Hope sinks

The second angel sounded his trumpet, and something like a huge mountain, all ablaze, was thrown into the sea. A third of the sea turned into blood, a third of the living creatures in the sea died, and a third of the ships were destroyed. (Revelation 8:8)

It’s hard to know which is more astonishing: the yet ongoing creation of what likely will be the worst single ecological disaster of modern times or the somnambulant reaction of the public to this catastrophe. The reality, however, is that they are two sides of the same coin.

The American mainstream media has seemingly lost all ability to evaluate the events of our times. Its sole basis for deciding what to report are how many eyeballs a story will attract. If an event lacks sex or violence, has no immediately obvious connection to people’s everyday lives, is too complicated to be explained in 60 seconds, or is not trumpeted by a celebrity or well-known politician (the latter being a subset of the former), then its airtime or column space will be minimal, at best. Stories are not pursued or developed; there is no time or money for that. Besides, all the Woodwards and Bernsteins were long ago put out to pasture.

Needless to say, the oil industry culprits in this fiasco have no interest in drawing any more attention to the disaster than is unavoidable. Honestly, who can blame them? No, the scandal beyond the scandal of the blowout itself is the blanket being thrown over it by our government, with the acquiescence of President Obama. Beyond the public’s reaction, where is his outrage?

A month into this catastrophe, the unavoidable realization is that the president is keeping as much of this story below the radar screen as he can. There are probably multiple explanations for this but it fits with a disturbing pattern of this administration to shield big business from the consequences of its actions. A growing number of commentators are recognizing the parallel between the current hands-off attitude towards BP and the protection of the TBTF banks last year at the start of the Obama administration.

It is now obvious that BP has been lying from the start about the quantity of oil gushing from its blown well. Again, no surprise. What is incredible is how government agencies have not only not challenged BP’s estimates but have seemed to go out of their way to avoid coming up with their own figures. But this only continues what has also become obvious, the dereliction of duty at all levels of the agencies charged with regulating offshore drilling.

Following the almost laughably pathetic performance of oil and drilling company executives testifying before congress, President Obama came out to sternly chastise them for their finger pointing and blame games. There have also been announcements of regulatory reorganization. Yet the scope and horror of this event continues to be downplayed and, of course, the oil continues to pour out.

Obama’s lecture was very similar to his expression of dismay last winter with banking executives’ resistance to his reform proposals. For this appearance he trotted out grim faced Paul Volcker to stand at his side and relegated Treasury Secretary Tim Geithner to the sidelines. Volcker is known as the only administration figure to have consistently urged that the TBTF banks be severely reined in by new government regulation. But Volcker is only an advisor and, after Obama’s public tongue lashing of the banks, disappeared from view once again.

In the 1950s a GM CEO famously said, “What’s good for GM is good for the country.” Barack Obama seems to have accepted this philosophy, now applied to corporate America generally. It is very likely that he came into office having been convinced that the nation’s economy was on the precipice of a Depression-like collapse. And that assessment may very well have been accurate. Avoiding this, however, has resulted in two pernicious strategies. One was to keep the magnitude of the danger a secret to prevent the public’s panic from giving the economy the final push over the cliff. The second has been to give time and protection to the country’s seriously wounded banks and other corporations to enable them to rebuild and power a national recovery.

What has not been considered, however, is the possibility that the financial collapse was the result of systemic problems in the nation’s and even the world’s economy. For if that was the case, then simply putting all the old economic pieces back in place will only set us up for yet another crisis, probably worse than the last. And many financial and economic observers fear this is indeed what is in the offing. Increasingly, Obama’s fabled caution and pragmatism seems to playing right into the hands of those whose primary goal is protecting the status quo. Virtually all his advisors are Washington and Wall Street veterans who can only see the world from the perspective of those vantage points.

While the pettiness and goofiness of the Bush administration are gone, it is remarkable how little else has changed. What better sign of this was there than the announcement of yet another supplemental appropriation for the Pentagon? Combat deaths in Afghanistan have passed the 1,000 mark and more American troops are now there than in Iraq. Meanwhile the vision of our future in Afghanistan only gets murkier and our tactics become more reprehensible.

“Change you can believe in” was one of Obama’s primary campaign slogans yet change is exactly what seems to be most missing. Add to that “Yes we can” and “The power of hope” and the emptiness and cynicism of it all becomes all too familiar and very sad.

Having supported and voted for Barack Obama my feeling is of disappointment, of course, but also embarrassment and foolishness. I was taken for this ride once before with Bill Clinton—how could I not have learned? Fool me once: shame on you. Fool me twice: shame on me. And while the consequence of his words cannot be treated lightly, it is hard after a generation of misgovernment and deceit not to think again of Thomas Jefferson’s famous warning: “God forbid we should ever be twenty years without such a rebellion. …[W]hat country can preserve its liberties, if its rulers are not warned from time to time, that this people preserve the spirit of resistance? Let them take arms.”

Dies irae (Sunday Reflections for May 9, 2010)

Hear this, you that trample on the needy,

and bring to ruin the poor of the land,

saying, "When will the new moon be over

so that we may sell grain;

and the sabbath,

so that we may offer wheat for sale?

We will make the ephah small and the shekel great,

and practice deceit with false balances,

buying the poor for silver

and the needy for a pair of sandals,

and selling the sweepings of the wheat."

The LORD has sworn by the pride of Jacob:

Surely I will never forget any of their deeds.

(Amos 8)

“Thus says the LORD!” The image of the thundering prophet is a part of our common culture, even if does not bring to everyone’s mind a specific character such as Jeremiah, Amos or John the Baptist. The Bible’s prophetic tradition may not be its most familiar but it likely has been its most influential. It certainly underlay Jesus’ mission as it has the work of countless reformers over the centuries, both religious and secular. In modern times it has been embodied in Gandhi, Martin Luther King and even Karl Marx.

The words of the prophets are inherently subversive. They are intended to shake up people and shake up institutions. They bring out into the light what is hiding in the shadows. They challenge established authority and conventional thinking. They make people squirm and often get them angry. They give people hope and courage. They are the Bible’s dynamite.

Hear this word, you cows of Bashan

who are on Mount Samaria,

who oppress the poor, who crush the needy,

who say to their husbands, "Bring something to drink!"

The Lord GOD has sworn by his holiness:

The time is surely coming upon you,

when they shall take you away with hooks,

even the last of you with fishhooks.

Through breaches in the wall you shall leave,

each one straight ahead;

and you shall be flung out into Harmon,

says the LORD.

(Amos 4)

Recently Wall Street’s largest investment firm, Goldman Sachs, was charged with fraud in a civil suit by the federal Securities and Exchange Commission. It’s reported that federal and state criminal investigations are also underway. Other similar companies may also be getting attention from regulators and prosecutors.

These investigations and legal actions are, of course, all a consequence of the 2008 financial meltdown which led, in turn, to the worst recession since the Great Depression of the 1930s. While some have explained this economic downturn as being an inevitable occurrence like the seasons, there is a growing consensus that its severity, at least, is the result of fraud and illegal market manipulation. In the case of the Goldman Sachs’ suit, it is charged with marketing and selling as an investment vehicle a mortgage backed security which had, in fact, been constructed to fail. And fail it did, costing investors about $1 billion.

Many see this case as the tip of the iceberg, a representative sample of the corruption that riddles Wall Street’s investment and banking operations. And many also see Wall Street itself as simply the largest and the most visible component of a global financial system that is riddled with fraud and fantasy (suspicions only strengthened by this week’s market gyrations).

When economists or financial commentators speak or write to explain it all, most of us just shake our heads or our eyes glaze over. “It’s just too much. Who can understand any of this?” Yet millions of ordinary people have lost jobs, lost their homes, and lost their retirement dreams in this latest financial debacle. We may not understand this game and yet we play it in some form almost every day.

John said to the crowds that came out to be baptized by him, "You brood of vipers! Who warned you to flee from the wrath to come? Bear fruits worthy of repentance…. Even now the ax is lying at the root of the trees; every tree therefore that does not bear good fruit is cut down and thrown into the fire." And the crowds asked him, "What then should we do?"…"Whoever has two coats must share with anyone who has none; and whoever has food must do likewise." (Luke 3)

The biblical prophets see corruption and injustice and they call it out. They don’t necessarily have a systemic solution for the problem. They see what’s wrong, however, and name it in no uncertain terms. No doubt they would be counseled to be practical, realistic, constructive, and not always so negative. What’s sobering about their stories is that in nearly every case their messages are ignored—and disaster follows.

There are voices today naming the evils of our financial and economic system. Few are political or economic authorities. Those that can’t be ignored are often dismissed as kooks. Yet with new communication outlets like the internet, their message is being heard even if not heeded.

None of these voices that I know of are religious authorities, but then neither were the biblical prophets. Interestingly, though, many are familiar with the Bible and the prophetic tradition. The root of much of the world’s economic misery is its enormous debt. Recently I have been hearing promotion of an ancient biblical concept: jubilee. This was the practice of debt forgiveness every quarter-century. It was intended as a great social leveling and an undoing of the injustice assumed inherent in all great debt burdens. Needless to say it would be the worst nightmare for bankers and politicians the world over.

The prophets were demanding, unreasonable, and sometimes hysterical. What they asked for was impossible, people said. Yet, according to the Bible, God spoke through them—and events proved them right. Their stories are a warning that in dangerous times the “unreasonable” voices are the ones we may need to listen to most of all. They may, in fact, be the voice of God who, if the past is any indication, also seems to have a penchant for being unreasonable.

Eurozone tottering (cont.)

Greek protesters expressed their disdain today for austerity measures proposed by the government to qualify for international bailout funds. Unions marched in Athens' streets and a group broke through barricades to unfurl banners on the Acropolis.

Meanwhile, the financial world expressed its disdain for the whole EU debt mess by sending stock prices tumbling around the globe. The DOW dropped 225 points or 2%. There is growing concern that the cost of propping up all the EU's faltering economies will be more than anyone wants to afford. If so, then defaults by other EU PIIGS and beyond (Hungary?) will be inevitable and the affects will ricochet in all directions.

Eurozone tottering (cont.)

As Zerohedge says, "All you need to know in two easy words."

Eurozone tottering (cont.)--updated

Another day of meetings, phone calls, and statements of concern as Europe's debt crisis rolls on. The IMF is reportedly now ready to pony up $120 billion over 3 years to prop up Greece--much more than previous estimates. German politicians have also apparently hammered out a bailout plan. And Greece is said to have agreed to a severe austerity plan to reign in its out-of-control deficits.

The concern is whether all this is too little, too late. It is no longer just a Greek problem, with Portugal and Spain both beginning to experience the same financial pressures afflicting Greece. Bailing out all three countries could be more than the IMF and EU together could afford--if the crisis stopped there. Promises of austerity have been heard from the Greek government before but it is not at all clear whether the Greek people will go along with them.

Every day of "plans and proposals"--rather than actual decisions--only deepens the crisis and leaves more opportunities for the circling financial vultures.

Update: Paul Krugman in Friday's New York Times: So is the euro itself in danger? In a word, yes. If European leaders don’t start acting much more forcefully, providing Greece with enough help to avoid the worst, a chain reaction that starts with a Greek default and ends up wreaking much wider havoc looks all too possible.

Eurozone tottering--updated 2x

European Central Bank HQ in Frankfurt

Standard & Poors downgraded the debt of Spain today as borrowing costs continued to rise for the PIIGS. (Reports here and here.) The current credit crisis is also spreading beyond the eurozone as Hungary also saw its bond rates going up. Meanwhile Germany, the primary source of funds for a proposed Greek bailout, continued to hem and haw about what, if anything, it was willing to do. As has been predicted for months, Greece's credit problems are spreading across the southern tier of Europe and beyond.

Mostly the US has just been watching all this out of the corner of its eye. Obviously we have plenty on our own plate right now. Yet as Europe discovered when Lehman imploded, finance and credit today is all international. A credit earthquake in Europe will inevitably send a tsunami in our direction. (See Simon Johnson’s “Wake the President.”)

The global economy is still very fragile--much more so than most people realize. Government officials, especially here in the US, have done a good job of putting out the message: "We've turned the corner, the crisis is past." They know how crucial public confidence is in reviving economic activity. Nonetheless, the 2008 financial meltdown revealed real and fundamental problems in the global economy which have still gotten little attention. Most of what ailed the system then, still ails it now.

A credit crisis in Europe could well trigger the same kind of panic as happened in fall 2008. Again, the banks will demand government bailouts to prevent a complete financial meltdown. This time, though, most government tanks are close to empty. A second massive bailout is just not in the cards, which means the economic dominoes will fall however they want.

Another option which is also a threat to the US is that the eurozone actually gets its act together and does something constructive. Most agree this would inevitably mean a significant devaluation of the euro. This is already predicted for the pound once British elections are past. The result: European goods become cheaper (wine, travel, BMWs!) and American goods become more expensive. Oops. There goes President Obama’s plan to grow the economy via expanded exports.

It’s easy to portray Germany as the bad guy in the current mess but it really is like the person trying to decide how to rescue a drowning man without himself getting pulled under. Germany has avoided many of the financial pitfalls other countries have fallen into and is still relatively healthy economically. It sees the Greek bailout, likely followed by bailouts of who knows how many other countries, as a continuation of the problem rather than a solution. It will not go in debt to finance these loans and German taxpayers have no interest in digging deeper to pay for them.

Like the US in 2008, Europe wants to push its problems down the road, hoping time will miraculously produce a solution. The US wants this to be a problem Europeans will solve by themselves. Meanwhile, many major banks have insured themselves against European sovereign defaults via the CDS market making their role in all this ever more suspicious. Thus once again for them it’s “heads we win, tails you lose.”

What tangled webs we weave.

Update: Paul Krugman wonders today whether events are making the unthinkable thinkable or even inevitable. Namely, it may well be that Greece's exit from the euro is around the corner, with others to follow. Carrying this out will be a huge mess but that's what we have already. Krugman's personal plan: "I think I’ll go hide under the table now."

Update 2: Paul better move over. Felix Salmon wants to join him.

Greece tottering (cont.)--updated 2x

Greece's short-term debt is now the worst in the world as its 2-year government bond went to 13.55%. Greece surpassed the previous worst bond rate of Hugo Chavez's Venezuela. This comes in conjunction with an outbreak of "blue flu" (as its called in this country) among Greek air force pilots who called in by the hundreds today as too sick to fly, apparently in protest of pay cuts and new tax measures. (Note: Greece is a member of NATO.) In any other scenario this would be considered insurrection, suggesting either civil war or a coup is around the corner.

Greece has been "promised" a bailout by the EU yet keeps getting mixed messages about what it needs to do to qualify for this aid. The economically healthiest EU member is Germany and it knows it will have to provide the the largest portion of any aid Greece receives. This notion has little popular support in Germany and local elections are coming up in a month. The other reality is that everyone knows Greece needs far more aid than the amounts that have been publicly discussed. Yet another reality is that after Greece, Portugal, Spain, Italy and possibly other EU countries will also be coming hat-in-hand for financial help.

The story is starting to get old, waiting for some conclusion. As time goes on, the last chapter is looking increasingly ugly.

Update: Yves Smith at Naked Capitalism has a good piece on the topic today titled "Greece: Dead Man Walking?" There is also a good discussion in the commentary that follows. Increasingly the comparison being used is that Greece could very well be the EU's Lehman Brothers.

Tues 04/27: Standard & Poors downgraded Greek national debt to junk status today. It also lowered its rating on Portugal's debt two notches.

To whom much has been given: an update

Wall Street bank heads testify before Congress

Yesterday the SEC indicted Goldman Sachs for civil fraud. The specific trade cited is just one example of countless others done by GS and other TBTF Wall Street banks. In brief, GS is charged with selling sub-prime mortgage-backed financial instruments which it knew would soon turn into junk. It did not disclose this to buyers, however. Further, these were created at the request of a hedge fund client specifically so it could bet against them. GS is not (yet) accused of similarly "shorting" its own product but if it is later this would be much worse.

The one individual named in the indictment is a GS VP named Fabrice Tourre or "Fab" as he sometimes calls himself, as in this email. The brains behind this particular deal, in his own words he perfectly describes the use of intellectual gifts to create a device for fraud and deception build on sheer greed:

Goldman Sachs CEO Lloyd Blankfein

More and more leverage in the system. The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!

Reportedly the Attorneys General of both New York and Connecticut are seriously considering criminal indictments against Wall Street bank executives. It's also assumed more action will be coming from the SEC and perhaps other Federal agencies. This is likely just the first chapter in what could be a very long saga--at least, let's hope so.

Update: LA Times columnist Michael Hiltzik has an excellent column on the SEC lawsuit against Goldman Sacks' and the financial chicanery that led to it. He zeroes in on the larger issue and why new federal financial regulation is essential to restore order in the world of TBTF banking:

The real issue isn't what Goldman knew or didn't know about the larger economy. The issue is that Wall Street's business model has become corrupted into one dependent on creating transactions that spin financial wheels to virtually no economic end, merely to generate fees and profits.

To whom much has been given (Sunday Reflections for April 18, 2010)

This week marks the 40th anniversary of one of the great “happy ending” stories of modern times: the flight of Apollo 13. At the time, I was experiencing the last weeks of junior high and so was more than a bit distracted. I remember it happening but it took Ron Howard’s 1995 movie Apollo 13 for me to learn the story in detail. Even prior to that, however, those events had provided a phrase for my lectionary and that of many others: “Houston, we have a problem” (though the actual words spoken by Jack Swigert were “Houston, we’ve had a problem”).

Apollo 13 was to have been the third human landing on the Moon. Instead, an oxygen tank rupture, two days after the April 11, 1970 launch, rendered the craft nearly inoperable as well as nearly unsustainable for its three-man crew. The story, told well in Howard’s movie, is one of calm ingenuity under immense pressure, by the ship’s crew and the Mission Control staff in Houston. With the absolute minimum of necessary power and barely avoiding fatal carbon monoxide poisoning, Apollo 13 did a single loop around the Moon and limped home to a Pacific splash down on April 17. Later NASA deemed the mission a “successful failure.”

Tom Wolfe’s 1979 book chronicling the beginning of the US space program focused on the first test pilots and Mercury astronauts. In his title, Wolfe deemed these men to have The Right Stuff. That “stuff” was obviously still present ten years later and was the only thing that made Apollo 13’s failure a success rather than the catastrophe many expected.

My memory of that time has other events imprinted more vividly, however. In addition to being a rocky time for my family (on top of the usual early-adolescent angst), it was also a time of great upheaval for the country. A new president, Richard Nixon, had won election promising he had a plan to get the United States out of Vietnam. After a little over a year in office, that plan wasn’t going so well.

The South Vietnamese military was not stepping up to replace American forces the way they were supposed to. In order to give our allies a leg up, President Nixon ordered an “incursion” into neighboring Cambodia to root out Communist Vietnamese forces that had taken refuge there. Nixon’s April 30th nationally televised address announcing the invasion was two weeks after Apollo 13’s return and I still remember it. The glow of Apollo 13’s rescue was quickly lost.

The following week on May 4, 4 students were killed and 9 injured by Ohio National Guardsmen at Kent State University. Some of the students were part of a crowd protesting the Cambodian operation but others were just bystanders. Almost immediately college campuses across the country were engulfed in protests and violence. Hundreds of campuses were closed as 4 million students went on strike.

My brother was a freshman at Southern Illinois University. A little over a week after the Kent State deaths he called home: “Come get me. They’ve closed the school.” My dad and I jumped in the car and made the long boring drive to SIU (Interstate 57 was only partially completed then). It certainly looked like the war had come to Carbondale. Every window in the downtown was broken. A campus building had been burned. The National Guard had set up an outpost right next to my brother’s dorm.

To borrow NASA’s language, it’s hard not to view the events of May 1970 and everything leading up to them as a horrendously unsuccessful failure. Perhaps the most well-known chronicle of America’s Vietnam experience is David Halberstam’s 1972 The Best and the Brightest. His title, like Wolfe’s, highlights the unique abilities of the people involved in this national endeavor. His title, however, is highly ironic, of course.

The question Halberstam pursues is how such able and intelligent people could have gone so horribly wrong in virtually every way: in their expectations, strategy and execution of the war. These were the “whiz kids” brought to Washington by President Kennedy and largely retained by President Johnson. Renowned leaders of business and academia, their self-confidence led them to arrogantly pursue, in Halberstam’s words, “brilliant policies that defied common sense,” which often ignored contrary judgments of lower level military and foreign policy officials. (This was something I heard of first hand from a college professor of mine who was a retired Green Beret general. Stationed in Vietnam before the buildup, his negative evaluations of the war’s prospects were not welcomed at the Pentagon. Realizing his career was at a dead-end as a result, he moved on to college teaching.)

A similar story is beginning to be told about the 2008 financial meltdown. Of course, the events of this saga are likely still being played out. It is already clear, however, that the precipitating causes of our current economic collapse have all over them the fingerprints of many of today’s “best and brightest.”

It’s obvious that the heads of the nation’s “too big to fail” Wall Street banks are made of equal parts brilliance and arrogance. It has been documented how these firms also regularly recruited thousands of the top graduates of the country’s best colleges and universities. By their own admission, many of them now admit they had one goal: make lots of money—which they did, often beyond their wildest dreams. Put to such use, however, their education and brilliance have now cost us and people around the world houses, jobs, savings and still unfolding economic misery, beyond most people’s worst nightmares.

Interviewed about their flight, Apollo 13 commander Jim Lovell was asked if the crew was ever scared or thought of dying. Matter-of-factly he said no, they were just too busy carrying out their various tasks. And even if they had run out of things to do to save themselves, Lovell went on, they knew that, until the power or oxygen gave out, they would continue to send data and report their findings so that it could be figured out later what had gone wrong. That was their job.

In Luke’s parable of the faithful steward, Jesus concludes by saying, “From everyone to whom much has been given, much will be required.” I suspect that if the Apollo 13 crew or those who had been down below in Mission Control were to hear those words, they would be received with a shrug-of-the-shoulders “Well of course.” Yet that wisdom or awareness seems to have escaped many of those in the midst of our current national crisis.

As we enter graduation season, I hope commencement speakers will use this crisis as an opportunity to convey both the blessings and the responsibilities talent and opportunity carry, and warn against the irresponsibility and harm of selfishly misusing them. If they do, those speakers will certainly have no trouble providing living examples of people who have chosen each of those paths, and of the consequences of the choices they made.

Every country for itself

Martin Wolf is the star economics writer for the UK’s Financial Times. Today on her blog Naked Capitalism, Yves Smith dissects Wolf's latest column about the conflicting interests of the world’s two greatest exporting countries, China and Germany (or "Chermany" as he dubs them), and just about everybody else. Wolf says these two otherwise very different nations are in agreement that the world needs to keep buying their products but should stop borrowing so much. This message, says Wolf, is “incoherent” and pursuing such a strategy is a sure fire formula for deflation, the bogeyman of the Great Depression.

Smith agrees with Wolf that the austerity this would impose would be both disastrous for the borrowing countries (e.g. the Unites States) but would inevitably reduce China and Germany’s exports. The bottom line is that China and Germany are right that the continuing trade imbalance is unsustainable but their solution is no solution at all. They are trying to put the problem and the solution entirely on their trade partners but it’s not going to work.

What’s happening, according to Smith, is that all the participants in the global economic mess are each trying to resolve it on their own terms which, of course, can’t possibly work. An international problem needs an international solution but thus far there’s not much interest in that because politicians are listening only to their own constituents--a sure path to disaster. In Smith's words:

This battle of wills is rooted on every front in domestic politics, plus a collective inability to recognize that our current version of globalization is no longer workable. But we appear likely to test the current system to destruction rather than come up with less drastic ways out.

Mass delusion (updated)

Michael Lewis is one of the economics and finance journalists who are doing yeoman's work reporting the Great Recession and its origins. His piece "The End of Wall Street's Boom" was an early exposure of the insanity that had descended on New York's investment bank culture.

Sunday Lewis was on 60 Minutes in a great interview with CBS correspondent Steve Kroft. The nuance Lewis provides is to look past the good-guy, bad-guy dimension of the story. There were/are plenty of "bad guys"--no doubt about that. The questions are why were there so many and why was is it so easy for them to do such bad things? As Lewis says:

I'm afraid that our culture will come to the conclusion, 'cause it's always the easy conclusion, that everybody was just a bunch of criminals. I think the story is much more interesting than that. I think it's a story of mass delusion.

Indeed, in some ways, it was a delusion that gripped most of the country. Bernard Madoff looks more understandable once you realize to what extent the whole investment and credit culture had become one giant Ponzi scheme. Who, for example, wanted to blow the whistle on the sub-prime mortgage game when, as President Bush had declared, we were headed for the "ownership society"? Why couldn't everyone own their own house? Of course, what regulators or legislators wouldn't do in an organized fashion, the markets eventually took care of in a painful and chaotic crash.

Listening to Lewis's story, I keep thinking, "You can't make this stuff up." Watch and learn and then laugh or cry, as you choose. The videos are available below (with annoying Lipitor commercials) or you can read the transcript at the CBS News website. (Hat tip Barb for alerting me to this broadcast.)

Update: A guest post on Yves Smith's Naked Capitalism (see my previous post), draws attention to an important point Lewis makes about "the delusion": people involved had huge financial incentive not to see what was going on. Here's Lewis, preceded by Upton Sinclair:

Upton Sinclair said:
"It is difficult to get a man to understand something, when his salary depends upon his not understanding it."

Bestselling financial writer Michael Lewis is now saying the same thing. In an interview with 60 Minutes, Lewis said:
"Wall Street is able to delude itself because it’s paid to delude itself. That’s one of the lessons of this story. People see what they’re incentivized to see. If you pay someone not to see the truth, they won’t see the truth."



Watch CBS News Videos Online


Watch CBS News Videos Online

Indefensible Men

In the previous post and elsewhere, I have written about the culture of Wall Street and its role in the 2008 economic debacle. Here is an amazing post by Yves Smith at her blog Naked Capitalism. It was originally a magazine article and is a LONG read but well worth the effort. The reader discussion that follows is also astonishingly excellent. Starting the post and in the comments you will find quotes from Reinhold Niebuhr, Hannah Arendt, George Orwell, and others to give you some idea of the level of conversation.

In brief, “Indefensible Men” makes clear the enormous economic and cultural distortion that Wall Street has become. “Psychopathology” is the word that comes up more than once in the comments and it is not at all inappropriate. This is a world most of us have no experience with and can hardly imagine, yet it is impacting all of our lives and indeed much of the world—and not for the better. As the responders make clear, however, doing something about it will be a monumental undertaking.

We are in the midst of an economic, political, and cultural crisis of the first order. If it is at all possible, I encourage you to find an hour or so to read this piece and the conversation that follows.

Dream big (Sunday Reflections for March 14, 2010)

Your old men shall dream dreams, and your young men shall see visions. (Joel 2:28)

A little after 8 am, five days a week 52 weeks a year, I get in my “In Box” an email newsletter from KurzweilAI.net. This is a web site created by inventor, author and futurologist Ray Kurzweil. (If you’ve ever used an electronic keyboard or voice-recognition software, you’ve probably made use of something he has a patent on.)

Kurzweil is a dreamer but, as his life has shown, he also has the ability to turn dreams into reality. Now in the latter part of his life (or maybe not “latter” if one of his dreams comes true) he is focusing most of his attention on creating dreams, big dreams—visions of the future both near and distant. Many of his futuristic visions have been dismissed by others as fantasy but not all. And given his past accomplishments many hesitate to dismiss anything he imagines as “impossible.”

Each of the little e-newsletters he sends out has about a half-dozen story summaries, with a link to click on to find the full story if it interests you. These stories are all about things happening right now in countless fields of research and technology. The topics include biology, medicine, nutrition, energy, computing, transportation, physics, astronomy, climatology, communication, robotics, and more.

Many of the stories are truly amazing but for me what’s most impressive is simply the sheer volume of the stories. They arrive day-after-day so that you can’t help but thinking, “Wow, there’s a lot going on in the world.” And the result of that is to make me really—hopeful.

That’s important because we live in what can be a very discouraging time. We can be discouraged by our own personal circumstance or by the economic gloom that has covered much of the developed world. I know it affects me. It’s obvious that—unlike the TV commercial—there is no Easy Button to get us out of the financial and economic mess we’ve gotten into. We’re going to be here for awhile.

Yet as this newsletter shows, around the world people are working to solve problems and make our lives better. Most of these people are working with little recognition—they fly below the media’s radar. Yet they are doing truly remarkable things, many of which someday (and in many cases it isn’t far off) are going to make this world of ours a better place to live.

In many ways Kurzweil provides little glimpses of humanity at its best, of human beings fulfilling what we imagine is our ideal function and purpose: helping each other to live better and happier lives. It brings to mind those early and simple instructions in the Bible: "till the garden and keep it" and “love your neighbor as yourself.”

Obviously, however, that isn’t all that’s going on in our world. Indeed, what makes these newsletter articles stand out is that they are often so unlike what is in the news much of the time. Yet one other hopeful thing is that we seem to be asking serious questions about why that is. We are wondering about the ways we are spending our time and talents, energy and resources. We are asking serious questions about our collective values and priorities.

The 2008 financial meltdown has caused a harsh spotlight to fall on Wall Street and for good reason. Certainly the causes of the Great Recession are varied and complex but the Wall Street investment “too big to fail” mega-banks must take a lot of the blame. Their ever more complicated, multi-trillion dollar financial schemes and products (financial weapons of mass destruction Warren Buffett has called them) collapsed like a house of cards, very nearly bankrupting the country and much of the rest of world. The reverberations and repercussions are not over yet nor, apparently, are many of the risky bank practices that got us into this mess.

While not necessarily justifying their previous behavior, bank leaders have argued that these institutions provide a vital service to the country and the world. Goldman Sachs CEO Lloyd Blankfein has gone so far as to say they are doing “God’s work.” The importance of banking services, especially making available investment capital, is not disputed. What is in doubt, however, is whether these banks are, in fact, providing those services. Rather, their top priority seems to have become not making loans but making money and lots of it—mindboggling amounts of it—however they can.

Wall Street’s banks are the most extreme examples but they are causing many to ask some basic questions about our economy and our society, our needs and priorities. For instance, there are many enormously talented people at these banks. They and their talents are a great resource—is what they are doing really the best use of that resource for our society?

Even more basic: what values are we teaching our children? What should their priorities be? Do we still believe making money and being happy are one and the same? What should be the goal of their education? If we say it is to be able to get a job, how do we deal with the fact the many of today’s jobs will cease to exist in the near future and many of the future’s best jobs haven’t even been imagined yet? And with our ever-increasing productivity and efficiency, is “having a job” even going to be the best way to think about adult life for future generations?

It has perhaps always been true that one of humanity’s greatest obstacles has been lack of imagination. We are creatures of habit. Those who ask “what’s over that hill?” or “what if we did it this way?” have more often been laughed at or scared off than listened to. What is remarkable about the world’s recent history is that such people have been given much more credibility and opportunity. Still, changing habits and ways of thinking are hard for all of us.

My daily e-newsletter from Ray Kurzweil tells me, however, that countless, mostly nameless, people are asking questions and searching for answers in a quest for a better life for all of us. Are they being encouraged? Are there enough investors willing to take a chance on their research and to make their discoveries reality? Are there other talented people who could be doing such things but who got misdirected into jobs or life paths that really aren’t benefiting themselves or the rest of us—or are benefiting themselves without consideration for the rest of us?

Great things ARE happening. Great discoveries are being made. Great problems are being solved. Imagine now if these weren't just stories in a newsletter but it was everyone’s daily reality? A dream? Perhaps. But dreams are where great things always begin. And this dream is based on belief in the greatness and goodness of the creation in which we live and of which we are a part.

We're all Greek now

Jeremy Warner is Assistant Editor of the UK’s Daily Telegraph and a highly regarded economics commentator. In his most recent column he looks down the tracks to see what’s coming and what he sees is not very reassuring. Basically the world’s economies are looking in the mirror and seeing—Greece.

The fear is not so much that Greece will set off some kind of financial chain reaction. The world’s economies are not a string of dominoes. Rather, there is a growing awareness that Greece’s predicament, while extreme, is not all that different from that of most of the economies staggered by the Great Recession. “Greece may be in its own particular class of basket case, but it is also just a harbinger of things to come for all fiscally stretched advanced economies.”

As Warner points out, while the global economic contraction has been severe, the financial cataclysm feared by many two years ago did not materialize. Wall Street has rebounded and there is debate about what date will be chosen as the official beginning of the recovery. And yet . . .

. . . there is a continued air of unreality about the whole thing. Everywhere in the West, and even in China, the “recovery” – such as it is – floats on a sea of public support, with the hoped-for rebound in underlying private-sector activity as elusive as ever. More worrying still, the stimulus is beginning to peter out of its own accord. Conscious of the dangers of ending support prematurely, many governments would hope to run large deficits for quite a bit longer. Impatience in the bond markets is fast closing off this option.

Here in the US the affects of the federal stimulus will soon be waning. The Federal Reserve has announced it will cease this spring its massive purchase of mortgage related assets. Interest rates are sure to creep up, likely causing real estate sales and prices to fall still further. The budgets of countless state and local governments are in shreds, yet budget cuts and tax increases are both loudly protested. Unemployment remains stubbornly high and if the recession develops a “double dip” this summer or fall, as many economists fear, it will certainly go higher.

What Warner is saying is that no matter how central governments shuffle and deal their fiscal cards, serious economic adjustments are now unavoidable. Greece is the first country to painfully discover this but it will not be the last.

As the drug-induced stupor of public support wears off, the pain will be almost universally felt. Public policy may have smoothed the comedown, but it hasn’t permanently suspended it. If there is one positive to be drawn from these widening deficits, it is this: they have at least focused attention on the intergenerational debts that we threaten to heap on to our children, and provided the wake-up call needed to address them. Sadly, the necessary structural reforms must begin with our unsustainable pension and healthcare costs. Which means that working longer and saving more will become the defining mantras of the next decade.

Alice in Wonderland economics

Via Mike Shedlock we learn of another example of the craziness of today’s financial world. The Nevada Federal Credit Union is paying its customers to withdraw their money. Yes, their message is: Please take your business elsewhere, we don’t want it. Why? Because it is costing them to hold money. They cannot find any worthwhile loan opportunities (it is Nevada, after all) and they can't engage in the high risk investing/gambling that the big boys on Wall Street can. They are paying more in required deposit insurance (.4%) than they can earn with short term Treasuries (.25%).

Here is a simple example of how artificial is the Fed’s current policy of holding interest rates at nearly zero--in other words, more smoke and mirrors. Economists and financial bloggers like Shedlock have been saying for a couple years now that most government interventions to right our economic ship are counterproductive. Their goal is to restart the country’s economic engine but do nothing to fix its problems. When your car needs a tune-up, if not an overhaul, pouring additives in the tank may get you a few more blocks or miles, but you’re still going to end up on the side of the road with the hood up.

No "easy" button

Quote of the day:

Our economic future is more and more a product of the political choices we make, and those are increasingly difficult. We have no good choices. We are left with choosing the best of bad options. Some countries, like Greece, are now down to choices that are either dire or disastrous. There is no “easy” button.

From "Between Dire and Disastrous" by John Mauldin on Barry Ritholtz's The Big Picture. The letter is somewhat long but a clear and succinct description of the Greek economic conundrum and its consequences for the whole developed world. In brief: no country is very far from being the next Greece.

You also go into the vineyard (Sunday Reflections for February 14, 2010)

He went out and found others standing around; and he said to them, “Why are you standing here idle all day?” They said to him, “Because no one has hired us.”' He said to them, “You also go into the vineyard.” (Matthew 20)

I’m old enough to have lived through a few recessions. I’m also old enough to have parents who lived through the Great Depression. The current economic downturn is being viewed as somewhere in between these categories, hence its designation as the “Great Recession.”

The cover story of the current issue of The Atlantic is a disturbing report on the long-term effects of this recession’s worst consequence: our persistently high unemployment. The article summarizes the extensive body of research on the experience of unemployment. This includes unemployment’s consequences years after the experience, for individuals, communities and society.

We all recognize the emotional stress of being out of work. Research shows, however, that it is probably more devastating than we imagine.

Andrew Oswald, an economist at the University of Warwick, in the U.K., and a pioneer in the field of happiness studies, says no other circumstance produces a larger decline in mental health and well-being than being involuntarily out of work for six months or more. It is the worst thing that can happen, he says, equivalent to the death of a spouse, and “a kind of bereavement” in its own right. Only a small fraction of the decline can be tied directly to losing a paycheck, Oswald says; most of it appears to be the result of a tarnished identity and a loss of self-worth. Unemployment leaves psychological scars that remain even after work is found again, and, because the happiness of husbands and the happiness of wives are usually closely related, the misery spreads throughout the home.

Persons unemployed early in their adult lives are more prone to heavy drinking and depression years later. The lifetime earnings levels of young people who enter the work force during times of recession are permanently reduced compared to those who begin working in economically healthy time. And the significantly higher unemployment rate of men versus women is disruptive to both families and communities.

The weight of this recession has fallen most heavily upon men, who’ve suffered roughly three-quarters of the 8 million job losses since the beginning of 2008. Male-dominated industries (construction, finance, manufacturing) have been particularly hard-hit, while sectors that disproportionately employ women (education, health care) have held up relatively well…. At the time of this writing, it looks possible that within the next few months, for the first time in U.S. history, women will hold a majority of the country’s jobs.

Higher unemployment rates for men contribute significantly to violence, crime and drug abuse. Neighborhoods and communities that had seen real progress in these areas are now watching this progress reversed. Domestic violence rates are increasing. Out-of-wedlock births are increasing while marriage rates are declining.

Compounding the effects of this recession is that for most people it is exacerbating downward economic trends underway for at least a decade.

In a Pew survey in the spring of 2008, more than half of all respondents said that over the past five years, they either hadn’t moved forward in life or had actually fallen backward, the most downbeat assessment that either Pew or Gallup has ever recorded…. Median household income in 2008 was the lowest since 1997, adjusting for inflation.

The article’s author concludes that, while still mostly unseen at this point, the length and severity of this recession is causing serious disruption to personal lives and communities across the country. These consequences will be broad and deep.

We are living through a slow-motion social catastrophe, one that could stain our culture and weaken our nation for many, many years to come. We have a civic—and indeed a moral—responsibility to do everything in our power to stop it now, before it gets even worse.

There is wide acceptance that this recession is “different.” We are not just experiencing a hiccup in the business cycle but a serious breakdown in our economic engine. The recovery will likely be long, slow and uneven. Many communities and industries simply will not come back to their previous conditions.

This Great Recession is also raising questions about some of our economic realities and assumptions. The devastated construction and finance industries grew—with government collusion—to compensate for stagnating incomes and the loss of previously well-paying manufacturing jobs. Rather than face these problems directly, there is yet strong temptation to re-inflate these essentially nonproductive “bubbles.” In another case of economic denial and fantasy, government at all levels have been running ever-increasing deficits and accumulating enormous unfunded employee benefit obligations. None of this is going to be fixed quickly or easily.

But there are even more fundamental questions being asked. Why are so many communities in near-permanent states of depression? Why are economic inequalities growing? Why are we unable to have economic prosperity that doesn’t endanger the ecological health of the planet? Why are so many businesses focused on quarterly profits rather than long-term growth and development? Why can we not provide affordable health care to all our citizens? Why are there such enormous disparities in education? Why is our political process paralyzed when it comes to dealing with these problems?

The last question may be the most telling. The answer to it is that dramatic changes in our culture and indeed the world have resulted in new challenges for which there are no easy answers or consensus. Globalization is improving the standard of living for millions of previously impoverished people. At the same time, however, it is lowering that standard for millions of previously well-off people, as well as replicating much of the social chaos and ecological damage previously experienced in the developed world.

But the real challenge is even more fundamental. Technological innovation is creating such high levels of efficiency that in many areas of the economy, human labor is nearly superfluous. Bluntly, we are running out of things for people to do. This may be more recognized in Great Britain where what we call being “laid-off,” they call being “made redundant.” Yet surely it is now an accepted human right that no one can be considered “redundant.”

The challenge for us as a society is to reimagine what constitutes valuable work. There is no end to useful things people could be doing. For those things to constitute gainful employment, however, the benefits of economic efficiency have to be redistributed. Rather than making a relatively few investors fabulously wealthy, rather than constantly building and shrinking enormous corporate and government bureaucracies, rather than building ever-more houses and shopping malls, rather than manufacturing and marketing evermore pointless toys and gadgets—perhaps we need to be asking some really basic questions: What makes us happy? What makes for a good society? What do we want our world to look like?

For the truth is (but which we are too startled to realize) the human race is on the verge of making those questions, about which ancient people only dreamed, ones we can actually answer and do something about. In other words, as a species we are rapidly entering a whole new world which is asking of us a very different question than we faced before: Now that we don’t have to work to stay alive, what do we want to do that make us happy? Our problem, as so often happens, is that having finally gotten what we dreamed of for so long, we aren’t sure now what to do with it. Somehow, though, I think that’s a good problem to have and in solving will make us better people.

But what if they're wrong?

Right now the markets are doing their best yo-yo imitation again, this time in response to the PIIGS debt crisis (PIIGS=Portugal, Ireland, Italy, Greece, and Spain. Eastern Europe and the Baltic states also have some serious financial problems. Many don’t think the UK is in all that great shape, either. And then, of course, there’s Dubai. Oh, and did I mention Turkey?) The immediate concern is Greece, which is running an enormous deficit and may soon be unable to finance its debt in the bond markets, thus risking a default. Greece’s economy is relatively small but everyone’s fear these days is of contagion, a chain reaction. One default will cause interest rates to spike for all the other unhealthy countries, risking their defaults. Pretty soon a third of the EU is insolvent, overly exposed banks are tottering, and it’s fall 2008 all over again.

US markets are way up today (though still bouncing around quite a bit) on the news that the EU has agreed to “help out” Greece. Is this a bailout? Details will be worked out in coming days, the new EU economic affairs commissioner says. And the devil will certainly be in the details. German tax payers are not excited about paying for Greece’s fiscal irresponsibility—but the Greeks aren’t either, apparently. The government has only just begun reigning in spending and already there are strikes with many more promised to come. And if Greece is bailed out, who else will be coming to Strasbourg (EU headquarters) hat-in-hand?

By why should we care about Greece, or the PIIGS, or even Europe? Near the end of his life, Otto von Bismarck is reported to have said that the next Great War would begin over “some damn fool thing in the Balkans.” In 1914, of course, that is exactly what happened. Today’s economic interconnectedness is not unlike the diplomatic alliances which quickly pulled most of the world into war. The lack of real understanding of the consequences of those connections is also similar. What would happen if Greece defaulted on its debt (or Portugal or Spain or Dubai)? No one really knows, and for that reason no one wants to try it and find out.

The United States remains the world’s single largest economy but it has obviously been rocked on its heels. There is some awareness by the average worker/voter that these global imbalances are playing a role in our domestic economic problems. For a generation now we have known that our dependence on foreign oil is a problem. For nearly as long we have watched with alarm the movement of manufacturing overseas to countries with much lower labor costs. With the economic reversals of the current recession, real wages and living standards have been flat for the past decade. Some would argue they are actually in decline.

On the positive side China and India, the two previously impoverished and largest nations on earth, are booming. Of course, the resulting prosperity is being very unevenly distributed, and they are both experiencing all the other complications of modern industrial economies, including urban congestion, pollution, crime, rampant political corruption, and social disruptions of all kinds. Brazil, Vietnam and other Third World countries are having similar experiences. And they all view with suspicion the developed First World’s sudden concern with global warming and greenhouse gases—which the developing countries are all now producing in abundance.

The real issue, however, is much bigger than Greece, or the PIIGS, or even the EU, for that matter. We are all in a global economy now and no one really knows what that means. We are learning as we go along, and that’s not a particularly comforting realization. We know there are major global economic imbalances and that they are major problems. Two disturbing things about that reality are 1) the economic and political experts have no idea how to right those imbalances and 2) those imbalances are getting worse. This is not a good thing.

*    *    *

The official story of both the previous Bush and current Obama administrations is that, through their daring and aggressive actions, the country was pulled bank from the brink of economic catastrophe. Now we must simply wait for the admittedly painfully slow recovery, and then our economic ship will be righted and sail along happily once again. They may be right. There are also reasons to worry that they are partially, or even very, wrong.

What’s of concern now is not just disagreement on the cause of this “Great Recession” but even what really happened in 2008. A helpful explanation I read recently is that government officials see the events of 2008 as essentially a “panic,” an economic psychological event. What’s necessary then is to restore confidence, calm the markets, and get everyone to start investing, hiring, and spending as before.

There is another unofficial view, however, that the situation is more serious—perhaps much more serious. For those who espouse this position, 2008 was not simply a panic but a real economic crisis, exposing significant problems which need to be dealt with now if we are to avoid similar or worse crises in the future.

One way to summarize the crisis viewpoint is that the economy is being seriously distorted by attempts to patch over the consequences of the global economic imbalances. This is what is causing the “bubbles,” the artificial markets of recent years that have inflated and then disastrously blown up, e.g. the housing bubble most recently and the tech bubble before that. Bubbles give the illusion of growth and prosperity for awhile, and then they pop. In the aftermath, the economy as a whole has moved little, if at all, but with significant resulting chaos and disruption. The housing excesses (in both quantity and quality) in the 2000s were just as economically pointless and unproductive as the tulip bulbs of 17th century Holland.

The concern is that the 2008 TARP bailouts and 2009 deficit-financed stimulus have (again) swept our economic problems under the rug. The current run-up in the stock market is at least a mini-bubble, the result of the government pumping billions of dollars into the economy with nowhere for it to go. While everyone acknowledges too many houses were built at too high prices, we are again hoping for prices to rise and home construction to rebound. Consumer wages and assets have fallen yet we are again hoping they will start borrowing and spending. We just need to get the economic juggler juggling again (paying no attention to those marbles rolling around the floor) and everything will be fine.

The causes of the 2008 economic convulsion will be analyzed for years to come—which is not particularly comforting to realize. To this day there is no consensus among economists or historians on either the cause of the Great Depression eighty years ago, or on what finally pulled the world out of it. The conventional answer to the latter, a world war, is also hardly reassuring (but that, too, is disputed).

What was catastrophically unique about the housing bubble was that it was fueled by an enormous growth of credit. Most of that debt has been transferred to the federal deficit or is still hidden on the books of the TBTF banks via fantasy asset valuations. The story is much the same across Europe, especially in the PIIGS and the UK. The strategy seems to be to play an international high-stakes shell game: keep shuffling the bazillions of dollars of global debt around so no one will notice. In the meantime, wait for tax revenues and asset prices to rebound and—poof!—the debt will disappear.

Needless to say, there is a lot of doubt this scheme is going to work. Or the strong suspicion is that it will only work by the creation of yet another bubble, with the same disastrous results. This strategy is derisively described as “kicking the can down the road.” Of course there is the very real possibility that the can will be run over and flattened before it gets to its “destination,” as Greece’s problems are rudely reminding everyone.

Since this scheme requires the rebuilding of “confidence,” Western leaders are unanimously insisting that the corner has been turned and recovery is underway, however slowly. None will publicly express doubt that the juggler can keep all his balls in the air. Joining them in this phalanx of optimism are, of course, the world’s bankers and financiers (including, very likely, your own investment advisor). Their survival depends on them being right.

But what if they’re wrong? Given they’re huge miss in not anticipating the most recent economic meltdown, that has to be recognized as at least a possibility. And there is ample reason to suspect it is much more than just a possibility. What’s scary, though, is that it’s not at all clear what the alternative strategy should be.

Most of those who say we are in the midst of a serious economic crisis believe we need to stop playing financial games and swallow the necessarily painful medicine. But then what? Big banks are allowed to fail, inept businesses go bankrupt, prices fall even further, government shrinks, wages fall, unemployment rises—and then where are we? The assumption is, that like a diving plane, the economy will eventually resuming flying at a new, though lower level. But what if the economic pilots can’t pull the nose up in time?

Another possibility, it seems, has to be at least considered: namely, that there is no answer. Is it possible that our long-running, free market capitalist system has finally run its course? It may not just be irony that within less than a generation of the demise of communism, its rival system, capitalism finds itself on the ropes. Perhaps the longer view of history will be that something fundamental about industrial society came unraveled at the turn of the millennium.

This doesn’t mean we are necessarily on the verge of some economic cataclysm or dystopian future. It could be the world is on the verge of something new and different—and better. Wrenching global economic disparities and ecological deterioration certainly argue that a better system could well be awaiting discovery. Getting there, however, as history and present events indicate, will likely involve significant trauma and upheaval. In any case, it may well be time to stop patching the old wineskin and instead start looking for a new one.

Update: Baseline Scenario has a comprehensive summary of its revised global economic forecast, which corresponds to many of the issues I address above. Its final point: 22) We are steadily becoming more vulnerable to economic disaster on an epic scale.