The World We'll Inherit

5/31/2009

Restoring Perspective: Damn You Baby Boomers

The root of the 'too big to fail' argument extends back to the Bear Stearns fire sale to Chase and the subsequent liquidity injections for Freddie and Fannie. This should have been evident to everyone when Dick Fuld, CEO of Lehman Brothers, clearly expected to receive a bailout or forced acquisition from his former rival and fellow investment banker Hank Paulson, only to be shown the door by a devilishly righteous Treasury Secretary when zero hour struck.

The grin was wiped off Henry's face seemingly overnight, and all of a sudden we had TARP and 'toxic' aka 'distressed' aka 'legacy' assests that the Federal government desperately needed $700B overnight to purchase all of these rotten investments from the banks before the world was going to end. You can, and should, read documents recently made public in a Freedom of Information Act challenge by Judicial Watch to get a full appreciation for the both the tremendously historic nature of the TARP program, as well as the cavalier attitudes taken by those charged with its design.

Here we find our selves in retrospect with the terms 'too big to fail' or 'systemically critical' becoming matters of daily business in DC, I think everyone needs to watch this FRONTLINE episodes "Inside the Meltdown" and "Ten Trillion and Counting" to get a refresher on exactly the extent of our obligations and the blatant disregard for long-term sustainability demonstrated by policymakers. As it turns out failure during tough times is every bit as critical to survival of our capitalist system as success and prosperity during boom times.

I blame it all on the irresponsible and self-absorbed baby boomers. I look forward to the day when our parent's generation can no longer find a job because their skills are useless, which should be around the same time our government finally acknowledges that Social Security is gone and never coming back just like their 401k and eTrade account.

As long as the members of the UAW don't suffer hard times today, the rest of us won't be too pissed off at the government when that inevitable day does arrive, right?? Screw the unions, screw the banks, screw the newspapers; let them fail and hope they drag their irresponsible middle-aged managers right out of the workforce with them because their salvation is coming at the expense of our civilization's slow and painful demise.

Behind the Financial Bailout: Treasury documents and internal e-mails in the days before TARP

There are few weeks in American history as epic and significant as those leading up to TARP. See the embedded document below, courtesy of Zero Hedge, for a glimpse into the Treasury Department managed by an Investment Banker and judge for yourself the historical implications.
Treasury CEO Talking Points v1

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5/30/2009

Moral Hazard: Wall Street to Detroit to California??

The following is an excerpt from the March 16, 2008, edition of "FOX News Sunday With Chris Wallace":

WALLACE: But there's an overarching philosophical and policy question here that I want to try to get at with you about the government's role.
Why should the government, and thereby U.S. taxpayers, bail out lenders and borrowers who made bad decisions? And if they know they're going to be bailed out, what does that do to the moral hazard argument that they don't end up paying a price?

HANK PAULSON: Well, first of all, I really understand the moral hazard argument. So on the one hand, you've got a moral hazard. On the other, you've got what's right for the markets, what's right for the stability of the financial system, the U.S. economy.
All of these situations are situation-specific, depending on what's going on in the markets at the time. You're jumping to a conclusion about what the cost is going to be to U.S. taxpayer. So I just want to point that out.
And this situation hasn't played out yet. And wait and see how that plays out.
But to get to your general question, this is something that — you need to balance these two considerations. And I would say at this time, given where we are, and given how important it is to minimize disruptions in our capital markets, and how important it is to protect the economy which you were talking about earlier, this was the right decision.

The reason we are bailing out GM and Chrysler is that the government has deemed them both "too big to fail". I think this is ridiculous and nothing more than a convenient explanation for a very inconvenient reality which allows politicians to claim they are acting in the good of all taxpayers by bailing out the car companies. Below is a post by Robert Reich from October 2008 in which he directly addresses this concept:

According to Treasury Secretary Hank Paulson, the biggest Wall Street banks now getting money from the government are just "too big to fail.” Fed Chairman Ben Bernanke uses a different euphemism – he calls them “systemically critical.” The point is that if any of them goes down, it could take the whole financial system with it. So we taxpayers have to keep them up.

We’re hearing the same argument elsewhere in Washington for saving General Motors. It’s just “too big to fail.” So Congress is considering a bailout that would keep GM afloat and sweeten a merger between GM and Chrysler.

Pardon me for asking, but if a company is too big to fail, maybe – just maybe – it’s too big, period.

Reich makes an excellent point, but hardly addresses how to overcome this misconception that anything can be too big to fail. Very few policymakers are willing to acknowledge that there should be no such thing as "too big to fail" because the consequences of failure may cost them their jobs and influence, which is unfortunate because I thought the whole point was to eliminate all of the systemic risk in the system, not keep the same idiots who got us here in their jobs.

This doesn't even get into the reality that the car market in the US has hit a saturation point and people don't need to buy cars as bad as GM would like us to believe. Even if this Chapter 11 plan works and GM restructures into a more efficient entity, is the government gonna subsidize American households to buy a new GM car to maximize the value of their equity stake? Will they pass laws that create disincentive to buy foreign cars? I just don't see an end-game in the whole auto bailout, but if anyone has any ideas I would be happy to hear what they have to say.

I consider the Obama team to be essentially a bunch of well intended control freaks who consider it there duty to do something, anything, to avert failure. I am eager to see what happens when California fails, which is no longer just a possibility, it is absolutely inevitable. Bailing out California as a state somehow "too big to fail" would be disasterous because no matter what terms the Fed's impose on California, there is no way we can trust them to fix the underlying problems that caused the state to go into this irrecoverable nose-dive in the first place (problems we can certainly get into if anyone is interested).

Where does the Moral Hazard end?

5/28/2009

Nassim Nicholas Taleb explains his Black Swan theory...

5/06/2009

PandemicFlu.gov: Public Health in the Connected Age...

(Originally posted on the Connect Health Care Blog)

The Federal government has launched an intensive web-driven campaign through a new platform at PandemicFlu.gov to disseminate information on potential pandemic-level flu outbreaks. Each state has its own sub-site linked into the broader federal platform, with an impressive coordination of relevant information across a large network of local interests.

Several other Federal, State and NGO information outlets have also done a great job of distributing tools to connected citizens that can be used to quickly share and discover information across web-based communities. Some examples include:

CDC Index of Public Health Social Media Tools
CDC YouTube Channel
CDC Swine Flu Portal
WHO Influenza A(H1N1)
CDC-TV (see below)

Red Cross Pandemic Influenza Portal

Social media tools are readily available to bloggers through both the CDC and the Department of Health and Human Services (HHS), which both have over a dozen unique embeddable widgets which automatically update with the latest public health information.

The State Department and DoD have information geared to American's living abroad or with global connections which may leave an individual particularly vulnerable.

State Department Pandemic Influenza Fact Sheet

DoD Pandemic Influenza Watchboard

Obama on Swine Flu

4/28/2009

Shia Family Law: Why you read things before you sign them into law...

Afghanistan President Hamid Karzai admitted over the weekend that he had not read the Shia Family Law he signed last month, which clearly seems to reintroduce many of the oppressive policies of the previous Taleban government overthrown in the 2001 American-led invasion. President Karzai said, "The law is under review and amendments will take place. I assure you that the laws of Afghanistan will be in complete harmony with the constitution of Afghanistan, and the human rights that we have adhered to in international treaties.”

While it is arguable whether or not the furtherance of women's rights in Afghanistan was a valid reason to invade the country in the first place, it is in my opinion morally abhorrent to allow laws so clearly backwards to ever be reimposed on a population once they have been overthrown.

Apparently this is how Obama feels in retrospect, after hearing about how the new "Shia Family Law" allowed for marital rape and barred married women from leaving their homes without their husbands permission. Hamid Karzai has pledged to "review and amend the law" and admitted he did not read the 250+ pages before he signed it, but since the country's constitution allows for separate legal codes for Shia and Sunni Muslims it is unclear how this will be accomplished.

Too bad his "moral compass" led him so far down the wrong path before his "nuanced reflection" inspired him to change his mind...

I suppose Obama isn't entirely to blame as much as the system is because he even admits he didn't know until after it was passed. Not even Hamid Karzai read the bill, so I think to place the blame on the new guy would be harsh. It was clearly squeezed through by Karzai as a domestic political play before upcoming elections (for which he filed as a candidate today) during the information vacuum in the diplomatic relations during the transition and purging of senior diplomats. I am confident Obama would have applied serious pressure on Karzai to kill the law had he known of it.

Considering the investment of political, human and economic capital Obama has committed to Afghanistan, I think he will likely do all he can to squeeze Karzai, but not at the expense of winning on the ground with the Taliban. Winning is peace, and Obama is not unwilling to make a deal to win the peace. This is a radical deviation from US policy under Bush. I don't think it is unreasonable to make deals with people, so I hope he can maintain the leverage long term because the real battle is bringing investment and prosperity once the fighting ceases.

There is a lot that I believe Obama can do both militarily and economically to aid in the Karzai government's fight to win the peace. For example, Afghanistan is known for being the world's largest producer of opium, the vast majority of which is sold onto the black market and used in street drugs. There is a multi-billion dollar global market for opium-based painkillers which multinational companies would likely dump billions of clean dollars into if long term peace is a viable reality. This would have an immediate impact on both the well-being of Afghanistan's many rural farmers, as well as increase the greater national prosperity and re-establish the country as a viable place to do business, both desirable outcomes of any US policy in the country.

Unfortunately, I think the investment will come to the farmers regardless of the laws on how men can treat their wives; we all know the US is a major investor in oppressive governments all over the world. It is such a shame that a society can live in peace with such despicably institutionalized social injustice.

4/27/2009

"Just when we thought it was over, it had only just begun..."

Swine Flu Pandemic

If you can believe it, the global economic and financial crisis is rapidly slipping into a global health crisis as well. The Department of Homeland Security (DHS) has officially declared a public health crisis following the confirmed Swine Flu (H1N1) in Kansas, California, Texas, Ohio and New York.

The virus, for which there IS NOT a vaccine, has led to the cancellation of all public events in Mexico City after dozens were killed and thousands hospitalized after the virus unexpectedly broke out late last week.

It is starting to feel awfully apocalyptic these days....

3/31/2009

Is the United States Second Amendment to blame for the destabilization of Mexico?

Fox News Sunday featured Representative Nita Lowey (D-NY) this past Sunday to discuss the recent outbreak of chaos between the Mexican government of President Filipe Calderon and the country's many large drug cartels. Rep. Lowry stated clearly when asked what she thought to be the cause of the turbulence that, "Mexican laws are too strict, so cartels come to the US to buy their guns", citing specifically "200 small gun dealers along the border".

Representative Lowey prescribed as the solution a renewal of the ban on assault weapons put in place under the Clinton Administration but allowed to expire by President Bush and the GOP Congress in power at the time the law's sunset provision came due.

This is not the first time a politician has chosen to fault the easy access of guns, particularly assault rifles and other automatic weapons, for the flaws of men who use those guns to perpetrate a violent crime. Domestic drug dealers and gangs have long been held up by advocates of stricter gun laws as evidence of how the right to bear arms has been grossly abused and misinterpreted in modern American society. However, is it reasonable to say that the problems of our neighbor could have somehow been avoided, or would be in anyway curtailed if the US were to ban the legal sale of heavy firearms? I think not.

Representative Lowry gives far too much credit to the Mexican authorities. The laws of Mexico should not be applauded, for they are deeply misguided on many fronts. Calderon has been a proactive president, but he is a lame duck nonetheless, as is any Mexican government. Calderon is hand-cuffed by the single six-year term limit (called a sexenio) placed on the presidency by the Mexican constitution, which combined with largely nationalized industry and national resources, stifle real economic growth and prevent policymakers from having any serious effect on the Mexican black market. This failure of institutions in Mexico leads Mexicans to flee to the US for a lot more than just guns -- they come for jobs, health care and a new life.

The cartels are going to get guns from Venezuela, Russia, or whomever else they can, and no ban on assault weapons will change that reality. I think that Rep. Lowey is taking advantage of the serious problems being experienced by the Mexican government to serve her own anti-gun political agenda, and to suggest that somehow the effect of the Second Amendment on the lives of Mexicans should be considered relevant to the domestic debate over the just nature of protecting gun-rights is misguided.

3/26/2009

Special Drawing Rights (SDRs) and the end of the Dollar's dominance...

Zhou Xiaochuan, Governor of the Central Bank of China (seen to the right with Hank Paulson), has called for an internationally endorsed shift away from the Dollar as the world's reserve currency "as soon as possible" in advance of the G20 Summit. Zhou urged the International Monetary Fund (IMF) to expand use of Special Drawing Rights (SDRs) and move toward a "super-sovereign reserve currency".

Special Drawing Rights are defined on the IMF website as "The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies."

This is a very radical idea and cannot be dismissed because (a) Zhou truly does hold the fate of the Dollar and the US economy in his back pocket; (b) the IMF Board of Governors has advocated expansion of the SDR allocations since 1997, with 131 members (77.7%) officially endorsing the proposal. 85% is needed to implement recommendations from the internal SDR review committee, which convenes every 5 years (next 2010). The US controls 16.75% of the total IMF vote, which granting the Obama administration de facto veto of all IMF resolutions. Zhou's plan called for additional currencies to be added to the basket used to value SDRs; encouraged SDRs to be accepted in international trade and investment so they can become established reserve; SDR denominated securities to be introduced. Obama has indicated he opposes any and all such measures.

It is hard to imagine the Dollar, the underlying grease that makes the world work smoothly for American businesses and politicians, is actually on the verge of becoming merely "part of the basket" as opposed to the peg to which each currency is valued. China is the largest holder of US debt and has tremendous leverage in the debate over the realignment of international currency regimes.

What is to prevent Beijing from coordinating a massive pooling of US debt holders in a Chinese managed international and developing market counter-part to the Federal Reserve? The collective Treasury holdings of the central banks in the 131 dissenting IMF member-states, Ivy League university endowments and personal fortunes of Billionaire philanthropists like Warren Buffett and Bill Gates alone would be enough to leverage a new mint for global reserve notes. It would be like stock-piling gold in Fort Knox to guarantee US debt to its creditors during the Depression (or at least I think it would be).

At what could have been a watershed in American history, Obama and his half-staffed Treasury Department have gone nearly 100 days in the opposite direction of the hopeful, Reagan-esque vision that candidate Obama was so widely praised for forging during his two-year campaign. The president has been either uncertain or unsatisfied with the qualifications of applicants for many critical bureaucratic appoints under his chief deputies. These posts are critical for managing relations with foreign central banks and finance ministers.

Beijing ordered Zhou to make his aggressive proposal at a crucial moment for Tim Geithner, who had only begun to unveil their plans to combat the morgaged backed securities ailing the financial markets and clearly failed to fully ascertain the significance of Zhou's comments. Geithner was initially receptive and open to suggestions from Zhou, but his comments spurred a 4.2% decline in the Dollar across all currencies in less than 10 minutes. 15 minutes later he backtracked, and in his second press conference Obama reaffirmed the strength and long-term viability of the Dollar as the global reserve currency. Perhaps Geithner has yet to be briefed by his Under-Secretary for Foreign Affairs on the concerns of Chinese policy-makers.

**I searched for photos of Secretary Geithner with the Zhou, and found none - though I did find dozens of candid snapshots of Geithner's predecessor Hank Paulson enjoying face-time with China's top banker. Perhaps Geithner should call on Paulson to fill the void while he continues to recruit his underlings...

3/07/2009

Is the Live Nation-Ticketmaster merger anti-competitive?

“Vertical integration on steroids” is how Jerry Mickelson, chairman of Chicago-based Jam Productions, characterized the plan to merge the nation’s largest concert promoter and ticketing agency. “This merger is much larger than just the ticketing business,” he warned. It could “monopolize the entire music industry,” because the two entities manage or have business agreements covering all music-related revenue streams with hundreds of major artists. (Chicago Tribune)

The new company will form a firewall to separate ticketing and promotion, Live Nation Chief Executive Officer Michael Rapino, who would be CEO of the combined organization, told lawmakers last week. “We would absolutely make sure that both divisions are separately run,” Rapino told a Senate subcommittee on Feb. 24. (Bloomberg) Senator Chuck Schumer (D-NY) made no secret of his opposition to the deal, dismissing it as "monopolistic behavior plain and simple".

Ticketmaster investors will receive 1.384 shares of Live Nation for each held. The value of the deal, $216 million at yesterday’s close, has dropped 48 percent since the deal was announced February 10th. Live concert promoter Anschultz Entertainment Group (AEG) has resigned to terminate their agreement with Ticketmaster if the deal is approved by regulators, according to a letter AEG sent to the SEC on February 6th, four days before the deal was announced.

I first read of the proposed merger between Live Nation and Ticketmaster, the world's largest concert promoter and top ticket seller respectively, in a cover story on Ticketmaster CEO Irving Azoff in an edition of the Weekend Wall Street Journal from early February. I had heard of the man but knew little about his story, which I admit to be very impressive. The piece was biased, and understandably so considering it was a feature on Azoff's career and life, so there was no critical analysis of the merger or details of the terms. I finished reading with no opinion of how the deal would affect the music industry.

In Monday's Financial Times, the editorial board concludes that the deal "...would work against the fans in the longer term, no matter what innovations were on offer initially". After reading the FT's compelling argument against the deal I began to think about the implications for the music business of the merger's success. After reading Jerry Mickelson's full statement before Congress (see below) it became clear what the larger implications of the merger would be for the independent live music business- eradication.

Hopefully Chuckie Schumer has the last word...

Technorati Tags: Live Nation, Ticketmaster, Music Business, Jerry Mickelson, JAM Productions, Charles Schumer, Senate Judiciary Committee, Michael Rapino, Irving Azoff

Jerry_Mickelson_Senate_Testimony_02-24-09

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