The brave new world of finance-14: The next bubble?

(For previous posts in this series, see here.)

In this final post in this series, I want to look at what might be the next bubble looming on the horizon.

In his article The next bubble: Priming the markets for tomorrow’s big crash (Harper’s Magazine, February 2008) Eric Janszen says that the total value of real estate, if priced according to historical growth rates, should be about twelve trillion dollars. But the real estate boom drove the prices up to about double that, to twenty four trillion. If this is truly a bubble phenomenon and real estate values drop to what they should be historically or even below, suddenly twelve trillion dollars worth of assets would have essentially vanished into thin air.

It may not be that catastrophic. As has been pointed out elsewhere, real estate prices have not dropped that precipitously as yet (and in some areas of the country have not dropped at all) and some are speculating that it won’t. Such people argue that while prices have declined from the peak, that it has now reached a new equilibrium and will not sink further. I think we won’t know for sure which is the case for a couple of years, until all the dust settles from the subprime crisis and all the losses have been tallied. At present, there is considerable guesswork as to the full extent of the losses, both real and potential.

But there is a serious danger that the subprime losses can trigger a recession or even a depression and both the government and the business sectors are trying to find ways to stave it off.

Janszen argues that to make up for the losses generated by the subprime crisis, the financial sector is already gearing up to generate, and thus benefit from, the next bubble sector. What area of business would make a good candidate for the next bubble? Based on recent history, Janszen says that it has to meet certain criteria:

We have learned that the industry in any given bubble must support hundreds or thousands of separate firms financed not by billions but trillions of dollars in new securities that Wall Street will create and sell. Like housing in the late 1990s, this sector of the economy must already be formed and growing even as the previous bubble deflates. For those investing in that sector, legislation guaranteeing favorable tax treatment, along with other protections and advantages for investors, should already be in place or under review. Finally, the industry must be popular, its name on the lips of government policymakers and journalists. It should be familiar to those who watch television news or read newspapers.

He looks at various possible candidates for the next bubble, such as the health care, pharmaceutical, and biotechnology industries, and finds each one problematic for various reasons. He thinks that the only sector that meets all the criteria is alternative energy, because it is one of the few sectors big enough to serve the purpose. He thinks that this is already in the process of being “branded” as the next big thing.

Riding the wave of the environmental movement and people’s concern about the future of the globe, he says we are going to see immense investment by the government in alternative energy sources (nuclear, hydrogen, geothermal, solar, hydrogen, ethanol), not because of any deep environmental concerns, but because it will enable the government to subsidize the energy industry by the tens of trillions of dollars necessary to make up for the disappearance of the assets incurred by the collapse of the real estate bubble.

He predicts that we will soon start seeing highly increased hype for various forms of alternative energy and companies that deal in them will start going public, issuing stock and cashing in on the hyped-up interest in this area, just the way internet startups did a few years ago. Janszen also points out that Al Gore has joined the big venture capital firm of Kleiner, Perkins, Caulfied & Byers that was involved in the IPOs of Google and Amazon. Thus despite the initial skepticism Gore received from traditional business and media when he raised the alarm about global warming, he may turn out to be useful to them as the poster boy for the new alternative energy bubble. Joshua Frank also raises questions about the support that the energy industry (including nuclear and coal) are giving Obama and what they might be expecting in return.

I must say that initially I was skeptical about Janszen’s fingering of alternative energy as the next bubble but more recently I have seen disturbing reports that he may be on to something. President Bush, John McCain and Congressional Republicans are now talking enthusiastically about the virtues of alternative energy and green technologies, even while ridiculing the notion of global warming and strongly resisting efforts at conservation. President Bush, for example, now talks up hydrogen-powered cars and solar and wind power as the way of the future, even as he opposes far more direct energy conserving measures such as raising fuel efficiency standards for cars and trucks.

Like many other people, I am very worried about the long-term health of the planet and in favor of reducing our consumption of all resources, including oil. One has the sense that the tide is turning on this issue, that more and more people are beginning to think that we cannot go on consuming resources at the current rate. It is very disturbing to think that the government-industry-Wall Street complex will hijack the general public’s very real concern and cynically use it to siphon yet more vast amounts of public money into the hands of private investors and speculators, the way people’s support for home ownership was used to pump up the profits of those financial institutions involved with real estate.

The next president will play an important role in determining whether we have real conservation efforts or are merely going to create an alternative energy bubble, and we clearly need to watch developments carefully.

POST SCRIPT: Will Tim Russert denounce and reject his ties to Stalin?

Yesterday, I wrote about Tim Russert’s appalling performance as moderator of Tuesday’s debate. General J. C. Christian is worried about what might happen if Tim Russert’s tortured logic in linking Obama to Farrakhan is applied to Russert himself.

The rise of Tim Russert and the decline of journalism

I watched the Democratic primary debate held in Cleveland on Tuesday. It was the first debate I had watched live so far during the primary season. Who do I think won? I think such questions are meaningless. These kinds of debates are not meant to provide that kind of result.

But the losers of these debates are quite easy to pick: they are usually the moderators. What I hate about these debates is not the candidates’ performance (they actually come off quite well) but the moderators, who come across as preening and vain and self-important, and who seem to think that the debates are all about them.

And of that breed, there is no doubt that Tim Russert is the most obnoxious. No one epitomizes all the problems of modern journalism better than him. His shtick is really wearing thin. He often makes it a point to refer to himself as just a ‘blue-collar boy from Buffalo’, as if that makes him an outsider, just like you and me, a regular, working class guy like his daddy, so that we will overlook the fact that he is a well-connected Washington insider, a consummate Villager, someone who is completely at home with the moneyed-classes that rule the country.

Russert also practices a really tedious form of ‘gotcha’ questioning by trying to find some contradiction between a politician’s past statement on some issue and their current position. He usually frames this by saying, “On June 14, 1987, you said . . . but then last week you said . . .” and then sits there with a smug expression, as if proud of himself for having done all that research into the candidates speeches and writings.

Of course politicians change their positions, as do we all. Sometimes that is the most reasonable thing to do. As economist John Maynard Keynes responded when questioned about his own change of position on some issue, “When the facts change, I change my mind. What do you do, sir?” Russert does not seem to really care if the alleged switch is on a major issue or a minor one, or whether the switch was justified because of a change in circumstances, or what the full context of the quote was. His entire goal seems to be to take the candidate by surprise and make them look awkward.

As Josh Marshall over at the excellent Talking Points Memo (which should be a must read for any serious follower of politics) says: “The standout performance of last night was Tim Russert’s repeated tirades at the candidates for not answering his clownish questions. So we thought we’d string all of Tim’s gonzo moments into one tight reel. Let’s all repeat together, “I’m rough enough, I’m tough enough, and doggone it, people like me!”

Being the target of an interview ambush by Russert is like being attacked by an angry chicken: it is alarming at first before you realize how ridiculous he is.

In general, Russert seemed to be ruder to Clinton than he was to Obama, interrupting her repeatedly, but Russert’s lowest point was when he had to resort to really tortuous logic to link Obama to Louis Farrakhan and demanded to know what he ws going to do about it. Sadly, Hillary Clinton used that question to do reinforce Russert’s absurd line of questioning and it then devolved into a contest to see who could pander more to Israel and the Jewish vote.

Again, Josh Marshall in a post titled Russert’s Lowest Moment (and that’s saying a lot) says it all:

I discussed this in the live debate blog. But I think it’s worth going back and watching Russert’s run of shame here. I would say it was borderline to bring up the issue of Farrakhan at all. But perhaps since it’s getting some media play you bring it up just for the record, for Obama to address.

That’s not what Russert did. He launches into it, gets into a parsing issue over word choices, then tries to find reasons to read into the record some of Farrakhan’s vilest quotes after Obama has just said he denounces all of them. Then he launches into a bizarre series of logical fallacies that had Obama needing to assure Jews that he didn’t believe that Farrakhan “epitomizes greatness”.

As a Jew and perhaps more importantly simply as a sentient being I found it disgusting.

What was the point of Russert’s line of questioning? Why such questions make no sense is that if you look in the weeds hard enough, you will find all kinds of people supporting each and every candidate. What does that prove about a candidate? Nothing really, because people support candidates for a variety of reasons, some substantial and some trivial, some positive and some negative. If you as a reporter find an unusual source of support, that say a serial murderer has said he really likes McCain or that anti-Muslim Christian bigots are supporting Huckabee or that some KKK members are supporting Clinton, those things by themselves do not reflect on McCain or Huckabee or Clinton and they should not feel obliged to renounce each and every instance of such support. If that was a requirement, then people opposed to a candidate could create all kinds of mischief and distraction by getting people to say they support the candidate they actually oppose, and then watch the candidate be forced to waste time and energy renouncing such support.

When you see candidates receiving statements of support from any person or group whom you think is beyond the pale, what you have to do as a reporter is to see whether the candidate has, by word or action, suggested that they share the values of those professing support for them. If you can’t find any such instances, then that is the end of the story.

But simply picking out someone you dislike and using their statement of support for a candidate to demand that they formally reject such support seems to be aimed at casting negative aspersions on a candidate. It is lazy and shoddy journalism, but exactly the kind that Russert practices.

Another of Russert’s grandstanding tactics is posing the absurd hypothetical in order to catch candidates off-balance. In the debate, Russert asked Clinton and Obama what they would do if they withdrew US troops from Iraq and then found that al Qaeda had come roaring back in that country and taken over. Would they send troops back in? Clinton, to her credit, slapped Russert down and said the question was one that was hypothetical and not worth answering.

But why stop there, little Timmy? Why not ask the candidates what they would do if Russia and China form an alliance with al Qaeda to try take over the entire Middle East, and use that as a base to invade Pakistan? Or what they would do if an alien spaceship suddenly appeared and asked them to take the aliens to their leader? I am sure that you can get your crack research staff to think of something even more fantastical.

These kinds of hypotheticals are just plain silly because they are so far removed from reality. Candidates should not have to spend time thinking about what they would do in all the possible situations, and they should refuse to answer such questions. Presidents, of course, have entire teams of people whose job it is to study hypothetical scenarios and review the various options available to them. But leaders keep those hypotheticals under wraps because to discuss them in public is as self-defeating as thinking out loud about your future moves while playing a chess game.

The only time to publicly discuss a hypothetical is when you want to use it to influence the other party’s actions, to exert some kind of pressure. The president can say, for example, that if the Iraqi government were to take action A, then the US would have to seriously consider doing action B. The point of such a hypothetical is clear: it is to signal to the Iraqi government that it should seriously consider not taking action A.

To me, people like Tim Russert represent the decline of journalism. He may not be the worst example (it is hard to beat Fox News for really bad journalism) but the fact that he is considered by many to be one of the best is a sign of how bad things are. Such people have turned me off watching TV news altogether. I seriously considered not watching the debate because I knew in advance that I would get irritated by Russert

I often think we would have much better candidate debates if they were moderated by college students who are policy debaters or Model United Nations participants. They usually are more serious and better informed and less smugly self-important.

POST SCRIPT: Interview on radio

I will be interviewed on a call-in program on radio on Saturday, March 1 from 10:00-10:30am (Eastern time). The program is called Situation Awareness and the host is Hans Meyer. This program is a FreeWorldRadioNetwork.net production, part of Blog Talk Radio.

I was contacted because the host had seen some very early blog posts of mine that dealt with those people I called Third-Tier Pundits (i.e., people like Ann Coulter, Jonah Goldberg, Michelle Malkin) who are very silly people who have little useful to say but spend a lot of time saying it. The topic will be expanded to a general look at how the media (especially punditry) operates these days.

I will be interviewed for the first 15 minutes and the next 15 minutes will be Q&A with listeners. The call-in number is (646) 478-4821. You can listen-in and download the podcast of this and other shows here.

The brave new world of finance-13: The new bubble cycle

(For previous posts in this series, see here.)

Karl Marx famously argued that capitalism, while being remarkably resilient in overcoming problems and capable of releasing enormous productive capabilities, also carries within itself the seeds of its own eventual destruction because of its incapacity to accept an equilibrium state. Capitalism requires that companies have to push for continuous expansion and growth and this leads to the creation of monopolies and instabilities that inevitably result in crashes. I never quite understood that aspect of the Marxist critique of capitalism. After all, why couldn’t a company, once it had developed a good product and business model, just continue to plug away at a steady rate of manufacture and sales and profits? Why did it need to grow and expand in size in order to survive? I know that it cannot simply stay the same since developments and competitors will leave it behind. I can understand the need to improve products, even change the product line, and increase efficiency. But why must there also be an imperative to increase market share and profit margins, which often means that one must take actions that are harmful in the long run? Is it caused by simple greed? It seems to be too simplistic to ascribe human emotions as drivers of macro-economic behavior.

Maybe the economists among my readers can explain the theory behind why this drive for growth and increased profits is an intrinsic part of the capitalist system. But there is no question that as a purely empirical matter, the drive for growth in market share and profits seems to be an inexorable law of capitalism, played out over and over again. One sees it in action everywhere, especially these days, as I have already discussed in reference to the newspaper and book publishing industries.

Stockholders demand it. And when I say stockholders, I am not referring to some evil anonymous entities. They are often us, indirectly. The managers of our own mutual funds, pension funds, and other retirement accounts are often the very people forcing the changes that I have identified as deleterious, and they are doing it in our names, in order to increase our wealth.

And therein lies the problem. When the people calling the shots in a business have little or no connection to the workings of the business itself, it seems like a recipe for disaster. Stockholders have only a marginal interest in the long-term health of the company they own. They can bail out at any time and as long as they recoup their investment with a tidy profit, they have no concerns about whether the company they abandoned goes bankrupt, leaving thousand of people, the now-unemployed workers and the communities that depended on them, badly scarred. The classic 1989 documentary Roger and Me that catapulted Michael Moore to prominence told the sad story of the rapid decay of his hometown of Flint, Michigan because of the decision of General Motors to shut down its production plant there and shift production elsewhere.

It seems to me that the current American economy is in terrible shape in a fundamental way although it seems to be doing reasonably well if looked at superficially. As a result of outsourcing and the rise of foreign production centers, the US is producing a smaller and smaller share of tangible goods for the world’s markets. Where the US seems to be growing is in the financial sector, the business of making money from money. But that seems to me to be a highly risky development. The more separated you are from the underlying source of your business, the more risks you run of creating ‘bubbles’, where entities are created that take on a life of their own.

I have written before of the tulip, Beanie Baby and dot-com bubbles. In an article titled The next bubble: Priming the markets for tomorrow’s big crash (Harper’s Magazine, February 2008), Eric Janszen argues that we seem to be entering a new era of business, where bubbles are a routinely recurring feature. Whereas in the immediate aftermath of the earlier big bubbles, financial regulators took steps to prevent repetition and those steps usually worked for decades, he says that things have now changed. Instead of the normal market cycles of growth and compression, the basic economy seems to have shifted to a fundamentally bubble economy, where one period of runaway and artificial growth in one sector is immediately followed, after it crashes, by runaway and artificial growth in a different sector. So the dot-com bubble was followed in less than a decade by the current real-estate bubble. And during these periods of growth, a few people in the financial and banking sectors make huge amounts of money and when the crash inevitably follows, governments are expected to pick up the pieces and to help the individuals who are the collateral damage.

Janszen’s suggestion that we are seeing a fundamental shift in business cycles from the tradition growth-and-compression to a bubble-and-bust one is truly disturbing since the people who end up getting buffeted and damaged the most by such big swings are ordinary people and taxpayers, not the big financial interests who cause the turbulence.

Next: What will be the next bubble?

POST SCRIPT: Encouraging news

A recent Pew survey suggests that more people are beginning to turn away from organized religion. (Click on the graphic labeled ‘Multimedia’ partway down the article for the detailed numbers.)

More than a quarter of adult Americans have left the faith of their childhood to join another religion or no religion, according to a new survey of religious affiliation by the Pew Forum on Religion and Public Life.

The survey also indicates that the group that had the greatest net gain was the unaffiliated. More than 16 percent of American adults say they are not part of any organized faith, which makes the unaffiliated the country’s fourth largest “religious group.”

In the 1980s, the General Social Survey by the National Opinion Research Center indicated that from 5 percent to 8 percent of the population described itself as unaffiliated with a particular religion.

In the Pew survey 7.3 percent of the adult population said they were unaffiliated with a faith as children. That segment increases to 16.1 percent of the population in adulthood, the survey found. The unaffiliated are largely under 50 and male. “Nearly one-in-five men say they have no formal religious affiliation, compared with roughly 13 percent of women,” the survey said.

The rise of the unaffiliated does not mean that Americans are becoming less religious, however. Contrary to assumptions that most of the unaffiliated are atheists or agnostics, most described their religion “as nothing in particular.”

I suspect that despite saying “nothing in particular”, many of those people are on the path to atheism or agnosticism but are hesitant to acknowledge it to themselves or to others, knowing how negatively such people are viewed.

The brave new world of finance-12: The consequences of the primacy of shareholders

(For previous posts in this series, see here.)

As I discussed in the previous post, the instability caused by shareholder demands for steadily increasing rates of return infects every area of business for the worse. Furthermore, the law requires of management that businesses be run purely for the benefit of its stockholders. While this is meant to prevent management from acting negligently or even fraudulently to enrich themselves, it also has the effect that even an enlightened management has to be very careful about taking measures that are (say) motivated by concern for the environment or by the needs of its employees or the community in which the business is situated. Unless those actions can also be justified as leading to greater stockholder value, the stockholders have a legal right to accuse the management of acting illegally and to sue to demand changes.

In his book Collapse which looks at how societies destroy themselves by destroying their environments, Jared Diamond argues that despite the awareness by some corporate executives that their actions are damaging the environment, and their personal unhappiness with doing so, they feel that their hands are tied. They have a legal duty to do whatever it takes to maximize the stock price, whatever the consequences.

It is easy and cheap for the rest of us to blame a business for helping itself by hurting other people. But that blaming alone is unlikely to produce change. It ignores the fact that businesses are not non-profit charities but profit-making companies, and that publicly owned companies with shareholders are under obligation to those shareholders to maximize profits, provided they do so by legal means. Our laws make a company’s directors legally liable for something termed “breach of fiduciary responsibility” if they knowingly manage a company in a way that reduces profits. The car manufacturer Henry Ford was in fact successfully sued by stockholders in 1919 for raising the minimum wage of his workers to $5 per day: the courts declared that, while Ford’s humanitarian sentiments about his employees were nice, his business existed to make profits for its stockholders. (p. 483)

This may be changing. Defining exactly what is in the best interests of a stockholder can depend on what kind of stockholder we are talking about, as is illustrated in the abstract of this paper:

The traditional wisdom is that management should serve the interests of the corporation and the stockholders who own it by maximizing stockholder wealth. But a significant number of legal scholars argue that management duty should be more broadly construed to include other constituencies (stakeholders), such as employees, creditors, customers, suppliers, and the community at large. The broader view of management duty means that management has more discretion and that stockholders will seldom have recourse if management fails to maximize profits. Nevertheless, many states have adopted so-called other constituency statutes permitting management to consider such other interests.

The difference between the two views of management duty depends on how one defines a reasonable stockholder. If management duty is measured by the interests of a diversified stockholder, management’s duty is to maximize profits even at the risk of bankrupting the firm. If management duty is measured by the interests of an undiversified stockholder, the duty is to maximize profits and to minimize risk. Because rational investors diversify, most commentators have assumed that fiduciary duty should be construed as if owed to a diversified stockholder. The thesis here, however, is that (i) it is impractical to measure fiduciary duty by reference to diversified stockholders because management itself is often a significant undiversified investor in the business, and (ii) diversified stockholders will, in any event, prefer management to behave as if it owes its duty to undiversified stockholders.

(A ‘diversified’ stockholder is one who has investments spread over a wide range of businesses (so that any one of them going bankrupt has negligible impact), while an ‘undiversified’ stockholder is one who invests only in that one company. The reason that the Enron bankruptcy devastated many of its employees more than simply losing their income is that they had all been encouraged to invest all their retirement funds in Enron itself, thus making them undiversified)

We see another aspect of this problem being played out with outsourcing. At some point, the only way that some manufacturing companies can keep raising profit margins is by abandoning their production facilities in the US and moving offshore where labor costs are lower (often because the workers are cruelly exploited and even child labor is used) and environmental protection requirements are less costly to meet. This happens even if the product being manufactured in the US was selling well. But in the long run, moving production offshore means that fewer people in the US are earning good incomes, the community in which the facility used to be located suffers economic trauma due to a reduced tax base and increased unemployment, and as a result the long-term domestic market for goods will shrink.

Thus we see a reversal of Henry Ford’s realization that in the long run it was better for him to pay workers well, not just because they deserved it and it was a good thing to do, but also because otherwise they would not be able to afford to buy the very cars he was producing. Management who think like Ford risk being forced out of office by stockholders, because the latter demand that labor costs be made as low as possible, even if that means shifting production overseas, so that they can increase short-term profits and thus raise stock price. The negative impact of such actions would only be felt much later and by then the savvy diversified stockholders would have divested themselves of that company’s stock and moved on. Thus the fact that down the road the market for the company’s products would shrink is not a luxury that the modern CEO worries about. The phrase “in the long run” seems to have vanished from our current business lexicon, to be replaced by the next quarter’s profit margins.

Next: The new bubble economy cycle?

POST SCRIPT: Taking political action to the streets

Attempts by those in power to suppress voting by the groups that they think are opposed to them are nothing new. In the state of Texas, which has a long history of such attempts, the Republican controlled government situated an early voting center seven miles away from Prairie View A&M university.

The students responded with a great piece of political theater. They marched en masse all the way to the polling place on the first day that early voting was allowed shutting down the highway while they did so.

With that one move, they got a lot of media attention, highlighted the issue of voter suppression, and seemed to have a lot of fun doing so.

The brave new world of finance-11: The changing emphasis of business

(For previous posts in this series, see here.)

The problem with the modern business world, as I see it, is that it is no longer enough that a company be successful in the traditional sense of steadily producing revenues in excess of expenditures. That model of a successful business is considered hopeless naïve these days. What investors want is not steady profits but a steadily increasing rate of return on investments and this is leading to chronic instability.

Let me give an example. Suppose I start a business that returns a 20% profit on my investment. That is a nice return, allowing me to provide good salary and benefits to employees, reinvest something in the company to improve the product, expand and improve the product, and so on. You would think that if I could continue to produce roughly 20% profits every year, I would be having a good company. After all, I am employing people, producing useful things, and making a reasonable amount of money. And as long as the company is privately owned by me, that might be true.

But things are very different if I take my company public and sell stock to investors. You would think that the stock market would also recognize and reward such a solid, stable, company by increasing the value of its stock. You would be wrong. Although my rate of profit might enable me to pay fairly good dividends to the stockholders, that is not enough to raise the price of the stock. If the CEO of such a company says that he expects the profits next year to be the same as the current year, the company stock will tank. What the stock market wants to hear is that you will increase the profit margin each year. So 20% profit in one year means that you have to produce (say) 25% the next year, and 30% the next year, and so on. And the stockholders want to see you take steps now to make that happen in the future. This immediately sets up an unstable situation. One simply cannot sustain such a runaway rate of growth without creating a negative impact in other areas. This is why we see companies that are making huge profits still cutting back on their work forces and squeezing salary and benefit concessions from their employees in their desire to drive up profit margins.

There are some businesses that could be very stable and profitable, but become unstable under the peculiar and voracious demand to raise profit margins. Newspapers are a good example. In most American cities these days, one daily newspaper has a monopoly. This makes for a stable market and a potentially stable, or even slowly rising subscription base, which is what is used to set advertising rates. It is true that the rise of the internet and things like Craigslist has eaten into much of their once hugely profitable classified advertising market. Old timers like me can remember the days when the Sunday classified section was of a monstrous size, often equal to the rest of the paper combined. Those days are long gone, perhaps thankfully given the waste of newsprint, but newspapers have survived that loss and most daily newspapers make healthy profits of around 20%. In fact, the average profit margin of newspapers is greater than the average profit margin of businesses as a whole. If they were allowed to remain that way, they could function quite nicely, putting out a good product. But that can only happen with privately owned newspaper companies. With public companies, the demand by stockholders to raise the rate of return is slowly destroying them. They cannot keep raising advertising rates or subscription prices or subscriptions by sufficiently large amounts to meet the demand. They are thus forced to cut costs and this is usually done by targeting the biggest expense and that is reporters, particularly investigative reporters.

One person who used to work for The Philadelphia Inquirer writes: “When I worked there as a staff writer, in 2000-01, I watched in disbelief as the paper let many of its best people go, to appease the cost-conscious Wall Street investors. Space for local coverage kept disappearing, and the suburban newsroom where I worked took on a graveyard-like atmosphere, with three or four abandoned desks for every one that was occupied.”

Thus newspapers end up gutting the main reason for their existence. So while profits may rise in the short run, the quality of the newspapers tends to go down in the long run, leading to an eventual decline in readership, leading to loss of revenue, and thus calls for more cuts. We see this happening right now with the Los Angeles Times, where the editor abruptly resigned because he was asked by the publisher to slash the size of the news staff in order to cut costs. Previous editors quit for the same reason.

Another industry that is in decline, not because of any intrinsic problems but because of the demand for rising rates of profits, is the book publishing industry. This industry used to contain a variety of niche publishers who would put out their own lists of quality fiction and non-fiction and manage to make a small but respectable profit, even while taking chances with new and untried authors. But the takeover of these houses by the big public conglomerates has resulted in the same kinds of pressure to increase the rate of return. But the book market is not very elastic. There is simply a limit to the number of books that a person can read in any given year and the number of readers is generally stable. A phenomenon like Harry Potter may occasionally expand the overall readership size, drawing in new book buyers, but those things are rare. So how does one raise revenues dramatically? By abandoning niche markets, forsaking quality literature or risky new writers, and instead trying to identify the next blockbuster, the next Da Vinci Code. But again, this leads in the long run to deterioration in the overall quality and diversity of the books that are published.

The February 2008 issue of Harper’s Magazine has a nice article Staying awake: Notes on the alleged decline of reading by novelist Ursula K. Le Guin where she challenges the assumption that the reason that the book publishing industry is suffering is because people are poorer readers now, and argues that the unreasonable profit demands of big publishing companies is what is destroying the book publishing industry.

Next: The consequences of the primacy of stockholders

POST SCRIPT: Some religious people never learn

The state of Florida has revised its science standards and for the first time, has included the word ‘evolution’ in it. (Welcome to the 19th century, Florida!) But of course some religious people were upset, as they always get the heebie-jeebies when the word evolution rears its head. So to mollify them, the wording was changed to refer to the ‘scientific theory of evolution’.

The irony in this story is that the religious people thought that this was somehow weakening evolution, when it is in fact strengthening it. To call something a scientific theory is to give it high praise. How clueless can they get?

Is there any hope for Obama?

In the previous post, I pointed out the surprisingly strong early backing that Obama has received from Wall Street, which raises the obvious question: Why would Wall Street invest so heavily in him? One reason is that the business sector always covers its bets so that whoever wins, they have ties to them. But another major reason is that the pro-war/pro-business interests in the US cannot get all that they want from Republican administrations. The Republican Party is too closely identified in the public mind with big business to overcome the public’s suspicion that they always are seeking to enrich the big moneyed interests at the expense of the poor. Some of the desires of big business can only be met by Democratic presidents and Congresses, who have managed to convey the impression that they are the party of ‘the little guy’, and thus can neutralize some of the suspicions and do things that Republicans cannot.

Thus many government actions that big business interests sought, like the deregulation of airlines, trucking, and railroads were done by a Democratic president, Jimmy Carter. It was also a Democratic president Bill Clinton that was able to push through the anti-labor NAFTA and the anti-poor ‘welfare reform’ legislation. A Republican president would have met stiff opposition if he had tried to do any of these things. It was also Clinton who signed off in 1999 on the repeal of the Glass-Steagall Act which was passed in 1933 in the wake of the Great Depression to prevent banks from overinvestment in the stock markets. The act created a firewall between commercial and investment banking activities, and banking and investment interests had chafed at the restrictions. The repeal of this act in 1999 is partially responsible for allowing the reckless behavior of the banking sector in the current subprime mortgage crisis where the boundaries between traditional safe banking activities (such as issuing mortgages) and more risky and speculative activities (such as investing in the stock market) became obliterated.

So what might Wall Street want from a President Obama that they are willing to invest heavily in his candidacy? One possible reason is Social Security. Wall Street has for a long time tried to get its greedy hands on the massive amounts of money that exists in the Social Security trust fund. At present those funds are invested in government securities. The financial people on Wall Street would love to see that trust fund ‘privatized’, meaning that the money could be invested in the stock market. Such a huge amount of money entering the stock market would make stock prices soar, making the big investors immensely wealthy, and would also generate vast amounts of money in commissions to the big brokerage houses and investment banks as these huge sums of money traded hands repeatedly. The scale of the transactions would dwarf even the subprime amounts.

When Bush was re-elected president in 2004, he announced that the big goal for his second term was to privatize Social Security (although he called it ‘reform’ since the word privatize evoked a strong negative reaction). To try and achieve this goal, he repeatedly tried to scare people by saying that the fund was going broke and that the present generation of young people would pay into the system but not get anything out when they retire and that something drastic (i.e., privatizing) needed to be done to save it. This was, and is, a lie. As I will discuss in a future post, more sober economists have pointed out that the Social Security trust fund is in quite healthy shape and could be made even more solvent far into the future with just minor tinkering.

Bush failed spectacularly in his attempts to panic people into privatizing Social Security because of fierce opposition to his plans, opposition that was fueled by well-founded suspicions that what he was really interested in was not the long-term health of Social Security but merely to enrich Wall Street interests. Bush has quietly shelved that policy ambition in his lame-duck administration and no longer talks about it. But it would be a big mistake to think that Wall Street has also shelved its plans. They think big and long-term, and the Social Security prize is huge. I suspect that they think that a President Obama, being seen as progressive, might be able to push through the kind of Social Security changes they want. These changes will, of course, be euphemistically called ‘reforming’ or ‘saving’ Social Security, instead of the more accurate ‘looting’.

To be fair, Obama has said he opposes privatizing Social Security and has (rightly) called for the lifting of the current income cap on the payroll tax (a move that Clinton opposes). But by talking about a Social Security ‘crisis’ that needs major action to rescue it, he is adopting the rhetoric of those who are urging privatization and that is dangerous because it can create be used to fuel a sense that something drastic needs to be done. This should be countered vigorously.

Economist Paul Krugman takes Obama to task on this issue:

Lately, Barack Obama has been saying that major action is needed to avert what he keeps calling a “crisis” in Social Security — most recently in an interview with The National Journal. Progressives who fought hard and successfully against the Bush administration’s attempt to panic America into privatizing the New Deal’s crown jewel are outraged, and rightly so.

This is why voting someone into office is never enough. You have to keep an even more vigilant eye on your person especially after they have been elected and keep their feet to the fire to make sure that the special interest groups that swarm like ants all over the federal government don’t hollow out your candidate, leaving him or her just an empty shell of campaign promises.

Both Clinton and McCain are touting their own “experience”, that they are people who rely “not just on words, but on work” but I am not sure this is a winning strategy for either of them. Voters don’t seem to get too excited about the message “Vote for me. I will work hard” or “Vote for me. I have been around for a long time”. To my mind, the absurd charge by Obama’s opponents that he is “inexperienced” could well be his best and most appealing quality to voters, because that means that there has not yet been enough time for him to be completely enmeshed in the web that is spun around politicians by the war/business interests, and in which milieu both Clinton and McCain are completely at home. Thus there are some small grounds for hope that it may not be too late to rescue Obama from the clutches of the pro-war/pro-business and Wall Street interests.

But the sad truth is that we are now at the very point in American electoral politics that the ruling pro-war/pro-business party strives to reach as soon as possible, where the remaining candidates with any chance of winning do not differ greatly on major policy issues, and the voters are encouraged to get excited about some hot-button issues (which you can be sure will come up soon), or minor differences, or their styles and other trivialities. This makes voters forget that their real policy choices are very limited and that, in effect, the presidential election is over as far as substantive issues are concerned.

That does not mean that one should not vote. McCain will be a truly awful president, though he may not plumb the record-breaking depths of Bush who currently has an astonishingly low 19% approval rating according to one recent poll, and keeping him out of the Oval Office is a worthwhile goal. And in that particular respect, Obama has a decisive advantage over Clinton since recent surveys suggest that Obama has a better chance of beating McCain than Clinton does. This may be because, as one commentator said, “Clinton divides the left and unites the right, while Obama unites the left and divides the right.” That is an obvious oversimplification, but is valid enough to be significant factor.

But I always find it depressing that I am usually forced to end up voting on the basis of who is the least-worst candidate, never for the one that holds any really promise of winning on a platform of real change.

So although I do not usually vote in primary elections, come Tuesday, March 4, 2008, I will vote for Barack Obama in the Ohio primary, basing my decision on the hope that he is not already corrupted beyond redemption.

POST SCRIPT: Combating the negative myths about Canadian health care

One of the big propaganda efforts in the US has been the way the Canadian single payer health care system is falsely denigrated in order to perpetuate the lie that the US has the Best Health Care System in the World, when in actual fact it is bloated, expensive, wasteful, inefficient, inadequate, and corrupt. (See here for a series of posts on health care.)

Earlier I linked to the first of a two-part series by Sara Robinson that combats the myths about the Canadian system.

The second part is now online.

The problem with Obama

Given my concerns about Hillary Clinton, one might think that I would be an enthusiastic Barack Obama supporter, but at this point I must say that I am somewhat underwhelmed by him. I have not been bowled over by his alleged charisma, perhaps because I almost never watch TV, preferring to read about events instead, and charisma is hard to convey with the printed word. I definitely prefer him to Clinton, but on many issues, it is hard to tell them apart. But the key difference with Clinton is that I think that Obama (unlike Clinton or McCain) is not (yet) completely in the maw of pro-war/pro-business party that rules the country, although the process by which those interests swallow up political leaders and turn them into zombie-like creatures that do their bidding seems dangerously far advanced in his case.
[Read more…]

The potential Clinton vs. McCain nightmare

(Due to the unexpected importance of Ohio in the primary process, I am pre-empting the economy series for three posts on the elections.)

Back in November 13, 2006, when Wisconsin’s US Senator Russ Feingold announced that he would not run for the Democratic nomination for president, I wrote the following:

“With Feingold’s departure from the race, we are headed closer to a nightmare scenario in 2008 where the two factions of the pro-war/pro-business party will send their most cynical and opportunistic and unprincipled representatives to vie for the presidency: Hillary Rodham Clinton and John McCain. The pundits will love them because they play the game according to the debased rules they understand, where the only things that matter are strategy and tactics, and principles are irrelevant.”

Now that the primary season is well underway, at least half of my prediction seems to have sadly come true, with John McCain almost certainly being the Republican nominee. It seems like only Barack Obama can prevent the full nightmare from occurring. The Ohio and Texas primaries on March 4 and the Pennsylvania primary on April 22 will play important roles in deciding who the eventual Democratic nominee is.

If it is eventually Clinton vs. McCain, one can look forward to the nauseating spectacle of the Villagers in the media fawning over McCain, completely buying into his self-aggrandizing pose of being a ‘straight talker’ and ‘maverick’ and ‘independent’, and completely ignoring his actual record which clearly shows that he is a rabid war-monger, someone who panders shamelessly and is willing to reverse policy positions if it is expedient to so do, and one who toes the Republican party line 88.5% of the time, much higher than the average of 80%. For reasons that are unfathomable to me, the Villagers seem to adore McCain and give him a pass on all these things.

As Duncan Black says:

McCain’s a skilled politician who is good at telling members of the media – and interest groups – what they want to hear. He’s good at making them think he agrees with them on whatever issue they happen to care about, and even though he almost never follows up with any coherent action or leadership on these issues, he has flattered the chattering classes by validating their Very Wise Positions and appealing to their intellectual vanity. Then when Saint John McCain is forced by Circumstances Beyond His Control to change his position, everyone involved feels very sorry for poor John McCain. Elites have contempt for those rubes known as “voters” so it pains them when voters force their sainted John McCain to do all of these bad things.

Our elite discourse is run by shallow easily flattered fools.

John McCain also shows every sign of having a highly authoritarian mindset, similar to the current Bush-Cheney regime. His repeated use of the grating phrase ‘my friends’ in speeches, and even ‘my friend’ when he is talking to one person in interviews or in a question-and-answer setting, is a dead give-away of a person who is patronizing the listener. He clearly thinks very highly of himself and looks down on other people. If he is elected president, we can look forward to more contemptuous treatment of anyone who opposes him, and whining and scaremongering to try and always get his way, the kind of behavior that has characterized the present administration.
The coverage of Clinton will also be awful but in a different way. There is something about Hillary Clinton that rubs some of the Villagers in the media the wrong way. Maureen Dowd and Chris Matthews and the entire Fox News network seem to get positively unhinged by her. This instinctive reaction causes them to obsess over the most absurd things. We can expect to see the Villagers focus negatively on personal issues and trivialities, her laugh and her looks, her clothes, her family, the old scandals, and so on.
My problems with Hillary Clinton are for reasons that are very different from that of the Villagers. I really don’t care about her personal characteristics except insofar as they affect her policy positions. My concern is that she has shown herself to be completely willing to do the bidding of the pro-war/pro-business interests. She is favored by the lobbyist and business groups and seems quite capable of even starting wars just to show that she can be ‘tough’. Her votes on Iraq and Iran are ominous, showing that she is an eager follower of the neo-conservative agenda of going to war with those countries and others in that region.

She is also completely in the embrace of Wall Street and other financial interests. Her health care plan during Bill Clinton’s presidency became a nightmare because from the beginning she sought to protect the interests of the health insurance companies, the very cause of the problem. Recently in her campaign speeches she has started adopting some of John Edwards’ rhetoric about class and railing against Wall Street interests dominating government, but her record shows that this is utterly disingenuous. She has been a loyal servant of those very same interests and they are backing her now.

I have never seen any indication that she (or her husband for that matter) has any core principles, things that she will never give up because she believes in it too strongly. It seems like every principle, every policy position, is negotiable in the service of gaining power. They raised ‘triangulation’ to an art form. She, like her husband, is ruthless in the pursuit of power, so do not be surprised if she and her surrogates start using all manner of innuendo and dirty tricks against Obama if the race for the Democratic nomination continues to be close and she is in danger of losing. She knows that at the age of 60, this is her only chance to be president as she will be considered too old for the job in 2012 or 2016, so brace yourself for some really tough campaigning from her. The age standard is much laxer for men. McCain will be 72 in August but not much is being made of that.

Both Clintons also have a history of using people for their own ends and betraying even close and loyal friends (Lani Guinier, Peter Edelman, and Vince Foster immediately come to mind) to further their own ambitions or to make deals with their political opponents. I think that both Hillary and Bill Clinton have shown themselves to be shrewd tacticians but political cowards.

As you might guess, I am not going to be voting for Hillary Clinton or John McCain in the Ohio primary.

Next: The problem of Obama

POST SCRIPT: Strange values

The people of Denmark are considered the happiest people on Earth, and have this strange notion that there are other things that are more important to happiness than money. Of course they are crazy. They have been driven insane by living in a socialist hell where they get free health care, government-paid maternity and paternity leave, education is free for all the way through college (and students are even paid to go to college), and they get subsidized child care as well.

When will the Danes wake up and realize that all these things are worth giving up in exchange for giving a very few people the opportunity to make obscene amounts of money, just like we do in the US? The US ranks 23rd on the happiness scale, by the way.

The brave new world of finance-10: Who’s to blame?

(For previous posts in this series, see here.)

As is typical with bubbles, people involved at all levels of the subprime mortgage debacle seemed to deliberately shut their eyes to any negative information, as if they thought that wishing things were just peachy would make it so. As long as nobody looked too closely at the structure, no one would notice that it was a house of cards, and the good times would continue forever. But they never do. The house of cards always collapses.

(Some observers have pointed out that it may not be completely accurate to call the current subprime crisis a bubble. In classic bubbles, the prices of the commodity fall precipitously to their pre-bubble values or even below. This has not happened yet with home prices but the crisis is not yet over. The behavior of the principal characters in this drama, however, exhibit all the qualities of those involved in previous bubbles.)

Who is to blame for this situation? To be sure, there is enough blame to go around.

It is true that some of the homebuyers were outright dishonest, colluding with brokers to fake documents and income in order to pass a cursory scrutiny before getting the money to buy houses they could not afford. And it is true that some of these homebuyers acted with almost unbelievable ignorance and even stupidity about what they were getting into when they signed the papers to buy their homes. The Cleveland Plain Dealer had an excellent series on the foreclosure crisis by Phillip Morris and one story featured a man with a well-paying job who lost his home because he did not keep up with his $1,200 monthly mortgage payments. Meanwhile he was spending $40 a day on the lottery, hoping to strike it rich!

But apart from the criminal and the almost criminally stupid, it is true that many people buying homes in these go-go times should have suspected that things were too good to be true, that it was unlikely that many of them could actually afford the houses they bought. And yet, the dream of owning their very own home for the first time must have been powerful enough that they were willing to believe the promises of brokers and bankers, who were merely using them to enrich themselves. We also live in a time when people are told that living beyond their means, spending money they might not have ‘stimulates the economy’ and is thus a good thing.

We now see a backlash, with some policymakers blaming these buyers for the mess they find themselves in. But apart from those who willingly participated in fraud, such attacks are unfair. Buying a house is an enormously complicated affair, beyond the comprehension of most people. Although I am fairly literate and numerate and reasonably savvy regarding personal finance, I recall being overwhelmed by all the legalistic documents that we had to sign when we bought our house. I could understand the key points, but there were pages and pages of detailed jargon that we were assured were standard boilerplate language. I recall thinking how easy it would be to be swindled by the bankers and other people involved in the process. I had to trust that they were acting in good faith. Has it come to a point where we each have to have a lawyer and accountant with us when we enter into any reasonably major transaction?

Homebuyers are largely dependent on the honesty of the professionals who they think are acting on their behalf. As Duncan Black (aka blogger ‘Atrios’) says:

The inability of the Republican lizard brains to even fake the slightest bit of empathy or sympathy for those experience economic troubles, or in fact to even restrain from outright hostility, is rather fascinating.

That isn’t to say all of those in foreclosures are victims. But there were a lot of people ripped off by mortgage brokers they thought were acting in their interests who instead were pushing them into crappier loans for bigger commissions. When you hire someone whose job you think it is to get you the best loan possible, and their incentives are actually to get you the shittiest loan possible and you are unaware of that fact, there’s a wee bit of a problem in the system.

But there were also more sophisticated buyers who were well aware that their mortgage interest rates would soon go up but did not care. They were those who believed in the ‘greater fool‘ theory and saw themselves as smart investors who were planning to sell their property for a tidy profit before the rates rose. And as long as the prices kept going up and demand was high, that strategy would have worked. But as the subprime crisis unraveled and the number of foreclosed houses started shooting up, there was a glut in the market, buyers became more fearful and choosy, and prices started dropping and even the richer, more sophisticated buyers found themselves stuck with properties they did not want. It was cheaper for them to cut their losses and to walk away from their property than to sell it for a huge loss. This constitutes another wave of abandoned home foreclosures.

Sadly, the end is not yet near for this crisis. 2008 will be another year in which many initially low-interest teaser adjustable mortgage rates will rise, leading to another wave of foreclosures due to people’s monthly payments rising above what they can afford. About 1.6 million homes were foreclosed last year and this year is expected to bring a similar number. The government and a consortium of six major banks involved in the subprime market announced a plan called Project Lifeline to give homeowners facing foreclosure thirty days more to try and refinance their homes so that they can afford them, but it is not clear if this will work. There are strong fears that this is inadequate.

Next: How did things get this way?

POST SCRIPT: Hype in sports

David Mitchell (one partner of That Mitchell and Webb Look) makes fun of the nonstop breathless hype by sports announcers, where every upcoming game is made to sound momentous. Here he is talking about English football (‘soccer’ in the US).

The brave new world of finance-9: Two case studies of destroyed communties

(For previous posts in this series, see here.)

Up to now, I have been looking somewhat generally at the problems created by the collapse of the subprime mortgage market: how the problem was created and the scale of the problem. But to really appreciate how it worked and its impact on actual people, one can look at two case studies, in Stockton, CA and Cleveland, OH.

CBS’s 60 Minutes had a report on the community in Stockton that showed how the pyramid scheme worked:

Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent.

And yet, these loans were marketed aggressively. As Jim Grant, a leading expert on credit markets said: “When you opened your mailbox in 2004, 2005, you could barely — people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides.” Little or no attempt was made to verify ability to pay.

Grant calls it an invitation to fraud. “You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, ‘I have an income of, oh, $400,000 a year.’ They say, ‘You do? Fine. Just sign right there.’ And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, ‘Ah. You have verified this?’ ‘Why, yes, we have.’ And the lending officer would say, ‘Great. So do I,'”

Almost all of the people involved in the transactions made good money, then passed the risk onto someone else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them, resold the mortgages to big New York investment houses.

Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows’ ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s.

“At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did,” Grant says.

It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble.

All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth.

Some unsophisticated buyers actually wanted to live in the houses they bought but did not realize that after a year or two the monthly payments would skyrocket out of their range. They consist one group of defaulters, and these people are overwhelmingly low-income or middle class. Cleveland’s Mount Union neighborhood was one such community hard hit by these dreams destroyed, as this news report describes:

The streets are empty. Trash rustles down the road past rusted barbecues, abandoned furniture, sagging homes and gardens turned to weed.

This is Mount Pleasant, a neighborhood in southeastern Cleveland ravaged by the subprime mortgage crisis roiling the United States.

Faded “for sale” signs sit in front of deserted houses. The residents are gone, most after being evicted for missing their mortgage payments.

For county treasurer Jim Rokakis, the greed of the banks is to blame for this man-made disaster.

“All you needed was a pulse to buy a house. Some loans were written with no money down, no proof of buyer’s incomes. They did not even check what people were saying. Most of those folks were jobless,” he said in an interview.

The Mount Pleasant community, he said, “was the perfect storm: poor folks, unemployed and a desire to get a piece of the American Dream.”

I have shown this clip by comedians John Bird and John Fortune on the subprime mortgage crisis some months before, but it is worth seeing again because it captures precisely the way the crisis occurred, the cavalier attitude of the banking and financial sectors to the way they used other people’s money, and how the whole house of cards was built on illusion and hype.

Next: Assigning blame

POST SCRIPT: Causing and taking offense

Bill Maher explains why he is not afraid of offending religious sensibilities.