Faith Based Everything

We all know the term "faith-based." It's usually applied to religious groups, who coined the phrase. It is, in fact, how they pursue their religion, and ostensibly their god.

It's not the religious context I want to bring up. The most powerful faith based idea around is in the economic realm. This global, free market, libertarian, neo-conservative capitalism, that has been embraced by conservatives and the Republican Party, including the wholey owned subsidiary Tea Party, is an entirely faith based economic ideology. It has it's holy scriptures, tenets of the faith, it's prophets, high priests, preachers, evangelists, seminaries, churches and cathedrals. To speak against this economic religion is to commit blasphemy and be branded a heretic.

Another is that of the military-industrial complex. However, there's a lot of corruption by the above. The whole basis of the MIC is there's a lot of MONEY to be made, and the way to do it is by imagining enemies everywhere that want to kill us. With making money the prime virtue of the faith, only a few heretics question it.

The big problem with faith based anything is that it obscures reality, making any problems that arise out of the idea in question nearly impossible to overcome.

The Local Economy.

Whenever local people/politicians talk about economic growth for my small southern city, in the next breath they will talk about bringing companies to the city to provide jobs. The biggest advantage is the cheap labor force. Special tax breaks for the company also get involved. The plus side to this is the cash injected into the local economy from outside in the form of wages gives a net gain to the economy.

On the other side of the equation, the big box retail stores that come here are a net drain on the local economy. The stores are in the business of making a profit, which means more money must come into them than they leave, which means money flows out of the local economy through them. These stores are dependent on distribution chains that spread around the world. Dollars spent at Wal-Mart not only make their way to Bentonville, Arkansas and the Walton families pockets, but most go all the way to China. Good for the Chinese. Us? Not so much.

Also, in a very real way, we are dependent on these stores to feed, clothe and supply a myriad of other things for us. If they stopped, for whatever reason, where would that leave us?

If we keep our dollars circulating in the local economy we will all benefit. It would be of much greater benefit to our local economy if we were to move to a more locally oriented and sustainable economy, dependent on ourselves and our own talent and labor.

/eom

If You Can Take It

There's been a number of good articles come out that I haven't had time to blog about (along with the fact I had a good post going when my computer bluescreened).

Let's start with an article titled, The Two Documents Everyone Should Read to Understand the Crisis,

As a white-collar criminologist and former financial regulator much of my research studies what causes financial markets to become profoundly dysfunctional. The FBI has been warning of an "epidemic" of mortgage fraud since September 2004. It also reports that lenders initiated 80% of these frauds.¹ When the person that controls a seemingly legitimate business or government agency uses it as a "weapon" to defraud we categorize it as a "control fraud" ("The Organization as 'Weapon' in White Collar Crime." Wheeler & Rothman 1982; The Best Way to Rob a Bank is to Own One. Black 2005). Financial control frauds' "weapon of choice" is accounting. Control frauds cause greater financial losses than all other forms of property crime -- combined. Control fraud epidemics can arise when financial deregulation and desupervision and perverse compensation systems create a "criminogenic environment" (Big Money Crime. Calavita, Pontell & Tillman 1997.)

The FBI correctly identified the epidemic of mortgage control fraud at such an early point that the financial crisis could have been averted had the Bush administration acted with even minimal competence. To understand the crisis we have to focus on how the mortgage fraud epidemic produced widespread accounting fraud. [emphasis mine - OG]

I get really suspicious when people keep copping to "incompetence." It can hide much more nefarious motives.

These two documents are enough to begin to understand:

• the FBI accurately described mortgage fraud as "epidemic"
• nonprime lenders are overwhelmingly responsible for the epidemic
• the fraud was so endemic that it would have been easy to spot if anyone looked
• the lenders, the banks that created nonprime derivatives, the rating agencies, and the buyers all operated on a "don't ask; don't tell" policy
• willful blindness was essential to originate, sell, pool and resell the loans
• willful blindness was the pretext for not posting loss reserves
• both forms of blindness made high (fictional) profits certain when the bubble was expanding rapidly and massive (real) losses certain when it collapsed
• the worse the nonprime loan quality the higher the fees and interest rates, and the faster the growth in nonprime lending and pooling the greater the immediate fictional profits and (eventual) real losses
• the greater the destruction of wealth, the greater the (fictional) profits, bonuses, and stock appreciation
• many of the big banks are deeply insolvent due to severe credit losses
• those big banks and Treasury don't know how insolvent they are because they didn't even have the loan files
• a "stress test" can't remedy the banks' problem -- they do not have the loan files

Wired has an article about this Chinese economist David X. Li,

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.

Isn't that special...

The damage was foreseeable and, in fact, foreseen. In 1998, before Li had even invented his copula function, Paul Wilmott wrote that "the correlations between financial quantities are notoriously unstable." Wilmott, a quantitative-finance consultant and lecturer, argued that no theory should be built on such unpredictable parameters. And he wasn't alone. During the boom years, everybody could reel off reasons why the Gaussian copula function wasn't perfect. Li's approach made no allowance for unpredictability: It assumed that correlation was a constant rather than something mercurial. Investment banks would regularly phone Stanford's Duffie and ask him to come in and talk to them about exactly what Li's copula was. Every time, he would warn them that it was not suitable for use in risk management or valuation.

In hindsight, ignoring those warnings looks foolhardy. But at the time, it was easy. Banks dismissed them, partly because the managers empowered to apply the brakes didn't understand the arguments between various arms of the quant universe. Besides, they were making too much money to stop.

And isn't that what it's all about?

"Li can't be blamed," says Gilkes of CreditSights. After all, he just invented the model. Instead, we should blame the bankers who misinterpreted it. And even then, the real danger was created not because any given trader adopted it but because every trader did. In financial markets, everybody doing the same thing is the classic recipe for a bubble and inevitable bust.

Yeah, they deserve all that money because they're such frakkin' geniuses.

Li has been notably absent from the current debate over the causes of the crash. In fact, he is no longer even in the US. Last year, he moved to Beijing to head up the risk-management department of China International Capital Corporation. In a recent conversation, he seemed reluctant to discuss his paper and said he couldn't talk without permission from the PR department. In response to a subsequent request, CICC's press office sent an email saying that Li was no longer doing the kind of work he did in his previous job and, therefore, would not be speaking to the media.

It's probably nothing.

I was commenting on The Quiet Coup, when my computer bluescreened,

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

It's worth the read.

Sleep Well.

/eom

Infinite Debt

Thomas Geoghegan (pronounced ja-hay-gun) has an article in Harper's called Infinite Debt: How Unlimited Interest Rates Destroyed the Economy. He was on Amy Goodman's Democracy Now show last Tuesday. You hear it or read the transcript here. It's well worth the time.

It reads, quote, “no amount of New Deal regulation or SEC-watching could have stopped what happened…The problem was not that we ‘deregulated the New Deal’ but that we deregulated a much older, even ancient, set of laws.” The article goes on to say, quote, “We dismantled the most ancient of human laws, the law against usury, which had existed in some form in every civilization from the time of the Babylonian Empire to the end of Jimmy Carter’s term.”

And who came after Carter? Why, yes, that would be Saint Ronnie of the Ray-Gun. He refers to a SCOTUS decision in 1978: Marquette National Bank v. First of Omaha Service Corp.

Sure, that’s the Brown versus Board of Deregulation for the financial sector. The case—Justice Brennan, of all people, opinion said that banks that operate—out-of-state banks that were subject to the National Banking Act of 1864, signed by President Lincoln in the middle of the Wilderness Campaign, effectively preempted any state regulation capping the interest rates of those banks when they sent their credit cards in from out of state. Now, back in 1864, banks in Delaware weren’t operating out in Nebraska or handing out credit cards across the country, and there was no such thing as Visa or MasterCard.

The effect of this was that the big national banks were not subject to any state usury law, because the Banking Act of 1864 had no interest rate cap on it, not contemplating the kind of situation that we’re in today. And in effect, this sealed what had been a trend throughout the country, which is lifting these interest rate caps for banks and giving consumers easy credit on the premise that they would just pay tons and tons of interest so that the banks were protected if the loan weren’t repaid. In fact, the banks had incentive to hand out credit cards and hope that the loans would not be repaid, because the interest rates on these credit cards were so high.

So the capital in this country began to shift in the financial sector. That’s why the financial sector began to bloat up. That’s why we ended up, by 2006, having a third of all profits going into the banks and the financial firms and not into the real economy.

This is nothing less than the banksters waging economic war, class war, on the rest of us.

I feel one of the reasons I am in favor of the bailout of the auto industry is, aside from all the other reasons, a sense of guilt that we set up all the returns in this economy in favor of financial firms and really disinvested from industry. And even worse, we began to turn industry into a banking itself. General Motors, General Electric began to operate banks, because that’s where they made the big profit, in the loans to consumers, uncapped interest. It’s a very destructive situation.

And this isn’t some left-wing progressive critique circa 2009. Adam Smith, in The Wealth of Nations, warned how important it is to have interest rate caps on the financial sector, or all the money will gush into there and out of productive uses. Keynes, in The General Theory of Employment, Interest, and Money, the great classic, 1936, has a little chapter at the end saying, “Yes, we have deficit spending. I’ve got this way of getting out of the Depression. By the way, we’ve got to keep the interest rate caps on the banks.”

...Many economic historians, see history as nothing but a turf war between three groups: the manufacturers, workers and the bondholders, or the financial sector. So where does labor fit in in all of this? People lost the ability to get wage increases and got the ability, an incredible ability, really unknown in previous times, to get credit cards with which they had high rates of interest. So, unable to get wage increases, people—or unable to get union cards, really, people got credit cards and began running up these great debts, which addicted the country to high rates of return in the financial sector, so that people were kind of spending their way out of the real economy, pushing more and more money, by the fact that they were going into debt, into this virtual financial sector economy. So, really, the inability of people to raise their own wages and the incredible ease with which they could get credit instead helped create this flow of capital out of manufacturing and into finance. You know, we, the little people in this country, helped finance the bloating up of this financial sector and really the downsizing of our own jobs in the real economy. We sent the signals, you know, to investors to put money into the financial sector and not into the manufacturing sector.

Check it out.

/eom

The Prez Hits It Out of the Park.

Well, President Obama just knocked one out of the park with his first “State of the Union” address before the entire government of the United States, IMHO. Well, not quite. Attorney General Eric Holder was the “Designated Successor”. He’s the one, that in the line of succession would become president if something catastrophic happened. So he’s out of DC at some undisclosed location (which somehow does not sound nearly as ominous as when it was applied to Dick Cheney). I took note that he acknowledged the mucky-mucks that were there then turned and spoke directly to the American people. A few highlights:

The concern is that if we do not re-start lending in this country, our recovery will be choked off before it even begins.

It’s the bankers that have the capital and are not lending. Are they trying to sabotage Obama’s recovery plans? I laugh when I hear the right-wingnuts say we’re socialists. I’ve even told people, if we were socialists the bankers wouldn’t have testified before Congress, they would have been shot before Congress. I had a doctor agree with me.

Already, we have done more to advance the cause of health care reform in the last thirty days than we have in the last decade. When it was days old, this Congress passed a law to provide and protect health insurance for eleven million American children whose parents work full-time.

He got a standing ovation from the Democrats on this, but none of the Republicans stood, and I don’t think they even applauded, and I thought, Yeah, I hope someone’s getting a picture of this, how they’re disgusted about providing healthcare to children. How can you not say they’re simply heartless bastards?

I also know that nearly a century after Teddy Roosevelt first called for reform, the cost of our health care has weighed down our economy and the conscience of our nation long enough. So let there be no doubt: health care reform cannot wait, it must not wait, and it will not wait another year.

Impressive. He’s putting it on the table now. He’s going for it, I think: national health care. Teddy Roosevelt first called for universal health care in the US. If he’d mentioned Truman, then it would have been for sure. He might as well, he’s as popular as he’s ever going to be.

That is why it will be the goal of this administration to ensure that every child has access to a complete and competitive education - from the day they are born to the day they begin a career.

I think he’s talking about college. The US should have free education through all levels at all times. It’s called investment in human capital. Something the so-called “free market” has been woefully lacking in since it’s ascendancy under Reagan.


And there was a lot more. I can’t believe how flat and god-awful Bobby Jindal sounded afterwards. Not to mention the fact he was spouting the same nonsensical Republican ideology and policies that have brought us to the edge of the abyss in the first place (if indeed we aren’t over the edge already and merely slowly picking up speed). If this is what the Republican Party is becoming, all I can say is, Bring It On…

/