Friday, May 28, 2010


Why is it that in the states of California or Wisconsin if you start this ...

or light the match that leads to this ...

... you are "liable to the owner of the property for the damages to the property" (CA) or "shall be liable for all expenses" (WI) caused by the fire?

But if you do business in the Gulf Coast and do this ...

and cause this ...

... Republicans will fall over themselves to limit liability? Just asking.

- Mark

P.S. Check out this satellite photo of the Gulf of Mexico from Huffington Post (click to enlarge) ... Additional photos here.

Thursday, May 27, 2010


Some of you might recall that back in October of 2009 I wrote "You Can't Turn a Pinto Into a Mustang." At the time I was using Ford cars to explain how - in the real world - you can't take a piece of crap car (Pinto) and suddenly revalue it and get classic car (Mustang) prices. That is, of course, unless you're one of the financial institutions that can take advantage of a Jan. 1, 2009 government ruling which says "Go ahead, revalue the toxic crap you own ... we don't mind."

In my October post I explained (by using Ford cars as a metaphor) how the Financial Accounting Standards Board's (FASB) 2009 ruling effectively allows America's financial institutions to ...

Level I: Price their financial instruments according to everyday market prices, known as the "mark-to-market" method.

Level II: Price their financial instruments according to what similar assets might sell for if more of them were around and/or sold. On this, think assessed value on hard to value antiques or one of a kind goods.

Level III: Ignore Level I and Level II pricing methods and simply make shit up ... known in the accounting world as the "mark-to-make-believe" method. 

All too often, it appears that America's financial institutions are using Level III mark-to-make-believe methods to make up their prices. What I didn't explain at the time are the details behind the game. Here's how it's happening ...

It turns out that when FASB implemented "Statement 157" on January 1, 2009 - in addition to directing financial firms on how to assess "fair value" for their goods (Levels I, II, or III) - it also left a loophole wide enough for William "The Refrigerator" Perry to walk through.

More specifically, FASB rules allow America's financial institutions to ask for a pricing waiver on financial instruments if they don't like the numbers from Level I or Level II methods. This is akin to a homeowner who hopes to secure a loan on their house being able to say, "I don't like the value my house was assessed from the Level I or Level II methods. I want a waiver so I can apply mark-to-make-believe (Level III) methods ... yeah, I want to let Peter Rabbit assess the value of my house."

Put another way, you get another shot at reassessing the value of your house at a price that has nothing to do with what it's really worth. Making matters worse, other financial institutions, the American taxpayer Federal government, and other unsuspecting market players have to play along with the charade and accept the price too.

To be sure, the financial firms have to fill out some extra paper work to gain access to the mark-to-make-believe (Level III) pricing method. The FASB does have it's standards (wink, wink). But what's a few more fairy tales penned in an economy that already has an Alice in Wonderland character to it? Once you're down the rabbit hole does it really matter if you burrow deeper?

Gaining access to mark-to-make-believe (Level III) method is the result of a loophole that says if your financial asset is exposed to "forced liquidation or distress sale" conditions you can apply for a waiver. As you might guess, given the market conditions of the past year, virtually any toxic financial instrument created on Wall Street could qualify for a Level III categorization, as long as the financial firm is willing to do the paper work.

And just like that, a toxic CDO or an SIV (which are akin to financial toilets), can be revalued to some made up number that makes Wall Street's financial mandarins feel better about themselves. More importantly, because of Tim Geithner's hare-brained scheme - which allows financial firms to use their toxic crap as collateral for new money - financial firms can dump their repriced assets on the American taxpayer Federal Reserve for new loans, credit, and profits.

To be sure, the market value of the product may still be in the toilet. But who cares? As long as the book value of the instrument hasn't collapsed we can all make believe that our banks are doing just fine. Thank you FASB.

In the end, it's because of FASB (which is under the SEC) that Wall Street's biggest players (1) have been able to maintain the illusion that their assets and their financial institutions are worth more than they really are, and (2) can go to Uncle Sam for more loans and credit guarantees, using collateral that's toxic and/or has tanked in value.

So, yes, if you work in Wall Street's Alice in Wonderland world, it appears you can turn a Pinto into a Mustang.

-  Mark

Wednesday, May 26, 2010


As usual This Modern World captures the derivative concept better than most ...

 Click to enlarge.

- Mark

Tuesday, May 25, 2010


It's no secret that NASCAR got it's start back in the days of prohibition. Illegal moonshiners and whiskey runners, trying to outrun the law, would find ways to make their cars faster than those of the local police. And they did. Today's NASCARs are marvels in mechanical engineering.

While the cars have gotten faster, the vehicles used on the NASCAR circuit aren't allowed on our public streets for a reason. They're too damn fast, and they aren't up to code (though they can withstand a crash better than the average car). In fact, laws on the books prohibit you and I from tampering with our cars in ways that would make them too big or too fast for public roadways because of the temptations and affiliated dangers that come with having access to all that speed and power.

It doesn't matter if you are a professional racer, over time even the best can crash and burn. Worse, they will take even good drivers out with them.

When you do get car that can outrun the police speeding laws, the highway patrol, the flow of traffic, etc. all work to keep you in check. Put another way, as much as Americans love NASCAR and going fast, we all understand that you can't have people running around driving like NASCAR drivers in suped up automobiles. Even Germany's famous autobahn has 'coercion' and other rules that are enforced by the autobahn police.

This is what makes the current financial reform legislation so frustrating. We know that having "too big to fail" (TBTF) financial firms isn't good for the nation. We saw this in 2008. We saw variants of this in 1987 and in 1929. Yet the current financial reform bill being discussed in Congress does little to nothing to rein in the stupidity and greed we saw before 2008 by the TBTF banks. Indeed, private bank analysts are even suggesting that the financial reform bill won't have any teeth at the end of the day.

It's as if, after causing a series of epic crashes on our nation's highways, we said ...

... "No problem, let's allow the NASCARs, the muscle cars, and other Speed Racer wannabes out on the public road ways. They're good 'ol boys anyways. Nothing's going to happen. We can trust them, this time."

Then we have the fact that the financial reform bill does little to nothing to stop the big banks from trading in highly speculative derivative products, with taxpayer backed (FDIC) money. In a few words, banks can continue using your money deposits - which are government insured - to make market bets that only the banks profit from. If the market tanks, and the banks go under again (and they will), it's you and me the FDIC who has to come in and save the TBTF banks, again (under the guise of insuring your money, of course).

And, No, the provision in the finance reform law that says banks will be liquidated and the executives will be fired if they go belly up (again) is no real safeguard. There were already provisions for this to happen. We didn't use the law in 2008 because ___________________ (fill in blank). What makes us think we'll use it the next time? Because we learned our lesson after 2008? Give me a break.

The financial reform bill currently making it's way through Congress essentially tells all the financial Speed Racer wannabes, "Don't worry. If you crash, or make other people crash, we'll pick up the tab through our 'Speed Racer Wannabe' insurance program" (otherwise known as FDIC).

Look, at the end of the day, if you want to supercharge a car and race it you can always go to a local speedway on the weekend, or beome a professional and join the circuit. The point is, you're the one on the hook for your need for speed. Similarly, if you want to claim to be a super capitalist because you make supercharged market bets you're supposed to use your own damn money. And then you're supposed make market bets in a way that affects only you when your bets don't pay off.

Is this really hard to understand?

- Mark


This Jon Stewart clip helps explain our BP problem too.

Whether we use The Three Stooges or Jon Stewart to help explain the oil spill in the Gulf one thing is clear: Whether it's crony capitalism or a broken government America is being taken for a ride by corporate America and their friends in Congress. As if we needed a reminder after watching Congress and the Obama administration fall over themselves to reward Wall Street for their stupidity and greed ...

- Mark

Monday, May 24, 2010


From British Petroleum's initial efforts to downplay and hide the effects of the oil spill, to the efforts of Congress to posture over who's going to have the toughest sounding sound byte over making BP pay (with no clue about what to do), to the seeming inability of the Obama administration to challenge corporate America when they screw things up, what we're really looking at in the Gulf Coast region is simple ineptitude and buck-passing at it's finest. The fact that America's political and corporate elite are jockeying for King of the Spill position while the Gulf Coast region's marine life slowly dies off only makes matters worse.

While it's no laughing matter, this piece from The Three Stooges helps explain what's happening in the Gulf Coast. You'll understand once you see Curly's great find - a "water-let-'er-outer" - 5 minutes into the clip. Enjoy.

- Mark

P.S. For the record, Moe represents the federal government because he's trying to direct things, while deflecting the blame for doing nothing. For his part, Curly represents BP because he makes a mess of things, even after claiming to fix the boat. Finally, Larry represents Congress because he's doing what he can to look important, while doing nothing to make things better.

Saturday, May 22, 2010


Bill Maher takes a look at Kentucky's Republican Senate candidate Rand Paul ...

Rand Paul's candidacy, the whacky statements from their two dueling banjo U.S. Senators (Bunning & McConnell), plus Kentucky's Creationist Museum, tells me that Kentucky just might be making a pitch to become the movie site for the sequel to Deliverance ... they can call it, Deliverance by Paul: Watch Out Banjo Boy.

Seriously, Rand Paul seems so out of step with events in the 20th century, that it's hard to see how anyone could take him seriously for a leadership post in the 21st.

- Mark

Friday, May 21, 2010


This is definitely not good news. The fact that the Federal Reserve is lending money to Europe that might not be paid back, at rock bottom prices, tells me that our financial mandarins realize that our economic mess is not confined to the idiots on Wall Street. While it may seem improbable that the Europeans wouldn't pay us back at this point, the fact that we're trying to create a risk free market world after the 2008 meltdown tells me that we're in deeper trouble than many suspect.

For those of you familiar with the 1930s - and who have read "The Fed's Currency Swaps" - you wouldn't be off the mark if you thought about the Ottawa Conference in 1932, when the global economy began breaking up into competing currency blocs. Apart from the fact that we're now almost two years away from the meltdown, here are the similarities between 1932 and today:

1. 1932 ... The British tried to manage their way through the Great Depression by creating favorable conditions for their dominion states, which would benefit the British economy.
1. 2010 ... The United States is trying to manage their way through the 2008 Market Meltdown by creating favorable conditions for their "dominion" states in Europe, which will benefit the U.S.

2. 1932 ... England's concerns over paying more money because of higher tariffs (Smoot-Hawley) led England and her dominion states to drive down their dollar exchange losses by essentially abandoning the dollar to form a new "sterling bloc." They did this because no one really trusted "the market" or the irresponsible policies of the Great Powers at the time. Others followed suit, which led to currency wars.
2. 2010 ... Europe's concerns over paying higher interest rates for dollars led the Federal Reserve to drive down Europe's interest rate costs with dollar swaps (essentially unsecured loans), which have done little more than dump more dollars into Europe. The U.S. has done this because no one really trusts the market players or the irresponsible policies of Europe and the United States to keep the price of the dollar stable in Europe (or around the world). When others (China, Russia, etc.) decide they will retaliate, watch out.

3. 1932 ... In the process, England and their dominion states essentially admitted that the gold standard had collapsed.
3. 2010 ... In the process, the U.S. and Europe are essentially admitting that market cues are unreliable and that the dollar (and EU) may be collapsing.

Ottawa 1932 was the shot that preceded the arrival of competing currency blocs. Put another way, with the U.S. desperately trying to save it's "dominion" states in the aftermath of the 2008 market collapse, it's efforts just might put the world's monetary system on the road to meltdown.

The U.S. might be trying to save the day (as did the British in 1932) for their dominion states by playing with currencies and the cost of money. But everything may still come tumbling down because the excesses of market players today, coupled with short-term policy prescriptions (forming a "sterling bloc" in 1932 vs. offering rock bottom interest rate dollars to Europe in 2010), are akin to the false bravado that emerged around a sinking Titanic.

The details may be a little more complex than I have offered here. But the bottom line is this: We're screwed.

- Mark

Thursday, May 20, 2010


Yesterday's election results are interesting because it demonstrates that the Tea Party Mojo that Republican Party members like to claim as their own might be little more than Hate Talk Radio (+ Fox News) smoke & mirrors, at best. The energy that got President Obama elected is still alive, and might be the real center of our political universe. There's two reasons why this may be the case.

First, the Republicans lost a congressional seat in a district that John McCain won to Democratic candidate Mark Critz. This means that among the four congressional special elections held since President Obama was elected, Democrats have (1) won a seat Republicans had held since the 1850s (NY-23), (2) held Kirsten Gillibrand's tough seat (NY-20, a Republican leaning district), and (3) won in the only district in the country that McCain won after Kerry had carried it in 2004 (PA-12).

This suggests that, for all their talk about fearing Obama, Pelosi, Democrats and deficits (a Bush legacy) the American public just might fear letting the Republican Party have another bite at the apple even more. This is not good for a party that's been popping off about taking over the House, or that 130 seats might be up for grabs in November.

Second, since President Obama's election, electoral events in the Senate don't necessarily bode well for the Republicans. Scott Brown's victory in Massachusetts is seen less as a harbringer of things to come for Republicans, and more as an overhyped media talking point. Brown is no dependable Republican. More importantly, yesterday's results tell us that while Democratic progressives may be disappointed in President Obama siding with Wall Street, they're still pissed off and ready to go after lukewarm Democratic incumbents who seem too cozy in Washington.

Arlen "It's-All-About-Me" Specter is out in Pennsylvania. Democratic Senator Blanche Lincoln (a serious corporate tool) is on the ropes in Arkansas. This means that progressives, liberals, and Democrats are under no illusion that simply electing President Obama is going to fix the country. He's going to need to be pushed, and he's going to need help. Democrats seem to understand this, now. 

Worse, for the Republicans, is that they now have to deal with their newest Tea Party darling, Rand Paul, in Kentucky. Check out this interview. It's stunning for what it reveals about Paul, and the Tea Party.

In a few words Paul demonstrates that the Tea Party libertarian market views are really more in tune with a segregationist "States' Rights" platform than they are with America's historic mission. Seriously, for Paul to suggest that private commercial interests should be allowed to discriminate - while saying he's opposed to racism - is like saying you're a family values man, and then standing by and claiming it's a "family matter" when asked about your wife beating, child molesting friends (or is that more like proposing abstinence programs for teens while you're having an affair with a staffer?).

Look, if the state has no interest in preventing prejudice and hate from infiltrating society, even those owned by private parties, what's to prevent segregationists, supremacists, and outright racists from carving out entire regions of the country under the pretense of creating "free market" havens? It's been done before. Only then we called it states' rights.

As James Madison made clear, "If men were angels no government would be necessary." Guess what? We're not angels. Just because you (or your Tea Party supporters) have a Unicorn-like belief in markets will not alter this simple reality. You can't wish something true, no matter how much you believe it.

What becomes clear from the Rand Paul interview is that the Tea Party movement is slowly being exposed for what it really is: A mix of disgruntled Republicans and far right extremists in Political Drag. At the end of the day, while they get to play dress up and yell and cry like they belong in an institution, they're still nuts.

All of this is important because with Republicans stonewalling on any kind of financial reform, and weak-kneed Democrats pushing financial reform that doesn't quite do the job because of gaping loopholes, we're pretty much looking at another market meltdown. Those of you who follow this site regularly know why. Putting Tea Party candidates and their narrow-minded, Republican-on-Steroids, policies in office again would only make things worse. We can't afford another generation of misguided deregulation and tax cuts for the rich.

If there is a positive side in this environment (to the extent that there is a silver lining), we have this: If a market meltdown does occur before a strong slate of progressives are elected to office, yesterday's elections suggest that the adults of America are still at work. They aren't resting after President Obama's election. To be sure, they might be ready to pick up pitchforks and torches when the market meltdown occurs. But at least they won't add fuel to the fire, like the Tea Party libertarians seem ready to do.

If it's true that progressive and liberal groups are ready and organized enough to get real Democrats elected - and with the Tea Party being exposed every day as little more than the extreme wing of the Republican Party - we might actually get to see real some reform done over the next few years.

With that, let's keep in mind that FDR didn't create the New Deal in a year (or two). The extremists in political drag might not like it, but President Obama still has time. More work needs to be done. Stay tuned.

- Mark

Tuesday, May 18, 2010


While all the pundits seem interested in what's happening in the various primary races around the country today the reality is we still need to deal with the issue of America's banksters getting too big to fail (TBTF), and the fact that they're making bets like they're in Vegas with no adult supervision. Here's what's happening.

From TBTF to an Oligarchy of Interests
Back in September 2009 Thomas M. Hoenig, the 63-year-old president of the Kansas City, Federal Reserve Bank spoke about the need to rein in our increasingly TBTF banks. Because of the bailouts and the fact that the Federal Reserve has encouraged merging failing institutions with healthy ones Hoenig noted that "the top 20 banks own 70% of the [banking system's] assets." In many ways it's much worse. The top four banks in America (BofA, JPMorgan-Chase, Citigroup, and Wells Fargo) now control $7.5 trillion in assets, which accounts for more than half (52%) of our nation's total economic output for the year.

According to Hoenig, by dumping billions in taxpayer bailouts and guarantees on the banks - with virtually no questions asked, and no new restrictions - the federal government has effectively removed the threat of receivership, bankruptcy and disgrace from their horizons. This, not surprisingly, has had the effect of conferring special status on America's biggest banks.

So instead of finding themselves in receivership, and seeing their top executives fired for incompetence, our TBTF banks have become the new aristocracy of corporate America, perpetuating "an oligarchy of interest" ... that only benefits themselves.

Wait, It Gets Worse
Apart from removing the threat of bankruptcy from our nation's biggest institutions financial horizons, we have another, bigger, problem to deal with. Banks are making bets on derivative contracts at record levels, with money they didn't earn and, worse, with less than stringent capital requirements. First, the record levels ...

Immediately after the market collapsed in September 2008 the notional value of derivative trading (the stuff that got the banks in trouble) dropped by almost $7 trillion dollars, to $149 trillion, according to the FDIC. The reason was simple. In a few words, the banksters got spooked.

But once the banksters got Congress the American Taxpayer to bailout their stupid bets at 100 cents on the dollar things began to look up. The banksters went wild. Just one year after the September 2008 market collapse the notional value of derivatives traded by the banksters surged $31 Trillion, and reached $191.2 Trillion by September 2009 (that's more than 13 times our nation's GDP for the year). 

Guess who's making the most derivative bets trades according to the FDIC? Yup, it's the biggest TBTF banksters who own most of our nation's financial assets.

Better yet, take a guess what our biggest banks are betting trading on? Small business loans? Home loans? Corporate loans? Neighborhood development contracts? Not even close. They're betting on interest rates (90%) and foreign exchange contracts (8%). That's right, according to the FDIC, 98% of what they're betting trading on is the price of money in the future ... money that you and I provide them with our tax payer dollars.

Wait, it Gets "Worser"
Until 2004 the financial industry's "net capital rule" restrained brokerage firms to debt to equity ratios of 12 to 1. But then the Securities and Exchange Commission (SEC), as per their regulations, met to consider a request by Merrill Lynch, Goldman Sachs, Lehman Brothers, Bear Stearns, and Morgan Stanley. The request was very simple. Led by then CEO of Goldman Sachs, and future Treasury Secretary, Hank Paulson, the firms wanted the SEC to allow them - and just them - to lift their debt to equity ratios so they could borrow and trade more (on derivatives).

In a few words, for every dollar these firms had and traded they wanted to bet & carry more debt on the books. The SEC granted them their request and, as you can imagine, the brokerage firms went nuts on derivatives (almost doubling the amount of derivatives traded by the time the market collapsed in 2008).

Bear Stearns and Merrill Lynch, in particular saw their debt to equity ratios jump beyond 30 and 40 to 1 respectively. For those of you doing the math at home, this would be akin to someone making $50,000 per year and the banks allowing them to borrow and carry $1.5 to $2 million in debt ... which they then used to gamble in Vegas!

Since the market meltdown you'll be happy to know that little to nothing has been done to alter our Vegas economy environment. Leverage (debt) and "net capital" (asset) requirements remain virtually unchanged. My friends, Elvis has not left the building ... the party continues.

- Mark

Addendum: As long as I'm bringing up Elvis (and since he's still cool), I might as well include this song, because it reminds me where our banksters should be.

Monday, May 17, 2010


It used to be that if you lied on a regular basis others would eventually see you as someone who is not credible. Not so for the viewers who follow Fox News. Apart from the blatant "they hate America" tone on Sean Hannity's program, Hannity's lies about President Obama not supporting U.S. troops would get him in deep trouble on any other network. But we're talking Fox News here ...

Coming from someone who has no military background but likes to pretend they're GI Joe (the classic chickenhawk), Hannity's efforts to discredit President Obama demonstrates how he and Fox News are simple propagandists with a political agenda. How anyone could view them any other way says much about those who follow these clowns.

- Mark

Saturday, May 15, 2010


So polls are now showing that Americans are fine with Arizona-type laws that allow racial profiling, as long as the goal behind the effort is greater security and public safety. Do we really want to go down this road?

Seriously, if "reasonable suspicion" is going to be our bar then profiling in the name of security means we're going to have to start targeting right-wing groups and people who look like this ...

and this ...

and this ...

and this ...

and this ...

Because when you can do stuff like this ...

or even this ...

... the net of racial profiling has to get wider to include people who look like this ...

On another level, scenes like this ...   

... suggest that society will become increasingly divided if we begin embracing racial profiling as a police tool. More simply, logic tells us that the profile net is going to have be cast wider than people are comfortable with today.

The silver lining in all of this? It serves as a reminder that the Founding Fathers had a reason for including the Bill of Rights when the Constitution was formed. Fear, witch hunts, and stereotypes that inflame public passions should not govern public policy.

- Mark

Friday, May 14, 2010


We're supposed to feel good about this?

The headlines in the financial world are telling us that we should be happy. Why? Because the amount of money our nation's private banks are stealing borrowing from the American taxpayer Federal Reserve has dipped to about $5 billion per day. So, for the period ending May 12, 2010 the banks only stole borrowed $77.5 billion from the American taxpayer Federal Reserve.

Why is this important? Because the banks can borrow from the Federal Reserve at virtually 0% interest, and then turn around and buy U.S. securities, which pay between 3-4%. Let me emphasize this point:

1. If a bank borrows $5 billion per day from the Federal Reserve (at virtually 0%) they can then ...
2. Walk down the street to purchase U.S. securities, which pay 3-4% interest ...
3. Then collect between $150 - 200 million in interest, for no other reason than they are a bank.

Well, I guess borrowing $5 billion a day is better than when these guys were borrowing $188 billion a day at virtually zero percent interest, which they did at the height of the meltdown.

My only question is where do I sign up?

Oh, that's right. We can't. We're not banks. We're just taxpayers who get to fund and subsidize this banking bonanza. But wait. It gets even better (or is that worse?)

It turns out that the American taxpayer Federal Reserve is now on the hook for more than $67 billion (Table 1: Look for lines "Net portfolio holdings of Maiden Lane" I, II, and III)  because we've they purchased the toxic crap that came out of failed Bear Stearns, and the toxic crap (CDOs) that AIG had on their books. Why is this important? Because by purchasing the failed "investments" of Bear Stearns and AIG at contract price (not market price, because the market tanked) our money allowed America's financial institutions to say, "Look, our investments paid out ... we can now pay ourselves 100 cents on the dollar ... where's my bonus?).

It actually gets worse when you look through the Federal Reserve numbers. But I think I'll leave it alone for now.

- Mark

Thursday, May 13, 2010


A great example of how out of control the far right has gone is this piece from Newsweek (hat tip to Candi). From "purity tests" to demands that political candidates comply with eight of the Republican party's 10 "Reaganite" principles, the modern GOP has demonstrated that they are highly intolerant of indepedent or creative thinking. This is an incredible demand given that their last guy almost wrecked the country trying to follow their Reagan principles.

Explaining "why every recent GOP president wasn't conservative enough for today's party" Andrew Romano walks us through some of the policies of the five most recent Republican Presidents. His conclusion? The current GOP and their Tea Party bachannalia have gone off the deep end (actually, that's my conclusion).

Below I've posted what Romano wrote about President Reagan who, by the way, scores only 4 out 10 on the Reagan scale.


Fiscal Policy
The RNC based its purity test on Ronald Reagan's "principles"—chief among them a belief in "smaller government, smaller national debt, lower deficits, and lower taxes." But although the Gipper slashed taxes dramatically during his first year in office, the rest of his fiscal record directly violated the very rules the RNC created in his honor. During the Reagan years, federal employment grew by more than 60,000 (in contrast, government payrolls shrunk by 373,000 during Bill Clinton's presidency). The gap between the amount of money the federal government took in and the amount it spent nearly tripled. The national debt soared from $700 billion to $3 trillion, and the U.S. transformed from the world's largest international creditor to its largest debtor. After 1981, Reagan raised taxes nearly every year: 1982, 1983, 1984, and 1986. The 1983 payroll tax hike even helped fund Medicare and Social Security—or, in terms today's Tea Partiers might recognize, "government-run health care" and "socialism."

Domestic Policy
Were it enacted, the RNC's Ronald Reagan purity test would've also put Reagan in the crosshairs for a number of his signature domestic policies. "Oppose Obama-style government run health care"? As governor of California, Reagan nurtured and eventually expanded Medi-Cal, the nation's largest Medicaid program. Support "market-based energy reforms"? In California, Reagan established the Air Resources Board to intervene in the market and fight smog; as president, he signed more wilderness-protections laws than any president before or since. "Oppose amnesty for illegal immigrants"? In 1986, Reagan passed the Immigration Reform and Control Act, which eventually granted amnesty to 2.7 million illegal immigrants, and he continued to speak out for immigration rights after leaving office. Support "the right to keep and bear arms by opposing government restrictions on gun ownership"? Actually, Reagan was a staunch backer of the Brady Bill, urging Congress in 1991 to "enact it without further delay." To win the RNC's blessing, according to the purity test, a candidate would've had to support eight of 10 so-called Reaganite principles. But Reagan himself wouldn't have come close.

Foreign Policy
Foreign policy is where Reagan seems safest, at least at first glance. But despite his Cold Warrior bona fides, the Gipper still would've had a tough time pleasing today's conservatives. For starters, he refused to send more troops to the region when Hizbullah murdered 243 U.S. servicemen in Beirut in 1983, choosing instead to immediately withdraw the Marines remaining in Lebanon. Now, that would be a violation of the RNC resolution requiring candidates to back "military-recommended troop surges" in the Middle East. And in 1981, Reagan condemned Israel's preventive strike on an Iraqi nuclear reactor, which doesn't jibe with the RNC's demand to "[support] effective action to eliminate th[e] nuclear weapons threat" in North Korea and Iran. Sure, Reagan may have ended the Cold War and all. But would it have been enough to win the Iowa caucuses?

Social Views
Reagan was born in 1911, and his social views were largely in line with midcentury norms. But compared to other conservatives—especially the evangelicals who helped elect him and still dominate the GOP base—his record on social issues while in office was remarkably undogmatic, especially for his time. In 1967, he signed a law in California that legalized millions of abortions. In 1978, he opposed California's Proposition 6 ballot initiative, which would've barred gay men and women from working in public schools, and risked what his advisers predicted would be political suicide in taking to the airwaves to denounce it. Later, Reagan would become the first president to host an openly gay couple overnight at the White House. In 1981, he defied Jerry Falwell and other evangelical leaders by nominating Sandra Day O'Connor to the Supreme Court. A moderate, she would go on, along with one of Reagan's other nominees, Anthony Kennedy, to vote to uphold Roe v. Wade. As Peter Beinart has put it, "Turns out this Reagan guy wasn't really that Reaganite after all."

- Mark

Wednesday, May 12, 2010


Does homo economicus exist? The notion that market actors are the dominant players who drive and shape society towards efficiency and stability - and should be left alone to pursue their ends for doing so - has it's roots in the 18th century, and persists to this day. In my view, whether you believe in homo economicus isn't as important as whether you can explain WHY you believe it.

All to often people believe something simply because: (1) it's convenient, (2) it's what they were told growing up, or (3) they don't know any better. This is one of the reasons why I wrote The Myth of the Free Market: The Role of the State in a Capitalist Economy. I wanted to help shed light on the misguided belief that market players should be deferred to because they're virtuous in a market setting.

To help my students prepare for exams in my International Commerce class I address the issue of what Milton Friedman got wrong, and cover several concepts they need to be familiar with for their exams. Below are some of the issues I've covered (I've listed page numbers where the topic can be found in my book throughout the text below).


To understand how Nobel Laureate Milton Friedman got it wrong I start by looking at what Adam Smith, the patron saint of modern capitalism, said about markets and trade in 1776. Adam Smith made it clear that a level playing field - or what he called the "laws of justice" - should not be undermined. Custom, tradition, privilege, market conspiracies, favorable legislation, and affronts to human dignity all work to undermine the market's playing field by shifting resources to those that don't necessarily work for their reward (15-17, 26).

The interesting thing is that Adam Smith wasn't the only one who saw how the laws of justice could could be violated in 1776. James Madison and the Founding Fathers spoke about the need to reign in merchants and other factions because the "most common and durable source of factions has been the various and unequal distribution of property" (17-19).

These considerations, according to the Founding Fathers, inflamed "passions" in post-revolutionary America and threatened to tear apart the new union. Worse, according to Madison, is how "the latent causes of factions are thus sown in the nature of man." Simply put, we're not necessarily good people, especially in a trading environment. Madison wrote: "If men were angels, no government would be necessary." Guess what? We're not angels. And unicorns don't exist either.

We can't trust one another, even in a market setting. This is why we have a Constitution (see especially Art. I, Section 8). This is why we create laws and regulations.

All of this is something Milton Friedman passed over, or got wrong, when he discussed the power of "the market" to transform the passions of merchants. More specifically, Friedman placed so much faith in people doing the right thing in a market setting that he virtually ignored what the Founding Fathers, and Adam Smith, said about the human condition. The Founding Fathers, in particular, had seen in real time what a weak central government would produce, and did not want to re-visit the Articles of Confederation.

Like it or not, they all believed merchants can't always be trusted in a market setting. Indeed, Adam Smith believed that merchants, left to their own devices, would work against the interests of the consumer, and would use the state to secure their positions if necessary. If  Adam Smith, James Madison, and the Founding Fathers understood this, why not Friedman?

I think I know why ...

Making Milton Friedman's position on freedom even more bizarre is how he assumes liberty is like air, it's just there for everyone. This is why he suggests an "umpire model" for society. Let the state call balls and strikes in markets, and that's it.

However, Friedman ignored how umpires can be changed (to market friendly umpires). He ignored how strike zones can be changed (deregulation & favorable legislation). He ignored how, for a long time, some people never got to the plate (women and people of color). Finally, he ignored how umpires can get dirt thrown in their faces (yes, market players can and will collude with government regulators and members of Congress ... as Wall Street in 2008, and what's happening in the Gulf of Mexico now, illustrate).

All of this can undermine our level playing field and, worse, can destroy the moral justification of capitalism. We need to remember that the moral justification of capitalism, which is the cornerstone of our market economy, rests on one simple principle: If you work hard you will get ahead.

Personal responsibility and a strong set of moral obligation has grown out of this simple principle.

Once you undermine the conditions that make the moral justification of capitalism work we're all in trouble. Personal debt levels, record bankruptcies, and homeowners walking away from their mortgages, among others, are not good signs today.

Still, today market players continue to invoke what Adam Smith referred to as our system of "natural liberty" to pursue their own selfish ends. Ironically, while they channel the spirit of Adam Smith to justify their efforts in the market, their activities in the modern era both undermine the laws of justice (i.e. our level playing field which helps determine how reward and resources are distributed) and violate what Adam Smith called "the order of nature and reason" (which leads to market imbalances and societal disconnect; 37-45).

Because his belief that market players will do the right thing in a market setting was so strong Milton Friedman irresponsibly grafted his biases on to his policy analysis, and his policy prescriptions. This is where he got it wrong. Men aren't angels. Men pursuing profits and wealth can become even worse.

To believe otherwise is to embrace the unicorn.

Milton Friedman didn't simply get the human condition wrong. He doubled down on the Unicorn.

Specifically, he went beyond promoting his umpire model of markets (we can all be trusted in a market setting while we're pursuing profits) to deliberately distorting the debate, and the facts. While there are many things that Milton Friedman missed when it came to understanding human nature, below is a partial list of what Milton Friedman got wrong, ignored, or misrepresented in his work(s) (which I discuss in chapter 2 of my book).

Throughout his writings Friedman consistently warns about the collectivist tendencies he saw in western democracies. Seeing socialist ghosts in every corner, Friedman constantly warned about creeping socialism, and how market capitalism (at least his Unicorn vision of markets) was being threatened. What Friedman ignored is that markets aren't an either/or proposition. This is a false dichotomy (10). Saying you either do it my way or we're going down a socialist rat hole does not represent what happens in the real world, and is not sound analysis (especially for jump starting a debate).

For all of Milton Friedman's dire warnings about America - and the west - going to hell in a hand basket because of the creeping socialism he saw threatening our world, Friedman missed one important fact: Post-war America and the west experienced the greatest, and widest, degree of economic growth and prosperity in human history (5-13). We avoided the threat of major market collapse, or economic depression too.

Warning about the dire effects of an evolving "collectivist" regime when growth and stability are high and widespread is simple fear-mongering. Global confidence in the sturdiness of the world's financial center, New York, evolved for one simple reason: Transparency was tethered to sensible regulations (something to think about today).

Milton Friedman understood he could ride on the back of the field of economics, which maintains in an elevated - but undeserved - position in the political world, and in the social sciences of academia. This position was a powerful tool politically. Milton Friedman understood this and deliberately sought to discredit his opponent's arguments by:

(1) Conflating government regulations and the push for civil liberty protections with socialism and collectivism (his influence is so great that Tea Baggers today still don't know the difference between the categories).
(2) Marginalizing the efforts and duties of government as wasteful, when we all know that state functions are distinct from those of the market.
(3) Dismissing other, competing, disciplines as "speculative philosophical discourse" that are less rigorous than economics (which studies homo economicus).
(4) Denigrating his opponents arguments by making references to the "bubbly emotionalism" of their position(s).

To be sure, all intellectual battles require that you distort, marginalize, dismiss, and deride the efforts of your opponents if you can't defeat them on the merits (I know, I know ... the Unicorns). But think about it. How many professional economists saw the market collapse coming in 2008? (I'll link a short list here later.) How many understand it's roots today? (And, no, it's not Fannie Mae's fault, or the fault of all those people who took out loans they couldn't afford, or the fault of government spending alone ...) Milton Friedman understood the political climate of the day, and took advantage of it to irresponsibly push his world view (see esp. the intro to Ch. 4).

If you create an automobile we now know that we need the DMV, the CHP, the DOT, and ... the list goes on. Do you really trust Wall Street to do the right thing now that the crisis has passed (for now)? Do you trust British Petroleum will make things whole in the Gulf of Mexico? Do you care if your medical doctor is certified? Complex industrial societies require rules and regulations. Commerce over long distances requires it. Milton Friedman seemed to believe that creating a complex and interdependent society across a continent is it's own achievement. It's not. You might want the government off of your back, but I can assure that you want him on your neighbor's.

Whether it's Manifest Destiny, land grant colleges, our Indian land policy (someone had to kick them off for you to invest in it), land acquisition policies (war/purchase), market subsidies, mass market purchases (starting with the Civil War), infrastructures (Erie Canal, RR, etc.), the creation of America's middle-class (yeoman farmer, blue collar workforce, and the social wage earner), education policies, tariff policies, civil rights, etc. it's clear that the state has had the dominant role in creating the conditions for wealth creation in America (30-35, plus Ch. 6). There are no invisible hands here.

Work hard and get ahead? Not if you were a woman, black, or even white male without land (initially). The state has worked hard to open and guarantee opportunities for those who were once relegated to second class status in America. Access wasn't provided by enlightened market players. There was too much money to be made keeping the field tilted in their favor.

Later, when child labor laws, family wage laws, and Jim Crow/Civil Rights laws were required, the state once again stepped in. Industry, for the most part, fought the state every step of the way. The market didn't open opportunities magically. It was democracy in action. It was people making demands on the state, and then having the state act. This is politics, which means the state. The state made the moral justification of capitalism work in America, not market players.

There's more, but this is more than enough (for now). Next exam post: From War & Mercantilism to Classical Liberalism.

- Mark


There's not doubt that Fox's Megyn Kelly is a conservative, and often uses her "news hour" to push an agenda. This is why this defense of Justice Ruth Bader Ginsburg caught me by surprise.

After Bill O'Reilly claimed Justice Ginsburg "doesn't care one whit about the Constitution" (ironic considering this) - and that he can "prove it all day long" - Kelly tells him "You don't know what you're talking about on this."

It could have simply been a moment. But then again, perhaps Kelly wants to reshape herself and become Fox's next Shepard Smith, who may be the networks only genuine journalist. In all cases, it's an interesting exchange.

- Mark

Tuesday, May 11, 2010

WALL STREET: L'État, c'est moi

During his reign as the King of France (1643-1715) Louis XIV is said to have remarked, "L'État, c'est moi" ... or "I am the State." The implications were clear: Bestowed with the divine right to rule, as head of state Louis XIV could draw on the resources of the state (to go to war, for example) because his best interests, it was believed, served France's best interests.

There were no countervailing powers to speak of domestically. Merchants vied for royal favors. Commoners sought out the benefits of the royal touch. In many respects, whether he actually uttered the words "L'État, c'est moi" Louis XIV was the French state.

Fast forward almost 300 years and we find ourselves in a not too dissimilar - albeit twisted - situation. Today our Too Big To Fail (TBTF) financial institutions can draw on the resources of the state, almost at will. This has especially been the case when they make poor decisions. From legislated bailouts to long-standing subsidies, and trillion dollar market guarantees, we can no longer kid ourselves. Industry lobbyist have captured Congress; Wall Street owns the state.

The ability of our TBTF institutions to push Congress around, and to secure what they need after making a mess of things, is discussed at the end of chapter 10 in my book:

It’s at this point they have the power to “raise revenue” by imposing on the state ... taxing it's resources through credit extensions, bailouts, transfer payments, and favorable legislation, among others. This type of control and influence over the state ... is akin to the systematic poaching of state prerogatives. History and common sense tell us this should not happen. Recent developments, however, tell us it is now an accepted practice that raises few eyebrows.

Think about it. Wall Street now has the power to raise revenue (from bailouts), tax our resources (through subsidies & write-offs), and to secure favorable legislation (from legal protections to off-shore gimmicks and other market guarantees).

Worse, they can now scare off legislation designed to reign in their excesses because members of Congress are afraid of Wall Street's moneyed wrath. Campaign donations withheld, or sent to political opponents, is a powerful weapon.

It really doesn't matter how many times the President, or members of Congress, say "never again." We all know they're lying to themselves, and to America. Under the current mind-set, any TBTF financial institution will always be able to tax the resources of the state to serve it's interests. The threat of economic meltdown has become a politically accepted form of financial extortion.

This helps explain why we've embraced market subsidizing debt and other market activities that do little more than extract wealth from the economy, while putting the nation deeper into a debt-drenched mud pit.

The demands of Wall Street, and their TBTF financial institutions, have moved beyond the control of the modern nation-state. In many respects, Wall Street can now declare "L'État, c'est moi."

- Mark

Monday, May 10, 2010


One of the reasons I enjoy reading Money Morning is that they consistently provide some of the best insight into market developments, before they happen. For instance, for all the talk about computers run amok and "fat fingers" (punching the "b" instead of the "m" in front of "illion"), the real key for understanding last Thursday's market collapse can be found in this article ... from August of last year. Here's the money quote:

High-frequency trading uses the speed of supercomputers to trade faster than a human trader ever could. Human owners of the supercomputers program them to take advantage of information milliseconds faster than other computers, and whole seconds faster than ordinary human traders. This is not a minor development; HFTs now represent about 70% of the trading volume in the U.S. equity market.
In a few words what's happened is that computers have turned our markets - as I point out in my book - into a gambling den focused on wealth extraction rather than wealth creation (this Money Morning article brings us up to date, while this one provides some common sense ideas for dealing with the problem). 

Between the idiots betting on toxic debt instruments, and the leeches trying to suck wealth from the stock market, what we now have is a marketplace dominated by unbridled greed and stupidity, and a get-rich-quick mentality that is not healthy for the American economy.

It's really that simple.

- Mark

Thursday, May 6, 2010


The only sport I follow with any regularity is pro football. To be sure, I coach my son's baseball teams, and I've gone to a few pro baseball games over the past few years. But unless it's the 7th game of the finals, I don't follow basketball. Until now. I now have a team. It's the Phoenix Suns.

Most of you know why I feel this way, but these two articles offer good commentary on the situation for those of you looking for more information.

As long as I'm discussing sports I should mention that this news gives me hope for the next football season. Cutting JaMarcus Russell is good news for Raider fans every where.

Seriously, JaMarcus Russell is like George W. Bush ... all the resources and tools in the world to succeed, but he still ends up as an abject failure. Like Bush after he got his Daddy to pull some strings, so he could serve in the National Guard and go AWOL, Russell had a ton of money and the starting job handed to him, but he was always missing in action. What a flop.

On the positive side, at least Russell didn't wreck the economy, undermine our national credibility, and leave us in two dead end wars.

- Mark


History repeats itself,
first as tragedy, second as farce.

- Karl Marx

After World War I the victors assembled in France to assess the future. In Article 231 from the Treaty of Versailles (1919) - the infamous "war guilt" clause - Germany was obligated to pay the equivalent of $32 billion (about $389 billion today) to their former enemies. Famed economist John Maynard Keynes would refer to the terms as a Carthaginian Peace, a phrase now used to refer to any punitive pact or treaty that does little more than impose brutal terms, and remind a defeated party that they are in an inferior position.

At the time many economists, including Keynes, viewed $32 billion as excessive. Keynes, and other Versailles participants wanted the slate wiped clean. In their view, little was to be gained - and much would be lost - if the punitive terms of Versailles were pursued. The League of Nations agreed, and supported the reduction of Germany's war reparations to $28.3 billion.

But the debt burden was still too much. Early in 1929 the Young Plan was introduced, which reduced Germany's war debt to about $713 million (about $9 billion today). But the dye had been cast. The political environment that would nourish the likes of Adolf Hitler had been created.

When the Great Crash occurred in 1929, it insured that all discussions surrounding The Young Plan for Germany would be akin to rearranging the deck chairs on the Titanic. The plan emerged, but it was still-born. There was no turning back the clock.

The lesson from this period is clear: Debtors should not be driven into a blind alley. This appears to be a lesson the world seems to have forgotten, or is too tone deaf hear.

While the lessons of World War I are many, they are clearly being ignored today. Domestically, in the United States, Wall Street has been allowed to profit from scurrilous and ethically challenged contracts of dubious utility. Meanwhile brutal and draconian terms are being prepared for taxpayers, workers, and (former) homeowners. This is happening on many levels across the globe.

Abroad we're now watching a Greek Tragedy unfold. Today, Greece's financial problems are being driven by debt to earnings ratio of approximately 113% in 2009. Put another way, for every Euro Greece earns they owe 1.13 (for purposes of comparison, the debt to GDP ratio for the United States today is about 87%). Interest and penalty fees will compound Greece's problem, with one report suggesting that Greek debt levels in 2010 will reach 125% of earnings (of GDP). Things could get worse.

This helps to explain what's been happening in Greece. Riots, the likes of which we haven't seen since Argentina in 2001, have become standard fare. They're even eliciting fears that things will get worse should tourists decide to stay away from the cradle of democracy for a long period of time. At the heart of the protests are concerns over belt-tightening measures - wage cuts, higher taxes, spending freezes, etc. - imposed in Greece, which Argentinian President Cristina Fernandez de Kirchner said were "almost identical" to the ones imposed on Argentina in 2001.

The Argentinian President added:

“The international multilateral lenders, which keep offering the same old prescriptions, still don’t understand what’s going on in the world.”

To be sure, debtors should be responsible for their obligations, but only to a point. The road to the free market is a two-way street. Little is ever said about the reckless lenders and their dependence on favorable legislation, or how government strong-arm tactics impose draconian terms on the middle-class.

The dependence of market players on favorable legislation seems to have reduced their commitment to perform simple due diligence, or to exercise simple common sense. Just because you create a highly profitable but market destroying investment instrument doesn't mean you deserve to get paid for it - especially if the instrument turns out to be crap. What about credit write downs? When do we start winding down the expectations of arrogant lenders and the financial leeches who gamble on their activities?

Then we have the global and domestic double standards, which are increasingly obvious for others to see.

As evidence of the emerging double standard, consider what a collapsing Greece is being asked to do in return for a 110 billion-euro loan package from the euro zone countries and the IMF.

* Freezing public sector pay until 2014
* Reducing allowances in the public sector by 20%.
* Increasing VAT from 19% to 23%
* Raising excise taxes on fuel, alcohol and tobacco by 10%.
* The imposition of new gambling, property and green taxes.
* Slashing or freezing state pensions.
* Increasing the average retirement age from 61 to 63 years.

Now consider what happened in the United States when Wall Street blew itself up, and the financial markets collapsed:

* Public sector borrowing increased.
* Budget deficits grew, which are now supercharging the national debt.
* Government bailout loans, plus tax payer-backed trillion dollar guarantees for Wall Street.
* Tax cuts for the middle class (in spite of what the Tea Baggers want you to believe).
* Health care reform that expands coverage to millions of more Americans (while this is on mark to reduce budget deficits, the symbolism of increased government assistance is not lost on others).
* Continued favorable legislation for the financial sector that continues to subsidize profits, and doesn't walk back deregulation policies from the 1980s & 1990s.
* Wage cuts, but only for certain public sector employees in many states.

To be sure, I understand the Golden Rule (He who has the gold makes the rules). But the United States no longer controls it's financial fortunes, as this graph depicting total debt in America (Federal, State, Local, Personal, etc.) indicates.

Nor is the United States in a position to help manage a debt-drenched world (Federal Debt to GDP ratio) that, for some, may look like a bad pre-quel to 1929.

In case you're wondering, after Germany was granted better terms in the 1920s it's Debt to GDP dropped to roughly 85% (about where the United States is at today).

In his book The Economic Consequences of the Peace John M. Keynes points to Vladimir Lenin, who remarked that the best way to destroy the capitalist system is to debauch the currency. In Keynes' view, standing by while debt obligations pile up and become burdensome only leads states into continuous cycles of borrowing and printing money. This creates the conditions for inflation to flourish. He was predicting Germany's hyper-inflationary period years in advance.

As noted above, the lesson is clear: Debtors should not be driven into a blind alley.

What's happening in Greece today, and with the world doing little in the way of reigning in Wall Street's gambling on debt (or disciplining firms like Goldman Sachs), there's little hope that any kind of discussion on credit write downs will occur any time soon (though these guys seem to have some good ideas). In fact, it appears that the European Union only has "procedures" for excessive deficits, and not for those who seek to cannibalize it.

Simply put, there's too much money to be made on debt, even if it means the staggered collapse of the European Union.

If there's any truth to what Karl Marx said about history, we need to take a hard look at the debt-drenched position that Greece, the rest of the so-called PIGS, and the developed western states now find themselves. As Keynes noted after considering the dire straits Germany would find itself confronting in the 1920s, there will come a breaking point: " ... who can say how much is endurable, or in what direction men will seek at last to escape from their misfortunes?"

What's occurring in Greece today may be the first act in a larger tragedy. Still, we know one thing. The financial games the world played (the Dawes and Young plans) after Germany ran into financial trouble in 1922 may have granted the world a temporary reprieve. But it also allowed the serpents of fascism and Nazism to escape and prey on weaker souls.

With the historical lessons clear, and with EU regional repercussions on our radar screen, one thing is certain: This is not just Greece's problem.

- Mark

Wednesday, May 5, 2010


Right before the market crashed in 1929 Yale University economist Irving Fisher famously stated that stocks had reached "a permanently high plateau."  We all know what happened next.

Here are a couple of other quotes that may soon become part of our nation's "famous last words" collection, courtesy of British Petroleum ...

It's "unlikely that an accidental surface or subsurface oil spill would occur from the proposed activities."

- BP's exploration plan for the Deepwater Horizon well

"due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected" to wildlife refuges and wilderness areas.

- BP's exploration plan for the Deepwater Horizon well,
after conceding that a spill could impact beaches.

As a reminder, here some additional famous last words ...

"We place absolute confidence in the Titanic. We believe the boat is unsinkable."

- White Star Line Vice President, P.A.S. Franklin

"A new era of active credit management."

- Alan Greenspan (1995), former Chair of the Federal Reserve,
simultaneously praising the glorious new era of finance & debt,
while justifying his cheap money policies (p. 227).

"Even with full authority to intervene, it's not credible that regulators would have been able to prevent the subprime debacle."

- Alan Greenspan, former Chair of the Federal Reserve,
trying to justify his failure to act on market bubbles.

And my personal favorite ...

“I can’t believe Keith Richards outlived me.”

- John Palmer, who passed away at 62, June 15, 2009.

- Mark