The brave new world of finance-8: The end of the housing dream

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

The real estate boom fueled by the easy availability of subprime mortgages was a classic pyramid phenomenon, entirely dependent like all such phenomena on an endless stream of new buyers coming along willing to pay the inflated prices. When the crash came, as it inevitably does with all schemes that are based on expectations of permanent and rapid price increases, it turned out to be financially advantageous for many people who had taken these loans to declare bankruptcy and simply abandon their homes and walk away, since the money they owed was often more than the house was worth. Some became homeless as a result, but others who had bought these properties more as investment vehicles did not fare too badly. Many had put no money of their own as down payment so they had essentially rented the houses for a few years, often at below market rates.

But when the crash came, the repercussions extended far beyond just the actual homeowners. The mortgages sold in the secondary markets had been bought by those who bundled up a lot of them into aggregated units, with the impressive name of SIVs (Structured or Special Investment Vehicles) that were then bought and sold like other commodities in the securities market. The links to the value of the actual pieces of land on which these securities were supposedly based became more and more tenuous and even disappeared. In fact, the ownership of the actual properties is now so murky and obscure that cities like Cleveland are finding it hard to find out who actually owns the mortgages on abandoned properties, in order to get them to pay for their maintenance and upkeep. As a result the city has sued twenty one investment banks that dealt in these SIVs, trying to recoup the losses that the city is incurring as a result of all these defaults and the resulting abandoned and decaying properties that are further driving property values down.

The bundled mortgages were grouped into different classes of SIVs, depending on the supposed risk of default. The price of the different SIVs then became primarily determined not by the actual value of the properties of which they are made up (that link to reality was severed early on) but by the ratings that these SIVs received from the appropriate credit rating agencies. Those ratings are supposed to reflect the actual risk of default of the mortgages in the bundles, and are supposed to be assigned on the basis of careful scrutiny of the mortgage portfolios. That did not happen. The rating agencies gave higher ratings than the creditworthiness of these mortgage bundles deserved, thus making these SIVs seem more valuable than they were. (The ratings agencies themselves are now under scrutiny for this practice by investigators, as people seek to find out who is to blame for the debacle.)

Meanwhile, bond insurance agencies like Ambac, MBIA, and FGIC that normally insure safe municipal bonds against the unlikely possibility of default decided that that was not providing enough profits and eagerly looked to expand their operations into the booming subprime mortgage market. They started underwriting these SIVs in the event of default, based on their inflated values and credit ratings. This caused the supposed financial wizards who buy and sell these kinds of securities based on their ratings (since they rarely know what the securities actually contain) to bid up the prices of these supposedly ‘good’ investments.

The transfer of SIVs became like the children’s party game of passing the cushion, where these securities rapidly changed hands, their prices rising because of the commissions paid, their inflated credit worthiness ratings, and the underwriting by supposedly reputed insurance agencies. When the music stopped and the prices dropped, those investment banks left holding the SIVs suddenly found no buyers for their rapidly depreciating assets. The top investment banks in Wall Street have already sustained losses of $120 billion because of the losses in their subprime mortgage portfolio, and the story is not nearly over.

Now that many of these SIVs are almost worthless, the insurance agencies that underwrote them are also at risk of going bankrupt, since they insured these securities against losses. Their own credit ratings are being downgraded, which can be disastrous to their ability to obtain new business.

So we see a domino effect, with the losses incurred by the deflated SIVs hitting the investment banks, the credit agencies that gave them undeserved ratings, and the insurance agencies that backed these securities without sufficient case reserves. In addition, we have the homeowners who have lost their homes due to foreclosures, the cities that have to deal with the blight of abandoned homes, and the schools and cities that have lost tax revenues due to the drop in home prices. The fallout is also affecting those homebuyers who had good credit (i.e., ‘prime’ borrowers). As a result of the subprime crisis, banks are tightening credit and raising interest rates on even those people with good (i.e. ‘prime’) credit and now some of them are facing foreclosure and bankruptcy, so the subprime label for the crisis is becoming a misnomer. The scale of the disaster has still not been fully felt by the general public.

We are now seeing the government scrambling to provide subsidies to these companies, either by lowering interest rates enabling them to borrow money more cheaply to cover their losses or by giving them loans or trying to arrange consortiums for financing their losses, and other forms of subsidy. The British government, for example, has invested $26 billion in Northern Rock Bank when that bank’s mortgage based assets sank in value, and is considering giving it even more. Similar bailout measures are being proposed in the US.

Like many rich people who praise the virtues of capitalism and are quick to condemn giving welfare to poor people saying that it is ‘socialism’ and rewards bad behavior, the investment banks and insurance industries are totally shameless when it comes to demanding that the government bail them out when they themselves get in trouble and are in need because of their own greedy and reckless behavior.

Next: Two case studies in disaster

POST SCRIPT: Doctor House is Dr. Yahweh

“Religion is a symptom of irrational belief and groundless hope.”

The brave new world of finance-7: The subprime mortgage debacle

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

The current so-called subprime mortgage crisis is a result of a real estate boom fueled by a combination by ignorance, greed, lax standards and oversight, and outright criminality.

Unlike art or precious stones, in the case of a house, the value can be determined within a fairly narrow range. Knowing the neighborhood, the size and state of repair of the house, historical pricing patterns, etc., one can assess the value of a house fairly accurately. Barring sudden unforeseen events such as finding oil on the property or the discovery that some major new construction is going to occur nearby, or that the house has been built on a toxic waste site, the price of property tends to be fairly stable and predictable.

When it used to be the case that the banks that loaned you the money to buy a house held on to the mortgage themselves, there were built-in checks and balances to prevent the unrealistic pricing of homes. After all, foreclosing and selling a house is a costly and tedious business that banks would like to avoid, so it was in their own interest to ensure that the buyer could afford the house so that default was highly unlikely. It was also in the bank’s interest that the house was being bought at a reasonable price, with a down payment, so that the bank was lending substantially less money than the house was worth so that they could sell it easily in the unlikely event of a default. That was indeed the case when we bought our own house nearly twenty years ago. There were careful checks of the title to make sure the ownership was not challenged, a valuation of the home by an independent appraiser to make sure we were not paying too much, and we had to demonstrate, using tax returns and the like, that we had the steady income that we claimed we had and that it was sufficient to pay the mortgage. The fixed-rate mortgage payments themselves were high enough so that they covered the interest and also part of the principal, so that the money we owed the bank steadily decreased over the time of the loan.

But those days are long gone. Now the banks that loan you the money to buy your house resell your mortgage within days in the secondary market. Since the banks that initially provide the money for the house purchase do not hold on to the mortgage but quickly sell them, this does not require them to look too carefully into what they are financing. Indeed it is better not to do so at all, since the banks make their money at the point of transaction, so that the more mortgages that pass through their hands, the more money they make. This lack of close scrutiny also encourages the emergence of unscrupulous mortgage brokers who make their living on the basis of the number and value of the mortgages they broker between buyer and bank. Hence it is in their interest to obtain as many mortgages as possible for as high a value as possible. This encourages them to inflate the prices of the houses being bought and sold (in which they are aided by appraiser accomplices) and to inflate the incomes of the buyers so that they become eligible.

In order to make even more buyers eligible, buyers with poor credit histories (i.e., those labeled ‘subprime’) were also offered adjustable rate mortgages with no down payment and low teaser interest rates for the first few years so that they could afford the payments, at least initially. Furthermore, they were offered mortgage deals in which the monthly payments were interest only (in which case the money owed never decreased) or, incredibly, did not cover even the interest, so that as time went by the borrower owed more money, not less. The net result of the latter practice was that the value of the mortgage often exceeded the value of the house by substantial amounts.

Why would buyers accept such terms? These practices enabled them to afford to live in a more expensive house than was otherwise possible for the few years during the initial low-interest period and they thought they could sell and move on before the higher rates kicked it. Those who hoped to make the house their permanent home could hope that they would be either earning more money in the future to make the higher payments affordable or were told that they could refinance to a fixed rate mortgage at better rates in a year or two, before the low initial interest rates ended.

As a result of all these dubious lending practices, more people became ‘eligible’ to buy more expensive homes and home prices naturally started going up as a result of the increased demand for them. As long as the real estate market was booming and prices were rising, overextended buyers felt they always had the option of selling the home at a higher price than what they bought it for, thus paying off the mortgage loan with a tidy profit left over. Everyone would be happy. As a result, no one was looking very closely at the underlying value of the properties. There was no incentive to do so, and in fact it was discouraged. Why do that and destroy the dream?

Next: The end of the dream

POST SCRIPT: Lewis Black gives TV executives some good advice

Everybody should be converting: The sequel

There was a fascinating discussion in the comments section on the post Everybody should be converting that I encourage everyone to read. I was going to reply in the comments but it got too long (my usual failing) and I thought it merited a new post that pre-empted (once again) the series on the new economics.

What took me by surprise was the challenge to my assertion that religions, by their very nature, asserted a set of beliefs that implied the primacy of each one over its competitors, and thus implied a duty by its adherents to convert others to its beliefs. Of course, whether any one individual chose to proselytize or not and if so, how one set about doing it, was a matter of choice. But I said that one could hardly fault anyone who took their religion seriously enough that they tried to persuade others to join. Hence I could not understand what the fuss was about Pope Benedict XVI’s revision of the Good Friday prayer and Ann Coulter’s remarks about the need to help Jews and other non-Christians “see the light” (as it were) and convert to Christianity.

The response in some comments that modern “liberal” versions of Christianity were more like a lifestyle choice, that one picked one that meshed with one’s own way of life and was congenial to one’s own personal philosophy, was eye-opening for me. As I understand it, there is usually a core set of beliefs that each religion adheres to and one affirms a belief in those doctrines during the process whereby one becomes a member of that religion. To see what belonging to a religion implies, one should look at the affirmations of belief that one has to make before one can be converted to a new religion.

For example, if one wishes to become a Muslim, then one has to accept certain doctrines, which includes a statement of primacy over other religions, such as: “[Islam] is a religion as well as a complete way of life which requires submission to the Will of Allah and obedience to the laws of Allah alone as set down in the final of the revealed Books of Allah, the Holy Qur’an. Islam, in fact, is the direct relationship of a Muslim with God Almighty.”

A similar requirement to accept Judaism to the exclusion of all other religious faiths and practices is obligatory when one wants to convert to at least some forms of Judaism. At the very least, it requires a rejection of the idea that Jesus is the Messiah or divine in any way.

The statement of belief for Christians can be found in the baptism and/or confirmation process they go through as children or adolescents, which I went through as well. Such affirmations of belief are also routinely required in the liturgy at each worship service for Christian denominations. In Christian churches, one sees this in the Apostle’s Creed or the related Nicene Creed, one of which is usually said by the congregation at every communion service. The former says:

I believe in God the Father Almighty, Maker of heaven and earth.

And in Jesus Christ his only Son our Lord; who was conceived by the Holy Ghost, born of the Virgin Mary, suffered under Pontius Pilate, was crucified, dead, and buried; he descended into hell; the third day he rose again from the dead; he ascended into heaven, and sitteth on the right hand of God the Father Almighty; from thence he shall come to judge the quick and the dead.

I believe in the Holy Ghost; the holy catholic Church; the communion of saints; the forgiveness of sins; the resurrection of the body; and the life everlasting.

What Catholics and Protestants generally agree upon is the following:

Both Catholics and conservative Protestants generally agree on some major theological matters, like the existence of angels, Mary’s virgin conception; Jesus’ sinless life, incarnation, crucifixion, bodily resurrection, and his imminent return of Jesus to Earth in the second coming; Heaven, Hell; the Trinity, and the deity of Jesus. They agree that his execution brought about atonement — the potential to bridge the gulf between humanity and God caused by sin.

This is a pretty powerful set of beliefs that one affirms each Sunday. It was because of my inability to accept these things that I left the church. I just could not bring myself to make these assertions, even though I was completely comfortable with the lifestyle of the liberal Methodist church I belonged to, liked the people there, and agreed with its approach to many social justice issues.

It is true that in many churches there is no explicit call to evangelize (although Jesus (Mark 6:10-12) does encourage his disciples to do so), but my point was that if you believe all the things that are stated in (say) the Apostle’s Creed, one is saying that Christians have a special relationship with god, just the way that Muslims and Jews say they have a special relationship too. Surely that message is an important one that should be shared with non-believers?

Since Protestant Christians can usually switch between denominations and join new churches without formal conversion practices or a renewed public statement of beliefs, that may make it easier to think that joining a church is a lifestyle choice, without any doctrinal commitment. But I think that is misleading. It arises because almost all the Protestant churches share a common set of doctrinal beliefs, making transitions appear to be non-doctrinal. This funny sketch by the BBC comedy series That Mitchell and Webb Look illustrates this point.

The vicar in this sketch is a particularly nasty person but his point is that joining a religious organization is different from joining a book club where all that one is looking for are companionable people. Joining a religious organization carries with it a real intellectual cost and requires a commitment to a set of doctrines that usually includes, at a minimum, a rejection of all other religious doctrines.

The novel Life of Pi tells the story of a little boy in India who wanders through his city and happens to come across congenial priests in the neighborhood Muslim mosque, Hindu temple, and Christian church. He studies each religion with its priest, finds them all attractive for different reasons, and unbeknownst to the other priests or even his family, considers himself a member of each religion. Each priest considers the boy to be an exemplary member of that particular religion, who attends religious services regularly and shows proper devotion. The comedic showdown occurs when Pi is walking with his family in the park and by coincidence, encounters all three priests as well. Everyone is shocked and disapproving of his membership in the competing religions, much to Pi’s chagrin and puzzlement.

Of course, I realize that there are some religions (like the Unitarians) that are specifically geared towards people who simply want to be part of a community of like-minded people seeking some sort of spiritual companionship and which do not assert a set of doctrines that require allegiance or exclusivity. But those are exceptions. Most religions do not allow (or at least frown upon) their members being simultaneously members of competing religions. They see themselves as being right and the others wrong at least on one (and usually more than one) important doctrinal issue. And as such, it makes sense to try and bring other people in, to convert them.

The brave new world of finance-6: Greed and bubbles

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

One can never underestimate how the power of greed, the thought of making a lot of money quickly, can cause otherwise rational people to lose their senses. A friend of mine works for the white collar crime division of the Cleveland police and he can tell story after story of sensible middle-class or wealthy people, the kinds who could be your neighbors, who are professionals and cautious in most of their dealings, becoming the victims of some racket run by charming men and women. These people often did not even need the money they thought they would quickly make. In each case, it was greed that overcame their judgment, coupled with the desire to feel that they too are smart investors with access to valuable information that the general public did not know. Conmen and conwomen know exactly how to prey on such people.

Greed is also what fuels bubbles. The so-called ‘dot com’ craze of the late 1990s is within recent memory of most of us, where privately-held internet companies would go public and sell stocks, whose values would then skyrocket literally overnight. Initially some people made a lot of money and this soon attracted more naïve investors who assumed that the good times would always last. But they never do and in 2000 the inevitable crash came, wiping out nearly 80% of the paper value of people’s investments.

While most of us are not the kinds of financial high rollers who get invited to participate in such IPOs (Initial Public Offerings), it is easy to get sucked in by the general enthusiasm and try and get in the game later, when the savvy investors have already made most of the money to be made. It may be hard for us to comprehend how people could get so unhinged that they forget the basic rules of investment and fall prey to speculation. But I can see how other naive people like me could easily get sucked in and invest their savings thinking that there was easy money to be made.

As economist Burton Malkiel says in his chapter on bubbles in his book A Random Walk Down Wall Street (1999):

Not all investors in the bubble companies believed in the feasibility of the schemes to which they subscribed. People were “too sensible” for that. They did believe, however, in the “greater fool” theory – that prices would rise, that buyers would be found, and that they would make money. Thus, most investors considered their actions the height of rationality as, at least for a while, they could sell their shares at a premium in the “after market,” that is, the trading market in the shares after their initial issue. (p. 43)
. . .
The consistent losers in the market, from my personal experience, are those who are unable to resist being swept up in some kind of tulip-bulb craze. It is not hard, really, to make money in the market. . .What is hard to avoid is the alluring temptation to throw your money away on short get-rich-quick speculative binges. (p. 53)

During the dot-com boom in the late 1990s, I would read almost every day of yet another internet company that would have an initial release of stock and of those who bought them finding their investment doubling or tripling within days. Even I had the vague feeling that by not participating in this boom, that I was somehow losing out, that I was falling behind by standing still. I felt a tug, a temptation to ‘get in the game’. But I did not actually invest during the dot-com boom because not only do I not understand the stock market, I do not even like the principles on which it works, where bad news for ordinary people seems to mean good news for investors.

For example, I recall the day in July 2005 when terrorists struck the London underground trains, killing many people and causing panic in the financial markets. Brit Hume of Fox News said that when he heard the news, the first thing the occurred to him was that it would be a good day to invest in the stock market, to take advantage of the sudden drop in stock prices due to the tragedy. I was stunned by that shameless display of callousness and greed. I simply cannot imagine thinking like that, to eagerly look forward to tragedy and disaster as opportunities for making money. It seems ghoulish to take advantage, however indirectly, of the misfortunes of others. And so I cannot bring myself to directly ‘play the market’, as they say, although my retirement accounts are presumably being invested by someone who is playing such games, so my hands are by no means clean.

But it is not only big investors who can fall prey to that kind of hype. If you find it hard to imagine that normally level-headed people could go nuts over things like tulip bulbs, recall the idiotic Beanie Baby craze of the 1990s. The prices of those cheaply made and nondescript toys started rising insanely as certain of those stuffed animals, sometimes for no discernible reason other than a rumor that they would become scarce, suddenly became highly sought after items. Ordinary people started lining up at stores on rumors of their availability and started paying far more than what they could afford for things that they thought would become collectors’ items. The idea of an everyday item (a small, mass produced, cheaply made stuffed toy!) becoming a valuable investment vehicle was bizarre. This was such an obvious mass hallucination that I could not believe it was happening before my very eyes. Clearly reality had to prevail at some point and that bubble also crashed, leaving some people with huge quantities of Beanie Babies that they could not sell at even the list prices.

But while the Beanie Baby example was illustrative in the way it caused some people to spend more money than they could afford, it has had nowhere near the devastating impact that the current sub-prime mortgage bubble debacle has spawned. Once again, as with the tulip bulbs or Beanie Babies or the earlier dot-com bubble, the problem begins when the price of an item gets divorced from reality.

Next: The subprime mortgage bubble.

POST SCRIPT: Ricky Gervais in Extras

Comedian Ricky Gervais, who created the original The Office, has a new comedy series called Extras, where he works as an extra and tries desperately to ingratiate himself with the stars in order to get a break or at least a speaking role. This gives the show the chance to have famous actors as guests for each episode.

In this scene, we see him with Patrick Stewart.

The brave new world of finance-5: Crystal ball economics and the rise of bubbles

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

My first real awareness that my understanding of what constituted sound economics and business practices was orthogonal to how Wall Street viewed it came in the 1990s when company after company sought to increase its stock price by slashing its work force, thus increasing its profits (at least in the short term). I recall that the head of Eastman Kodak at that time fought this expectation that he too follow suit. His argument was simple: His company made products that were in demand, was price competitive, and was making good profits. Why should he get rid of good, loyal, experienced workers, the very people who had made the company successful, for no good business reason but merely to drive up the stock price? I thought he made complete sense, which just shows how much I knew. Outraged stockholders quickly organized his ouster and replaced him with a new CEO who did what they wanted, which was to ruthlessly reduce the payroll, in the process throwing tens of thousands of people out of work. But those actions did drive up profits in the short term, and the stock price rose, which is all that Wall Street cares about. The fate of the Kodak CEO was a warning to other CEOs that they had better not even think about putting the long-term health of the company or its employees above the short-term profit needs of the stockholders.

What seems to have happened that is driving this trend is that the line between appearance and reality in the financial sector has become increasingly blurred. For example, it seems to me that a company’s stock price should reflect its actual performance. So when it releases its annual report that says how well it did the previous year, its stock should rise if the report is good and fall if the report is bad. But that is not the way it works anymore. We are told sagely by analysts that what Wall Street cares about is not the data-based present (what some of us like to call ‘reality’) but expectations for the future. The measure that is used to determine stock price is how the report compares with what ‘experts’ and ‘analysts’ predicted it would say. What determines a stock price now is what analysts expect will be its profits in the future. We have moved from reality-based economics to crystal ball economics.

And therein lies the problem. It seems to me that the more one is separated from actual data, the more shaky the structure becomes. Once you shift the focus away from actual data to predictions about what future data will be, you have started playing a different game, that of appearance and expectations, and this can swiftly spiral out of control, where prices can start to rise based on unrealistic expectations, and then the rise itself seems to retroactively give substance to the expectations, which in turn fuels expectations of even greater rises, which causes even greater price rises, and so on. In short order, one has an accelerating price spiral where the relation of the price to the actual value of the commodity has been severed.

In some cases, fixing the actual value of a commodity is not easy and the price does become the value. This is true where rarity is an important factor is setting the price, such as in gold and precious stones. Art is another such commodity. Clearly the value of a painting by Rembrandt is not based on the raw materials used and the hours he put into its creation.

But apart from such specialized situations, in most situations we do have a rough idea of how much something should rationally be priced at based on some measure of underlying value, such as the cost of raw materials and labor, the cost of similar items in the market, and historical price patterns. When the prices of such things start outstripping the underlying value by wide margins, then we are heading for trouble because of the creation of ‘bubbles’. As Eric Janszen defines it in the February 2008 issue of Harper’s Magazine (p. 39): “A financial bubble is a market aberration manufactured by government, finance, and industry, a shared speculative hallucination and then a crash, followed by depression. . .A better, if ungainly, descriptor would be “asset-price hyperinflation” – the huge spike in asset prices that results from a perverse self-reinforcing belief system, a fog that clouds the judgment of all but the most aware participants in the market. Asset hyperinflation starts at a certain stage of market development under just the right conditions. The bubble is the result of that financial madness, seen only when the fog rolls away.”

The most famous historical example of a bubble (perhaps because it seems so extreme now) was the tulip bulb craze of 1636 where the price of tulip bulb ‘futures’ (i.e., the price expected in the future) skyrocketed, with reports of a single bulb selling for as much as a fashionable house and garden in Amsterdam! The problem with such bubbles is that they are like a Ponzi scheme in which the really savvy investors who get in early make a lot of money. The later people make money only as long as the prices keep rising rapidly because of the arrival of new investors (also known as ‘suckers’) willing to buy at inflated prices, thinking that prices will continue to rise. The need to maintain the illusion of unstoppable growth makes people reluctant to prick the bubble by bringing it into contact with reality, by asking awkward questions about the actual value of the commodities being bought and sold. But of course, rapid price increases are unsustainable and it is only a matter of time before the madness passes. In the tulip bulb bubble, by 1637 people started realizing that these tulip bulb prices were unrealistic and that they had been had. The tulip bulb market then came crashing to the ground, and people left holding these future contracts took a devastating financial hit.

The South Sea bubble that crashed in 1720 was another example of where stock prices rose wildly, and the rise itself fueled expectations of future rises, thus leading to an out-of-control spiral, again followed by a crash.

The Florida real estate boom and bust of 1926 was yet another example of a bubble where land prices sometimes quadrupled in a single year, driven up by speculators and naïve investors who felt that the only way prices could go was up and were thus willing to pay almost anything thinking they could make a future profit.

Next: More recent bubbles

POST SCRIPT: Mythbusting the Canadian health care system

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.)

Here is the first part of a series that combats the myths about the Canadian system.

Everybody should be converting

(I am taking a short break from the series of posts on economic issues. They will continue next week.)

Earlier this week, Pope Benedict XVI issued a replacement for the traditional Good Friday prayer and it has riled up some Jewish groups. Part of the new prayer says: “Let us pray also for the Jews that the Lord our God may illuminate their hearts and that they also may acknowledge Our Lord Jesus Christ.” This new prayer was considered less offensive to Jews than the old one because the “old text prayed for, in Latin, the conversion of the Jews, calling on God to deliver “that people. . .from its darkness” and to remove the “blindness” “

Nevertheless, the new prayer is still considered offensive. “Rabbi David Rosen, director of inter-religious affairs for the American Jewish Committee said that although he was pleased that the offensive terms were removed from the prayer, he still objected to the new prayer because it specified that Jews should find redemption specifically in Christ.”

Abraham Foxman, national director of the New York-based Anti-Defamation League, also was disturbed, saying that he was “deeply troubled” that the intention to petition God for Jews to accept Jesus as Lord was kept intact.

To me, within the framework of religion, both the old and the new prayers make perfect sense. Clearly Catholics (and other Christians) believe that Christianity is the one true religion. Otherwise why would they be Christians? Many also believe that those who do not “accept Christ” in some form or other are not going to heaven, or at the very least are going to find some obstacles in their way to getting there, and at the very worst are going to find their post-death experience very nasty indeed. Therefore it is actually quite humane on their part to pray that Jews (and Hindus and Muslims and Buddhists and atheists) will also “see the light” and become Christians. As Rev. James Massa, executive director for interreligious affairs for the U.S. Conference of Catholic Bishops, points out, the prayer should be understood in the essential Catholic view that “all people come to salvation through Jesus Christ.”

Similarly, when Ann Coulter caused outrage by saying to talk show host Donny Deutsch (who is Jewish) that it would be better if everyone became Christian, she was being consistent with believing in the virtues of her own religion.

DEUTSCH: That isn’t what I said, but you said I should not — we should just throw Judaism away and we should all be Christians, then, or —
COULTER: Yeah.
DEUTSCH: Really?
COULTER: Well, it’s a lot easier. It’s kind of a fast track.
. . .
COULTER: We just want Jews to be perfected, as they say.
DEUTSCH: Wow, you didn’t really say that, did you?
COULTER: Yes. That is what Christianity is. We believe the Old Testament, but ours is more like Federal Express.

Similarly, one would expect that Jews who think their own religion is the right one should be hoping and praying that non-Jews would recant their existing beliefs and believe in the Jewish god. After all, the Old Testament repeatedly tells us that the Jewish god takes a particularly harsh view of those who worship other gods and does not hesitate to dish out all kinds of awful punishments to apostates. So humane Jews should try to prevent people of other faiths from meeting such a fate by getting them to convert to Judaism.

It also makes sense for Muslims to try and convert people to their religion, even if it involves pointing out the deficiencies of other religions.

Since every religion thinks that their god is the right one, they should all be trying to convert each other, out of purely humane impulses, just so that everyone would be worshipping the ‘right’ god, according to them. To do otherwise would be a sign of callous disregard for the fates of people’s immortal souls.

In fact, those who use Pascal’s wager as an argument that atheists, just to be on the safe side, should profess belief in god should also advocate forcible conversions, since they clearly think that their god prefers even a cynical, self-serving statement of belief in god to principled disbelief.

The present situation, where people seem to think that politeness demands that we refrain from claiming superiority for their own religion, seems (within the framework of religion) contradictory. After all, religious people presumably think that their faith is the most important thing in their lives, so why be so reticent about it? Like the many debates we have had during the primary elections, why not have debates as to which religion is the best and which god is the right one to be worshipped? If we can spend so much time and energy in selecting a mere president, surely we should be willing to do at least as much for something as important as the ultimate fate of people’s immortal souls?

I for one would enjoy listening to public debates as to why any one religion is better than the others. In fact, the logical thing would be for religions to run advertisements on TV to try and persuade people of other faiths to switch, kind of like the Mac vs. PC spots. It would be interesting to see Madison Avenue wrestle with how to do the religious equivalent of “Tastes great!” versus “Less filling!”

So let the games begin!

POST SCRIPT: Perhaps Mitt should have converted

I showed this clip last month but I am repeating it because of Mitt Romney’s decision to suspend his campaign. Pat Condell pointed out that childhood indoctrination of religion is so strong that even though Mitt Romney must have known that his Mormon beliefs might be the one thing that might doom his candidacy for the office he craved, he still clung to it to the end, even though he had changed his stance on so many other issues.

The brave new world of finance-4: From social being to consumer

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

In the last post, I suggested that sending out checks for $600 to each taxpayer, especially those who don’t need it, and then encouraging them to waste it, hardly seemed like a coherent economic plan. Such a policy can only be understood as a subsidy to the business sector disguised as a benefit to individual taxpayers. We are merely conduits through which money is given by the government to Wall Street.

It was not always the case that governments responded this way. The US has met greater social and financial challenges before and responded quite differently, most notably the WPA (Works Progress Administration) program, begun in 1935 to get the country out of the Great Depression of 1929. “[T]he WPA provided jobs and income to the unemployed during the Great Depression in the United States. The program built many public buildings, projects and roads, and operated large arts, drama, media and literacy projects. It fed children, redistributed food, clothing and housing…About 75 percent of WPA employment and expenditures went to public facilities and infrastructure, such as highways, streets, public buildings, airports, utilities, small dams, sewers, parks, city halls, public libraries, and recreational fields. The WPA built 650,000 miles of roads, 78,000 bridges, 125,000 buildings, and 700 miles of airport runways. Seven percent of the budget was allocated to arts projects, presenting 225,000 concerts to audiences totaling 150 million, and producing almost 475,000 pieces of art.”

But those were days in which the collective good was more valued. Can you imagine that they even thought that spending money to provide cultural enrichment to the general public was a good thing? How quaint! Nowadays, we sneer at such an approach. What is considered good is not to have people be able to go to a library or a park or to enjoy a concert or play, but to get them to go to shopping malls. Nowadays, people are urged to not see themselves as part of a community, a social fabric, a collective. We are taught to see ourselves as ‘consumers’ whose only purpose is to accumulate private goods. When did that strange word ‘consumer’ come into vogue as a means of describing people? Its popularity is a symptom of how we are expected to see ourselves as merely voracious organisms, a species of bacteria, whose purpose is to eat up products to make the business sector happy. These days the purpose of a ‘stimulus package’ (as it is euphemistically called instead of the more accurate ‘let’s all waste money together’ plan) is to serve as a subsidy to business. The government wants people to use the money to buy junk they don’t need.

The notion that I, as an individual, have an obligation to spend money to ‘stimulate the economy’ strikes me as insane. I do not have to do anything of the sort. I have no obligation to goose up the economy by spending myself into the poorhouse, just because it is good for the stock market. As I see it, my obligations are to work productively, be a good citizen, serve my community, live within my means, and save for my family and the future – the kinds of things that Benjamin Franklin would have approved of. It seems blindingly obvious to me that the less I spend on unneeded goods and services, the better it is, both for my own financial health, the health of the community, and the long-term health of the planet. And yet, every muscle of government and business propaganda seems to be aimed at convincing people of the opposite. In a way one can understand that. When one is trying to convince people to so something that goes against common sense, one has to pull out all the propaganda stops. Thus the news media report with approval, and even glee, if people go on shopping sprees at Christmas. They are thrilled to tell us about people maxing out their credit cards buying gifts for all and sundry. They are downcast if people decide not to spend money they can’t afford.

The government is even being urged to call the $600 check a ‘bonus’ rather than a ‘tax rebate’ since studies indicate that people think of a bonus as ‘free money’ and are thus more likely to spend it, whereas a rebate is seen as your own earned money being returned to you, and is thus more likely to be saved.

The sad thing is that some people have actually bought into this notion that their proper role is to serve as engines to drive the consumer economy. In interviews, I hear people actually blather on about how they feel they should immediately spend their $600 refund check so that the economy benefits. They have swallowed the whole bogus story, hook, line, and sinker.

It seems clear to me that we have ceded control of the economy to the worst elements of the financial world, by taking it away from those who see it as serving the long-term well-being of people by encouraging sound business practices, and handing it over to people whose main goal is use money to make money, a financial pyramid scheme that depends upon the collusion of the government, a few big industries, and the financiers and other money people of Wall Street. We see now the government essentially using the money of ordinary people to bail out (and thus essentially reward) the scandalously risky behavior of the financial sector that has been driven by greed.

British comedians John Bird and John Fortune show in this satirical interview how the banking and finance sectors recklessly siphon away people’s money for their private benefit, confident that if things go badly wrong (as they have) the government will bail them out using public funds. The Northern Rock they refer to is the big British Bank that got into trouble due to the current subprime mortgage crisis and had to be bailed out by the British government.

Another example of how the government’s priorities are to maintain the profits of a few at the expense of the financial health of the many can be seen in its attitude to single-payer health insurance plans. There is absolutely no question that this would be not only provide overall better health services to the public at lower costs, but would also be hugely liberating for business. (See here for earlier posts dealing with this issue.) The employer-based health care system has to be the biggest albatross dragging down American business competitiveness. And yet, the stranglehold that the health insurance, pharmaceutical, and medical industries have on our government, and the huge profits made by them at everyone else’s expense, means that the current system continues without even a serious challenge to its existence, even as the economy gets dragged under. The ruthlessly exploitative health care industry has been helped in their efforts to preserve their lucrative cash cow by the Villager propaganda, endlessly repeated, that America provides the Best Health Care in the World and that Americans would never support a single-payer system. These are all completely unjustified assertions, but they are repeated unquestioningly.

Next: The rise of the ‘bubble economy’.

POST SCRIPT: Flight of the Conchords

Those two wacky musical comedians give a quick summary of the Lord of the Rings.

The brave new world of finance-3: The ‘free money’ stimulus package

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

Clearly I am not the only one that thinks that current fiscal and monetary policies are not only unsustainable but also immoral and that their priorities are completely out of whack. French President Sarkozy, following the discovery of the speculative trading and fraud that resulted in losses of $7 billion at one of France’s largest banks Societe Generale, also called for an end to this mad, reckless way of thinking, where short term profits trump everything else.

“The point of a financial system is to lend money for economic activities, which, in turn, generate profits,” Sarkozy told a gathering of French nationals at the French embassy [in India].

“It is not to go and speculate on different activities which create enormous flows and profits in a few hours,” he added.

“If one can make profits in a few hours, one can also make gigantic losses in a few hours as well. And it is time to realise that (we need) to insert a bit of wisdom into all these systems,” the president said.

Because of fears that the US is headed for a major recession, we currently have the Bush administration and the Congress planning to pass a ‘stimulus package’ to stave that off. A major recession would undoubtedly be a bad thing for ordinary people since it is likely to result in many people losing their jobs, creating widespread hardship. But the current plan seems to be to for the government to spend $150 billion by mailing checks for $600 to each taxpayer, plus an additional $300 per dependent child.

Sending checks to people does not seem to me like a very coherent plan. What is even more bizarre is that the government (and stock market investors) are really worried that people will use this money in a responsible way, by paying their bills, repaying loans, reducing their credit card debt, or putting the money into savings for their retirement or their children’s education. What they want people to do is to behave irresponsibly, by immediately rushing out and spending the windfall money on items they don’t need, like plasma TVs or other high-priced consumer goodies.

Giving poor people a check for $600 will undoubtedly help many of them stave off some immediate disaster and even hunger. Many people are just one paycheck away from going cold or becoming homeless. But instead of urging people to use this small windfall to avert an immediate crisis and regain their financial footing, the government is actually encouraging people to spend the money on more junk, to indulge in just the kinds of reckless consumer behavior that caused many of them to fall into deep debt in the first place. After scolding people for living beyond their means, we are now encouraging them to do just that. As Bob Park writes sardonically, but accurately:

In case you didn’t notice, your 401k is shrinking. Don’t worry! President Bush has a plan: send a check to every family in America. People are supposed to spend it on the shoddy merchandise they didn’t buy at Christmas. Where is the money coming from? From taxes we paid to end Iraq’s WMD program. It worked perfectly; there is not a WMD to be found in Iraq. No one could think of anything except war to spend the stimulus money on (like maybe health insurance for children, or fusion energy, or the International Linear Collider) so Congress agreed to the President’s plan to write everyone a check. After decades of public-service announcements telling people to save, we can now expect to be told the opposite. So much for the laws of economics. The program would be more environmentally friendly if they cut out the middleman. Instead of every family, send checks to every business. Operating on a government subsidy would free business from the need to produce more useless crap to sell.

Do such policies make any sense? We have a country in which the infrastructure is crumbling and many people are hopelessly in debt, unable to even pay their mortgages or credit card bills. Why are we encouraging them to get into even more debt by buying things they don’t need or can afford? Is this any way to run the world’s largest economy?

Furthermore, while I can understand giving really poor people some money, what is the point in giving middle-class and rich people a one-time payment of $600? I personally don’t want or need $600. If given it, I will save it to meet some future need. Giving people money and urging them to spend it frivolously seems to me to be equivalent to dropping currency notes out of helicopters and hoping something good comes out of it. Surely there are a lot of other things that could be done that would produce benefits while putting the money into circulation?

I can think of lots of worthwhile ways of spending $150 billion that could have long-lasting and beneficial effects. I would much rather see that money being used for the collective good. How about refreshing decaying urban areas by creating parks and public recreation areas for people? How about improving water and electricity services to deprived rural areas? How about creating a system of low-cost satellite health clinics staffed by paraprofessionals to provide better early care to people, the way that many countries do? How about hiring people to do the many things that need to be done to improve our communities?

Is indiscriminately giving large numbers of people relatively small sums of money the best plan that our great financial brains can come up with?

Next: Past experiences with combating recession

POST SCRIPT: The moral hazard myth

One of the reasons that the US has an insane crazy-quilt health care system, and the source of weird arguments used against universal single-payer health care schemes, is the strong belief among health care economists that providing easy access to health care creates a ‘moral hazard’, where people will abuse this benefit.

In this New Yorker article, Malcolm Gladwell demolishes this myth.

The brave new world of finance-2: Further indicators of insanity

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

The current weird situation in which the stock market rises on what you or I might think is bad news can also be seen with labor figures. When reports are released that unemployment is low (which ordinary people would think is a good thing), the stock market tanks. When unemployment figures rise, the stock market also rises. Why? We are told that if unemployment is low, that means that workers are in demand and thus have more clout in negotiations and their wages are likely to rise. Again, you and I might think it is a good thing for working people to be earning more. But for investors, this is bad because rising wages means lower profits for companies and an increased possibility of rising prices, which means the possibility of inflation, which means that the Federal Reserve might raise interest rates to reduce the money supply and thus lower the risk of inflation. And we know the love affair that investors have with low interest rates. Hence the stock market goes down.

All this may be perfectly rational behavior within the weird world of finance. But to me there is something profoundly disturbing, immoral even, about an economic value system that is so committed to low interest rates that it even cheers on news that by any measure is not good for ordinary people. As Barbara Ehrenreich writes yesterday: “So thoroughly is the economy decoupled from ordinary experience that according to a CNN poll, 57 percent of Americans thought we were already in a recession a month ago. Economists may complain that this is only because the public is ignorant of the technical definition of a recession, which specifies at least two consecutive quarters of negative growth. But most of the public employs the more colloquial definition of a recession, which is hard times. And — far removed from whatever happens on Wall Street, the Nikkei, Dax, or the curiously named FTSE — most Americans have been living in their own personal recession for years.”

You or I might think that it would be desirable to have an economy in which almost everyone was working and putting money away in savings for their future and the future of their children. But such a scenario seems to give the financial sectors and investors in Wall Street nightmares. And unfortunately, they are the ones who seem to control monetary and fiscal policies.

We seem to be living with a financial system has lost touch with human needs.

Why is it that our sense of what is a healthy economy has been overturned? One reason is that the US economy has switched from one that was dominated by the manufacturing sector (i.e., where companies actually made and sold stuff like steel and cars) to one that is dominated by the co-called FIRE sector (finance, insurance, and real estate).

The US is rapidly ceasing to be the country that makes things that people in other countries want to buy. The US has been running up huge trade deficits since 1970, with the rapidly increasing deficit in goods exported to other countries failing to compensate for the (small) surpluses in the services sector.

The FIRE sector, rather than actually manufacturing goods, essentially uses money to make more money and this change in activity has profound consequences. One negative consequence of the dominance of the interests of the financial sector over the general economy is that economic policy seems to be now driven to serve the needs of investors, not actual manufacturers. As a result of the desire to placate the Wall Street investors, we now have a situation where the goal of the Federal Reserve seems to be not to maintain the long-term health of the nation through careful management of long-term fiscal policy, but to shore up the value of the stock market in the short term.

We saw this desire to placate Wall Street brutally on display just recently. The week ending on Friday, January 18 had seen stocks plunge worldwide on reports of further massive losses incurred by American financial institutions due to the sub-prime mortgage debacle (more on that fiasco later). Monday, January 21 was the Martin Luther King holiday in the US where the exchanges were closed but stocks dropped sharply that day worldwide, and dropped again on Tuesday, January 22 in the far east before the US markets opened on Tuesday morning. Everyone was braced for a massive plunge in the stock market when the US markets opened on Tuesday. But in an effort to prevent this, the Federal Reserve did something it very rarely does, and that was to have an emergency conference call among its governors and decide to slash interest rates by a huge amount (0.75%) before the US markets even opened, as an emergency move on a day when it does not usually make changes in interest rates. This news struck me as a bad sign, that the Fed thought the situation was serious. But the stock market responded with cheers, because low interest rates make money cheaper to borrow and this enables financial speculators to make even more money. The only thing Wall Street loves more than low interest rates is a surprise lowering of interest rates. Then on Wednesday, January 30, at its regular meeting the Fed lowered the interest rates again by another 0.5%. The Dow Jones stock index, which had been in negative territory, suddenly shot up nearly 300 points within an hour of the announcement, before sinking back into negative territory.

To me, the Fed taking such remarkable and dramatic steps meant that they thought the economy was in serious trouble and heading for recession. Recessions are awful things, shutting down companies and throwing lots of people out of work. But for Wall Street investors, all that seems to matter is lower interest rates, whatever the cause. They are already putting renewed pressure on the Fed for further and deeper cuts in interest rates since the last one did not really work as far as they were concerned and merely kept the status quo. They are circling like wolves, essentially demanding that the Fed lower the rates even more, perhaps by even larger amounts. If the Fed does not keep lowering rates, the stock market is likely to decline. We seem to have reached the stage where it is taken for granted that the main role of the Fed is to please Wall Street investors by keeping stock prices high by manipulating interest rates. As long as they do that, the long-term health of the economy seems to be ignored.

Next: The crazy ‘stimulus package’ – Get your free money here!

POST SCRIPT: The lobbyists’ preferences

See which candidates have garnered the support of lobbyists.

The brave new world of finance-1

One topic that I have tended to avoid in my blog posts is the subject of economics. This is because the ‘dismal science’ is one of those subjects where I feel a little out of my depth. Whereas I can make sense of events in many other areas of everyday life, even to the extent of making modestly successful predictions about what should occur, behavior in the world of business and finance tends to defy my expectations. For a long time, I thought this was due to my weak understanding of the basics of economics. But now I am wondering if it is because the economic world is, frankly, crazy.

I am beginning to worry that the modern US and global economy has become untethered from reality or even basic common sense. French President Nicolas Sarkozy seems to share my alarm when he recently said that we now seem to have a global “financial system which is out of its mind and which has lost sight of its purpose.”

Let me start out by admitting that I am old-fashioned when it comes to basic economics and finance. My understanding of those topics is similar to Benjamin Franklin’s Poor Richard’s Almanac proverbs, which extol the virtues of hard work, thrift, and prudence. The basic ideas that Franklin advocates – live within your means, don’t waste time on too much frivolity, avoid spending money on things you don’t need, save for the future – are things that I understand and basically try to follow. They still make sense to me as a means of ordering my personal finances.

Although I am not, and never have been, a businessman, the basic idea of business – investing money in producing some product or offering a service, and charging for those things at a price high enough to make a profit that is at least slightly above what one might earn from simply putting the money in a bank and earning interest on it – is again something I understand.

But those kinds of attitudes seem to be hopelessly out-of-place in the brave new world of modern high finance. My awareness that I don’t understand modern finance is on display with the way that the stock market actually performs compared to the way that I expect it to perform. Again, I think I understand the basic idea of stocks. If a company needs to raise money to improve or expand its business, one option is to borrow it, another is to sell stock to the public. The public that risks its money this way gets rewarded if the company invests that money well and continues to make profits which gets returned to the stockholders as dividends. Also a company that is efficiently and well-run and produces goods and services that people desire is a company that becomes more valuable over time and that more people will want to own stock in, thus driving up the stock price and benefiting the stockholders even more.

Thus its stock price should be a gauge of the health of a company and the stock market should be a gauge of the overall health of the underlying economy and the companies that make it up. If a country has many companies that are producing goods and services of value that are sought, then the stock market indices should go up, and vice versa.

That is my admittedly naïve understanding of the world of business and personal finance. It is something I understand.

But as far as I can see, the world of business and finance is now topsy-turvy, with causes and effects becoming blurred or even interchangeable. The stock market seems to be acting independently of the underlying economy. Rather than its stock market being an effect, reflecting the basic health of a company, high stock prices are seen as good in themselves, even if that is obtained at the cost of driving a company into the ground. The actions of company management now seem to be increasingly driven by the desire to drive up the stock price, even if this might mean harming the long-term health of the company. And even government policies seem to be aimed at keeping stock market prices high rather than in ensuring that the underlying economy is sound.

Take for example the news released on Monday, January 28th that new housing starts had slumped dramatically. This was widely seen as yet another sign that the economy was slowing down and that activity was declining, perhaps the precursor to a recession. In other words, it was a sign of a seriously ailing economy. And yet the stock market shot up that day, as if this was the best news. Why? The ubiquitous financial analysts who can explain anything after the fact said that this was because investors felt that such bad economic news would cause the Federal Reserve to slash interest rates once again very soon, and stock market investors passionately love low interest rates above all else. This is because low interests supposedly make other forms of investments such as bonds and money market and certificate of deposits less competitive, and thus more people will divert their money from those areas into the stock market, driving up demand. Thus lower interests rates means that we can expect stock prices to rise in the future, making them a good buy now. This thinking is what raised the stock prices on such a bad news day. Furthermore, low interest rates make it cheaper for businesses to borrow money, enabling them to have more money to expand their operations, thus resulting in growth in the future. Since the stock market is supposed to reflect the future, not the present, bad economic news like the drop in housing starts was seen as a good thing.

Next: More signs that modern financial world is out of synch with the real world.

POST SCRIPT: Fame

The highly versatile Stephen Fry (actor, director, author) has his own blog with a nice essay on what fame is like for the famous.