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Obama’s Too Big to Fail Rules Too Late to Matter

Published July 7, 2009 Deep , Universal Leave a Comment
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The AP has posted an article detailing Obama’s new regulatory plan that would if enacted impose serious penalties on financial institutions when they get too large.

Although there aren’t many specifics in the article about what those disincentives would be or exactly how the government would define ‘too big’, this is a much-needed step back on the road to financial sobriety. We should never as an economy or a country be held hostage to the failings of one single entity.

As deeply as I hated all of the bailouts we’ve been throwing around to woefully (borderline criminally, in my opinion) mismanaged institutions like Citigroup and AIG, I do believe their balance sheets may have been so enormous, their footprints and obligations so intertwined in the world economy, that their failure could have crippled the entire foundation of our credit-based system and brought it to its knees.

Yet don’t be fooled – our problems didn’t lie with any one or two entities, but with the entire system. What we had instead was a complete failure by the market as a whole – and even more damning, by the regulators in charge of watching those markets – to recognize the emerging credit/debt/mortgage bubbles whose eventual bursting forced this country to its day of reckoning.

A law breaking up large financial institutions or disincentivizing them from forming in the first place will help make future problems easier to spot and solve, perhaps, but it won’t by itself save us from our own worst behavior.

And it will do very little if anything to impact our current situation and economic crisis.

In fact, the most ironic thing about the Obama plan is that the entity which may now be most accurately considered ‘too big to fail’ is our own U.S. government, which through actions taken by the Fed and the Treasury has taken on much of the bad debt and obligations (and added a bunch of new ones) that will be stifling our economy for years to come.

We can only hope that the Chinese and other foreign governments continue to agree that the U.S. government is indeed too big to fail and allow us the time to work through our issues and restore some amount of fiscal and monetary discipline without cutting off their support in one fell swoop.

Questions: The Michael Jackson Edition

Published June 25, 2009 Deep , Personal , Universal Leave a Comment
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Michael Jackson dead?? That’s what the LA Times and AP are reporting, anyway (CNN hasn’t yet confirmed). Unbelievable.

Earlier today, my brother was bemoaning Farrah Fawcett’s death, trying to come to grips with the loss of his most common inspiration for those special, intimate teenage moments. (I kind of remember Farrah as being a sexy icon, but she was a bit before my prime mastubatory years).

Michael Jackson, however, was kind of like my Beatles. So I’m in shock, and surprisingly sad to learn of his premature death.

Thriller may be the album (and I do mean ‘album’) I remember playing the most as a child. I remember ordering and breathlessly awaiting a Michael Jackson biography from one of those Scholastic book forms we used to get as kids (I think it was called Thriller).

And despite all his successes, to me he seemed like such a tragic figure.

To honor of the loss of the undisputed King of Pop, I present the Michael Jackson edition of Questions.

1) What’s the first word you think of when I say Michael Jackson?

2) What Michael Jackson songs/albums do you have on your IPod?

3) Which Michael Jackson song is your favorite? (Jackson 5 Tunes included)

4) What about your favorite Michael Jackson video?

5) Which non-musical Michael Jackson moment/situation do you think is most memorable (eg moonwalk dance, neverneverland, plastic surgery, pepsi ads, his kiss/marriage with Lisa Marie, his pedophile trials, his fatherhood (baby holding), etc.)

6) Did you think Michael Jackson was guilty of pedophilia? If you think he was, as I do, do you also think, as I do, that he in some ways was as much of a victim as perpetrator given his unusual upbringing? Or do you think there can be no excuses for that kind of crime (pointing out that none of his siblings have ever been accused of similar behavior)

7) In the entertainment world, whose death do you think would generate more international attention and sadness than Michael Jackson?

8) Give me the over/under on how long it takes for a book publisher to take advantage of his death by coming out with a new Michael Jackson title? Will the book come out before the first posthumous record album? Will it be written by a Jackson family member, and if so, which one?

9) Why do you think Michael Jackson got all those plastic surgeries? Do you really believe it was medically necessary as he asserted once on Oprah (I think)? Couldn’t he tell the damage he was doing?

10) Some dude on CNN just compared Michael Jackson to John Lennon? Whose death was the bigger shock? Which one was the better performer? More influential musician?

The Audacity – and Righteousness – of Citigroup

Published June 24, 2009 Trivial , Universal Leave a Comment
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Citigroup executives have decided in their infinite wisdom to increase base salaries for many of their employees by as much as 50 percent.

The bank says the raises – which will be partially offset by a reduction in bonuses, though overall compensation packages could be higher or lower – are necessary to remain competitive … in an environment where the official unemployment rate will soon be in the double digits no less.

It’s easy and probably fair to accuse Citigroup management of being at a minimum extremely audacious and tone-deaf to the current environment. This is, after all, a financial institution that did everything in its power to run itself into the ground – egregious compensation, dubious loan-making, wanting risk management, overambitious acquisitions, questionable business line expansion.

As a result of its shoddy strategy and the crumbling economy, the company lost a whopping $27 billion in 2008.

The only reason Citigroup even exists today is because the government decided in its infinite wisdom that the company was ‘too big to fail’ and stepped in with capital several times – $40 billion in direct investment and another $300 billion in loan guarantees – to save it from bankruptcy.

Now the government owns a huge chunk of the company, which still apparently doesn’t give it the right to have a say in determining compensation for the rank and file.

The funny thing is, Citigroup executives may be doing the right thing, although they certainly could have done a better job explaining/defending their action.

One of the reasons – though certainly not the primary one – this country and its financial institutions got into the mess it did was because compensation policies were so heavily tilted to short-term performance, encouraging all employees, even those in areas like compliance, to woefully undervalue risk.

The decreased reliance on bonuses as an assumed form of regular compensation should help mitigate that carefree behavior in the future (though it will also likely stifle innovation as employees focus more on keeping their jobs as opposed to generating outsized profits – well, you can’t have everything and if i had my druthers, I’d rather our banking system be more preoccupied with stability than unnatural growth).

And while I want to scoff at Citigroup’s explanation that the salary increases are necessary to “ensure its employee compensation practices are competitive,” as a company spokesman put it in a Bloomberg article, it’s not entirely untrue. The irony is that because the government stepped in to save Citigroup as well as dozens of other troubled banks, the market for financial services employees is not nearly as bad as it would have been. Many of Citi’s competitors have already paid back the TARP money or plan to do so soon and will likely be offering better compensation packages to top employees.

You may think this is all a good thing, because the economic fallout of a collapse in our banking institutions could have been disastrous, certainly much more damaging than the destruction caused by the dislocations in the automotive industry.

I unfortunately believe for all the hundreds of billions of dollars we’ve spent, we’ve changed very little structurally, and only put off our economic day of reckoning a little while longer.

I also think this focus on compensation is mostly noise and beside the point. What the government really needs to do is start breaking up some of these institutions which we deemed necessary to save because they were ‘too big to fail’ and crafting regulation to limit this kind of concentration of power within the financial services industry.

Alas, if anything, mostly I’ve been seeing it go the other way, as stronger players in the industry snap up the weaker ones and get even bigger. Combined with the moral hazard we’ve perpetuated with our reliance on bailouts, that consolidation is likely a recipe for disaster.

But Kate Edmonds Donner, an event planner in New York, said the best plan is to leave children at home or send them home after the ceremony.

“If it’s a formal wedding, children should go home after the cocktail hour,” she said. Practicing what she preaches, Ms. Edmonds Donner and her husband, Alex Donner, the society band leader, did not invite children to their wedding last year in Garrison, N.Y.

Yeah, I’m still in love with our president … (Obama’s Speech to Muslims)

Published June 4, 2009 Deep , Universal 1 Comment
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What can you add when one man says everything you’re thinking and says it with such clarity and such poetry??

All of us share this world for but a brief moment in time. The question is whether we spend that time focused on what pushes us apart or whether we commit ourselves to an effort, a sustained effort to find common ground, to focus on the future we seek for our children and to respect the dignity of all human beings.

It’s easier to start wars than to end them. It’s easier to blame others than to look inward. It’s easier to see what is different about someone than to find the things we share. But we should choose the right path, not just the easy path. There is one rule that lies at the heart of every religion, that we do unto others as we would have them do unto us.

Why Facebook will be a HUGE business…

Published May 5, 2009 Personal , Trivial , Universal Leave a Comment
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Late last year one of my predictions for 2009 was that Facebook would go public, sparking a mini-rally in the markets. Yet a lot of what I read about in the press lately is all about the company’s struggles – having trouble raising money at the valuation they want, having trouble hiring the workers they want, having trouble generating significant ad revenue.

To which I say, bullshit.

Seriously, you’d think the company was on the brink of failure, as opposed to being within 12-18 months, tops, of scoring the biggest Internet IPO since Google (And hell, I like my job just fine, but if you want to toss me a bunch of those pre-IPO options, Mr. Zuckerberg, I’m ready to chat)

I could go into all sorts of detailed analysis why I remain a committed bull on Facebook’s prospects, but all I need to do is show off a very simple demonstration.

Here are the sidebar ads I recently received on Facebook:



Damn, Facebook. Are you reading my diary, or what? The next thing you know they’ll be sending me an ad for McDonald’s Filet-o-Fish!

Now my assumption is the wedding ads are due to my recently updated ‘engaged’ status, and as for the hair restoration one, maybe it’s just the thirtysomething-year-old male demo.

But however they’re doing it, there’s no question Facebook has a friggin’ treasure trove of data on what their users like, what they need, what they do, who they hang out with etc. etc., and marketers should be able to use that information to their advantage.

People in the online marketing space have for years been talking about using the power of the Internet to effectively target specific users with relevant ads, but while there’s been some progress made on that front (search advertising is, after all, the holy grail of targeted advertising), no one company has been able to assemble the kind of information on its users like Facebook has.

The only real question is how much Facebook can get away with using. Personally, I think it’s great being served up relevant ads and as long as they don’t pass on personally identifiable information, I’m fine with it, but I know a lot of others find it all creepy and scream about invasion of piracy whenever Facebook tries to do something innovative with their data to make some money

But the privacy worrywarts should at least be comforted by the fact they certainly don’t always get it right. I pressed refresh and this was one of the ads that came up:

Not very relevant, unless, of course, Facebook has somehow figured out how to see into the future!! Perhaps they’ve scanned all my data and decided through some sort of complex scientific/actuarial data mining analysis that I’m a ripe target for breast cancer (men can get it you know!) Is it time for a mammogram????

Newspaper bailout? Please no … but we do need The Watchmen

Published May 5, 2009 Deep , Universal Leave a Comment
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What a shock. A reporter (fearing for his own job, perhaps?) asked White House Press Secretary Robert Gibbs if the potential imminent closure of the venerable Boston Globe calls for yet another government bailout, this time to save the flailing newspaper industry.

Gibbs was sympathetic to the plight of the industry but at best non-committal with his answer. Yet Clusterstock writer Joe Wiesenthal seems to think such a bailout is coming (although not in time to save the Globe), and that the Obama administration and Congress will justify such largess by carping “about how the lack of a thriving fourth estate posed (sic) ‘systemic risk’ to democracy.”

I don’t think Wiesenthal is right. The public appetite for more bailouts is basically nil, and if the auto industry is now getting the stiff arm from Congress then I can’t see how newspapers are going to be able to feed in any significant way at the public trough. The Obama administration has already rejected calls from house Speaker Nancy Pelosi asking for looser antitrust restrictions created under the Newspaper Preservation Act of 1970.

However, I’ve also seen our government do some stupid and surprising things over the past year, and it did after all once create a Newspaper Preservation Act, so perhaps we will see government intervention in the newspaper industry.

And make no mistake, a widespread newspaper bailout would be a stupid thing to do. No one under the age of 50 wants to read newspapers anymore. So what? Most of these people haven’t stopped staying up to date on current events, but are finding the news – at least the news they want – through other means, such as our beloved Internet and the emerging blogosphere.

As a former journalist, trained at one of our nation’s finest J-schools, I want to be sympathetic to the cry and hue I hear everyday from folks in the industry. But media companies should have to deal with the same technological creative destruction forces that numerous other industries have been forced to confront.

The newspaper industry will have to find a way to stay relevant amid emerging technological (perhaps the new large-screen Kindle will offer one answer) and societal changes, or die the slow death it deserves. I am confident a market will always exist – or at least eventually reemerge – for people who know how to effectively create and/or edit content.

However, I have one important caveat here. There is one function that newspapers perform that I do think is vital to our democratic society: Investigative journalism. I cannot begin to enumerate all of the political and business scandals that would likely never have seen the light of day had it not been for the fine investigative work funded by the newspaper industry.

Indeed, much of that investigative work is already disappearing as the industry adjusts to the new economic realities by paring their operations to the bone. Whether newspapers survive or not, the days are already numbered when editors would allow their best investigative journalists to go off the grid for months at a time pursuing a potential scoop that could net the publication a bunch of Pulitzer prizes.

Other media – like magazines and television – have occasionally shed some light on some very dark corners of American history, and certainly some in blogland would pick up the muckraking mantle of the newspaper industry, but it is possible that the private market will no longer be interested in supporting the important investigative work the newspaper industry has historically done.

If the newspaper industry does not survive, and no other privately funded source emerges to effectively replace the investigative work it once did, then the government should step in to create and fund an investigative agency that would perform that function.

A group of Watchmen, if you will (and Watchwomen, of course).

I haven’t given much thought about the organization or mandate such an agency would have – although it would have to have an extraordinary amount of independence from government interference and electoral politics, even more than the Fed and the Supreme Court currently enjoy – and certainly we’d need to figure out who would watch the watchmen. It could be that the creation of such an agency may be too complicated or costly for the federal government.

In any case, I can live easily in a world without newspapers. But a world without a functioning investigative journalism system would be scary indeed.

If aliens don’t exist, does God?

Published April 22, 2009 Deep , Universal 4 Comments
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In the past couple of days, I’ve come across a couple of articles** about space and space exploration that got me asking the following, kinda random questions …

Why haven’t we found other forms life in space yet? More importantly, why haven’t other forms of life found us? And could the fact that we haven’t had any extraterrestrial encounters be at least somewhat supportive of the theory that humans are indeed a unique species, and that maybe there is a god or divine presence that approximates the concept as detailed by many of Earth’s practiced religions?

Now I kind of understand why we haven’t found life yet (by the way, this entire post presumes that Area 51 conspiracies and the like have no bearing in fact, that we have neither seen nor been seen by extraterrestrials, which admittedly is an awfully big presumption). Our space exploration attempts are still too immature, and we’ve barely begun to penetrate the infinite universe beyond our own galaxy, so our lack of success on the contact front shouldn’t be a surprise.

But given that the universe is infinite, wouldn’t one have to assume that there are also an infinite number of planets that DO harbor life and that at least on a few of those planets (if not an infinite number of them), that those life forms are so advanced that they’ve developed much better means of exploring the universe, including the means to contact us.

I know I’ve always thought that it seems almost incomprehensible to think that we’re alone in this universe, but doesn’t the fact that we haven’t been contacted yet by ETs mean that life may in fact not exist anywhere else? Ok, this is a bit of a stretch of an analogy, and a bit silly to boot, but this line of thought is kind of like how I have to assume that our species never develops the ability to time travel because if we ever did wouldn’t we somehow know about it (or perhaps the second we do develop it and test it out, we rip open the space-time continuum and destroy the universe just like Doc Brown always feared).

And if we are alone, what does that say if anything about the god question? I don’t think the answer to the question of whether life exists outside this planet would by itself prove or disprove god’s existence. However, I have always felt it would be very tough for most organized religions to square their beliefs and their written source materials with the existence of ETs. But isn’t the reverse also true – as long as we are unable to find life outside our little planet, doesn’t that support the mostly religious theory that Earth is a singularly unique place, and humans a special species whose purpose for being here is a divine mystery to be solved?

Or am I missing something very basic here?

** One article was actually a fascinating photo journal of some amazing pictures a NASA spacecraft recently took of Saturn. The other story talked about the fact that researchers have found a couple of planets outside our solar system that appear to be same size of Earth (but likely too hot to harbor life).

The buzz for 3/17/09: Ashton, Oprah and Generation Twitter

Published April 17, 2009 Personal , Trivial , Universal Leave a Comment
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I AM DEADMAN. HEAR ME TWEET! (Partial Video Blog Transctript)

Big news today. Ashton Kutcher just attracted his one millionth follower on the microblogging service Twitter, a milestone which has generated a fair amount of fanfare, but it’s only the beginning as cult leader Oprah is going to feature Twitter on her talk show today and send her first tweet over the air.

Oh, how wonderful.

Excuse me if I don’t join in the celebration – if I’m not all, ahem, atwitter with the news – but I have very mixed feelings here …

Now I am obviously no Luddite and as you can tell from the mere fact I am video blogging, I am not immune to the allure of banal self-expression and interactive communication, I enjoy reading status updates from my friends on Facebook – which at its core is all Twitter really is – and even occasionally provide my own update, but somehow Twitter crossed a line that offended my delicate sensibilities …

I realized quickly that what infuriated me the most about Twitter is how beautifully it fits with our time. What a perfect metaphor for our society. Our unquenchable thirst for fame and recognition, our almost pathological need to reveal private, mostly unimportant details of our lives to anyone who will listen, not to mention our rapidly dwindling attention span and deteriorating communication skills.

Twitter is inevitable. Few people bother with books anymore. Newspapers are an endangered species. The letter is a lost art. Real-life contact is an inconvenience. Communities and neighborhoods where we physically look out for one another are artifacts of a distant past.

It’s time to face it.  Whether I use the service or not, I am still a twit who tweets. We are all Generation Twitter. So why not follow Ashton and Oprah and twit boldly into our glorious 21st century. Resistance is futile. I have seen the future, and it has 140 characters or fewer ….

Image: Kutcher wins duel with CNN

Kutcher wins duel with CNN

Baby Boom Goes the Dynamite: The Lasting Legacy

Published April 12, 2009 Deep , Universal 1 Comment
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The Baby Boomers have blown it in spectacular fashion.

For much of the past 20 years, they have been the ones in charge of this country. During that time, they have…

… ignored the looming Social Security crisis, which has been simmering for decades and is now apparently coming to a boiling point much quicker than originally estimated.

… ignored the looming health care crisis, fighting alongside the dangerously powerful AARP lobby for small benefits like cheaper drugs while letting the larger issues of increasing system-wide costs and underfunded Medicare obligations spiral out of control.

… ignored the looming global warming crisis, choosing to go to war to maintain their reliance on cheap foreign oil rather than seriously pursue alternative energy sources.

… ignored the looming credit crisis, living further and further beyond their means, indulging in unbridled consumerism and rampant asset speculation.

So is it any surprise, really, that their solution to our country’s current economic crisis has been to saddle future generations of Americans with even more crippling debt, making it even harder for us to solve the numerous other looming disasters we face because of their neglect??

I had strong hopes that the election of Barack Obama – one of the last of the Baby Boomers – would lead to a change in Washington, to a recognition that there was too much at stake to play the same silly political games and to keep ignoring the spreading cracks in the foundation of the American empire. But mostly, it’s been more of the same.

Instead of trying to repent for their profligate and selfish ways, the Baby Boomers have decided to cement their legacy by throwing one last Hail Mary of Irresponsibility, in the form of trillions of dollars of tax cuts and stimulus plans and bailout packages, in hopes of putting off the ultimate day of reckoning a little bit longer.

Harry Truman had a sign on his desk that said ‘The Buck Stops Here.’ Unfortunately, I think the Baby Boom generation took that to mean it should then pocket the buck.

It wasn’t always that way. For a while, the Baby Boomers bettered our world. They fought for progress, for peace, for women’s rights, for civil rights. In business and in culture, they created and innovated, producing a tremendous amount of national wealth and prosperity. To be honest, the past 40 years have in many ways been an exciting and fruitful period for America. But somewhere along the way, the Baby Boom generation stopped thinking about the future of the country and started looking out only for its own best interests (Was it a cynicism and selfishness borne out of Watergate and other historical events or just out of normal human nature?)

It’s easy to overgeneralize about a generation, of course, and probably somewhat unfair. These are our moms and dads, after all, and individually it’s tough to fault them for the damage they’ve wrought.

It is in fact quite painful to watch as our parents finally reach the tantalizing edge of retirement only to find that their IRAs and 401Ks have been decimated and that idyllic, restful ride off into the sunset postponed, perhaps indefinitely.

Painful and tragic, perhaps, but also in some ways justified. Collectively, the Baby Boom generation is merely reaping what it has sown.

Unfortunately, for the rest of us, the prospects are even dimmer. The field now lies fallow.

Playing God and Taking Shortcuts…

Published April 1, 2009 Deep , Universal Leave a Comment
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This financial crisis is more than what it appears.

It is symptomatic of a society that sometime over the last 30 years lost its way by seeking not the road less traveled, but instead the quickest route.

It is the culmination of a mindset that increasingly became interested in pursuing immediate gratification at any cost.

Look around you. In every area of modern life, the shortcut has become the rule, not the exception.

In sports, we substituted medicine for athleticism as steroids offered the quickest path to success (And I cheered as Mark McGwire belted homer after homer chasing down Maris’ record).

In entertainment, we substituted notoriety for talent as reality television offered the quickest path to fame (And I lapped it up as Richard Hatch ‘survived’ an island and dozens of out-of-control women wooed Flavor Flav).

In war, we substituted power for strategy as shock and awe offered the quickest path to victory (And I couldn’t pull my eyes away as CNN aired its little war video game, the pinball-like sights and sounds of buildings being destroyed and people getting killed).

In friendship, we substituted technology for intimacy as tweets and status updates offered the quickest path to communication (And I blog away, making facile analogies as dreams of writing the Great American Novel slip away).

It goes on and on and on.

We wanted it big, we wanted it all, we wanted it now.

Cheating, if not encouraged, was at least ignored. Just pay no attention to that man behind the curtain.

So is it really any surprise that in business, too, we fell prey to the same phenomenon? In hindsight, it almost seems inevitable that we indulged in this financial alchemy, pursuing policies and practices to make the quick buck while conveniently ignoring the potential long-term negative consequences of our actions.  The no-doc loans, the credit default swaps, the collateralized debt obligations belong in the same metaphorical bucket as the anabolic steroid, Omarosa and gastric bypass surgery.

The funny thing is, the issue isn’t due to a loss of work ethic. Most of the bankers who concocted these weapons of mass destruction worked insanely hard at their jobs, just as our medically enhanced athletes put in long hours at the gym, just as our most vacuous reality stars went to incredible lengths to promote themselves (and just as I am spending way too much time trying to fine-tune this post).

And I’m not about to suggest that this eagerness to seek the shortcut is an entirely new development. People have of course always found ways to cheat or exploit the system – it’s just that in the past, the tools were more rudimentary and thus less dangerous (e.g. the spitball and the corked bat just can’t wreak the same havoc as the human growth hormone).

We became too smart and too powerful for our own good. We acquired knowledge and technology, but not the wisdom to use them productively, or to realize that sometimes we should refrain from using them at all.

And unfortunately, our primary solutions to this crisis so far – the stimulus plans, the bailouts, the monetary injections – offer more of the same. We are still seeking the quick, easy way out. Wanting it all, and wanting it now. Not willing to deal with the consequences of our actions.

Which of course makes perfect sense. In a world where man ultimately controls so little, including the time and manner in which he will depart it, how can we be surprised when he believes he has figured out a better way of accomplishing a goal and overplays his hand.

We have gotten what we deserved.

We have somehow lost our way.

We better find it back.

Government Debt: The Final Bubble

Published March 26, 2009 Deep , Universal 5 Comments
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Could this be the beginning of the end for our markets’ last great bubble?

An auction yesterday of $34 billion in 5-year U.S. government bonds didn’t go over so well, fetching prices well under what analysts were expecting.

Ruh-roh.

Oh I know, it may not seem like that big of a deal. The debt still got sold, unlike an unsuccessful auction for 40-year bonds in the UK. The fact that our auction resulted in yields (which move in the opposite direction of the price of bonds) of 1.849% versus the expected 1.801% seems like rather unimportant, inside-baseball type of stuff.

And if it’s just one bad auction, then it may not be important (Edit: Demand for an auction of $40 billion in two-year U.S. notes Tuesday was quite strong). But if this weak demand is a signal of things to come, then we are in for a world of hurt.

In the past ten years, we have had a dot-com bubble, a housing bubble, a credit bubble and an oil bubble, but I have contended they will all pale in comparison to the government debt bubble we are now experiencing.

Think about it: The U.S. government, despite owing $10 trillion in debt, despite incurring an additional $1.3 trillion deficit in 2008 (a number which will certainly be crushed this year and likely for years to come if the Obama plan even gets partly realized), has been up until now able to sell almost as much of the debt as it wishes to at extremely low interest rates.

The Pollyannas will say that there’s a good reason for the low cost of our debt, and why that situation won’t change anytime soon. The big concern right now is deflation, not inflation. Other countries have at least as many problems as we do, and too much savings to boot. They need to put their money somewhere, and the U.S. markets are still the world’s best, safest place to invest money. They own too much of our debt to start selling now – it would only lead to mutually assured destruction.

“This time it’s different.” To me, there are no four more dangerous words. It defies the laws of economics and of logic to expect that a nation awash in debt with miles and miles of higher and higher deficits on the horizon will be able to lend more money at virtually zero interest for an extended period of time.

The only question is when do the floodgates open? We’ve heard rumblings of complaints – notably, on the record and not anonymous – from Chinese officials about our country’s economic situation and increasingly high levels of debt. We’ve seen budget deficit estimates from the CBO which far exceed the optimistic ones put together by the Obama team. And now we had a disappointing auction.

Of course, to a certain extent, debasing our currency is what the government wants. If we could control the pace of the move, some inflation would be a good thing since we’re so heavily in debt (as the value of the dollar falls, that means debtors owe less in ‘real’ terms). But it is highly likely that the transition would come too fast and too quick for our economy and our policies to adjust without experiencing significant dislocations and subsequent pain.

I can almost guarantee you that if government debt is a bubble and it does pop, you won’t see our foreign lenders gently exiting the market. It will be a stampede.

And what will be the implications of such a scenario? Believe it or not, they are likely far worse than anything we have seen so far. Interest rates will soar, as will inflation. Savers will be crushed. Investment will grind to a halt. An already weak economy on its knees would get weaker. We will be forced to renegotiate our obligations with foreign lenders, most notably the Chinese.

The end result could be no less than the end of U.S. hegemony.

The dagbuzz for 3/23/09: The Geithner Bank Stability Plan

Published March 23, 2009 Deep , Universal Leave a Comment
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Details of the Geithner bank stability plan came out today, and Wall Street for one loved it. And why not,  for the plan basically allows financial institutions to take the worse of the toxic assets rotting away on their balance sheets and pawn off the vast majority of the risks of nonpayment onto the U.S. government (and ultimately the U.S. taxpayer).

I will give credit to Geithner for creativity in crafting the plan given our limited options. Without the use of private money and leverage, we would never be able to afford absorbing all the problematic assets without jeopardizing the health of the U.S. balance sheet and sending our foreign investors fleeing for the exits. And even if we could afford it, Congress would never step up with the money now that the public’s appetite for these Wall Street bailouts has totally disappeared, so Geithner cleverly bypassed that particular concern by giving extraordinary powers to agencies like the Federal Reserve and the FDIC.

It is quite apparent from reading the fact sheet the U.S. Treasury released today regarding the plan (which I encourage everyone to read since it actually provides a concise, rather easy-to-understand summary) that Geithner’s core assumption is that current market prices for these toxic assets are not reflective of their underlying value.

If Geithner is right, and prices of these assets are artificially low, then his plan could very well work. If he’s wrong and, as many experts believe asset prices fall further, then we are throwing good money after bad, and the leverage we are employing will cause even more damage.

Geithner says new plan is best option

Eliot Spitzer: A thoughtful voice of reason (alas, without any power)

Published March 23, 2009 Deep , Universal Leave a Comment
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In a recent interview with CNN,  former New York Governor Eliot Spitzer gave detailed, thoughtful, reasoned insights into a whole host of recent topics related to our financial crisis, including AIG bonuses, Obama’s performance, the media’s impact, regulation, etc.

I recommend the 20-minute Fareed Zakaria interview in its entirety, but if you only have limited time, Spitzer offers a concise explanation into the cause of our current economic situation for a few minutes starting at about the 10:45 mark (I have attached that portion of the video below.

No matter what you think of his personality (I always thought he seemed like an arrogant, hypocritical jerk) or the personal indiscretions that caused his ultimate demise (to me, it should have been a matter between him and his family and THAT’S ALL), Spitzer unquestionably took a harder, more probing look at Wall Street and its practices than anybody else who was in a position of power during that time. If we had had more Spitzers running around, then perhaps we would have addressed our problems earlier and avoided some of the pain we are experiencing.

Private-public partnership proposal poses plenty of problems

Published March 22, 2009 Deep , Universal Leave a Comment
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Oh goody. Looks like we’re about to hear the details of Geithner’s long-awaited financial stability plan, which has as one of its key components a public-private investment pool designed to help rid our system of the toxic assets rotting away on bank balance sheets.

Apparently, the Treasury will hire four or five private investment managers to run a fund that will purchase the assets. The government will then match whatever monies the private firms manage to raise and invest.

Sounds simple enough on the surface, but is it just me, or do bad things generally happen when government and the private sector get into bed together?

What often ends up occurring is one of two things:

1) The private companies – because they get all sorts of government breaks and incentives, including in many cases the assumption of losses should really big disaster strike – end up making decisions that do not properly assess risks vs. rewards, resulting in ultimate failure, whereupon the government must become more fully involved anyway. It’s exactly the kind of privatizing profits, socializing losses phenomenon we’ve seen with the current crisis. And it’s the taxpayer who gets screwed.

2) OR, public policy concerns get in the way of maximizing profits, and the government feels like it must step in to protect the interests of the American populace. In this case, the private enterprises get screwed, and are either forced to alter their investment strategy in inefficient ways or watch as their investments or ‘outsized’ gains get confiscated in one manner or another.

We saw both 1 and 2 when it came to the Fannie Mae and Freddie Mac disasters, and watching the AIG fiasco unravel is like watching the same story over and over again.

Though your ideology may affect the way you ultimately view the AIG situation – either management knows the company is too big too fail so they are not spending the taxpayers resources wisely, or the government is being forced by public outrage to get involved in company decisions that would be better left to management – we should clearly have done one of two things: Let the company fail and allow the private markets to work its destructive magic (and risk systemic collapse as its unpaid obligations filter through) or fully take the company over and end this charade that AIG is still a private entity. Anything would likely be better than this half-assed, want-it-both-ways solution we currently are trying.

In most cases, public-private partnerships are just clever ways to try and remove large obligations off the balance sheet of the American government (but merely postpone the costs), and justified under the guise that private industry can do things cheaper and more effectively.

I’m sure there are instances where public-private partnerships have been successful (if you know of any, please let me know in the comment section), but when the goals of the two entities are ultimately so different – one wants to maximize profit, the other wants to address some sort of nonprofit-based public policy goal – it’s no surprise the end result often ends up being a disaster.

Look, I know I’m doing the very thing I’ve been complaining about: Criticizing the new administration without giving its agenda or policies a chance (hell, in this case, I’m criticizing without even seeing the plan!).

Obama & Co. inherited this giant, sticky, complicated financial mess and are trying to be creative about fixing it without making our government go broke. There are no easy answers, and I frankly don’t know what the alternatives are. But the idea that we’re employing the same basic strategy that helped get us into this crisis strikes me as very unwise, to say the least.

The Congress AIG Bonus Bill: Bravo! (Seriously…)

Published March 20, 2009 Trivial , Universal Leave a Comment
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Great. Now there’s a backlash to the backlash to the AIG bonuses, and everyone is scolding Congress for acting so rashly in crafting a bill designed to recover 90% of the bonuses in taxes.

Conservatives are complaining the bill is unconstitutional and unproductive. In his Obama interview, Jay Leno said he’s frightened about its implications, and dagblog.com’s own Genghis is mocking the effort.

Gimme a break.

Don’t get me wrong. I have plenty of problems with this bill.

I question the constitutionality of the law.

I think targeting bonuses alone is unwise and insufficient. Companies will just get around the law by increasing base salaries, and bonuses in any case are a reasonable compensation incentive, as long as they’re tightly tied to performance at the individual AND corporate level.

I agree that some talented people may be poached by companies not encumbered by the law and that this would put the very institutions we’re trying to rescue even further behind the eight ball.

I worry that banks that aren’t healthy may try to return the TARP money as soon as possible, undermining the main purpose of the program in the first place – keeping the banks well capitalized and the credit flowing.

However, I think all of these potential issues aren’t nearly as concerning as the critics would have you believe.

I’m no lawyer or Constitutional expert, but I do believe the bill of attainder issue has been at least somewhat addressed by broadening the law to include bonuses paid by any bank receiving a certain amount of TARP money. At a minimum, the answer doesn’t appear clear-cut and deciding questions of legislative constitutionality is one of the reasons why we have the court system anyway.

While I’d rather have Congress devise a broader, much more considerate compensation bill, I’m not going to cry that banks which are receiving significant sums of taxpayer money in order to stay solvent are severely limited in their ability to pay out bonuses to people already making a very good living (the bill only targets households with income greater than $250,000). When these banks are healthy and making a profit again, they can return the money and institute whatever compensation policies they want.

In terms of top talent leaving banks targeted by the bill, I think this concern has been wildly exaggerated. The financial industry has been decimated; unemployment in the sector is very high and even some very talented capable individuals are out of work and available should any talent be poached. Besides, you gotta find it laughable that we are worried about these ‘best and the brightest’, since it was in large part these very same folks with their fancy financial alchemy that created the monster which finally broke our system. Perhaps a thorough management cleansing at some of these companies would ultimately be helpful.

I also largely dismiss concerns regarding the unintended consequences of incentivizing banks to return the TARP money too quickly. If banks are healthy, we want them to return the TARP money as soon as possible. If banks are not healthy, and still attempt to return the TARP money, the government can stop them. Government regulation requires a certain amount of capitalization, and the stress tests will hopefully further separate the healthy institutions from the sick ones.

In short, I am glad Congress is moving in haste on this issue, even if in practical terms the AIG bonuses are chicken feed and any legislation addressing them will do very little in terms of getting us out of our current mess.

Would it have been so much better had we used force of law to stop AIG from giving out the bonuses n the first place? Absolutely, and if Geithner or others did not act forcefully enough to make that happen, I hope they are taken to task for that failure.

Do I hope our legislators take the time to craft a meaningful, defensible bill that minimizes any negative unintended consequences? Of course. Now that the first tranche of bonuses have already been paid out, and it will be up to the government to get the money back, it only makes sense to do this right.

But symbolism matters, and if we plan on continuing this practice of doling out hundreds of billions of dollars to companies in need, we have to show that this kind of behavior won’t be tolerated. It’s our money, and we have a right to say how it is used.

If in the process, we begin talking about how our culture of excess and misaligned compensation policies led to an unhealthy focus on short-term profit and an imbalance in dangerous risk-taking, then all the better.

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