Wednesday, April 30, 2008

Intellectual Honesty-Followup

"Someone please remind Mr. Makin that it is those of us who have saved money for years that he intends to rob to mollify the banking mob and the dumb people who bought houses that were priced beyond their reach. We have already suffered a good deal of inflation, far, far beyond the measly amount that the government admits to each year" Robert Reynolds letter to the WSJ, 21 April 2008.

"Mr. Makin's article needs a better title: 'From Weimar to Washington.' ... You say it can't happen here? Check the change in the dollar's value to the euro over the past year; it is already happening", Erich Kothe letter to the WSJ, 21 April 2008.

Apparently you can't fool all of the people all of the time, see my 18 April 2008 post. I like the term "banking mob". That's how I see it, the bankers screaming for inflation are a bunch of mobsters, demanding counterfeiting.

Dammit, Kothe, don't give Helicopter Ben any ideas. He might think the title "Weimar Ben" is a compliment, and imitate the Reichbank's 1922-23 actions.

BOE is no Fed

"A sweeping plan unveiled by the Bank of England [BOE] to swap government bonds for banks' hard-to-sell securities comes at a steep price for banks. ... But, banks will have to accept a significant discount in the value of securities they exchange. The [BOE] will be the arbiter of the swap valuations. On Monday, it said that for every L100 of triple-A rated U.K. residential mortgage-backed securities offered as collateral by a bank, that bank would receive L70 to L90 of treasury bills. ... But the central bank had to publicize when the overnight window was tapped, which 'led to the great bank hunt,' Mr. [Mervyn] King said, to learn the identity of banks seeking funds. To avoid that hunt, the central bank won't disclose the amounts being swapped by banks through its new program until the borrowing window closes in six months. ... The [BOE's] new program has overtones of the [Fed's] recent initiative to swap government debt for hard-to-sell securities in the U.S.", WSJ, 22 April 2008.

The BOE's program is better than the Fed's in "buying" bank paper for 70-90% of par instead of the Fed's "buying" Bear Stearns' paper for 97% of par, $29 billion for $30 billion. The Fed's and the BOE's programs both try to maintain bank secrecy. I expect Britain's Financial Services Authority will do as much to force disclosure of these borrowings as Chris Cox's SEC, nothing.

Tuesday, April 29, 2008

Bush's Walter Durantys

"In the summer of 2005, the Bush administration confronted a fresh wave of criticism over Guantanamo Bay. ... The administration's communications experts responded swiftly. Early one Friday morning, they put together a group of retired military officers on one of the jets normally used by Vice President Dick Cheney and flew them to Cuba for a carefully orchestrated tour of Guantanamo. ... Hidden behind that appearance of objectivity, though, is a Pentagon information apparatus that has used those analysts in a campaign to generate favorable news coverage of the administration's wartime performance, an examination by the New York Times has found. ... Most of the analysts have ties to military contractors vested in the very war policies they are asked to assess on air. Those business relationships are hardly ever disclosed to the viewers, and sometimes not even to the networks themselves. ... Analysts have been wooed in hundreds of private briefings with military leaders, including officials with significant influence over contracting and budget matters, records show. They have been taken on tours of Iraq and given access to classified intelligence. They have been briefed by officials from the White House, State Department and Justice Department. ... Several analysts acknowledge they suppressed doubts because they feared jeopardizing their access. ... Several analysts strongly denied that they had either been co-opted or had allowed outside business interests to affect their on-air comments", David Barstow (DB) at the Houston Chronicle, 20 April 2008.

This is news DB? Get serious. The NYT should not be surprised. This is standard operating procedure in Washington and New York. Nothing an "independent analyst" says should be taken at face value. In any field. Not newspapers either, not even the NYT. From 1922 to 1936 Walter Duranty (WD) was the NYT Moscow bureau chief. WD became known as Stalin's aplogist in denying the existence of Stalin's Ukranian starvation program. The NYT claimed Fidel Castro was not a Communist, just an agrarian reformer. A NYC joke in about 1960 had Fidel's picture on a NYC subway advertisement with the caption, "I got my job through the New York Times". What's the big deal here? Some analysts went on Iraqi "Potemkin Village" tours. WD saw Potemkin villages. So? Governments select experts to advocate existing policy, not challenge it.

China's NASDAQ Moment

"The sharp decline in Chinese stocks is approaching a milestone: With a 4% drop Friday, the market has fallen by nearly half since its peak last fall. The decline has wiped out nearly $2.5 trillion of wealth and is testing the government's apparent resolve to let the market find equilibrium on its own. ... The other big loser is India, which was the other big winmner over the past few years. The Mumbai Sensex Index is down 19% so far this year. ... A widely accepted measure of stock valuations, the price-earnings ratio, has fallen on the Shanghai market to 35 times announced income from a peak of about 70 times last year, though some say accounting remains opaque at many Chinese companies", WSJ, 19 April 2008.

The notion of a market "worth" 70X earnings is absurd. China looked like a bubble to me, see my 12 October 2007 post. China's market reminded me of two articles by Jeremy Siegel (JS), a Wharton finance professor which appeared in the WSJ on 14 March 2000 and 19 March 2001. They are worth reading, bear in mind when they were written. They are available at

Monday, April 28, 2008

Toothless SEC-2

"Broadcom Corp. agreed to pay $12 million to settle [SEC] charges it falsified its reported income by backdating stock-option grants over a five-year period. The company restated its financial results in January 2007 and reported more than $2 billion in additional compensation expenses, one of the largest such restatements to date arising from stock-option backdating, according to the SEC. 'The scope and magnitude of the fraud warrants the significant penalty imposed on the company,' said Linda Thomsen, the SEC's enforcement-division director. The Irvine, Calif., semiconductor maker settled without admitting or denying the SEC's claims. ... The penalty ranks among the biggest brought by the SEC in its investigation into backdated stock options. The largest penalty was against Mercury Interactive Corp., now a unit of Hewlett-Packard Co. Mercury agreed to pay $28 million without admitting or denying wrongdoing, last May to settle charges it failed to record $258 million in compensation expenses", my emphasis, WSJ, 23 April 2008.

"The story starts in 2002, with [David] Einhorn rightly proud of his ability to spot companies with shoddy accounting practices. ... Convinced that he has found another juicy target, he zeroes in on Allied Capital, a business-financing company that seems to dawdle when it comes to marking down the value of its troubled loans. ... He grew so irate about the company's accounting that he alerted the [SEC]. The SEC did little with his complaint; in fact, it investigated him instead for spreading negative views about Allied. ... Large chunks of 'Fooling Some of the People All of the Time' amount to an angry man's recital of his grievances--and Mr. Einhorn has some good ones. An SEC lawyer who quizzed him aggressively about his short-selling methods later went into private practice and registered as a lobbyist for Allied. ... Einhorn's carefully documented battles with Allied Capital say a lot about the temperament needed to be a great investor. Tenacity is vital. So is patience. And so, too, is an ability to keep a sane perspective. ... The book also shows why good accounting really matters. It is easy to mock finicky people with green eyeshades who worry about footnotes. But reliable numbers are essential if capital is to be allocated properly in our economy", my emphasis, George Anders book review of David Einhorn's book in the WSJ, 23 April 2008.

Is Thomsen joking? A $12 million penalty for a $2 billion restatement! Wow, that's .006 of the restatement. I'm sure this will deter future corporate miscreants. I say again the SEC should be prohibited from closing a case without an admission of wrongdoing which the plaintiffs' bar could make collateral estoppel use of, or a no action letter. Who needs the SEC's enforcement division? It's useless. Tell us Thomsen, what size fraud would merit say a $2 billion penalty? $333 billion? Linda, your resume indicates you were an AUSA once. Remember anything? Ever read securities law? It has a "books and records provision", 15 USC 78m.

Einhorn's story is like Ray Dirks, see my 6 October 2007 and 9 April 2008 posts. Nothing Cox's SEC does should be taken at face value. The SEC's contempt for the First Amendment should concern us all. Even you Cox. I understand you have a Harvard Law JD. Does Harvard Law School teach "Con Law"? Did you take it? Do you remember any of it? 2002 was before your reign at the SEC. That said, do you think the SEC owes Einhorn at least an apology?

SEC, Investors' Friend, Fiend?-2

"The [SEC] was on the defensive as lawmakers pressed the agency to quickly increase its oversight of credit-rating firms in order to bolster confidence in financial markets. At a Senate Banking Committee hearing, lawmakers questioned whether some of the ideas for new rules presented by SEC Chairman Christopher Cox in private hearing would go far enough to fix and proactively stave off problems. Mr. Cox outlined a series of steps that the agency is considering, most of them focused on greater disclsoures. Others being discussed would seek a greater separation of the rating and business sides of the firms. ... Cox said that 40 SEC staff members were conducting reviews of the seven largest credit-rating firms, including Moody's Investors ... [S&P] and ... Fitch. ... So far, the SEC has uncovered violations of internal conflict-of-interest policies that occurred earlier this year. ... 'Who is rating the rating agencies?' asked Sen. Jack Reed. ... Under the law, the SEC is required to monitor policies and procedures, including conflicts of interest at ratings firms. ... Sen. Christopher Dodd, the chairman of the committee, and Sen. Shelby pushed the SEC to take a hard line, asking Mr. Cox repeatedly if he would revoke a rating firm's charter if it consistently resulted in poor ratings. ... Cox responded that Congress didn't give the SEC authority to revoke a license for getting ratings wrong. If ratings were consistently wrong because firms weren't following internal procedures, 'then [the registration] could be revoked,' he said", my emphasis, WSJ, 23 April 2008.

Cox, does your SEC accept a ratings agency's procedure if it consistenly looks into Ed McMahon's "hermetically sealed mayonnaise jar", and its ratings were no better than chance? I think Shelby misspoke. I think he meant to ask: would the SEC revoke a rating agency's NRSRO status? Well? Hey Mark Olson, have we an opportunity for you. Have the PCAOB adopt "Generally Accepted Ratings Agency Standards". Then you can conduct agency reviews. This will not ensure the quality of their work, but it will give the PCAOB something else to do. Besides, you guys need a "product extension". Nothing Cox suggested will do more to improve a rating agency's product than peer reviews did for the CPA profession. 31 more years are coming.

Sunday, April 27, 2008

Repeat Player Advantage-2

"A suit against a leading provider of arbitrators raises issues that for years have been leveled against the organization and that could come into play more as debt-collection actions rise in a likely recession. ... The suit follows a number of questions by lawyers, courts and some former NAF arbitrators in recent years about whether NAF arbitrations are fair to consumers. ... While other arbitration organizations have also come under attack by critics, NAF has found itself in the spotlight in part because a significant percentage of its work includes disputes involving consumers, rather than disputes between businesses. ... Jean Sternlight, a law professor at the University of Nevada, Las Vegas [said] an NAF arbitrator 'can expect to see many many disputes involving the same company, there may be a heightened pressure on the arbitrator to rule in favor of the company or else risk losing future arbitration work.' ... [A West Virgina court ruled] The fact that consumers are required to arbitrate before NAF, which is financially dependent on repeat business from lenders, the court concluded, 'impinges on neutrality and fundamental fairness.' A California appellate court likewise ruled in 2002 ... the employer enjoyed a possible 'repeat player' advantage, including "knowledge of the arbitrators' temperaments, procedural preferences, styles and the like, and the arbitrators' cultivation of further business. ... Elizabeth Bartholet, a Harvard Law professor ... said she was regularly rejected by a credit-card company from hearing arbitrations after making one ruling favorable to a consumer in a credit-card case", WSJ, 21 April 2008.

Repeat player advantage? No way! The entire arbitration pocess should end. How? A civil RICO suit. I think a good plaintiffs' attorney could plead it. Imagine naming dozens of former judges as defendants in this case along with the NAF and some large credit card issuing banks. Sounds good to me. I think Sternlight is too kind, "there may be"?

Justice Is Blind and Dumb Too

"A legal settlement with federal regulators requires former senior executives of Fannie Mae, including former Chief Executive Franklin Raines, to donate about $2 million to charities and give up stock options that may turn out to be worthless. .. 'The settlement is a capitulation by Ofheo,' said Steven Salky, who represented Timonthy Howard, Fannie's former chief financial officer. An Ofheo spokeswoman said the government got a good settlement. 'This settlement is at the high end of settlements in similar matters,' she said. ... Under the settlement, the three executives are to pay fines totalling about $3 million, but those will be covered by Fannie insurance policies, according to lawyers involved with the settlement. ... In a statement, Mr. Raines said the settlement 'is not an acknowledgement of wrongdoing on my part, because I did not break any rules while leading Fannie Mae'," WSJ, 19 April 2008.

"Securities regulators refused a congressional request to disclose why they dropped an investigation into whether Bear Stearns Cos. harmed investors by improperly valuing complex debt securities. The [SEC] cited confidentiality in its decision involving the late-stage probe of the Wall Street firm. At issue is a move by the SEC to abort an enforcement case into activities at Bear Stearns several months before the firm imploded in March. ... 'The Commission does not disclose the existence or nonexistence of an investigation or information generated in any investigation unless the matter is made a matter of public record in proceedings brought before the Commission or the Courts,' SEC Chairman Christopher Cox said in an April 16 letter to Sen. Charles Grassley. ... Legislators also could argue that the SEC wouldn't be releasing data to the public, but rather to Congress. Meantime, the SEC's inspector general is investigating circumstances related to the dropped Bear Stearns case, following a request by Sen. Grassley", WSJ, 23 April 2008.

Another Bush administration triumph. What's $2 million to Raines? Nothing. No indictment, no fines Raines must pay. Nothing. He surrenders some worthless stock options. And these clowns, through the SEC fined Joe Jett $8.4 million, see my 12 September 2007 post. Where's the DOJ?

Chris Cox, congratulations! Why isn't the Bear Stearns investigation a matter of public record? The public's got at least a $29 billion stake in it. I have long seen your SEC as the most cowardly and incompetant I have encountered in my professional career. Now you just pushed aside Harvey Pitt's SEC as the most venal. I hope Congress holds you in contempt. I'll make things real easy for you David Kotz (DK), SEC "Inspector General", whatever that is. I surmise the SEC ended its Bear Stearns (BS) investigation because the SEC couldn't find BS improperly valued debt securities. Why? Because BS valued them the same way as every other Wall Street house, including, dare I think it, Goldman Sachs. See how easy that was DK? Did our old friend Robert Steel, see my 7 April 2008 post, quash the investigation? Did Hank Paulson? Robert Rubin? Well DOJ, will you look into whether or not someone obstructed the operations of a federal agency, 18 USC 1505? Hey Conrad Hewitt, what's your opinion? You're the SEC's Chief Accountant, aren't you? See my 6 February 2008 post. Will the DOJ look into this? Why? Just go and incarcerate ten more peasants, each with half a dozen $10 crack rocks. See also my 1 April 2008 post. Imagine, the SEC had time to prosecute the "PWC two" and did not have time to finish its Bear Stearns investigation. Amazing!

It's 1973 All Over Again

"The global food crisis is a monetary phenomenon, an unintended consequence of America's attempt to inflate its way out of a market failure. ... Washington has weakened the value of the dollar as a palliative for the credit crisis, so much that 'nobody seems to doubt that the US dollar will lose its status as the world's reserve currency,' as journalist Amity Shlaes wrote in an April 9 Bloomberg News column. ... China is exchanging its depreciating reserves of US dollars for things of value, notably rice, with frightening consequences for dependent countries, and deadly consequences for American foreign policy. ... [T]he ascent in the cost of rice to $24 from $10 per hundredweight over the past year tracks the declining value of the American dollar. ... For developing countries whose currencies track the American dollar ... this is a catastrophe. ... Never before in history has hunger become a global threat in a period of plentiful harvests. ... It is not only rice, of course, that the cash-rich countries of the world are buying as a store of value; the price of wheat, soy and other grains has risen almost as fast. The George W Bush administration might as well have used the State Department as a set for the Jackass reality show. American arrogance has eroded the ground under many of the governments on which its foreign policy depends", Spengler at, 21 April 2008.

Spengler strikes again. China's position is like Japan's in 1973 when Nixon embargoed the shipment of soybeans to Japan. Are US export controls coming next? See my 4, 19 and 21 February 2008 posts.

Saturday, April 26, 2008

Trade and Other Wars

"The influence of foreign money, of indebtedness to foreigners, of dependence on foreign oil, hangs over Washington D.C. like a gallows. ... It may be said that McKinley held a classical rather than an economic position. He looked back to ancient wisdom, ignoring the modern economics. It is not that economics is wrong in its principles of efficiency. Merely, economics is one-sided. Economic efficiency is not the be-all and end-all of human existence. And yet, today's politics would leave you with this very impression. Today's political thinking, with its emphasis on globalization, free trade and permeable borders would shock a man like McKinley. The ongoing debasement of America's currency would illicit, from him, groans of disapproval. He would ask: What do the Americans of 2008 think they are doing? ... Joseph ... Schumpeter penned the following memorable lines: '[If] we have got to live in a mercantilist, nationalist, bellicose world dominated by a few great empires, on the one hand, and if the domestic policy of this country is to remain free to shape its own destiny, on the other hand, I do not see the possibility, and I should very much doubt the wisdom, of any major deviation from the policy of protection.' ... In opposition to self-sufficiency, our theorists and politicians talk glowingly of 'interdependence'--that form of dependency that draws nations and continents together in a process that ultimately promises 'one world,' one 'global village' (a.k.a. globalism) ... This oppressive ideology pretends that opposing forces can amalgamate under the shaky utopian ramshackle of 'multiculturalism.' To solve the problem of human difference, a counterfeit unity has been conceived. Under the rubric of tolerance we have abandoned our own heritage. ... The ancients taught that history is cyclical. ... Perhaps that is where we are headed: to a new self-sufficency, independence and rebirth. In order for this to happen the various organs of dependence--the nanny state, paper money and mass debt--must pass into oblivion", JR Nyquist at, 28 March 2008.

Washington ignores the national security implications of importing manufactured goods and foreign populations. Must we lose a major war or have a civil war, before our politicians realize them? Tarriffs on certain foreign goods may be considered part of the defense "budget".

Friday, April 25, 2008

Prosecutorial Immunity?

"I read in the LA Times that the [US] Supreme Court will take up a case to decide if a former Los Angeles County District Attorney can be sued for his part in a man's wrongful conviction. ... The prosecution had no fingerprints, forensic evidence, or weapon. They did have the testimony of an informant who was a pro and who had a long history that should have been known by the defense at trial--but it was not known by the defense, since the prosecution did not disclose that information. ... However, the management at the [DA's] Office did not put any sytem in place to track informants. ... In spite of the evidence of many instances of misconduct, prosecutors are very rarely disciplined for their misconduct. Even more rare is the prosecutor who is charged with a criminal count due to his misconduct in the handling of a case. ... In other words, the prosecutor may commit heinous abuses of one's civil rights and there is generally nothing anyone can do about it. Surprised? I was. ... The Supreme Court in 1976 ruled that 'prosecutors, like judges, must be free to do their jobs without fear of being sued later' and that this rule of 'absolute immunity' applies when a prosecutor 'acts within the scope of his professional duties.' This means that the prosecutor knows beforehand that almost no action he takes in a case will result in civil or criminal punishment. ... What is it about this case that has many prosecutors in America afraid that Goldstein might win? Accountability. They are frightened that they will be held accountable for their actions. I think it would be a great thing for America's prosecutors to be scared to death that they will be held accountable for sending innocent men to prison or death row because they screwed up. Unlike some lawyers who have commented on this case, I think that the prosecutors are violating due process on purpose rather than by accident in the majority of those cases. ... Attorney discipline rarely is applied to prosecutors. ... We need to strip them of all immunity", my emphasis, Joseph Potter (JP) at, 22 April 2008.

The attorney discipline process is as big a farce as the PCAOB. Which attorneys does it discipline? In most cases small firm plaintiffs' attorneys. How often does a state bar disbar a major firm partner for actions he took defending a corporate client? I suspect rarely if ever. In about 1991 I read an LA Daily Journal, a LA lawyers' paper, article, that publishes appellate opinions, among other things that said just this. Prosecutors are human. Really. To understand their actions read our greatest judge's words in 10 Harvard LR 457, "The Path of the Law", 1897, Holmes. "But if we take the view of our friend the bad man we shall find that he does not care two straws for the axioms or deductions, but that he does want to know what the Massachusetts or English courts are likely to do in fact", 460-1. "But what does it mean to be a bad man? Mainly, and in the first place, a prophecy that it he does certain things he will be subjected to disagreeable consequences by way of imprisonment or compulsory payment of money", 461. Absent consequences for bad acts, the prosecutorial profession will fill with bad men. And has.

Food Price Crisis

"For all the economists and consumers who hope high food prices are temporary, here's one reason why they probably won't be: Farm costs are skyrocketing, making permanently higher prices essential for farmers to keep expanding production. ... In the American Midwest, land prices have jumped, along with the cost of energy and chemicals. ... The higher costs are transforming the economics of agriculture. Since some of the heftier outlays--like those for fuel--are expected to persist, farmers will need to command higher prices for their crops than they did a few years ago to maintain their profit margins. ... Rising costs 'are sweeping across the commodities complex, and agriculture can't escape it,' says Michael Lewis, global head of commodities research at Deutsche Bank in London. The upshot, he says, is 'a complete structural shift' in agricultural prices to a new, higher, level", WSJ, 14 April 2008.

"The upshot for Asian governments is increased social tensions in many countries where food shortages were unheard of until very recently. ... People have to eat, and if it costs them too much to eat, they will in turn demand to be paid more. This creates a vicious cycle of inflation that will eventually reduce the living standards of pretty much every second person in the region. ... Agricultural produce has been the source of much abuse by the Europeans, whose Common Agricultural Policy (CAP-surely an acronym that deserves an 'R' as it second letter) is uniquely responsible for keeping a billion people in dire poverty. ... Any European who talks about how much more civilized the continent has been relative to America's war-mongering clearly doesn't understand the horrific costs on poor farmers elsewhere in the world. Put simply, while it's easy to count America's war dead, perhaps in the hundreds of thousands, victims of European farm subsidies number in the hundreds of millions. ... There is another culprit here. ... the US dollar. More simply, the idiot central bankers of Asia who squander their responsibility at the altar of conformity by purchasing billions of dollars worth of useless financial assets have done their region a great disservice. The US dollar is too strong relative to inherent industrial and service sector advantages of the US economy today. Put differently, America's economy is far bigger than it deserves to be, thanks mainly to the unregulated appetite of Asian central bankers in accumulating US dollars and its overvalued counterparts such as the euro. ... The other side of this wealth transfer is that Asian currencies are stupidly cheap compared with the competititve advantages that have been heaped on the region for the past few decades. That in turn attunes an excessive number of factor inputs to the production of goods for the US consumer rather than serving domestic consumption. Looking through the economic make-up of most of the region, only Australia and India stand out as countries with a defensible mix of domestic consumption against goods produced for export", Chan Akya (CA) at, 18 April 2008.

"Energy Secretary Samuel Bodman said Friday that the growing emphasis on corn-based ethanol has contributed to higher food prices, and he said the nation should begin 'moving away gradually' from ethanol made from food such as corn. ... Bodman's remarks come as efforts to make motor-vehicle fuels from grains such as corn are coming under fire amid soaring world food prices and food riots in several countries. A U.N. report Tuesday called biofuels a 'crime against humanity'," WSJ, 19 April 2008.

"Mexicans feel the pain of record corn prices every day when they buy a staple of the national diet, the corn tortilla. Tortilla inflation has been severe enough to send citizens to the streets in protest. ... While corn farmers elsewhere welcome the surging prices, Mexican farmers are absorbing higher costs to feed corn to cattle, hogs and chickens. That means higher prices for milk, eggs and meat. ... 'The days of cheap food have ended,' said Juan Antonio Pedroza, president of a trade association of Mexican food producers. 'The social impact will be tremendous'," Houston Chronicle, 20 April 2008.

I agree with Lewis. I don't expect to see grain costs drop for years.

CA has this knocked. I remember when I was with "Big 8" about 18 months, a senior accountant referred to "Creatively Revised Accounting Principles", CRAP. We have CRAP all over. Where is this going? US living standards will fall relative to Asia and US imports of Asian goods will fall as measured US inflation rises. In 1896 William Jennings Bryan, at the Democratic Convention in Chicago said, "Having behind us the producing masses of this nation and the world, supported by the commerical interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind on a cross of gold". The Asian central bankers crucify their own people on a "cross of dollars".

Amazing, I agree with the UN about biofuels, even if I would not call them a "crime against humanity" as opposed to a blunder.

Is Pedroza ever right.

Thursday, April 24, 2008

The Bloodless Coup Continues-5

"'It will have the license to go everywhere: private equity funds, investment banks, hedge funds,' [Robert] Steel, the under secretary of the Treasury for domestic finance, said in an inverview last week. ... In fact, he is a former vice chairman of Goldman Sachs, the big investment bank. And in the last two years, Mr. Steel has been co-chairman of one commission that claimed heavy-handed regulation was stanching financial innovation and another that argues the hedge funds could police themselves. His apparent conversion to the merits of regulation illustrates how the laissez-faire bones of the Bush administration have been rattled by the government-brokered rescue of Bear Stearns and the trauma of the credit crisis. ... In truth, the plan may well fail to become law because some of its prescriptions, like diluting the powers of the [SEC], have drawn fire from those who have long believed that the Treasury has an antiregulatory bias. .. The regulator would pass judgment on the capital levels, trading exposure and leverage of Wall Street's most sophisticated institutions. ... Steel's enthusiasm may represent less a philosophical conversion than an acceptance of raw political facts. ... Paulson disputes the notion that the plan of Mr. Steel is antiregulatory in the slightest. 'Bob has never been antiregulation,' Mr. Paulson said in his horse voice. At Goldman, he said, Mr. Steel was an effective liason with regulators and was often 'on the point of the spear,' when it came to dealing with them. ... As someone who reaped significant gains from his days at Goldman, and who further augmented his wealth from investments in some of Wall Street's most exclusive and successful hedge funds like Tontine Partners, Eton Park, TPG-Axon and Lone Pine Capital, Mr. Steel brings the practiced, experienced eye of the genuine participant to the task", my emphasis, Landon Thomas (LT), 15 April 2008.

Did Steel have a "Road to Damascus" conversion, or do we see something else? Did Steel realize his "former" employer, Goldman Sachs (GS) and other Wall Street houses were in financial trouble and wanted a federal bailout? Who better to do it than a GS-controlled Fed? Did Steel conclude it was time to dust off his "effective liason" skills and co-opt the Fed? LT misses something in writing of Steel's "apparent conversion". As I understand it, Steel was always consistent. If something is good for GS, it's good for the USA. See my 14 October 2007 and 6, 7 and 13 February and 7 April 2008 posts. A regulator with a "license to go everywhere" will not be subject to law. I'm sure Mussolini would have approved of such arrangements.

Fortune on Inflation

"If the filet mignon is reasonable, all is right with the world. If it seems unduly expensive, Dana gets worried that inflation is spinning out of control. So a couple of months ago he returned from a month in Paris to find that the price of pricey steak had jumped to $38, up from $36. To hear him tell it, not since the Last Supper has an evening meal emanated so pervasive a sense of impending doom. ... But it's a little frightening when a guy who just spent several weeks spending euros (now 1.58 to the dollar and climbing) comes back to New York, switches to dollars, and finds himself 'aghast' that everything's so expensive. ... So how do we account for the discrepancy between the [Fed's] recent assurances that inflation is under control and the 91% of the population that's worried it isn't? ... The ... most disconcerting possibility is that the CPI systematically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. ... One of my favorite 91-percenters, Fusion IQ's Barry Ritholtz, puts it amusingly: 'If you take everything out of the CPI basket that's going up in prices, sure, you have no inflation!' ... People like Ritholtz are thinking of the 1996 Boskin Commission, which was established to determine the accuracy of the CPI. The Commission conlcuded that the CPI overstated inflation by 1.1%, and methodologies were adjusted to reflect that", my emphasis, Elizabeth Spiers (ES) at Fortune, 14 April 2008.

Welcome aboard ES. One quibble: The Boskin Commission was not "established to determine the accuracy of the CPI", but to find a rationalization for reducing it. At least, that's my opinion. See my 5 October and 18 November 2007 posts.

Wednesday, April 23, 2008

Incentives Count-For Oil Companies Too!

"ExxonMobil Corp. doesn't make many mistakes. In the often-chaotic petroleum business, its careful budgeting and efficient operations are widely admired. But Exxon's stingy approach to capital spending--amid skyrocketing oil prices--could be a target of second-guessing for years to come. ... Consider these numbers. In 2007, Exxon spent 5.3% of revenues on exploration and capital outlays, down from 6.5% in 2003. The actual dollar amounts did increase, to $20.9 billion from $15.3 billion. But they didn't keep pace with Exxon's overall revenue growth, let alone soaring oil prices. ... 'Exxon has consistently been the most cost-disciplined of the big oil companies,' says Morgan Stanley analyst Doug Terreson. 'They most likely believe that the historic rise in oil prices isn't sustainable. Otherwise they would be spending a lot more than they have.' ... What's more, countries such as Venezeula and Russia have become more assertive about the terms on which foreign oil companies can operate within their boundaries", George Anders at the WSJ, 16 April 2008.

"Russian oil production declined in the first quarter of 2008. ... But since 2003, the most efficient Russian oil company, Yukos, has been dismembered, contracts with efficient foreign operators such as Royal Dutch Shell have been forcibly renegotiated, and Russia has imposed an 80% tax on revenue after the first $27-a-barrel price. ... Venezuela recently seized majority control of foreign oil concessions, so even with the world's largest oil reserves, its production has declined since 2006. Nigeria taxes foreign oil companies at 98%; its production has declined 10%", WSJ, 16 April 2008.

I think Terreson is all wet. I suspect Exxon's management believes current oil prices will be maintained, but Exxon will be unable to profit from them as a result of tax changes and contract renegotiations.

The Bush Administration is Consistent

"The rate at which the Internal Revenue Service audits big corporations continued to drop, hitting a 20-year low in 2007, a new study shows. Researchers at the Transactional Records Access Clearinghouse, affiliated with Syracuse Univeristy, examined IRS data and found that 26% of corporations with $250 million or more in assets were audited in 2007. That was down from 34% a year earlier and 43% in 2005. During the 1990s, such rates typically hovered around 50%. ... The IRS argues that the number of audits of any particular class of companies isn't as signficant as the bottom line: what it collects in extra tax revenue stemming from such audits. Using a somewhat different classification system, the IRS says it brought in $14.2 billion in enforcement revenue in 2007 from companies with more than $10 million in assets, up 34% from the prior year. ... Barry Shott, an IRS deputy commissioner ... said that a decline in the number of audits of the very largest corporations--typically multinationals--was explained in large part by a relatively new program in which the IRS works closely with such companies before they file their returns", my emphasis, WSJ, 14 April 2008.

There is so much here. I could not accuse Bush Adminstration (BA) personnel of having little minds, see my 29 October 2007 post. The IRS says focus on the amount of money it collects to assess its enforcement efforts: Chris Cox's SEC says look at the number of actions brought, see my 12 April 2008 post. The BA is consistent: in favoring big business interests. The IRS program which "works closely with [big] companies before they file their returns" looks like its version of the DOJ's "deferred prosecutions". See my 15 April 2008 post on this.

Tuesday, April 22, 2008

Krugman on the Crisis

"But there's another world crisis under way--and it's hurting a lot more people. I'm taking about the food crisis. ... There have already been food riots around the world. Food-supplying countries ... have been limiting exports. ... The subsidized conversion of crops into fuel was supposed to promote energy independence and help limit global warming. But this promise was, as Time magazine bluntly put it, a 'scam'. ... You might put it this way: People are starving in Africa so that American politicians can court votes in the farm states. Oh, and in case you're wondering: All the remaining presidential candidates are terrible on this issue. ... Governments and private grain dealers used to hold large inventories in normal times, just in case a bad harvest created a sudden shortage. Over the years, however, these precautionary inventories were allowed to shrink, mainly because everyone came to believe that countries suffering crop failures could always import the food they needed", my emphasis, Paul Krugman (PK) at the Houston Chronicle, 8 April 2008.

I agree with PK about ethanol and note the inventory shortfall is consistent with just-in-time inventories, see my 23 July 2007 post. Does mankind ever learn? A fellow named Joseph supposedly lived about 3,900 years ago and explained Pharoah's dreams about the seven fat and lean cows and seven heads of good and bad grain, see Genesis 41. Who would store grain for seven years today? What would Joseph and Pharaoh think if they came back today?

The Fed and Food

"It's time for the [Fed] to stop reducing the federal funds rate, because the likely benefit is small compared to the potential damage. Lower interest rates could raise the already high prices of energy and food, which is already triggering riots in developing countries. In order to offset the inflationary impact of higher imported commodity prices, central banks in those developing countries may raise interest rates. Such contractionary policies would reduce real incomes and exacerbate political instability. ... But high unemployment and low capacity utilization would not prevent lower interest rates from driving up commodity prices. ... Lower interest rates induce investors to add commodities to their portfolios. ... An interest-rate induced rise in the price of oil also contributes indirectly to higher prices of food grains. It does so by making it more profitable for farmers to devote more farm land to growing corn for ethanol. ... Commodity price inflation is of particular concern now that the CPI has increased 4% in the past 12 months. ... In lower-income, emerging-market countries, food and energy are generally a larger part of consumer spending. A rise in these commodity prices can therefore add proportionately more to the cost of living in those countries, and therefore depress real incomes to a greater extent than in the U.S.", Martin Feldstein (MF) at the WSJ, 15 April 2008.

"With a dramtic rise in the prices of foodstuffs, riots have flared up in dozens of hotspots around the world. Panicky politicians are responding with precisely the wrong policies, including production subsidies and trade controls. ... What is going on? We can discern four forces at work today pushing up food prices. ... Monetary policy in overdrive. ... The last time the real fed funds rate was negative for a prolonged period was in the mid-1970s. ... Exchange-rate agreements in disarray. ... Unsound market interventions. .. This time round, our government has been force-feeding the inefficient production of ethanol. The result: Corn prices have more than doubled over the past three years. ... Oil prices on the rise. ... The good news is that producers respond to relative prices, although it can take some time", Vincent Reinhart (VR) at the WSJ, 18 April 2008.

Welcome aboard MF. You should have said this months ago. I think the recent world-wide riots scare MF. I wonder what Thais, Egyptians, Vietnamese, etc., "marginal propensity" with respect to the price of rice is to hang Fed chairmen ?

VR, one producer which does not "respond to relative prices" is the Fed. With the Euro at $1.59 as I write, what prices does the Fed look at in setting monetary policy? VR was a Fed employee in the past.

Monday, April 21, 2008

Fed Power?!

"There's something strange about the Treasury Department's suggestions for the reform of banking regulation and about the cascade of commentary on it. From one end to the other, there's an assumption that the [Fed] has somehow lacked the information and authority it could have used to prevent the insanity that has engulfed the credit markets. ... Yet the investment banks that mattered, including Bear Stearns, (and Morgan Stanley, Merrill, Lehman and Goldman, not to mention the mortgage lender Countrywide), were all among the 20-odd primary dealers who help the Fed distribute Treasury bills in the weekly auctions that fund the federal government. ... Most commentators on the current credit crisis have argued that the banking regulators and supervisors played no role in its inception, because the bad mortgages were written and sold and packaged by unregulated mortgagge brokers and mortgage bankers. But all the bank-holding companies had subsidiaries that were active in the mortgage market, and virtually all the mortgages packaged for sale by private entities passed through some subsidiary of some bank-holding company or some bank-controlled investment vehicle at some time between the inking of the contract and its disappearance into a collateralized security. ... Of course, Fed examiners don't look at individual loans any more; they just ask banks whether they are living up to their own standards of due diligence, and if it's OK with the bank it's OK with the Fed. ... Like the stock market of the 1960s, this over-the-counter system has blown up, leaving behind gaseous waves of mistrust. ... We should note in passing that the big beneficiaries of the Fed's action on Bear Stearns were the sellers of credit derivatives insuring Bear's obligations. ... The truth is that the Fed had plenty of authority to take the steps that would have avoided today's dangers and its own embarrassments. The problem was that the Fed lacked the will to supervise", Martin Mayer (MM) at Barron's, 14 April 2008.

MM brought something to my attention I hadn't thought about before, i.e., current conditions in the derivative markets are like those of the put and call dealers in the 1960s before the advent of the CBOE and the existence of clearing houses. Crazy. I agree with MM, Bear's insurers were big beneficiaries of the Bear bailout.

Shhhh, Don't Tell the Children

"During a March 28 C-SPAN series, 'America and the Courts,' Justices Anthony Kennedy and Clarence Thomas were seen insisting that it is vital to their relationships with one another on the Court that Congress not mandate TV coverage of their oral arguments because that (Justice Kennedy actually said) would introduce an 'insidious dynamic' into the proceedings. Informing 'We the People' is insidious. ... Kennedy ... explained: 'We teach that we're judged by what we write and by what we decide ... I do not want an insidious dynamic introduced into my court that would affect the relations that I have with my colleagues.' ... We (justices) think that we should be entitled to at least a presumption of correctness and to some deference in determining how best to preserve the dynamic of the wonderful proceeding that we know as oral argument. ... From their high seats above us all, both these justices ignore that they serve on a public court, paid by taxpayer funds: and because of increasingly limited coverage of the Supreme Court in newspapers and on broadcast and cable television, many Americans know little of these nine distant arbiters of our rights and liberties in so many spheres of our existence. ... In similar testimony before a previous congressional committee, Justice Kennedy has more than implied that if Congress were to insist that the oral arguments be open to all, that disrespect for the Justices' 'presumption of correctness' would violate the Constitution's separation of powers! Where did he find that in the Constitution?", Nat Hentoff at, 14 April 2008.

"The court rules that the state of Kentucky may continue to use lethal injections when administering the death penalty. But that's not what's shocking. Nor was it surprising that for the first time Justice John Paul Stevens admitted he thinks the death penalty is unconstitutional. What is staggering, or at least should be, is that Stevens freely admits that he no longer considers 'objective evidence' or even the plain text of the Constitution determinative of what is or isn't constitutional: 'I have relied on my own experience in reaching the conclusion that the imposition of the death penalty' is unconstitutional. ... Barack Obama ... has explained his thinking toward judicial appointments thusly: 'We need somebody who's got the heart, the empathy, to recognize what it's like to be poor or African-American or gay or disabled or old--and that's the criteria by which I'll be selecting my judges.' ... Feeling sorry for the poor guy who violates the Constitution or the law has no role in how a Supreme Court justice is supposed to make a decision. ... In a very real sense, this election year we face the question: Do we want to live in a monarchy or a nation of laws? Is this to be a country where justices serve as a reliable backstop against encroachments upon the constitutional order, or is this to be a country where the most undemocratic branch of government serves as the tip of the spear for such intrusion?", my emphasis, Jonah Goldberg (JG) at, 18 April 2008.

I don't care what Kennedy thinks. It's not his court. It's the US Supreme Court, "our" court. All 302 million of us. If Kennedy thinks otherwise, he should be impeached then removed from office. The US is not a monarchy. Even a judicial monarchy. Emperor Kennedy, I don't apologize. I am an American citizen. I owe you no deference at all. Kennedy apparently thinks we are serfs and should kowtow in his presence. Where do these guys get off? Why are they entitled to a "presumption of correctness" in any area? Kennedy is to be congratulated for his honesty.

I feel JG's pain. After all, why did President Bush elevate Roberts and Alito to the Court? Because of their great intellects? Their scrupulous impartiality? Or because Bush expected they "had the heart, the empathy, to recognize" how hard it is to be a Fortune 500 CEO or investment banker?

Sunday, April 20, 2008

Financial Regulation-Two Views

"Nice try; no cigar. That was my reaction to the attempt of the banking community to forestall additional regulation, by recommending a suite of best practices to be embraced voluntarily. ... The question is whether the additional regulation will do any good. In an interim report on 'market best practices', the Institute for International Finance, an association of bankers, offers devastating self-criticism. ... Would you buy a voluntary code from people who describe their own mistakes in this brutal manner? ... First, in such a fiercely competitive business, a voluntary code is almost certainly not worth the paper it is written on. ... The IIF was created not only to represent the industry, but to improve its performance. It is clear that this has not worked. ... Last month, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard published an extraordinary paper on the long history of financial crisis. The chart shows that the incidence of banking crisis ... has been as high since 1980 as in any period since 1800. ... Yet why, I ask, should this industry have apparently failed to improve its standards of performance over the past century? After all, almost every other industry has done so. Consider how confident we are that the food we buy will not poison us. ... Consider, by those standards, the failures of the banking industry, as admitted by the IIF itself. ... The 'product' of the financial industry is promises for an uncertain future, marketed as dreams that can readily become nightmares. ... Boeing would not survive if its the aircraft it built fell out of the sky. Yet in the financial industry, huge blunders are also almost always made in common. If everybody is in the dance nobody is to blame and, in any case, governments, horrified by the consequences of a collapsing financial system, will come to the rescue. ...What then is to be done now? ... The agenda in the official report ... includes: strengthening prudential oversight of capital, liquidity and risk management; enhancing transparency, changing the role and uses of credit ratings; strengthening to authorities' responsiveness to risk; and improving arrangements for dealing with stress. But, it should go without saying, policymakers also believe regulation must be tougher. Given the damage done and the extent of the safety net provided, no alternative exists. Yet I am not that optimistic about regulation either. Regulators are doomed to close the stable doors behind financial institutions that always find new and more exciting ways of losing money. ... If regulation is to be effective, it must cover all relevant institutions and the entire balance sheet. ... It is impossible and probably not even desireable to create a crisis-free financial system", my emphasis, Martin Wolf (MW) at, 15 April 2008.

"No doubt nearly all bankers want the broad foundations of the existing banking system to be maintained. That system is their bread and butter and it has served them well. ... Who owns the ... Fed? ... The Fed's incorporation or very existence is a form of capital to it, and that's due to its being a creature of Congress. However, Congress makes no appropriations for it and lacks effective day-to-day control. The Fed's actions are largely independent of Congressional direction. ... Loeys said ... 'This was a run on the securitized world. The bank regulation and the structure of the supervisory system was created for a banking world of taking deposits and making loans. The world has moved towards capital markets, which were regulated from the point of view of consumer protection, but not from a systemic stability point of view.' ... 'Central banks' extension of liquidity to broker-dealers and (the) securitized world is permanent, and will be followed by regulatory control,' the [JP Morgan] analysts wrote. Notice the heavily bank-oriented (and slanted) world-view in these statements. To paraphrase them, the financial markets caused the recession, not the Fed, and not the banking system. The capital markets, although regulated for consumer protection, are not regulated enough. They are subject to excesses. They threaten the banking system's stability, so they need to be controlled. The banks cannot do this, so the Fed must. The Fed is the good guy. ... The banks, including the central bank, have clean hands. They were passive players in this disaster. The capital markets were the bad guys. The good guys will now have greater power over the bad buys. The good guys will save the system. ... Well, maybe the banking system will be saved so that it may continue to profit bankers for another cycle or two. ... Our current banking system ... produces economic instability ... a continuing loss in purchasing power of the dollar ... [and] support to ill-conceived and destructive spending policies of the state. ... Our banking system serves the interests of the bankers and the politicians very well. ... It is an interesting fact that the banking system is heavily regulated. This regulation provides the appearance that the banks are under public control. ... We will hear about reform ... It will be reform ... designed to prolong and enlarge the privileged position of the bankers. ... The fact is that the system cannot be reformed by any piecemeal regulation or deregulation, because the regulators are part of the system and help keep it alive. ... There is an optimal rate of inflation so as to hold up bank profits while ensuring the survival of various interests including the government itself. ... The Fed's current rescue operation is buying time so that banks can obtain more capital and liquidate bad loans or ship them off to the Fed in return for Treasury bills. ... The best solution to the financial problems brought about by the Fed's past bubblenomics is analagous to a 'big bath': write the old system off and start a new one with sound fundamentals. That means eliminating legal tender laws, doing away with monopoly government fiat money, and making institutions that claim to be depositories for money actually hold that money. ... Central banking must be destroyed before it totally destroys us", my emphasis, Michael Rozeff (MR) at, 16 April 2008.

I agree in part with MW. The problem is: "governments ... will come to the rescue". If bankers thought FBI agents would come for them with handcuffs, they would behave differently.

I agree with MR and have advocated repealing the Federal Reserve Act for decades. No proposed "reform" will do anything to protect the public from the banks. MR sounds like Cato the Elder, 234 BC to 149 BC, who ended every speech he made with: "Carthage must be destroyed", in Latin, "Delenda est Carthago". Similarly, the "Fed must be destroyed". Asking bankers to "reform" the banking system is about as sensible as asking CPAs to "reform" the CPA business. Not very. What can we expect? 31 more years, see my 28 December 2007 post.

On Black Swans

"In two bestselling books, Fooled by Randomness and The Black Swan, Nassim Nicholas Taleb has explored the ways people misunderstand randomness and risk. ... What I call a Black Swan is a surprise event--like the discovery of the black bird in Australia, which was unpredicable because swans in the Old World were all white. But unlike the bird, my Black Swan carries large consequences. ... Your dentist's income will not disappear on a single day: No single event will carry big consequences for her. ... The Black Swan is a matter of perspective. A turkey is fed for 1,000 days--every day lulling it more and more into the feeling that the human feeders are acting in its best interest. ... Anyone who knows anything about the history of banking (or remembers the 1982 Latin American debt crisis of the 1990s savings and loan collapse) will tell you that the subprime crisis was bound to happen. Banks are exposed to such blowups. Bankers have been the turkey historically. ... I've been telling anyone willing to listen that banks have a tendency to sit on time bombs while convincing themselves that they are conservative and nonvolatile. ... It is the 'science' of risk management that effectively turned everyone involved into a turkey. ... We replaced so much experience and common sense with 'models' that work worse than astrology, because they assume that the Black Swan does not exist. Trying to model something that escapes modelization is the heart of the problem. We like models because they do not require experience and can be taught by a 33-year-old assistant professor. Sometimes you need to say, 'No model is better than a faulty model' ... Let me blame the business schools and the financial economics establishment--they have a vested interest in promoting models and devaluing common sense. ... The problem may also be the Nobel in economics that gave a stamp to these junky theories. ... Occasional blowups are good if they are small and recurrent. ... In the past, the financial world had a very diversified ecology: banks going bust on a steady basis", my emphasis, Nassim Taleb (NT) interview by Eric Gelman at Fortune, 14 April 2008.

I agree with almost everything NT said. In the pre-Fed days we had more bank failures than now. However they were smaller and did little damage to the economy. Banks are not today's turkey. With the advent of the Fed and perpetual inflation, holders of dollar assets are. NT likens model building to astrology. I compared it to alchemy, see my 23 August 2007 post. I presume NT is criticizing the 1997 Nobels to Robert Merton and Myron Scholes. I also criticize the 1973 Nobel to Wassily Leontief.

Saturday, April 19, 2008

Intellectual Honesty and Housing

"The policy alternatives in the post-housing-bubble world are painfully unpleasant. In my view, the least bad option is for the [Fed] to print money to help stabilize housing prices and financial markets. Yes, use reflation to soften the pain for Main Street and Wall Street. If instead, we let housing prices fall another 25-30%--as predicted by the Case Schiller House Prices Futures Indexes--it's almost certain that Washington will end up nationalizing the mortgage business. ... Meanwhile, the collapse of house prices and the attendant damage to credit markets have become so severe that the Fed has been forced to create new policy measures at a fast clip, including the radical decision to take $30 billion worth of Bear Stearns' risky mortgages onto its own balance sheet, and to open the discount window to investment banks. ... The monetary easing I'm recommending can occur by having the Fed print money to purchase mortgages directly or purchase Treasury securities directly. The latter is probably more desireable because it adds higher quality assets to the Fed's balance sheet. ... Fed reflation--to slow the fall in home prices and alleviate the distress for households and lenders--carries many risks. ... The Fed should announce its intention to add to its holdings of Treasury securities in order to provide additional liquidity. It should cease pegging the fed funds rate while this policy is in effect. ... While there is a substantial risk that inflation may rise for a time--this would be the policy goal--monetization is more easily reversible than the nationalization of the mortgage market. ... The post-bubble period has yielded some very unattractive policy alternatives. They clearly underscore the rationale for having the Fed target asset prices--in a world where asset markets affect the real economy more than the real economy affects asset prices", my emphasis, John Makin (JM) at the WSJ, 14 April 2008.

I hand it to JM, he's honest about US policy choices: inflate or let Wall Street suffer. JM wrote, "inflation ... would be the policy goal". I'll illustrate. Suppose a house today is "worth" $400,000, i.e., it could be sold for cash to a third party in say 60 days for $400,000. The current "owner" owes a bank $550,000 on the house, having bought it in California 18 months ago. If the "owner" defaults, the bank loses $150,000. Simple enough. Suppose the Fed "gins up" inflation to average 12% a year for the next four years and the current "owner" holds the house. If it's price keeps up with inflation it is worth 157.4% of $400,000 or $629,600 in 2012 dollars. What's happened? The bank can be paid off because the mortgage it held was not inflation adjusted. Who loses? Anyone who holds bonds or savings accounts as they are only worth 63.5% (1/1.574) of their 2008 value. The losses go somewhere. JM's "solution": make those least capable of understanding the losses and who have the least political power bear them. JM's "solution" of trying to "stabilize housing prices and financial markets" reminds me of 1942-51 Fed policy, the "period of the peg". During these nine years the Fed kept long-term US Treasury bond rates "stable" at 2.5%. The peg ended 4 March 1951 with the Treasury-Fed Accord. The US had price controls from 1942-47. Reported inflation from 1942 to 1947 was, by years: 10.97%, 6.00%, 1.64%, 2.27%, 8.43% and 14.65%,, source. The US had an inflationary explosion in 1947 when WWII price controls ended. Consider, with long-term bonds yielding 2.5% all this time, what did they pay in real terms? We are seeing the inflationary explosion now. Overseas. Wait, inflation will be repatriated.

Mish on Walkaways

Michael Shedlock has a 15 April 2008 post worth reading at about borrowers walking away from their homes. I have nothing to add to Mish's post.

Friday, April 18, 2008

The Supreme's Win One!

"Chief Justice Roberts, writing for the 6-3 majority, ruled that the [International Court of Justice] finding was not binding because the Vienna Convention is an understanding between governments, a diplomatic compact. It was never intended to automatically create new individual rights enforceable domestically by international bodies. Texas's violation was of diplomatic protocols, and calls for a diplomatic reponse. ... Medillin v Texas also swatted away a claim of Presidential power. While the Bush administration did not agree with Mexico's choice of venue, or the intrusion on U.S. sovereignity, it attempted to allay the diplomatic ruckus by directing states to comply with the ICJ ruling in a 2005 executive order ", editorial at the WSJ, 26 March 2008.

The Bush administration's pandering to Mexico amazes me. Would it intervene for an American held in a Mexican prison? Bush favored the death penalty as Texas governor, yet now wants to deny it to Texas when applied to Mexican nationals. Amazing.

New Prosecutorial Darling

"But if the feds wanted to, they probably could come after [Eliot Spitzer] with a big, fat truncheon--a money laundering charge. ... Laundering charges get tacked onto all sorts fo offenses that involve cash, from gambling to Medicare fraud. ... Prostitution may be illegal, but Spitzer was not trying to camouflage profits from gangster activity. ... While the 1970 law [Bank Secrecy Act] was mainly aimed at prompting financial institutions to help the government catch money launderers, in 1986 Congress moved to criminalize money lanudering itself, with fines and lengthy prison terms. ... In the hands of federal crime fighters, the second law has been stretched beyond recognition. ... For years an overzealous federal court system has aided and abetted the government's quest to concoct money lanudering crimes. ... Money lanudering charges are the punitive damages of the criminal sector. It't time Congress cracked down on the prosecutors", Joel Androphy (JA) at Forbes, 7 April 2008.

I agree with JA, like other laws, those against money laundering have been used to "beat" guilty pleas out of defendants who are in all likelihood not guilty of them. Money landering charges and the threat to file them, have become so common they are now the "new darling of the prosecutors nursery". Criminal conspiracy was called "the darling of the modern prosecutor's nursery", Harrison v. US, 7 F 2d 259, 263 (2 Cir., 1925), (Hand, L. J). Criminal conspiracy, you have been disowned.

Thursday, April 17, 2008

Repeat Player Advantage

"An organization that helps resolve disputes between credit-card companies and their customers has been accused of disregarding the rights of consumers and favoring lenders in a lawsuit filed last month by the San Francisco city attorney. ... Companies such as credit-card issuers often prefer to resolve disputes with their customers through private arbitration, handled by one or a few lawyers known as arbitrators, rather than in court, in an effort to save time and money. ... From 2003 through March 31, 2007, 18,075 consumers' arbitrations in California were resolved through hearings conducted by the NAF, according to the suit, citing data reported by the NAF. Thirty of the matters, or fewer than 0.2% were won by consumers. 'NAF is actually in the business of ... churning out arbitration awards in favor of debt collectors,' reads the suit. ... But many plaintiffs lawyers and consumer advocates say that consumers are often forced into arbitration without adequately consenting, and that their recoveries can pale in comparison to jury verdicts", WSJ, 7 April 2008.

0.2%, wow! I'm sure NAF arbitrators are scrupulously fair. Of course, we might be seeing the "repeat player advantage" at work., i.e., NAF arbitrators side with the credit card companies over consumers since they will have continuing business from the former and in all likelihood, never encounter a particular consumer again. With the track record like that, I hope California puts the NAF out of business, at least within California.

More Fed Newspeak

"I want to briefly provide some thoughts on issues related to the so-called too-big-to-fail (TBTF) problem. As you may know, I have long considered this an issue of particular importance and relevance given the growth of large banks, their increasing complexity, and the history of government support for such institutions when they get into trouble. ... As we detail in the book, managing expectations of protection requires that policymakers take steps before a crisis to make it less likely that the failure of large or important financial institutions 'spills over' to other insitutions, markets and the rest of the economy. ... We simply cannot allow widespread perceptions of government support to pervade the financial system", my emphasis, Gary Stern (GS), Minneapolis Fed Chairman at the WSJ, 10 April 2008.

Fed "Chairman Ben Bernanke said Thursday that future financial crises can't be completely prevented. ... He said it was 'critical' for policy makers to talk to market participants to monitor conditions. ... 'We do not have the luxury of waiting for markets to stabilize before we think about the future,' Mr. Bernanke said", WSJ, 11 April 2008.

"What is perfectly clear is that Ben Bernanke and Henry Paulson are using someone else's money to help bankers: our money. ... This amounts to taking a little bit of value out of every dollar-denominated savings account to pay the bankers and brokers. ... If Bear goes belly-up, so what?", Frederick Horn (FH) letter to Barron's, 31 March 2008.

Note: GS is concerned about perceptions, not substance.

Now Helicopter Ben (HB) channels the old Hillary Clinton who wanted to hold millions of conversations. Who does HB think he should talk to? A frugal elderly person whose life savings no longer produce an adequate income for him or her because HB decided to save those institutions which are TBTF? Oh, sorry, there are none. Hey HB, what do you think of FH's letter? Will you tell us he is unenlightened, or ignore him? Economic Logician, if you want to understand gold, read FH's letter.

Wednesday, April 16, 2008

Inflation, a Worldwide Plague

"The surge in grain prices has caused U.S. Midwestern land values to rise as well, but prices have now expanded so far, so fast that some experts worry that the farmland market has become a bubble waiting to burst. ... The U.S. Department of Agriculture estimated that the price of an average acre of U.S. cropland rose 13% in 2007, to $2,700, more than double the $1,340 price of 1998. It predicts another 15% rise this year", WSJ, 7 April 2008.

"Inflation is back. After years of relative stability, a wave of rising prices is washing over the world economy. It comes at a most inconvenient time. The [Fed] is sharply cutting U.S. interest rates--the opposite of the usual response to rising inflation--to prevent the housing bust and credit crisis from causing a deep, prolonged recession. That's making the global response to inflation more complicated. ... High food and energy costs hit developing countries--where consumers spend a larger share of income on those necessities particularly hard. ... On Wednesday, the World Bank estimated global food prices have risen 83% over the past three years. ... But the fact that inflation is rising almost everywhere suggests some of its causes are global. As crops are sold for alternative-energy production, food prices have soared: The price of rice, the staple for billions of Asians, is up 147% over the past year. ... But the economic boom in emerging markets also means their currencies and prices are steadily rising, boosting the prices rich countries pay for imports from those poorer countries. ... Core inflation, a measure that excludes volatile food and energy prices, is not rising as quickly as overall inflation. ... In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. ... As [Mongolia's] income from copper exports surged, inflation reached 15.1% at the end of 2007. ... In Qatar, a rich emirate jutting into the Persian Gulf, surging revenues from natural-gas sales have led to more government spending. ... So is inflation, at 13.7% on the year in the last quarter of 2007. In part that's because Qatar followed its currency peg and moved in step with the Fed's rate cuts. ... That has triggered strikes and riots in the [UAE] by construction workers. ... 'Australia has done all right because the currency has been quite strong, and interest rates are high', says Ben Simpendorfer, an economist for the Royal Bank of Scotland. 'The Gulf states might have looked more like Australia if it weren't for the pegs'," WSJ, 10 April 2008.

"China's government allowed the country's currency to rise to its highest level against the dollar in more than a decade, despite weakening global growth, an indication that Beijing views rising inflation as a bigger danger than the risk of an economic slowdown. ... The yuan has now gained more than 18% against the dollar in less than three years, although it has been flat or even down against other major currencies, such as the euro. ... 'It's going to go a lot higher,' says Jim Rogers, a U.S. investor and self-described China bull. Mr. Rogers says the Chinese currency has the potential to strengthen to just two yuan to the U.S. dollar--a 2 1/2-times rise from current levels. ... Inflation is a social-security issue in China. Rising prices of cooking oil and meat were cited last month by residents of Lhasa, the capital of Tibet, as helping foment anger that resulted in riots. ... Already, inflation has clocked in at the fastest pace in 12 years in recent months, including the February rise in the consumer price index of 8.7% from the year before", WSJ, 11 April 2008.

"Finance ministers gathered this weekend to grapple with the global financial crisis also struggled with a problem that has plauged the world periodicially since before the time of the Pharaohs: food shortages. Surging commodity prices have pushed up global food prices 83% in the past three years, according to the World Bank. .. World Bank President Robert Zoellick warned in a recent speech that 33 countries are at risk of social upheaval because of rising food prices. ... Among other targets, [the IMF and World Bank] signaled out U.S. policies pushing corn-based ethanol and other biofuels as deepening the woes. 'When millions of people are going hungry, it's a crime against humanity that food should be diverted to biofuels,' said India's finance minister, Palaniappan Chidambaram, in an interview. ... Recently at least a dozen of 58 countries surveyed by the World Bank have reduced tarriffs to food imports and erected barriers to exports in hopes of restraining food prices domestically and moving toward 'self-sufficiency.' ... The global effect of export barriers, however, is to drive food prices even higher than they would be otherwise. ... About 18 of the countries sampled by the World Bank also are boosting consumer subsidies and instituting price controls. That prompted a warning from U.S. Treasury Secretary Henry Paulson to 'resist the temptation of price controls and consumption subsidies that are generally not effective and efficient methods of protecting vulnerable groups.' He said, 'They tend to create fiscal burdens and economic distortions while often providing aid to higher-income consumers or commercial interests other than the intended beneficiaries'," WSJ, 14 April 2008.

The Chinese, Arabs and others will eventually wake up and decrease their dollar reserves. That they still support US domestic consumption to the detriment of their own people, astounds me. The Chinese should be particularly aware of their "inverse" socialism in taking from poor Chinese peasants, to give to rich Americans. Wild.

China's domestic stability is more important to it than maintaining a large trade surplus. I expect the yuan to continue to rise over the next 3-5 years.

Amazing, I agree with Paulson about the undesireability of price controls and subsidies. Now if he would only apply that logic to US interest rates and potential homeowner bailouts.

Incentives Count-For Bankers Too?-2

"Last week's congressional hearings on the Bear Stearns [BS] 'non-bailout' were fascinating, and frightening. Our leading financial regulators said the [Fed's] unprecedented action was necessary to ensure the stability of financial markets which would have melted down had nature taken its course. ... That raises the question of when [BS] became unsound, especially in light of the public statements about the company's strength by their CEO only days earlier. If Bear was under-capitalized and over-leveraged, shouldn't red flags have gone up long before? ... The unstated premise is that, with better government oversight, we would not be suffering today's bear market and financial chaos. Of course, during the previous outsized boom, no one was calling up his congressman to complain that home values were appreciating too quickly. ... Leverage--and the rapid creation of dollars--fueled the boom we all seemed to love. But leverage cuts both ways, accentuating the benefits of a bull market and the pain of a bear market. The lesson we all must take away now is that leverage is not a one-way path to wealth with no risk of loss. ... But as [Sen. Jim Bunning [R., Ky]] implied, isn't it the regulators' job to ensure that we don't end up here again? That is the dilemma of 'moral hazard'. Conseqences not suffered from bad decisions lead to lessons not learned which lead to bigger failings down the road. And so we have the insidious modern trend to shirk responsibility and blame others for out missteps. This trend, this 'victim mentality,' is a path toward personal disaster", my emphasis, Ethan Penner (EP) at the WSJ, 11 April 2008.

"As the credit crisis has slowly expanded and worsened, there has been a flurry of activity in Washington to reduce the damage from it. There are bailouts and tax breaks, and even checks to parents of school-age children. But there is remarkably little action aimed at getting the credit system functioning again. In part, that is because there is a scarcity of ideas. Paul Volker [former Fed head] ... was right this week when he said the financial engineers had created a 'demonstrably fragile financial system that has produced unimaginable wealth for some, while repeatedly risking a cascading breakdown of the system as a whole.' ... For the time being, the solutions being pushed would not seem unreasonable to an old-fashioned socialist. ... The Basel II capital rules for commerical and investment banks clearly need to be strengthened, and regulators need to develop the ability to do their own risk assessments, rather than leaving the task to the banks and the credit rating agencies. That will take time and cost a lot of money, and it will require the derivative markets to be much more transparent. ... Most of the critics--myself included--did not anticipate the severity of the credit collapse, and we should not act as if the executives and regulators who failed to prevent it were blind or stupid. ... Volker, who knows how inflation can get out of hand, said the current situation reminds him of the early 1970's when inflation began to accelerate", my emphasis, Floyd Norris (FN) at, 11 April 2008.

Right on EP!. What does, "ensure the stability" mean? Why is stability good? "Meltdown" sounds frightening. What does it mean? I only know who gains and who loses. In today's America responsible savers lose, irresponsible bankers and borrowers gain. The regulators' job is to ensure politically favored classes have the public bear their losses. If we want to prevent this, shut down the regulators! Let investment banks fail! No, no, no! That might mean Lloyd Blankfein of Goldman Sachs might have to find a real job. Like shining shoes in Grand Central Station. See my 12 December 2007 post. Alcoholics Anonyomous (AA) has a concept, "hitting bottom". AA preaches an alcoholic won't sober up until he hits bottom. Similarly, bankruptcies may make our investment banker overlords hit bottom. I read terms like "meltdown" and think of Andrew Jackson's (AJ) war with Nicholas Biddle (NB) over the Second Bank of the US recharter. NB threatened to plunge the US into a depression unless the bank was rechartered. AJ was not dissauded. He launched his pet banks program and eventually killed the "moster". See my 24 December 2007 post.

I largely disagree with FN. First, the damage is, now! The "activity" intends to redirect the damage to politically disfavored classes. As for socialism, I agree, noting Karl Marx favored creating a central bank, see my 17 September 2007 post. The financial engineers were either fools or knaves, but created a system to redistribute wealth. The idea of regulators doing risk assessments is laughable. Why not have CPAs do it? Supposedly we should under Generally Accepted Auditing Standards. "Stuff and nonsense" said Alice. What does Mark Olson think about this? CPAs can't do it, even if they publish documents like that Francine McKenna cited at, 8 April 2008.

Why not think the executives and regulators were "blind or stupid"? I saw the collapse coming. So did others. So? Will FN suggest making me say, Comptroller of the Currency? I agree with FN, the executives and regulators were neither blind nor stupid: they knew what they were doing and planned to "cry wolf" to Congress all along if and when the credit markets blew up in their perennial game of "financial chicken" played with the real economy! Well, FN, fools or knaves? My vote: knaves.

Tuesday, April 15, 2008

Incentives Count--For Congress Too!

"Some self-styled conservatives have lately been suggesting that Republicans not overemphasize renewing the pro-growth Bush tax rate cuts. Instead, they argue, conservatives should focus on family-oriented tax credits for rearing children, education and health care. Authors such as Ramesh Ponnuru, Ross Douthat and Reihan Salam emphasize the encouragement of 'human capital formation,' as opposed to investment in physical capital. ... This could be a recipe for stagnation. Ending many deductions and fringe benefits would greatly expand taxable income. ... If the tax change is revenue neutral, and much of the revenue is devoted to large tax credits for families with children, then other taxpayers must pay a higher tax bill. ... We know from decades of economic modeling, and observing the revenue feedback when taxes are changed, that each added dollar Washington collects, then spends or gives away (for goods and services, entitlements or tax-transfers), costs the public about $2.50. ... The new 10% bracket is not 'at the margin' for most taxpayers, and so it has little supply-side incentive effect on work or saving. ... From the standpoint of today looking forward, the marriage penalty and child credit provisions of the 2001 tax cut would cost more to extend than would the 15% tax rates on dividends and capital gains. ... If the argument is that many people are no longer interested in tax rate reductions, that's because past increases in tax credits took millions of households off the income tax rolls. The bottom half of the income distribution pays barely 3% of the income tax. ... For people who pay no income tax, general government is practically a free good. ... A large expansion of family-friendly credits would make matters much worse and could tilt the political balance irrevocably toward runaway government. To be sure, it is fair to ask if a large tax credit for children constitutes an investment in human capital. ... The real problem is that government is too big. ... The true pro-family solution is less government, not more. And the likely outcome of taking millions more people off the tax rolls is more government, not less", Stephen Entin (SE) at the WSJ, 9 April 2008.

I agree with SE. Our current tax system of rates, credits, phaseouts and AMT has 90+% of the population pay virtually no tax. Further, it encourages resource misallocations in my opinion, in encouraging our least capable to go to college and have more children than they can otherwise afford. Contrast our policy with China's "one-child" policy. A contrasting opinion is: a 2 April 2008 post and related comments at Tax increases will never balance the budget. They will only lead to new spending programs like No Child Left Behind.

(In)Justice Department at Work--2

"A few years earlier, in the age of Enron, these kinds of charges would probably have resulted in a criminal indictment. Instead, Monsanto was allowed to pay $1 million and avoid criminal prosecution by entering into a monitoring agreement with the Justice Department. In a major policy shift, the Justice Department, once known for taking down giant corporations, including the accounting firm Arthur Andersen, has put off prosecuting more than 50 companies suspected of wrongdoing over the last three years. ... In many cases, the name of the monitor and the details of the agreement are kept secret. ... Firms have readily agreed to to the deferred prosecutions, said Vikramaditya S. Khanna, a law professor at the University of Michigan who has studied their use, because 'clearly it avoids a bigger headache for them.' Some lawyers suggest that companies may be willing to take more risks because they know that, if they are caught, the chances of getting a deferred prosecution are good. 'Some companies may bear the risk' of legally questionable business practices if they believe they can cut a deal to defer their prosecution indefinitely, Mr. Khanna said. Legal experts say the tactic may have sent the wrong signal to corporations--the promise, in effect, of a get-out-of-jail-free card. ... Defenders of deferred prosecution agreements say that they have been too harshly criticized lately and that they play a crucial role in allowing the government to secure the cooperation of a company while avoiding the time, expense and uncertainty of a trial. ... At a Congressional hearing last month, Mr. Ashcroft defended the agreements, saying that they have avoided 'destroying entire corporations' through criminal indictments. ... Paul J. McNulty, a former deputy attorney general who put the new guidelines in place in 2006 for corporate investigations at the [DOJ], said in an interview, 'There's a fundamental misapprehension with D.P.A.'s to think that they're a break for the company.' ... Charles Intriago, a former federal prosecutor in Miami, who specializes in money-laundering issues, said that huge penalties, like the $65 million fine for American Express Bank International in 2007, were 'peanuts' compared with the damage posed by a criminal conviction. ... The agreements were once rare, but their use has skyrocketed in the current administration. ... In general, such agreements result in companies acknowledging wrongdoing by not contesting criminal charges, but without formally admitting guilt. Most agreements end after two or three years with the charges permanently dismissed", my emphasis, Eric Lichtblau (EL) at, 9 April 2008.

"The Bush adminstration has a well-known aversion to regulating big business. As it turns out, it is also reluctant to prosecute corporations that break the law. Federal prosecutors have been regularly offering settlements to companies for wrongdoing that, in previous administrations, would likely have led to criminal charges. It is another disturbing element of how this adminstration has taken the justice out of the Justice Department. ... If corporations believe they can negotiate their way out of a prosecution, the deterrent effect of the criminal law will inevitably be weakened. The deals also leave a clear impression that an administration that prides itself on being pro-law-and-order--and on appointing federal judges who are tough on ordinary criminals--is tilting the justice system in favor of the wealthy and powerful. There also are worrying signs that some prosecutors may be using these agreements for political patronage", Editorial at, 10 April 2008.

No, the signal was intended. "A man is presumed to intend the natural and probable consequences of his acts", sayeth the Supremes. Even (In)Justice Department employees! "Allowing the government"? Are corporations sovereigns with armies to protect them from Uncle Sam? What's going on here? Isn't this nice? The Bush administration is more concerned about not destroying corporations than with incarcerating peons for decades over minor drug offenses. Artificial entities are more important than people to Bush & Co. "Fundamental misapprehension"? Please McNulty, stop insulting everyone's intelligence. That's exactly what they are. If they were anything else, the corporations in question would not agree to them! I agree with Intriago, $65 million is peanuts to Amex. Look at what's going on with BP and its proposed $50 million fine. Similarly, peanuts. Amen, EL. The current DOJ is so bad, you can almost want to see Hillary as our next President.

The Bush DOJ goes easy on "Extraordinary" as opposed to "ordinary" criminals. Makes sense.

Monday, April 14, 2008


"Though it garners relatively little attention, military bureaucracy poses a very serious threat to the long-term security of the [US], and its pernicious effect extends well down into the chain of command. ... Chickenshit is so called--instead of horse--or bull--or elephant shit--because it is small-minded and ignoble and takes the trivial seriously. Chickenshit can be recognized instantly because it never has anything to do with winning the war. One reason for the ubiquity of chickenshit in the modern U.S. military is the excessively high proportion of officers to enlisted men. ... Since, in the peacetime Army, there were not enough legitimate command and staff positions for all the officers, new positions had to be created, for which new functions had to be devised. ... At the same time, the Army recognized that these essentially bureaucratic positions did not prepare officers for combat command, so there arose an insistence on frequent rotation between staff, administrative, technical, and line positions, ranging between 12 and 24 months. ... The result was predictable: officers were constantly behind the power curve, and by the time they got their bearings, they were rotating home, to be replaced by another batch of essentially clueless 'newbies.' Proficiency was never established or maintained. ... Normally, one would expect that the higher the rank, the greater the experience. But in Iraq and Afghanistan today, we have lieutenants, captains, and majors who have made three, four, or even more rotations to a combat area, and thus have more real combat experience than most of the colonels and generals who give them their orders and direct policies in the Pentagon. ... In fact, it is not too much to say that there is a fight going on for the soul of the Army today, between the old guard of the Big Army, fighting budget battles ... and the Small Army who understand that most of our future wars will look a lot more like Iraq, and who are developing the skills, tactics and equipment to fight them. Evidence of this ongoing fight can been seen in the decision to bring General Petreaus back to the [US] to sit on the recent promotion board for brigadeer generals. This was done at the behest of Defense Secretary Gates, who was anxious to ... institutionalize the changes made by the Army in Iraq and Afghanistan by advancing officers who embodied those changes", my emphasis, Stuart Koehl (SK) at, 21 February 2008.

C. Northcote Parkinson wrote about the Royal Navy and how despite the number of its ships decreasing, the number of its officers increased 5-7% per annum! I am in partial agreement with SK. How does he know what our future wars will look like? If Iraq, what do we need an Army for? It's turning into a constabulary incapable of real war fighting, like say against a real potential enemy: China.

Conrad Hewitt = Andrew Fastow?

"Chief financial officers of public companies received new guidance Friday from the [SEC], giving firms more leeway to value asset-backed securities in cases where market prices or other relevant pricing information cannot be obtained. Public companies may use 'unobservable inputs' to value asset-backed securities, but only when actual market prices or relevant observable inputs are not available", WSJ, 31 March 2008.

I kid you not. Would Ed McMahon's "hermetically sealed mayonnaise jar" be an acceptable source of "unobservable inputs"? Mark Olson (MO), what will you do about this? Let me guess: let Big 87654 CPA firms secure "unobservable inputs" when documenting their audit work. Then let them prepare "unobservable" workpapers. Well, MO, is that the plan?

Sunday, April 13, 2008

Islam, Another Religion?

"Specifically, the religion model of Islamic terrorism itself requires rethinking. Western sociologists and war strategists have mostly utilized the dynamics of Muslims vis-a-vis westeners and their ally, Israel, to influence what they see as 'root causes' of terror. Prominent among these are the 'grievances' Muslins feel in the hands of the West and Israel. ... Although one could argue that most of these grievances are self-inflicted, Muslims have managed to successfully transplant the idea that being part of the weaker civilization, they are the victims. Wearing the mantle of a victim has its advantages, including the ability to camouflage aggresssion as a form of self-defense. However, the dynamics of Muslim-non-Muslim interaction in the developing world tells an entirely different story. Far more aggressive tactics have been employed by Muslims against much weaker opponents, be it in Darfur against black Africans or against brown unbelievers in South Asia. ... In the past sixty years, from every Muslim majority region of South Asia ... non-Muslims have been driven out in massive numbers to Hindu-majority India. This occurred when Muslim populations in these regions obtained political power. In 1971 about three million Hindus were slaughtered by the Pakistani army in the then East Pakistan and many more were driven to India, never to return. ... This has no parallel with any other religion in the modern era. ... This data ... compels one to scrutinize the roots of Islamic scriptures and study Islamic history of conquest. ... Islamic scripture is predominantly political and that the religion itself was probably devised to extend Islam's founder Mohammed's powerbase upon an edifice of theology. ... The conquest model is a much more inclusive and nuanced one, where terror is just one of the many tools for achieving objectives. It also explains why the Muslim population in Europe is fast growing, angry and disinfranchised (through self-infliction)--to deliberately create conditions conducive to Europe's demographic conquest by the Muslims", my emphasis, Moorthy Muthuswamy (MM) at, 20 March 2008.

I agree with MM. My study of the history of Pakistan and India since 1947 gave me a new understanding of the Israeli-Arab conflict. The Pakistani army killed about 2.4 million Hindus in East Pakistan in nine months before being defeated by India. This is a genocide I doubt one American in 100 has heard of. About 8-10 million Hindus were driven into India as refugees. Interestingly in 1947, Pakistan was about 30% Hindu. Now it is about 1%. India is about 14% Moslem and shows no signs of trying to force its Moslem population out. India has affirmative action for Moslems in university admissions, as does Israel! No, the sources of Islamic aggression are not injustices, at least as the West understands the term.

Tax Increases Coming

"By historical standards, federal revenues relative to GDP, at 18.8% last year, are high. In the past 25 years, this level was only exceeded during the five years from 1996 to 2000. ... Proponents of bigger government invariably argue that allowing all or some of President Bush's tax cuts to expire is necessary in the near term to balance the federal budget, and necessary in the longer term to finance the retirement and health-care promises to the baby-boom generation. ... As has so often been true in the past, the economic damage caused by the tax increases and tax avoidance behavior will prevent the promised revenues from being realized. At the same time, the promise of higher revenues will encourage Congress to continue its profligate spending. As a result, a tax increase won't lower the budget deficit. ... Balancing the federal budget without a tax increase will require strong fiscal restraint. ... The strategy of ratifying spending with higher taxes would require that all federal taxes rise by nearly 60%, bringing them to a European-level tax burden", my emphasis, John Cogan & Glen Hubbard (C&H) at the WSJ, 8 April 2008.

I disagree with one thing C&H wrote, "balancing the federal budget without a tax increase" assumes one could balance it. C&H write, "the promise of higher revenues will encourage Congress to continue its profligate spending". Indeed! Congress will spend more no matter what.