Archive for January 2011

My Cut

January 31, 2011

Recent events in Arizona and the Middle East have put an unplanned pause into Republican energy to cut the budget.  Some might argue there was never any energy for action other than talk.  In any case, time has now interceded.  Surprise, surprise, as the smoke clears, the Republican proposals look foolish and unworkable.  This reality the wise swiftly walk away from.

Republicans have said they will not cut social security, medicare, or the defense budget.    As a result Republicans are put in a quandary.  What should they cut?

Like all good politicians, it is always better to say what you would do, then to actually do it and live with the consequences.  Cut education funding when test scores are showing American students falling further behind other countries?  Cut highway and waterway maintenance and watch our bridges collapse and our seaports become obsolete?  Cut aid to inner cities and watch street crime skyrocket?  None of these are pretty options.

Another realization is that this Federal spending is like a lubricant.  The Federal spending trickles down with each government layer taking a cut.  If more layers of government are Republican controlled, spending is not so evil (ala George W Bush).  If Democrats control, then watch out, the Tea Party is coming to the rescue.

All of this is beside the point.  What should be at issue is whether the spending is producing the intended results.  If not, then spending should be revised until a more effective program can be established.

Commonsense should bring us also to realize that Defense spending is over the top.  It should be reduced by 30% or more.  Social security should also have its benefits slight adjusted to take into account the longer life expectancy of Americans.  Even more important, social security pay roll taxes should be increase.  Medicare and Medicaid should also be reviewed but these benefits should not vary meaningfully from those provided Federal employees.   Medicare payroll taxes should also increased.  But more important than  these Medicare adjustments, health care cost, which is the basic cost driver should be completely reviewed and steps taken to both cap and reduce the cost of health care.

This is a public discussion we are unlikely to ever hear.  Too many people receive a slice in either the public or private pool of money.  No one likes to give up their cut.

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Intelligent and No Hopes

January 30, 2011

As we watch events play out in Cairo, the pictures show a young, western dressed group confronting the Egyptian Government’s police.  The news tells us the demonstrators want an end to the Mubarak regime.  They hope that will lead to a brighter future.

The demonstrators (at least some of them) carry cell phones and are said to have been regular visitors to the web (until the Government shut it down).  This would imply these demonstrators are intelligent.  Why is it they are intelligent and still have no hopes?

I do not know the answer in this case.  I do know that information does not always make people intelligent or satisfied.  All to often we learn things that widen our image of what could be.  At the same time we know full well it is impossible or highly unlikely one would ever achieve the state of this new information.

Dictators have long realized that suppression of information (and even better, transformation of information into propaganda) is an invaluable aid in controlling a population.

Information requires the receiver to sift it through the sieve of past knowledge in order to put the information into perspective.  Education, of course, is also an important ingredient.  It provides knowledge and makes the sieve larger.  If it were just this easy.

There are forces, however, that work tirelessly to render the sieve useless.  Tyrants and dictators obviously work to replace information with “their” message.  Other opportunists, both local and foreign, are on the ready to spread a message favorable to them.  And, last but not least, the holy men come forth with their message from god.

While all three of these forces are dangerous, the holy men probably represent the greatest risk and danger.  Religions have routinely aligned themselves with Governments without regard to whether they are dictatorial or tyrannical.  The only condition religions make is the desire for a monopoly over access to god (and lest I forget, the right to extract money from their followers).

It is usually a good deal for the ruler.  He gets the syphon off a cut of the nation’s economy while the religion keeps the masses paying and their eyes focused on the hereafter.

Maybe over the next week or two we will get to see how this charade plays out in Egypt.  For sure there is much change necessary and the ending of corruption is a great place to start.  Just remember, waiting in the wings, are new groups that will propose to give Egypt a new start.  The odds are high (but not certain) that any non-secular group will fail to change that much.  The odds are certain, however, that if the new group is a cleric lead government, life will remain hopeless.

 

Open Mouth, Insert Foot

January 29, 2011

Yesterday, President Obama seemed to do what George W Bush always did.  That is, speak first, think later.

The hottest story on the 7/24 news cycle is the unrest in Egypt.  The popular uprising is threatening to topple the Mubarak government.  The usual actors are present.  Corruption, poverty, high unemployment, and repressive government tactics.  To complete this picture, we need to add there are no attractive alternatives.

There are alternative dreams, however.  For instance, a democratic, freedom loving, capitalist inclined insurgency could replace Mubarak.  And pigs could fly too.

But holding onto Mubarak is not going to bring much change to the Egyptian’s daily life.  Mubarak is not going to change his ways of meddling (read rigging) elections.  His friends, supporters, and family are still going to get lion share of government spending.

So what should President Obama do or say?

Publicly there is nothing the President can say or should say.  This is an internal Egyptian issue.  For better or worse, they must resolve it.

Behind the scenes, the US government can offer to insure the uprising is home grown and not part of foreign powers efforts.  Many experts see the hidden hand of Iran pouring money into organizing opposition to Mubarak.  The Iranian dream outcome is the overthrow of Mubarak and his replacement by a secular, Shiite friendly government.  Thwarting Iran or any other foreign power is something the President could and should do.

Speaking publicly, however, on allowing more US style freedoms is patently foolish.  US style freedoms are only possible in a country where the gulf between the rich and poor is filled with a middle class.  US style freedoms require a working separation of church and state.  None of this exists in Egypt.

Rather than waste time speaking publicly, President Obama would do well to revisit his entire Middle East and Islamic countries policies.  If it is the will of people living in those lands to experiment with secular governments, then like the tides, it is time to step back.

Strangely enough the good life we enjoy does not need or depend on a democratic Middle East or Afghanistan/Pakistan.  For sure these countries can ferment a lot of radicals.  Israel will need to get serious about finding peace terms with the Palestinians.

But economically, it is unlikely any of these countries will suddenly thrive.

President Obama is looking at one of those “lose-lose” problems.  Let’s hope he has the wisdom to pick the “least worst” option.

 

Laying Blame

January 28, 2011

There are 633 riveting pages.  The 2008 Financial Crisis is a mystery no more.  The icing on the cake, the crisis could have been prevented.

As crisis go, this was not your average one.  It had a lot of moving parts.  There was the government-gone private Fanny Mae and Freddie Mac.  These twins would buy mortgages from just about anyone.  They were golden because they came backed by Federal guarantees.  Private businesses backed by Federal money.  Hmmm.

Of course there was money in it for banks when they granted mortgages.  As soon as they granted a mortgage, the bank could sell the mortgage to Freddie or Fanny.  This gave the banks new money to grant another mortgage and pocket the fees associated.  No risk and money in the pocket.  Hmmm.

Investment bankers saw some new angles.  Why not bundle these mortgages and sell bonds that promised to pay the equivalent of your money mortgage payment to bond holders.  The original bank had already collected its fees and was collecting more fees for providing local service.  Freddie and Fanny, as well as other lenders could sell their mortgages to the bundlers who would issue bonds.  The bonds issuers, of course, made fees too.  Hmmm.

The investment bankers struck another idea.  What would they do with mortgages that were a little questionable?  Eureka,   Why not bundle a mixed bag of mortgage backed bonds into what they called a collateralized debt obligation.  They would get ratings agencies (Standard and Poor’s, Moody’s, etc) to rate these CDOs.  The highest rated would carry the lowest return, the riskiest the highest return.  The beauty of this approach was that the assigned ratings would be all slight variations of good ratings (whether they really were or not).  Hmmm.

Other creative investment bankers hit upon “slicing and dicing”.  Here they created CDOs that contained pieces of high rated CDOs and pieces of lower rated ones.  The idea was that by mixing (homogenizing) all types of CDOs, risk was spread out and no one would be too exposed.  Sounds like a free lunch.  Hmmm.

The investment banking community could not have done all this if there were not a ready market.  Money was available around the world chasing attractive returns.  Banks and investment firms around the world lined up to by these CDOs.  Why not, home prices kept going up.  Everyone was doing it.  Hmmm.

Not everyone was convinced that home price would go up forever.  Further, the creators of CDOs began to become worried.  They could not sell all of their CDOs.  What was not sold was parked on the banks books.  This required the financial institutions to reserve money they might otherwise have used to generate more income.  How to get these obligations off their books?  Hmmm.

The answer came in the form of credit default swaps.  CDSs are sort of insurance.  Their beauty is that they are not official insurance so they are not regulated.  CDSs are bets that some obligation will default.  One side bets they will default, the other side bets they will not fail.  Their attractiveness is that one side pays the other side money now on the bet that in the future the obligation will default.  Bird in the hand…?  Hmmm.

Before anyone could react the financial sector was awash in CDSs.  Holders of CDOs claimed they had mitigated their risk by purchasing CDSs.  CDS issuers did not have to report the issuance of a CDS since these instruments were not regulated.  And no one check to see what might happen if the CDS issuer could not pay.  Hmmm.

This arrangement grew while house sales continued to grow and feed new mortgages.  When the housing bubble burst, the flow of fresh fees dried up.  In addition, weak housing sales translated into job losses and the onset of a recession.

The next domino was mortgages defaults.  Mortgage backed bonds lost value.  CDO’s became less valuable and in time, CDSs were called on for payment.  Suddenly everyone could see the king had no clothes.  Hmmm.

Banks and financial institutions are one thing if they are anything.  They are distrustful to a fault when their greed is not satisfied.  If there was a chance they would lose money, they would first shut down their money lending operations and attempt to be the last man standing.  The world economy soon felt the impact.  It was not pretty.

At this point the term “too big to fail” gained new life.  Governments around the world bailed out banks and investment firms.  The rest is history.

The conclusion that this crisis could have been prevented should be no surprise.  The report should have said “the crisis should have been prevented”.  The nature of banking and investing is well known.  The fallibility of humans is equally well known, the free lunch trips most everyone.

Dishonestly filled out mortgage application forms, predatory mortgage interest terms, no (or limited) retained mortgage liability (when sold), and unregulated and non-transparent insurance-like instruments all could and should have been regulated.  If already regulated, they should have been enforced.

Greed and hot money cannot be regulated.  They are part of human nature.  The minority report which purports the crisis could not have been prevented does everyone a disservice.  Everyone that is except the banks, mortgage originators, rating agencies, and investment firms.

State Bailouts

January 27, 2011

Republican leaders said this week that they would oppose any attempts for States to ask the Federal Government to undertake a “bail out”.  This seems a wise position to take.  It does, however, also raise a number of questions.

Without bankruptcy, some States will have to raise the money (read raise taxes) to pay their bills.  Republicans are now on record as against raising taxes.  I wonder if this is a hint at a larger plan?

For example, Republicans might think they could have their cake and eat it too.  Suppose they cut Federal aid to education by placing the burden on States (remember no child left behind?).  It would then be State politicians that either raised taxes or cut some other State service (like aid to the needy).  No blood on Republican hands.

There has also been discussions that State bankruptcy might be a back door to open labor contracts with State employee unions.  While this might be attractive, it is inconsistent with a political stand that also wants to make permanent tax breaks for the wealthiest Americans.

The most fundamental reason for no bankruptcy is right in front of us.  State elected officials are responsible to provide services and to pay for them.  With bankruptcy as an escape, there would be no check and balance.

Maybe a larger question might be, “what about municipalities”?  Can units of government smaller than Federal and State, declare bankruptcy?  If not, should anyone be on the string to bail them out?

Have you considered what might happen if the big quake hits the West Coast.  Estimates have put the devastation in the trillions and all sorts of bond issues will go into default.

Too big to fail?

 

Genetics

January 26, 2011

Recently the New York Times published an essay that claimed once one controlled for environment, children with the best genes did best.  This is not an optimistic statement for the poor and the average middle class, or is it?.  What hope is there to improve the US educational system if this proposition is true?  It is not likely we will see the end of poverty, or that all children will be born above average.

We can look around and see plenty of evidence that children who grow up poor, in homes with single parents, with too little to eat, and live in areas where there are drugs and high levels of street crime, ordinarily do not do well in school.  This is not a genetics issue, this is an environmental one.

The NYT essay, however, omitted a third element which was neither environment or genetics.  It’s called training the mind.

We all know of gifted young athletes who are dirt poor, live in totally dysfunction families and dangerous communities who make it to the pros.  These men and women trained their bodies from the earliest time.  They improved every year.

Why not work on the brain?

I am not talking about reading skills.  I am not talking about math knowledge.  I am not talking about history or social studies either.  They are all important but are not what needs training first.

Adele Diamond’s work on “Tools of the Mind” is where we should look.  She emphasizes three executive functions that all students, from the earliest age, should practice.

“Inhibitory control” provides the skills to restrain oneself.  It allows a child to listen before interrupting.  In the extreme, it condition the child to control disruptive behaviors so that he/she does not alienate others.

“Working Memory” develops the mind’s capacity to absorb information and recall it when desired.  Memorization is important as a means of expanding the mind’s ability to retain more facts and as importantly, recall them for use later.

“Cognitive flexibility” is akin to the football player who learns to give a head fake and then sprint around the defender when it looked as if he would be tackled.  Thinking outside the box and sticking with the effort to solve a problem is a powerful tool.

A weak set of tools of the mind will affect both the education level and subsequent success of all individuals.  Even the wealthy born with great genes can have explosive tempers or choose the coach over the shovel.  Tools of the mind provide life long skills.

In the quandary of how to fix the US education system, the dominance of genetics does not inspire much hope.  Writing off the average student, or the one that comes from poverty is wasting too much valuable resources.

We have seen the success of training the athlete’s body.  We now need to work on training the mind.

 

Conservative Two Step

January 25, 2011

Last evening syndicated columnist, Charles Krauthammer, spoke in Philadelphia.  His speech from prepared remarks was both informative and skillfully presented.  He spoke from the right side of the plate and delivered an insightful perspective of President Obama and his presidency.  Krauthammer writes well and last night he spoke well.

In the question and answer portion of the evening, when prepared remarks give way to stump speeches, Krauthammer did not do as well.

In addressing the large Democratic losses in 2010, Krauthammer said the American people had rejected where Obama was headed more than what he had actually done.  In other words, the American people were voting that taxes would go up even though they had not risen in Obama’s first two years.  Krauthammer said Americans simply do not want a European style social democracy.

While this certainly reflects Krauthammer’s views, the vast American public has not a clue about Europe or its predominant form of governance.  What Americans received last election was over $2 billion is negative, hateful, misleading, and angry political ads carefully aimed by the conservative right at incumbent Democrats.

To another question about George W Bush’s decision to invade Iraq when there were no WMD, Krauthammer skillfully redirected his reply to say (without proof) there was not a shred of evidence that the US government knew there were no WMDs and it was close to “treasonous” to accuse the President of the US that he went to war on a lie.

Krauthammer did not step back and tell the audience that even if the President thought there were WMD (UN inspectors said they had not found any), Iraq did not represent an imminent threat to the US in any case.  Krauthammer also did not tell the audience that Dick Cheney, Donald Rumsfeld, Scooter Libby, Paul Wolfowicz, Douglas Feith, and Richard Pearle (all members of Bush’s team) had signed a document in 1997 which in effect called for the forceful Iraq “regime change” (google PNAC for more information).

Ironically in Krauthammer’s syndicated column on Monday, he called for the repeal of President Obama’s health care reform.     His premise had nothing to do with the fairness of the reform (elimination of pre-existing conditions) nor the implicit unfairness of people who choose not to buy insurance when they game the system and cause everyone else’s insurance cost to be higher.  But the most egregious position he took was repeal first, and then be patient for the Republicans to propose a plan.

The conservative two step conveniently leaves out key information and focus the talk someplace else.