anything that actually produces “real” things including publicly-held companies will suffer, so I think the stock market is in for a hit any way you look at it, but it may be more drawn out as the phony wealth schemes are subsidized by cash infusion and lowered interest rates.

    Zeus

    P.S. Another site (iTulip) claims that the Fed distributed not 30 billion but 328 billion globally last Thursday and Friday as explained in the comments and claimed on an accompanying video I forwarded to Skay for posting.

  9. on 15 Aug 2007 at 12:48 pm 9. James Killus said …

    I’ve been following these matters for quite a while, and I’m a regular commenter on Mark Thoma’s Economist’s View blog, and sometimes on Brad DeLong’s.

    I understand the sputtering fuming rage that is shown here; I subscribe to a version of it myself. Still, it’s good not to conflate too many phenomena. The skewing of the tax code, as exemplified by the capital gains treatement of hedge funds managers (or, for that matter, the preferential treatment of capital gains per se) is one problem. The nature in which economic growth (or the degree to which the financial rewards of that growth) has been more and more segregated is another issue. Housing economics is yet another issue, which is not the same as the current liquidity crunch in the mortage market. And so on.

    Certainly one can (and I have) made connections among these various issues to matters of ideology and class behavior, but one of the features of herd behavior (and class behavior is only one example of it) is that such actions tend to be formulated at sub-rational levels (as Citizen Zeus has implied) and, as such, reflect neither thought-out plans nor even consistent behavior. And the individuals who are tasked with rationalizing this behavior, in the current context mostly right-wing think tanks and the university departments that function as such, are generally of, at best, third-rate intellects, and they are really not up to the challenge. Indeed, it was the lack of need for real intellect that drew them to right wing ideology in the first place. The phrase that I recently used to refer to Karl Rove applies to them: they are track stars at fat camp (with sincere appologies to anyone reading this who has a weight problem).

    Anyway, to finally come around to my main point: since they are not actually very bright, and since they aren’t operating off of any real plan, the result is that their actions often come to grief, and they cannot always evade the consequences by merely passing it on to someone else via privilege. Moreover, their actions often set themselves up for a fall. It turns out that one reason why we are having the current mortgage crisis, for example, is that the “securitization” of sub-prime mortgages has left a situation when possibly viable mortgages cannot be renegotiated, because there is no one on the lender side with the authority to do so. Thus, “NINJA” debtors (no income, no job or assets) are just walking away from the homes, which then go to foreclosure, forced sale, and the driving down of the housing market. This was not part of the plan.

    Similarly, most hedge funds, the main losers so far, are only open to wealthy individuals and institutions. And while there may be calls to bail out banks, or any pension fund whose managers were so criminally negligent (oh, pardon me, I mean “imprudent”) as to invest in the HFs, but the losses to the upscale folks is real and will not be reimbursed, pardon while I cry a crocodile tear.

    In truth, no one knows how much of the suddenly illiquid assets are actually worthless, still worth something (or would be with renegotiation), or worth full value if the note holders can wait out the panic. I do, however, note an article in today’s newspaper which reports that the mortgage credit crunch is having a disproportionate effect on mortgages above 417K, which is where some Fannie Mae, Freddie Mac regulations kick in, so some of the high income crowd is suddenly finding it difficult to purchase or refinance their homes.

    Oh dear, I find another tear forming in my left eye.

  10. on 15 Aug 2007 at 1:05 pm 10. James Killus said …

    Ah, and I find I need to clarify something. When the Fed “distributes” money, as Citizen Zeus describes, what it is doing is “lending the money overnight.” It is not giving it away, and the institutions that receive it (all banks, as I understand it), must repay it in short order. The money is not still out there.

    Also, I believe that iTulip is coflating money lent by the Fed with money lent by European central banks.

    Again, I suggest going to Brad DeLong’s blog, as he has given some rough estimates of how much those loans were worth, i.e. the interest rate spread on an overnight loan is not nearly as large as you might think.

  11. on 15 Aug 2007 at 1:14 pm 11. Oaktown Girl said …

    James, I’m at work so and can’t pore over all this in detail, (and it takes me a lot of focus and time to grock all this), but are you saying that people with mortgages on houses over 417K are high income? Or are you talking about their lenders?

  12. on 15 Aug 2007 at 2:20 pm 12. Oaktown Girl said …

    Zeus - sorry about the tech glitches in your comment. I’ll get it fixed after work.

    Update: got it fixed (#6).

  13. on 15 Aug 2007 at 2:22 pm 13. christian h. said …

    Couple points: first, Zeus, I edited comment 8. to embed the links, as one was longer than a line, and the internets don’t like that.

    On to substance: James is correct on many points. In particular, the money central banks have “provided” so far is in form of short term loan to avert a liquidity crisis. Fund managers, however, are calling for more, namely everything from interest rate cuts to outright bailouts.

    The common feature in the disparate topics mentioned here seems to me to be welfare for corporations and their owners and managers, what Dean Baker (I think) calls the “conservative nanny state”.

  14. on 15 Aug 2007 at 2:53 pm 14. James Killus said …

    Oaktown Girl,

    I wasn’t talking about “all” owners who have mortgages above 417K as being high income. Certainly there are some “interest only” mortgage holders who would be properly classified as middle-income. There was roughly a 4-year window when an adjustible rate mortgage could be had at an initial interest of less than 5%, but the 30 year fixed rate never really went much below that, and someone buying a house on an ARM who didn’t plan on coverting to an FRM (or flipping the house) somewhere down the line was going to lose it sometime and it appears that time is now.

    The actual payments on a 30 year mortgage at 5% (again, lower than normal) is going to be over 8% of the principle, so the actual payments will be on the order of $3000 a month. That’s pretty solidly affluent, even in the Bay Area and other high cost venues. In the rest of the country, a half-million dollar house is in upper affluence.

    But that’s just the thin bottom end. It’s not that difficult to play some games to get your mortgage below 417K–if it’s only a half mil house you’re trying to buy or refinance. It really starts to bite, however, (as the article in today’s Chronicle points out) when you go to the “jumbo loans” of over a million, etc. Yes, there are some “we’re just folks” professionals in Santa Clara that live in million dollar homes, but if they went in recently, they’re paying $6000 a month in mortgage payments, and I can’t find it in myself to think that they are poor.

  15. on 15 Aug 2007 at 4:29 pm 15. Oaktown Girl said …

    Thanks for this post, Zeus. I’m just sick to think that there’ll be a huge bailout for these scum-sucking dirt bags.

    I think we should get real practical and creative about creating our own circle lending, our own markets (as with farmers markets, etc.) that cut out these non-productive, and indeed, life-draining, parasites.

    I am so in favor of this. I know the system’s rigged against anyone trying to do that, but I’d sure support it.

    I’d like to thank Tribunus Laticlavius christian h. for breaking the blog on his first day back from extended leave. Welcome back, Tribunus. Now go directly to The Trunk and stay there until further notice.

    James, thanks for the clarification.I was just trying to understand what you were saying on that last part because it wasn’t clear to me. Yes, anyone who can pay 6K a month is not poor.

  16. on 15 Aug 2007 at 4:48 pm 16. christian h. said …

    Trunked. On my first day back. I agree, though: someone has to be punished for breaking the blog.

  17. on 15 Aug 2007 at 7:48 pm 17. Zeus said …

    A few points, even acknowledging that the half-witted, if sub-consciously driven, rich may take a few lumps.

    It would seem that the different sectors of the market are linked in unprecedented ways. Only a few years ago, the housing market was used to bail out the stock market and buffer a recession. Now, thanks to mortgage-backed securities, etc. the stock market to a large extent IS the housing market and vice versa.

    The liquidity crunch is related to both in the sense that powerful investment fund managers have been using their phantom wealth generated by housing and stocks to leverage buyouts of businesses (i.e. private equity Cerberus to buy Chrysler). So their slip-ups and unmet margins can have very real effects on employment numbers and communities. I think that Chrysler deal’s funding has been held up perhaps permanently due to liquidity problems. Will they liquidate actual operating companies to meet margins?

    Okay there are some limitations, but there are still huge real sums skimmed in transaction fees and bonuses. The top hedge fund managers made over a billion dollars, yes billion with a “b”. Hey it you or I had that haul, we could afford to let our entire fund go up in smoke. Where is our incentive financially, unless it is to keep the shell game going and keep milking it?

    The Fed was set up by financial elites not as an exercise in democracy but to secure to their own interests. The Fed identifies the interests of the country conveniently as aligned with the interests of the rich, not unlike the “trickle-down” nostrums of Reagan, even when they demonstrably are not. I think the degree of that “are not” has been probably unprecedented or at least on a par with the last Gilded Age of the late 1900’s.

    Most of these financial elite even if they feel the pinch, have made a killing to the tune of tens or even hundreds of millions of dollars in bonuses, stock options cashed out, etc. and since they are on the pulse of the market, have no doubt squirreled quite a bit of it away in cash or other “real” property. They still have their booty even if they go bust. Not so with your middle class citizen trying to play the game. In fact in the past financial insiders have even welcomed a bust or a liquidity crisis, because they had the money to pick up assets on cents on the dollar.

    But there have been so many interactive angles of greed and so many creative ways to move money around, many are now saying they don’t know where the actual title or holding of value even resides. That is kind of scary don’t you think. Mortgages have been sliced and classed and sold off to so many people in so many forms no one can say for many of these instruments where the “there” is, to say nothing of responsibility when things start going belly up.

    Tell me how you do get junk rated as AAA? That’s why the pension fund managers were so eager to hop on. They believed the rating. AAA and high interest, who wouldn’t go for it. But the rating was based on a model based on a skewed “rosy” premise, that, surprise, made the rating agency very popular and very wealthy because it helped sell these lemons and make people a bunch of money. If you can answer me that one question without simply describing the technical ABILITY to do it, then we might be getting somewhere. Talk about moral and “spiritual” issues. The business ethic completely contrary to the classical notion of ethics seems to be consumed with garnering profit mechanistially in any way shape or form completely uncoupled from social rules, norms, principles.

    In one sense I agree. I don’t believe this is a conspiracy, unless one is talking about an unconscious conspiracy of greed and blind competition and profit-striving. But this doesn’t make me feel any better. Having people take down the country not knowing what they are doing (hello Bush and his crony CEOs) isn’t better than taking it down knowing what you are doing. Leadership is held accountable (or used to) for things it ought to have kept an eye, a brain, and a rein on. Today’s leaders seem to be all about plausible deniability so they can keep their couple hundred millions and not be brought up on criminal charges.

    And even this wouldn’t be so bad if consequences and accountability were really brought down on the heads of these guys. But besides a show-trial or two conviction, the lot of them have actually been rewarded for their misdeeds. Will they pay in the end, or will the U.S. taxpayer? My money is on the U.S. taxpayer because we always end up being the lender of last resort and the game is controlled by an institution whose interests lie with financial elites. I’ll be very curious to see what the Fed does, even given these “short term” liquidity infusions. Will they become longer term? Will rate cuts be justified and how will they be justified? The benefit always seems to accrue to the cronies, whereas the rationale is aimed at the broader public.

  18. on 15 Aug 2007 at 8:28 pm 18. Kiera PSI said …

    Trunked. On my first day back. I agree, though: someone has to be punished for breaking the blog.

    Look at it this way, Christian. That’s got to be some kind of record.

  19. on 15 Aug 2007 at 9:13 pm 19. James Killus said …

    Zeus,
    I have a friend who has lived in France, and he tells me that it seemed to him that the wealthy in France are more circumspect than they are in, for example, the U.S. or the U.K. He suggests that when they feel a bit too full of themselves, their necks begin to itch.

    If true, that would be the only lasting benefit from the French Revolution that I can see (well, okay, maybe the concentration of loot in the Louvre, if that’s a positive).

    I bow to the French Revolution because that’s one of the very few moments in history where wealth lost big. It also tests the rule: did the poor thereby benefit? Not as I can tell.

    Other times, other places, wealth protects against adversity; that’s what wealth is about, that and power over other people. Wealth just happens to be the most fungible part of privilege. Wealth, at least, can be, and often is, stripped away from individuals. That the rest of us seldom notice is like the fact that you cannot kill the Duke of Kent, for if you kill the current Duke (may god, of course protect the lad), the title would pass to another. So it tends to be with wealth.

    There are occasional exceptions to this; in the U.S. the most notable being the Great Crash. Many wealthy men became “flat busted.” I like the term, because of its literal application to those who took high dives into concrete. However, many more who were not wealthy suffered, even to the point of death.

    But, enough rambling.

    It is a cruel irony that often healthy businesses are cannibalized during credit crunches. That is because healthy businesses are the ones with cash enough to repay the loans (though sometimes afterwards not having enough cash to stay in business). Other, less flush firms, remain, being too anemic to provide enough blood for the vampire feast.

    But of course taxpayers are the ultimate lender of the last resort (provided you include inflation as a form of tax, as the printing press will do the trick as well). What do you think dollars are? They have no intrinsic value (nothing does). So what are they ultimately good for? They are good for paying taxes.

    And that, ultimately, is where stupidity meets the con job. The ongoing right wing attack on taxation has had the same effect that the other RW attacks on the idea of government have had: they undermine the very authority that they require to maintain their positions of power and privilege.

    You write as if the interconnectedness of finance is a bad thing. I’m not at all sure of that. When push comes to shove, what happens when all the mountain climbers are on the same rope?

    Besides, there’s always the guillotine. It’s a new century; maybe we’re due for some new traditions.

  20. on 15 Aug 2007 at 10:03 pm 20. JP Stormcrow said …

    I will say that I certainly do not understand all of the intricacies of the interplay of economic elements at the macro level. But I do think that people’s sense of when they are being “cheated” is very acute and as chrisian h notes that is a common theme in the comments here, even by those of us unschooled in the subtleties. And we may be somewhat deluded in that, stuck as we are without the big picture - but I am going to go with the gut on this one.
    However, what almost bothers me almost more than the greed (and envy, yes there is envy - all part of that hair-trigger “Cheater! Cheater!” alert system that we all have.), is my despair at the the thought that if for whatever reason people decided that there current house was basically OK, and instead of adding on or upgrading or buying stuff for their house etc., they spent more time talking to and doing things with their loved ones, reading a book, going for a walk or just enjoying the world - that then it would all go to shit economically and we’d end up burning our furniture to keep warm (and grab your personal shopping cart early). I know this marks me as an economic naif, but is there not another way? Do we need this hyperactive staus/privilege/wealth system just to stay afloat? To provide our basic necessities (and if you look at the world as a whole - it’s doing a great job of that eh?)
    [insert incisive analysis of alternative economic systems here.]
    A start might be decoupling our major status markers (which I believe we will always need as the social animals that we are) from the mechanisms of providing basic shelter and sustenance. I understand and appreciate the deep wisdom of Gore Vidal’s It is not enough to succeed. Others must fail. I guess I am wondering if we can move the arena to where “fail” has something less economic associated with it.

    Shorter JP: I guess I am just a Pollyanna in rogue’s clothing.

  21. on 15 Aug 2007 at 10:43 pm 21. Oaktown Girl said …

    Kiera - too, too funny at #18. Thanks for the laugh.

    Hey, all I know is that while the blog was going from completely broken to double-plus bonus extra slow, my MOJ Chief of Special Projects, 3Tops, kept whispering in my ear, “Hey Boss! Remember, there’s no such thing as a coincidence.”

    Oh, and you can go ahead and let the prisoner Patriot out of The Trunk now.

  22. on 15 Aug 2007 at 10:48 pm 22. JP Stormcrow said …

    This post and our response is bringing back memories of a Jefferson Airplane concert way, way back where the cops lost control and basically tear-gassed everyone, and the Airplane responded by playing Volunteers and we were all revolutionaries for about 2 minutes and 43 seconds. (Grace Slick & maybe some others in the band actually did get arrested after the show.)

    My old vinyl JA albums are something I do treasure, but then again how bourgeois is that? ‘Cuz All your private property is target for your enemy. and all that. I guess one man’s album from his youth is another man’s multimillion dollar yacht. It is all morally equivalent, they’ve just self-actualized their greed in more prodcutive ways.**

    ** And this in turn reminds me of an Amway tape I got from someone that basically counseled what they called “visualizing”. Which as far as I could tell meant using your free time to look at and “shop” for cars and houses that you could not afford - the better to help you “visualize” the material life you wanted and enabling you to get out there and move the product. In some ways it did strip away all the BS and got right to the essence of what a lot of society runs off. But my God, what a life! Also worth a read is this post by Digby, Why Paris Hilton Is Personally Making You Miserable, motivated by Robert Frank’s book Falling Behind: How Rising Inequality Harms the Middle Class.

  23. on 16 Aug 2007 at 9:06 am 23. Oaktown Girl said …

    Do we need this hyperactive staus/privilege/wealth system just to stay afloat?

    JP- I agree that this is an important discussion to have, but I am wary of having it in this thread. Remember how when the credit card companies were pushing their agenda for bankruptcy “reform”, the corporate media chatter was all about “the people” being too irresponsible with their credit cards and spending above their means, when in reality the majority of bankruptcies were in fact due to medical bill and job loss.

    Yes, there’s responsibility all around in the housing issue, but there’s huge differences in the degree and intentions. I’m not too keen on a navel gazing session on this one at this particular moment in time. I think it lets the bad guys off far too easily by taking them off the hot seat.

  24. on 16 Aug 2007 at 10:21 am 24. Oaktown Girl said …

    My boss just emailed this article from Charles Schwab’s website around to everyone in the office. He (my boss) calls it “an excellent article about what is going in the credit market today and why it is having such a broad affect on the markets, beyond just the housing market.”

    http://www.schwabinsights.com/2007_08/strategy.html

    Of course, I’m suspect of the source (Charles Schwab). If there’s anyone with more understanding than me who would like to do an analysis of that article, that’d be much appreciated.

  25. on 16 Aug 2007 at 10:33 am 25. James Killus said …

    JP,
    My answer to your question of “what would happen if everyone stopped the mindless consumption one-upsmanship” is somewhere between, “that bridge has yet to be crossed,” and “I don’t think it would be a bad thing, except that someone might make it so.”

    Edwards’ “Two Americas” rhetoric struck a chord with many people, and it’s too bad that he’s not addressing it more solidly. The idea behind my “Neo-colonialism” essay that I linked to in #9 is that Keynesian macroeconomic principles apply to parts of an economy, and not just the economy as a whole (which is rather hard to define nowadays anyway). If a community or class is deprived of money (as have the lower income parts of the U.S. economy), you can see a classic Keynesian “liquidity trap” in operation–what amounts to a recession/depression within that class of people. What drains money from a community/class is money flows away from that community/class, including Social Security surpluses (which then go to corporate welfare, war profiteers, and tax cuts for high incomes), extortionary health care costs, and the profit margins on ego purchases, everything from $200 shoes to SUVs.

    If people spent more money and time within their own community (in the broadest sense), I think that the communities would profit at the expense of predatory organizations and their managerial class. But that’s just an intuition, and there’s a good chance it will never be tested. People like the bling.

    As a complete aside, I like Paris Hilton. She’s high profile and has had actual, pay-taxes-on-them jobs. She advances the idea that status is not only about money and social class, by basically competing in an arena that includes Lindsay, Britney, and the other tabloid darlings. She’s a traitor to her class and they hate her for it, and I like that in a woman.

  26. on 16 Aug 2007 at 10:51 am 26. Seattle said …

    LOL Ok, now my eyes hurt, but this joke was worth it (from Oaktown Girl’s article)

    A group of economists is climbing the Alps. After several hours, they become hopelessly lost. One of the economists studies the map, turning it upside down and back again, surveying distant landmarks, consulting his compass and finally the sun. Then he turns to the others and says: “See that big mountain over there? Well, according to my calculations, we’re standing on top of it.”

  27. on 16 Aug 2007 at 2:29 pm 27. christian h. said …

    In other news, the federal government now knows what to do: hold a person incommunicado for years, torture him, accuse him of laughable charges… and watch a jury convict. This makes me sick. Not a single fucking juror standing up for the constitution, or justice in general - are they all so scared?

  28. on 16 Aug 2007 at 3:05 pm 28. Zeus said …

    There does seem to me to be too much apologism here for the wealthy.

    Starting with Paris Hilton: I know that the comment was supposed to be kinda snarky and subversive, but empirically, Paris does not indeed work in any meaningful sense of the word. She gets paid to be “her” on “The Simple Life” and can pull down anywhere from 10 - 50k just for showing up at a party. Sure she has to compete with Lindsay, but who really cares, certainly she doesn’t (with that eternally bored look on her face).

    The trap here is in either villifying or excusing the rich. I’m trying to do neither. I’m trying to call both them and US out. I don’t think it is inherently immoral to be wealthy. I’m more concerned about how you got it and what you do with. Fact is, it has become more and more accepted, and indeed obligatory, to use the cheapest, foulest, most direct route to the biggest pile of cash, and then to leverage it to make masses of more money for yourself. And it is a disease and an ethic that has spread to the other classes as well. Everyone’s looking for a sucker to play. Society’s cannot be run like this. It is out and out economic cannibalism.

    I AM challenging outright the legitimacy of the ruling class to be ruling or leading anything. The consistent and gross corruption and incompetence is so complete as to cast questions as to whether any of them should be trusted to run a popsicle stand. They have clearly forfeited that right as a neglectful and delinquent teenage has forfeited the right to go out drinking with our credit card and our car. Not only is their record atrocious, their narcissism gargantuan, their advice consistently wrong, their accountability absent, but their hubris and arrogance is absolutely intolerable– that this all ought to mean we trust them MORE and give them MORE power, because now we are under siege (militarily or financially) and “we experts and rich people” know how all this works.

    If anything good comes out of this it will be the breaking of the compact between the “richies” (upper class) the “wanna be richies” (the middle class) and the “richies will keep me safe and give me a job and maybe I can cut a million-selling record and be one of them after I get on American Idol” (so-called lower class). I don’t know about you, but I, for one, do not want their life even if it was handed to me. Narcissism is not purpose. Nor is it fulfilling. Isn’t the point to have, to serve, and to give fulfilling life? This is not something one needs a cent to attain, just regard, some basic sense and drive, love, and an open mind. I don’t think a society can long endure this radical narcissism. We are meant for each other, not ourselves. Our self is not an end, as recent economic impulses would suggest, both because it is not socially sustainable and because it is not personally fulfilling.

    I believe the grassroots is beginning to sense the emergence of an “inter” opportunity and they are creating new rules and discourses around how to develop it. I’m certainly doing my damnedest. This requires that I DO NOT villify, but confront, that I do not disperse myself into a million little issues but focus and pierce through the information, that I do not compartmentalize, but integrate this information and embrace the complexity and diversity around me as a poem, not as a threat.

    Citizen Zeus

  29. on 16 Aug 2007 at 6:52 pm 29. Oaktown Girl said …

    Zeus:

    Not only is their record atrocious, their narcissism gargantuan, their advice consistently wrong, their accountability absent, but their hubris and arrogance is absolutely intolerable– that this all ought to mean we trust them MORE and give them MORE power, because now we are under siege (militarily or financially) and “we experts and rich people” know how all this works.

    Outstanding. And related to this is part specifically is the verdict in the Jose Padilla trial which Christian mentioned in #27. And since that verdict has such gargantuan consequences for our Constitutional rights, even though we are still in the summer blog doldrums, I’m going to go ahead and ask christian to do a formal Open Thread on that breaking news topic tomorrow night.

  30. on 16 Aug 2007 at 7:01 pm 30. christian h. said …

    Very true, Zeus & Oaktown Girl. We’ll have an open thread on
    Padilla and everybody’s rights tomorrow.

  31. on 16 Aug 2007 at 9:00 pm 31. James Killus said …

    empirically, Paris does not indeed work in any meaningful sense of the word. She gets paid to be “her” on “The Simple Life” and can pull down anywhere from 10 - 50k just for showing up at a party.

    I’ve encountered it more that once, but it always brings me up short to find that people who should know better seem to believe that reality television has some sort of real connection to reality, rather than just being another sort of television.

    I truly find that bizarre. “Reality” television has writers, is heavily edited, and the people who participate are performers. Whether or not they are “good” performers, is the same matter of taste as all performances. But whether or not it is “work” is not really a matter of taste. It is, most emphatically and empirically, real work.

    Similarly, as to the question of whether or not one can “get to know” a person from reality television, the answer is quite simple: you cannot.

    Now realize, my first public assessment of Hilton was using her as an introduction to a discussion of Social Security, noting that, as a result of her actual employment in “earned income” jobs, she, unlike so many of her social class, has paid Social Security taxes (one of my “empirical” definitions of work–do you have a better one?). But, having noticed one unusual aspect of her phenomenology, I began to pay attention to other aspects. For example, she appeared on Saturday Night Live and did a good job of it. Do you have a appreciation for how hard that is, or how many other performers have come up short in that venue?

    Then, through another avenue, I encountered someone who has had business connections with Hilton’s business connections, as it were. I suggested to this person that it looked to me like Paris Hilton, like so many in the past, is a reasonably intelligent and ambitious young woman who decided to make a show business career out of playing a dumb blonde. He said that was pretty much his opinion as well.

    To be sure, it does appear that she is an exhibitionist and a narcissist. Those characteristics are so rare in show business, after all.

    As I have indicated on other comment threads, I am interested in the phenomenon of celebrity as much as I am interested in celebrities themselves. I don’t care for “The Simple Life,” for example, but it looked like honest work to me. If she got the role because of her perceived position in society, and inherited celebrity, well, I would say the same for Drew Barrymore, Jane Fonda, or Julian Lennon. One judges these things on a case-by-case basis.

    I’ve known a lot of leftists who have never worked retail or belonged to a bowling league, i.e. participated in activities that actual working class people engage in and find enjoyable. It’s easier to blame teachers for children failing to get an education if you know no teachers, easy to savage “bureaucrats” if none are in your social circle, complain about commie college professors if you don’t know any college professors, or any communists, and, well, you get the idea.

    And I do agree, the trap is either villifying or excusing the rich. Another trap is believing what you see on television, or read in the newspapers. There are all sorts of traps in the world, a good many of which we build ourselves. The ones I fall into are often built out of my own snark, but I know a few tricks for getting out of those.

  32. on 17 Aug 2007 at 8:13 pm 32. JP Stormcrow said …

    Oaktown @ #23
    [Do we need this hyperactive staus/privilege/wealth system just to stay afloat?]
    JP- I agree that this is an important discussion to have, but I am wary of having it in this thread

    Zeus @ #28
    There does seem to me to be too much apologism here for the wealthy.

    I did somewhat conflate two related but different things:
    1)The desire for a system that did not expose our livelihoods and basic material well-being to the manipulations of greedy cry-baby cheaters, and
    2)The moral standing of those self-same cheaters.

    I will just say that I would certainly hope that wishing for a system** where the inevitable status-drunk cheaters have a less direct impact on the rest of us, does not constitute apologism for the actions of the cheats. However, I do take Oaktown’s point that this can be easily spun (and has been so spun) as deflecting examination of the second point, and it is fair to question why that is where I would choose to go in response to Zeus’s post. So I’ll stop.

    ** Say for instance making it so status-seeking cheaters only piss-off diehard traditionalist sports fans and mess up their own bodies … just for instance. File this under “To what extent are sports surrogate warfare? and is there any possible analogous construct that could siphon off socially destructive economic oneupmanship?”

  33. on 17 Aug 2007 at 8:40 pm 33. JP Stormcrow said …

    our own markets (as with farmers markets, etc.)
    I was surprised to learn that several well-known brand names are agricultural marketing co-operatives including Land O’ Lakes and Ocean Spray. I think that Credit Unions are an interesting model. The Massachusetts Bankers Association attacks their tax-empt status by resorting to an age-old industry tactic: Unfunny Humor - with a penumbra of self-defeating stereotype. (and that said, there well may be some abuse of the credit union tax-exempt status.)

  34. on 17 Aug 2007 at 10:05 pm 34. Zeus said …

    Oh, it just must have slipped, that, once she went to jail, toting a copy of “The Power of Now” and extending that into making statements about spiritual meaning and the importance of that in her life, that she (Paris Hilton) should so readily fall back into and trot out narcissism, exhibitionism, which is, if not “her”, certainly her practice, her “stock in trade.” I have no patience for this. Whether she is narcissist or canny business woman playing a narcissist and agreeing to get paid big bucks to be one, is a form of personal and professional prostitution and not one to be admired.

    Do not villify: Yes, Paris may be a smart, ambitious, driven business woman (remember they said the same things about Bush, he just plays “aw shucks”). But both of those sides are odius to me. This is not cause for aspersion, but frustration. A little bit of shaking of head is warranted. Neither is productive. The ends are not legitimate in my view, though I feel no need to cast Paris down in the pits of hell for her largely obnoxious and innocuous behavior, but nor will I excuse it.

    Do not excuse: Why do we laud, support, and pay attention to such behavior. We ought to be smacking our own selves on our behinds. What is the aim. Self-aggrandizement, and Paris is very good at it, and more than a few are envious, including her critics, but not me. I find that end misses the point of living and therefore shows extreme poverty of imagination, moral courage, and service.

  35. on 17 Aug 2007 at 10:16 pm 35. Zeus said …

    First, I guess I do not believe “the wealthy” are necessary to a functioning society, much less a thriving society. Most of the claims for necessity for the wealthy rest on discredited claims about their brilliance and hard work. And even if those existed, the “bootstrap billionaire” or some such, real smarts sees the sense in ploughing it back into the community and world instead of wasting it on 10 houses that serve as love nests one week out of the year.

    I’ve got an idea or two about a newer economy. First get rid of all profit seeking in the public sector. If something is a public utility or public function, have the public do it and pay for it! Public health, garbage pickup, voting, postal service, are not things to be farmed out to for-profit adventures whose only goal is to get as much OUT of the public and return as little as possible to maximize their profit. What we have now is simply incoherent.

    Second, make real partnerships between government and industry where the government can sponsor research and collaborate with leading-edge entrepreneurs to develop something for public well-being, i.e. renewable energy.

    I like credit unions and the whole notion of non-profit. The money they would have siphoned off to absentee stock holders is used to subsidize lower rates on loans, etc. Doesn’t sound so bad to me. I think we are going to have to come to terms with the elephant in the room– profit, as it stands today, militates against broad public prosperity in favor of concentrated wealth.