Financial Engineering and BP

"In retrospect, the pattern seems clear. Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their 'seeming indifference to safety and environmental issues.' ... The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely--and may even have been unlikely--but that would bring enormous costs. ... For all the criticism BP executioves may deserve, they are far from the only people to struggle with such low-probability, high-cost events. Nearly everyone does. 'These are precisely the kinds of events that are hard for us as humans to get our hands around and react to rationally,' Robert N. Stavins, an environmental economist at Harvard says. We make two basic--and opposite--types of mistakes. When an event is difficult to imagine, we tend to underestimate its likelihood. This is the proverbial black swan. Most of the people running Deepwater Horizon probably never had a rig explode on them. So they assumed it would not happen, at least not to them. ... On the other hand, when an unliklely event is all to easy to imagine, we often go in the opposite direction and overestimate the odds. After the 9/11 attacks, Americans canceled plane trips and took to the road. There were no terrorist atttacks in this country in 2002, yet the additonal driving apprarently led to an increase in traffic fatalities. ... In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller's liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages--to tourism, fishing and the like--stretch into the billions, the responsible party is on the hook for only $75 million. ... Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs", David Leonhardt at the NYT, 6 June 2010, link:

http://www.nytimes.com/2010/06/06/magazine/06fob-wwln-t.html.

$50 million. Apply these principles to the CPA and rating agency businesses and see what happens.

Accounting Onion Almost Makes Me Cry

Tom Selling's 15 June 2010 post at Accounting Onion applies SFAS 52, Foreign Exchange Accounting, giving an absurd result. He slams the SEC, FASB and Big 87654 all at once for this. Good show Tom. Here's a link:

http://accountingonion.typepad.com/theaccountingonion/2010/06/asu-2010-19-when-a-dollar-of-cash-is-more-than-a-dollar-on-the-balance-sheet.html. Thank you Hugo Chavez for creating this anomaly. In rereading Tom's post I got an idea for Citigroup's treasury department. Incorporate a Venezuelan subsidiary; put $50 billion USD in it and presto, instant profits. Well Vikram Pandit, whaddayasay? I figure this idea is worth 1%. I'll expect my $500 million check within 30 days. Tom: If I get the $500 million, half is yours. I'll let you know.

Butchering the Sacred Cow

"This will not be done because Americans do not really want major spending cuts. To demonstrate my point, let us consider America's sacred cow, tax-funded education. ... That would mean expenditures in the range of $800 billion a year. If we assume that about 80% of these expenditres are funded by governments at various levels, we are talking something in the range of $600-$650 billion a year. ... There is also nothing that says that a government has the moral authority to coerce parents who hold to one view of education, or one view of how the world works, to subsidize the educations of other families, whose children attend schools that teach a view of the world closer to that approved by the subsidized parents. To say this is to announce one of the most hated heresies of the modern world. I mean 'heresy' in the good old-fashioned way that is was meant in the Middle Ages and in virtually any society prior to the Enlightenment. This heresy involved calling into question the legitimacy of a priesthood, self-appointed and self-policed, which gains its money from the civil government. ... The modern priesthood is the educational establishment in each nation. Tax funding goes to those institutions that have been certified as reputable by the priesthood. ... The state regulates educational establishments, even including home schools, in order to preserve control over the content and methodology of education. In earlier centuries, a similar oligarchy was run in conjunction with state funding and also state coercion. Churches policed the society, including the morals of society, by means of a monopoly granted to them by the civil government. ... The modern educational system is far more compulsory than churches were in New England in 1665. The school bus system is indicative of just how compulsory it is. On this point, read my story of the two buses. ... In the modern world, anyone who suggests that all tax money should be withdrawn from the funding of educational programs is regarded as a crackpot. I am such a crackpot. I believe that the state does not have a moral right to compel parents to support other people's educations. If it were my decision, I would shut off the funding by the state for every school in the [US], including the military academies. This would add something in the range of $600 billion to the private sector. Governments would not be able to persuade parents and others to hand over their money at the point of a gun from one person in order to subsidize the education of another person. ... In order to discuss tax-funded education, I want to change the topic from tax support of educational institutions to tax support of churches. The logic that I am about to present applies equally well to both forms of institutional arrangements. But the public is unwilling to accept the logic of the disestablishment of churches when it is applied to disestablishment of education. ... Politicians rarely give much thought to the fundamental issues of life. They are too busy getting elected and reelected. They cannot devote the time necessary to sort out fundamental truths from fundamental errors. ... To allow this year's majority in the state legislature to set standards for what should be taught in the churches is to grant them too much power to shape the thinking of the voters. ... The politicians will use the power of civil government to extend the public's acceptance of those political views and political conclusions that are favored by the present majority in the legislature. This will turn politics into a battle zone between rival churches. ... Competition is basic to progress in every area of life. ... The public is kept from hearing new ideas, better ideas, and more effectively preached ideas precisely because congratations are not in control of the purse strings. ... It is worth noting that within five years of the decision of the Massachusetts government to cease funding the Congregational churches of the state, the government began funding local schools", my emphasis., Gary North at Lew Rockwell, 12 June 2010, link:

http://www.lewrockwell.com/north/north853.html.

Certified? Like the PCAOB and CPAs? Monopoly? Sounds like Saudi Arabia. Political choice? Why do politicians like Keynesian economics anyway? Are government "economists" really priests? Five years. How interesting. Within four years of the Fed's creation we were in World War I.

Milton Friedman Was Right (Again)

"Who is poor in America? This is a hard question to answer, and the Obama administration would make it harder. ... Except for recessions, when the poverty rate can rise to 15 percent, it's stayed in a narrow range for decades. ... But the apparent lack of progress is misleading for two reasons. First, it ignores immigration. Many immigrants are poor and low skilled. ... From 1989 to 2007, about three quarters of the increase in the poverty population occurred among Hispanics--mostly immigrants, their children and grandchildren. ... Poverty 'experts' don't dwell on immigration, because it implies that more restrictive policies might reduce US poverty. Second, the poor's material well-being has improved. ... Suppose that all Americans doubled their income tomorrow, and suppose that their spending on food, clothing, housing, and utilities also doubles. That would seem to signify less poverty--but not by the new poverty measure. ... The new indicator is a 'propaganda device' to promote income redistribution by showing that poverty is stubborn or increasing, says the Heritage Foundation's Robert Rector. He has a point. ... To paraphrase the late senator Daniel Patrick Moynihan: the adminstration is defining poverty up. ... Government statistics should strive for political neutrality. This one fails", my emphasis, Robert Samuelson at Newsweek, 7 June 2010, link:

http://www.newsweek.com/2010/05/30/defining-poverty-up.html.

This is old news. Without poor people what would our poverty warriors do? See my 4 June 2010 post:

http://skepticaltexascpa.blogspot.com/2010/06/california-today-texas-tomorrow.html.

LA End Game

"Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa [AV] and the City Council have been either unable or unwilling to face this fact. ... Even if [AV] were to enact drastic pension reform today--which he shows no sign of doing--the city would only save a few hundred million per year. ... Five thousand is the number of employees added to the city's payroll during [AV's] first term as mayor. According to California's Economic Development Department, when [AV] took office there were 4.73 million jobs in Los Angeles and 252,000 unemployed people. Today, there are just 4.19 million jobs in [LA] and over 632,000 unemployed people. ... How have city leaders responded to this crisis? Pension officials have played accounting games, like smoothing the investment return over seven years rather than five years. ... And most egregiously, rather than laying off employees, city officials have shifted certain workers to agencies like the Department of Water and Power and the airport, which have their own funding. ... He continues to insist that bankruptcy is not an option for [LA] even as anyone who can count understands there is no other option", Richard Riordan & Alexander Rubalcava (R&R) at the WSJ, 5 May 2010, link:

http://online.wsj.com/article/SB10001424052748704608104575218392603082622.html.

Riordan is a former LA mayor. Rubalcava is an investment advisor. Yes, R&R, LA's bankruptcy looks inevitable. Got muni bonds? Sell!

Whose History?

"The State Board of Education's proposed revisions for K-12 social studies curricula have come under fire from the radical left. ... Studies have revealed how unbalanced America's humanities departments are. Democrats outnumber Republicans by a large margin. In the history department at the University of Texas at Austin, out of 50 registered voters, only one is a Republican. Moderate and conservative Democrats are also rare. This political slant is reinforced by the economics of scholarship: Academic historians have been trained and have invested their careers in a profession that counts as legitimate only those subfields that support the leftist orthodoxy. Military history, for example, has almost entirely died off; not a single professor of history at UT-Austin lists military history as a primary speciality, while dozens list sexuality, ethnicity and anti-colonialism. ... Thus, robber barrons, the New Deal and the civil rights movement are in, but the contributuions of inventors and entrepreneurism, the decline of the family and the failures of welfare programs and public education are out. The new standards represent real progress. They don't go far enough in challenging orthodoxy, but they are a step in the right direction. ... This artificallly inflated controversy points to a larger issue: The people must not develp the habit of blind deference to so-called academic experts. ... The fundamental question is this: Shall we continue to have a government ruled by the people, or shall we instead, yield to a self-perpetuating caste of quasi-official experts", Robert Koons (RK) at the Houston Chronicle, 14 May 2010, link:

http://www.chron.com/disp/story.mpl/editorial/outlook/7004327.html.

Henry Ford said "History is bunk". Amen. RK is a UT philosphy professor.

Three Strikes And California's Out

"Williams, who is 46, was a homeless drug addict in 1997 when he was convicted of petty theft, for stealing a floor jack from a tow truck. It was the last step on his path to serving life. ... Still, for the theft of the floor jack, Williams was sentenced to life in prison under California's repeat-offender law: three strikes and you're out. In 2000, three years after Williams went to prison, Steve Cooley becaume the district attorney for Los Angeles County. Cooley is a Republican career prosecutor, but he campaigned against the excesses of three strikes. 'Fix it or lose it,' he says of the law. In 2005, Cooley ordered a review of cases, to identify three-strikes inmates who had not committed violent crimes and whose life sentences a judge might deem worthy of second looks. His staff came up with a lost of more than 60 names, including Norman Williams's. ... In 1994, the three-strikes ballot measure in California passed with 72 percent of the vote, after the searing murder of 12-year-old Polly Klaas, who was kidnapped from her slmuber party and murdered while her mother slept down the hall. When the killer turned out to be a violent offender recently granted parole, support surged for the three-strikes ballot initiative, which promised to keep 'career criminals who rape women, molest children and commit murder behind bars where they belong.' The complete text of the bill swept far more broadly. ... But in California, 'serious' is a term of art that can also include crimes like Norman Williams's nonconfrontational burglaries. After a second-strike conviction for such an offense, almost any infraction beyond jaywalking can trigger a third strike and the life sentence that goes with it. One of [Michael] Romano's clients was sentenced to life for stealing a dollar in change from the coin box of a parked car. ... Now California is in the midst of fiscal calamity", Emily Bazelon at the NYT, 23 May 2010, link:

http://www.nytimes.com/2010/05/23/magazine/23strikes-t.html.

My favorite three-strikes criminal stole three 75 cent candy bars from a convenience store. At $62,000 a year, California's taxpayers will spend about $1.6 million to incarcerate him for the next 25 years. Over $2.25! Really! The Mikado's Lord High Executioner would not be pleased. As a practical matter most three-strikers will be parolled; eventually. My barber opposed this law. I asked him why. He said because it would make witness murders "free". Why not kill the witness? It won't add to your time. I told him strictly speaking it would cheapen witness murders as robberies accompanied by murders would be more likely to be investigated than "straight" robberies. He thought about this for a minute, said I was right and still opposed the law. My barber was a college dropout who took one economics class at NYU in the late 1940s.

Ticking Debt Bombs

"My first lesson in the power of contagion happened in 1997, when I was based on Seoul. ... Why would a problem in Thailand extend to wealthier South Korea? ... On the surface, contagion makes no sense. Just because country A falls into a debt crisis doesn't mean countries, B, C or G should as well. But that's not how investors think in times of uncertainty. Instead, they look for other potential trouble spots, then try to get out of them. ... Europe may be facing a similar contagion effect today. Worries that overindebted Greece could default sent investors scouring for the next ticking debt bomb. ... Not even the unprecedented $145 billion European Union-IMF bailout for Greece announced in early May is guaranteed to stop things from getting worse. In South Korea in 1997, the IMF rescue failed to restore shattered investor confidence. ... Athens must still prove it can implement the brutal tax hikes, public-sector salary cuts and other budget-reduction measures it promised in return for the aid. ... And why stop in Europe? Much of the indistrialized world is emerging from the Great Recession buried in debt, the result of historical profligacy mixed with the costs of stimulus packaages and bank bailouts initiated during the recession. ... No investor should equate Greece's problems with those of the US. But we're not in normal times. .... What makes contagion so scary is that investors respond in a completely rational fashion: they panic. .... Now, with the Greek rescue, Europe has finally shown the backbone to take on contagion. But it needs to do more. This is no longer a Greek crisis; it's a eurozone crisis", my emphasis, Michael Schuman (MS) at Time, 17 May 2010, link:

http://www.time.com/time/magazine/article/0,9171,1987598,00.html.

MS produced a descriptive piece devoid of economic analysis. Contagion means and explains nothing. MS, do you know what a balance sheet is? You are right about this: "it's a eurozone crisis". Instead of confining the cancer to Greece, Germany injected itself with it. Got euros? Poor dear. I'm sure MS will happily take them off your hands. This kind of piece Yves Smith would decry for its dismissive tone, "You sans culottes. Fear nothing. Super ECB-IMF is here. Buy Greek bonds". Why should Greece's $145 billion bailout do any more than spread the problem to Germany and France? MS, how dare you tell me what not to do? I "equate Greece's problems with those of the US". All times are those of "uncertainty". So? What made investors to look less positively on Greece's debt?

Greece and California

"In formally requesting Euro45 billion ($60 billion) from the [IMF] and [EU] Friday, Greek Prime Minister George Papandreou sought to end the drama over whether Greece can pay its bills. ... What it would do instead is open a wide new world of moral hazard--for Greece, for the countries providing aid, and for the future of the entire euro-zone. ... Thursday's market turmoil left Greek bonds in emerging markets territory at 8.7% on 10-year debt--5.7 percentage points about the German benchmark. This came after the EU's statistical agency, Eurostat, said it still lacked confidence in Greek figures and raised its 2009 deficit estimate to 13.5% of GDP from 12.7%. ... Meanwhile, tens of thousands of Greek public workers took to the streets to protest the government's austerity measures, such as they are. Could there be a greater disconnect? ... But over the next five and a half years, Greece will face some Euro240 billion in debt-service and refinancing costs-roughly equal to Greece's gross domestic product. ... Loans might delay, but cannot prevent, a radical restructuring of Greek debt. ... Further austerity measures demanded as a quid pro quo might take some domestic heat off Mr. Papanderou, but the IMF's policy history does not bode well for future economic growth. ... If Greece is bailed out, the markets will rightly conclude that a line has been crossed, and that Portugal and even Spain will be rescued too. Even the Germans don't have that much money. ... Mr. [Wolfgang] Schauble is so worried about Berlin's finances that he opposes tax cuts for Germans, but he nonetheless wants to bail out a spendthrift Greece. In an interview Monday in Der Speigel, he warned that, 'We cannot allow the bankruptcy of a euro member state like Geece to turn into a second Lehman Brothers,' adding that 'Greece is just as systematically important as a major bank.' ... Far better for the EU to draw the line now, force Greece and its creditors to take their pain, and to demonstrate to markets that there won't be a rolling series of bailouts. To adapt Mr. Schauble's Lehman analogy, better to stop the moral hazard at Bear Stearns, lest Spain become Lehman. ... Greece's problems are familiar across Europe: a welfare-entitlement state that is unaffordable given the country's anemic economic growth. This is what has to change, but it won't as long as the Greeks marching in the street believe their standard of living will be salvaged by German or French taxpayers", my emphasis, WSJ Editorial, 24 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200013667934980.html.

I agree with the WSJ noting the WSJ does not cite Islamic immigrants as a welfare-state problem in Europe. Nor does it compare Greece to California. Or the US. So I will.

Financial Reform, Chicago-Style

"A 'trilemma' is like a dilemma, only there are three things to choose from and you can have just two. The current debate over post-crisis financial regulation suggests we face such a trilemma: We can choose any two of the following: but not all three: 1) efficient capital markets 2) no bailouts to big banks and 3) a depression-free economy. ... But the idea that big banks might be able to get new capital from the Treasury was scarcely even contemplated. Choosing one and two resulted in a global financial and economic crisis worthy of the name depression. ... Either the bill does not imply future bailouts, as Republicans argue. Or, as seems more plausible to us, it is going to introduce such a wide range of new financial regulations that the efficiency of our capital markets will be significantly diminshed. ... Whether or not there is any basis for the SEC's claim that [Goldman] misled investors, the key point is that the collateralized debt obligation (CDO) at issue was nothing more than an elaborate wager on the future price of some mortgage-backed securities--a wager with as much economic utility as a gigantic bet on a roulette wheeel or a horse race. ... But [derivatives] increased the instability of the global financial system. And taxpayers have paid a heavy price since the system all but collapsed in late 2008. ... There was never a good reason for treating credit default swaps and their ilk differently from commodity futures, which are standardized and traded on exchanges. ... The nightmare possibility arises: Could the proposed cure turn out to be just another symptom of the same disease? As the rules become ever so more convoluted, so the opportunities for the unscrupulous increase--and the efficency of the financial system as a whole decreases. ... First, in the more controlled capital markets of the 1970s, borrowers generally paid more for their loans because there was less competition. ... Second, it is not at all clear that our crisis was exclusively caused by a failure of regulation as opposed to a failure of monetary policy. ... Third, the crisis of 2007-2009 originated in one of the most highly regulated sectors of the financial system: the US residential mortgage market", my emphasis, Niall Ferguson & Ted Forstmann (F&F) at the WSJ, 23 April 2010, link:

http://online.wsj.com/article/SB10001424052748703876404575200104219993576.html.

I only disagree with F&F over this: we cannot have a "depression-free economy". Apparently F&F don't favor the Dodd bill either.

Wait Listed By Jail-15

"The California budget crisis has forced the state to address a problem that expert panels and judges have wrangled over for decades: how to reduce prison overcrowding. ... Many in the state still advocate a tough approach, with long sentences served in full, and some early problems with released inmates have given critics reason to complain. But fiscal reality, coupled with a court-ordered reduction in the prison population, is pouring cold water on old solutions like building more prisons. ... The strains on the system are evident inside the state prison here, about 50 miles north of Los Angeles, where 4,600 inmates fill buildings intended for half as many. A stuffy, cacophonous gymnasium houses nearly 150 people in triple-bunked beds stretching wall to wall. The new effort this year is intended to remove from prisons criminals who are considered less threatening and divide them into two categories: those who pose little or no risk outside the prison walls, and those who need regular supervision. ... To slow the return of former inmates to prison for technical violations of their parole, hundreds of low-level offenders will be released without close supervision from parole officers. Those officers will focus instead on tracking serious, violent offenders. ... The state spends, on average $47,000 per year to house a prisoner. Early estimates suggest the new changes could save $100 million this year. ... California is the only state that places all prisoners on parole at release, no matter what the offense, Professor [Joan] Petersilia sad, and usually for one to three years. .. . Even the guards' union, which so heavily promoted and supported the tough sentencing of the past that fueled the prison building and expansion boom, now says it supports the idea of alternatives to prison and did not publicly object to the new law", Randal Archibold at the NYT, 24 March 2010, link:

http://www.nytimes.com/2010/03/24/us/24calprisons.html.

Even the guards' union. Wow. Times must be tough in California.

Iowan Thinking In Greece!

"Greek Prime Minister George Papandreou met President Obama in Washington yesterday, hoping to win US support for a crackdown on speculative traders. 'Unprincipled speculators are making billions every day by betting on a Greek default,' the Prime Minister said Monday, adding yesterday that Mr. Obama's response was 'very positive.' ... These days, of course, any purchase of Greek debt is a form of speculation--a fact reflected in the 320 basis-point spread over German bonds that Greece was forced to pay. ... As soon as Athens presented its latests E4.8 billion austerity package last week with across-the-board spending cuts, the pressure on the euro and Greek bonds eased. ... Unfortunately, this demonstration that the markets could be assuaged by some more-vigorous belt-tightening did not put Greek conspiracy theories to rest. ... These protests do real real economic harm and thus reduce government revenues, and Mr. Papandreou also does his economy no favors by railing against the very 'speculators' he needs to buy his debt. ... The bets against Greek solvency are the result, not the cause, of Greece's debt problems. The way to turn speculator profits into losses is be reining in government and reviving private growth", my emphasis, WSJ Editorial, 10 March 2010, link:

http://online.wsj.com/article/SB10001424052748704784904575111233555121958.html.

"'It has dawned on investors that solvency is a major issue--not a minor issue,' says Stephen Jen of the hedge fund BlueGold Capital Management. ... European Union President Herman Van Romply told several European newspapers on Friday that the bloc 'will be ready to step in if the Greeks ask.' French President Nicolas Sarkozy and Italian premier Silvio Berlusconi echoed those remarks, saying at a news conference that their countries were ready to help. ... The country's debt load totals more than 113% of its annual economic outpout and is rising. ... If Greece needs to restructure its debt, bondholders would find themselves sitting on big losses. ... The fundamental problem is that Greece is adding to its debt every year because of its big annual budget deficits. ... If that situation persists, Greece will never be able to pay off its debts without creditors agreeing to cut the amount they are owed. ... A big package could give Greece time to do a 'real devaluation'--a painful program of wage and price cuts, and a sharp drop in economic output, that could put it in a better position to pay off its debt, says Uri Dabush, director of the Carnegie Endowment for International Peace. ... But restructuring comes with a downside: A country that reneges on its debt would likely be shut out of global markets", my emphasis, Charles Forelle & Marcus Walker at the WSJ, 10 April 2010, link: http://online.wsj.com/article/SB10001424052702304703104575174203024119926.html.

Government officials frequently blame "speculators" for causing their problems. No. Speculation against Greek debt results from Greece's imprudent policies. Is Papandreou so stupid as not to understand that price stabilizing speculators make money. Price destabilitizing speculators lose money absent government bailouts. Now it's time for a war story. In 1974 I was auditing a subsidiary of a Midwestern utility for a Big 87654 firm. The subsidiary manager complained of a "cabal" of "Jews and speculators" who made the price of copper rise. Copper hit $1.44 in 1974, about $10 per pound today. I didn't have the heart to tell him, if the "Jews and speculators" were wrong about future copper demand they would lose their shirts. Does His Obamaness understand this? Who cares?

Why is Greece a worse credit than Uncle Sam? Because Unc issues debt in his own currency. Now. Got gold? Get more. Got any government bonds? California, Ireland, Greece, Unc, even Germany, yes Germany. Sell now! Now people realize Greek solvency is an issue. Where were they for years? Does Unc add to his debt annually? Greece will never pay its debts. Unc defaulted on his obligations to pay gold for dollars in 1971. So? Imagine, some people think Unc is a better credit than Exxon. They probably also believe in the Tooth Fairy and Easter Bunny. See my 15 November 2008 post: http://skepticaltexascpa.blogspot.com/2008/11/forbes-capitalist-fool.html.

Waiting List for Cops

"The bleak arithmetic of the recession has pushed cities across the nation to make deep cuts in police, fire and emergency medical services. ... Others have announced they will no longer respond to entire categories of calls, such as burglaries, check fraud, shoplifting and traffic accidents involving minor injuries. ... Public safety, considered a core government duty by voters on the left and right alike, has traditionally been protected from belt-tightening despite the fact that it consumes a big chunk of most budgets. ... Public safety accounts for 22% of general municipal spending nationally, according to US Census Bureau data. That's second only to education, which accounts for about 27%. ... Colorado Springs police no longer will deal with abandoned vehicles unless they pose a hazard. Officers are unlikely to respond to property crimes unless they have a solid lead on a suspect. ... Some police chiefs said the lean budgets have pushed them to do better. San Diego Chief Bill Lansdowne trimmed a number of specialized units to same money--including narcotics, canine and harbor safety--but assigned more officers to beat patrol", Stephanie Simon at the WSJ, 13 February 2010, link:

http://online.wsj.com/article/SB10001424052748704337004575059650511481356.html.

Property crime? Narcotics? What next? Will some cities stop enforcing prostitution laws? Stay tuned. Still want to hold muni bonds?

Small Banking From Boston

"The publishing world is too slow for Laurence J. Kotlikoff. On a frigid January day, the 58-year-old Boston University economist is pecking away at his computer keyboard in his office overlooking the Charles River. ... 'We have miscreants running the financial system left, right and center,' says Kotlikoff. 'Nobody is calling the [Obama] Adminsitration to task and saying, "You guys are putting a Band-Aid on cancer".' ... Instead of taking deposits and making loans, banks would connect borrowers and depositors with ultrasafe mutual funds created for those purposes. ... Kotlikoff sounds so unrealistic that, like George Bailey, he could use a guardian angel to set him straight. But he's beginning to catch the attention of powerful policymakers and the economists who have their ears. ... In the US, Kotlikoff's limited-purpose banking' idea is finding support among economists across the political spectrum, including University of Chicago Nobel Laureate Robert Lucas on the right and Columbia University's Jeffrey Sachs on the left. ... 'The problem,' he writes in his book, 'is the leveraging of the taxpayer by people with no formal training in finance or economics, no personal downside, an assortment of Napoleonic complexes, the money to buy ratings in New York and policy in Washington, and the ability to run circles around regulators.' ... In Kotlikoff's scenario, banks would be shorn of their risk-taking functions. ... Mutual funds would supply loans, too. Already, companies raise money by issuing bonds, which are bought by fixed-income mutual funds on behalf of investors. ... The advantage is that if certain borrowers didn't repay, there would be no systemic, global-economy-threatening crisis, liek the ones that can occur when one bank goes down and drags other with it. Instead, the worst that could happen is that investors who funded a particular loan would lose part or all of their investment. One side benefit: Kotlikoff says 100-plus regulatory agencies could be disbaded because financial firms would no longer have other people's money to play with", Peter Coy at Businessweek, 15 February 2010: http://www.businessweek.com/magazine/content/10_07/b4166042289206.htm.

Go Kotlikoff! I've favored "small banking" for decades. Frank Graham suggested 100% reserve banking in 1936, my 24 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/fed-and-four-letter-word-gold.html.

Steve Waldman on Truth

"Both globally and within most nations, the patterns of consumption required to sustain existing social arrangements are inconsistent with the distribution of the fruits of production. Social and economic stability, therefore, depend upon redistribution for which there is not overt legal framework or political consensus. To square this circle, the financial and government sectors have evolved means of hiding redistribution in complex, continually improvised arrangements", Steve Waldman at Interfluidity, 14 February 2010, link:

http://www.interfluidity.com/v2/548.html.

Welcome aboard Steve. I've said this for decades. That's why we have: Fannie and Freddie, Social Security, the Fed, education reform and who knows what else? Sooner or later, our entire edifice of deception will collapse. Look at California and how it concealed the effects of illegal immigration from its taxpayers. It's gotten so bad, even Sacramento can't hide the dead elephant in its living room anymore. See my 11 October 2009 post:

http://skepticaltexascpa.blogspot.com/2009/10/boskins-baaack.html.

Pravda on Vampire Squid

"I am a capitalist pig, and proud of it, thus you would not expect me to support government interference and more strenuous regulation of financial institutions--after all, capitalism (free markets) and tight regulation don't mix well. Well, at the risk of being kicked out of the Capitalist Pig Party, I am in support of tighter regulation of too-big-to-fail (TBTF) institutions--the likes of Citigroup, JPMorgan, Bank of America and (God forbid, after all, they are doing 'God's work' their CEO's words, not mine) Goldman Sachs. Lack of tight regulation in the TBTF space leads to the worst economic system of all: asymmetric socialism. The enormous gains are reaped by employees and shareholders, but losses are socialized and paid by taxpayers. That is simply immoral. Letting companies fail is at the core of capitalism's DNA, and I still stand by that", Vitaliy Katsenelson at Pravda, 30 January 2010, link:

http://english.pravda.ru/opinion/columnists/111922-capitalism-0.

More right-wing opinion from Pravda. Who would have believed this 20 years ago?

Boskin Encourages Obama!

"Politicians and scientists who don't like what their data show lately have simply taken to changing the numbers. They believe that their end--socialism, global climate regulation, health-care legislation, repudiating debt commitments, la glorie francaise--justifies throwing out even minimum standards of accuracy. It appears that no numbers are immune: not GDP, not inflation, not budget, not job or cost estimates, and certainly not temperatures. A CEO or CFO issuing such massaged numbers would land in jail. ... A commission appointed by French President Nicholas Sarkozy suggests heavily weighing 'stability' indicators such as 'security' and 'equality' when calculating GDP. And voila!--France outperforms the US, despite the fact that its per capita income is 30% lower. ... With Venezeuela in recession by conventional GDP measures, President Hugo Chavez declared the GDP to be a capitalist plot. He wants a new, socialist-friendly way to measure the economy. ... There is historical precedent to a 'socialist GDP'. When President George HW Bush sent me to help Mikhail Gorbachev with economic reform, I found out that the Soviet statistics office kept two sets of books: those they published, and those they actually believed (plus another for Stalin when he was alive). In Argentina, President Nestor Kirchner didn't like the political and budget hits from high inflation. After a politicized personnel purge in 2002, he changed the inflation measures. Conveniently, the new numbers showed lower inflation and therefore lower interest payments on the government's inflation-linked bonds. Investors and public confidence in the objectivity of the inflation statistics evaporated. His wife and successor Cristina Kirchner is now trying to grab the central bank's reserves to pay for the country's debt. ... The president and his advisers--their credibility already reeling from exaggeration (the stimulus bill will limit unemployment to 8%) and reneged campaign promises (we'll go through the budget 'line-by-line') consistently imply that their new proposed regulation is a free lunch", my emphasis, Michael Boskin (MB) at the WSJ, 14 January 2010, link:

http://online.wsj.com/article/SB10001424052748704586504574654261655183416.html.

What's MB doing here? Is MB giving Obama a roadmap to defraud Uncle Sam's creditors, as if Obamites like the Orzags need one. Would Vampire Squid's CEO or CFO "land in jail" for massaging numbers? Wow, the USSR kept multiple sets of books. Don't you know the US spends 45% of the world's total military spending? I don't know it. Imagine, government officials "revised" inflation statistics to cut Argentina's interest rates paid on TIPS. Still want Obama's? We remember MB, head of the "Boskin Commission" and new "Boskin Commission", my 5 October 2007 and 11 October 2009 posts: http://skepticaltexascpa.blogspot.com/2007/10/tip-on-tips.html and http://skepticaltexascpa.blogspot.com/2009/10/boskins-baaack.html.

Courts On Trial

"It is taken for granted that, for the sake of peace, justice and order, the courts must have a monopoly on judicial power within the boundaries of their jurisdiction. Yet, the ability of today's courts to achieve any any of those values with the monopoly power they possess is subject to serious doubt. Even if justice implies a court system with monopoly power to do justice, the converse is not true. The mere existence of monopoly judicial power does not imply that it will be used justly. ... However, what people want is not merely some reasonable assurance that disputes will be resolved, but that they will be resolved with at least a rough approximation to justice: the correct application of the right principles to the reasonably known facts. ... Why should we think the state, even a democratic state, will resolve disputes justly? ... Like any monopolist, the state will tend to charge more for its services than private arbitrators would. Moreover, since its revenue is guaranteed, and the courts have little incentive to attract or please its 'customers,' government courts have little incentive to incur the costs of producing justice: the intellectual, moral and physical effort required to achieve true justice. ... There is the story of the local judge who, confronted with having to wade through hundreds of pages of summary judgment motion papers, instead lazily told the lawyers, 'There must be an issue of fact in there somewhere. Motion denied.' ... Thus, government courts will tend to expand the rights and powers of the government, while shrinking the rights and powers of the citizenry. ... The [US] government has been growing steadily ever since 1776, with the reliable, continual and unsurprising endorsement of its own courts. ... Thus, government courts, unconcerned about securing or satisfying customers, tend to be more concerned about looking after their own interests and the interests of their allies. They adopt, for example, elaborate and fairly inflexible rules of procedure, most of which seem designed to serve the needs of the court, not the litigants. ... A further point: it is rarely remarked that government courts are subject to the same special interest group dynamic that plagues the other two branches of government. Most citizens want courts that mete out justice. Yet, a small group of people view the courts as a means to increase their wealth, power and prestige. Which group will tend to prevail over the other? ... The notion that appointed judges are apolitical is a fantasy entertained mainly by naive and self-appointed 'court reformers.' ... Lawyers appointed to judgeships usually are more wedded to secretive elite circles. Is that why elites almost unanimously favor appointing judges? ... It is a common belief that federal judges, who are appointed, are less political than state judges who are usually elected. However, every federal district judge in Buffalo stated out as a politically-appointed [US] Attorney or [AUSA]. ... They will tend to favor the interests of the power elite because of a similar outlook, loyalty, gratitude, or a desire for future appointments and other favors from the power brokers for themselves and their families and associates. .. While such judges may fairly adjudicate disputes between ordinary private persons, when such persons litigate against the state, or members of the power elite, they will tensd to discreetly favor the elite. They are usually clever enough to disguise the favoritism. ... We are told that no one should be the judge of his own cause, yet the state, in disputes with its own citizens or subjects, is always the judge of its own cause. ... In sum, the monopoly state provides no assurance that disputes will be resolved justly, merely that they will be resolved", James Ostrowski at Lew Rockwell, 29 December 2009, link:

http://www.lewrockwell.com/ostrowski/ostrowski95.1.html.

Jerome Frank, a Second Circuit Court of Appeals judge wrote Courts on Trial, 1949, about this issue, among others. It's a good read. Sandra Day O'Connor is a big proponent of appointing judges. I'm not.

The Biggest Taboo

"'I don't think there is much of an IQ difference between the Nordic peoples. ... If we are approaching a discontinuity in Western History then we will probably witness selection pressures in favor of ethnocentric warrior creeds. ... I don't think any single factor ever explains everything, not even genes or IQ, but if we assume that Europeans, and Germanic Europeans in particular, have a genetic profile which favors altrusim then we will probably be facing a bottleneck in the coming generations where only those whites capable of carving out a land exclusively for them and expelling intruders will survive and pass on their genes. ... What we have witnessed during the past century is the unprecedented situation where the global human population has exploded, but mainly in dysfunctional Third World countries. If high-IQ countries such as Germany and Japan have stagnating populations and low-IQ countries such as Nigeria and the Yemen have booming populations, does that not mean that the global average IQ is declining? It probably does. What kind of effect will this have on world civilization? This question is perhaps the greatest possible taboo that exists in the modern West, but in my view it needs to be asked. ... Around WWI, people of European origins made up at least a third of the world's population. Now we're soon down to single digits and still falling. This is rapidly turning into a question of survival. ... We should remember that most of the population growth in the Third World has been caused and sustained by the global impact of Western technology. When the West is no longer willing or able to carry these countries on our backs then many of them will simply implode'," Baron Bodissey (BB) quoting Fjordman at Gates of Vienna, 10 January 2010, link: http://gatesofvienna.blogspot.com/2010/01/iq-and-human-accomplishment-debate.html.

BB may be writing of Mencius Moldbug's "reset". For years I've said a "discontinuity" is coming. Be patient. It will. Here's a book to read on this topic, Human Accomplishment by Charles Murray (CM), 2003. Despite what you may have learned in politically correct school, most of it was done by dead white guys. The same CM who was co-author of the Bell Curve, 1994? Yeah, that guy.

Junior on Fed "Profit"

Neil Irwin (NI) has a 12 January 2010 Washington Post piece claiming the Fed had a $45 billion 2009 profit. With $2.2 trillion in assets, suppressing interest rates by 6 percent, my estimate, the Fed gave banks about $132 billion in 2009 taken from savers. A calculation like NI's makes sense in Stalin's world of "free capital"! About 40 years ago Kenneth Arrow, Stanford economics professor, introduced the "social rate of discount" concept. After various machinations, he estimated it was 6-7% per year in real terms. Let's use 6.5%, a 1.8% 2009 CPI increase and a $2.2 trilliion Fed balance sheet, the Fed should have earned (.065 + .018 = .083; .083 x $2.2 trillion = $183 billion) $183 billion last year. Ergo, US taxpayers suffered a $138 billion "opportunity loss" ($183 - $45) arising from the Fed's existence. Kill the Fed! Here's Junior's 12 post at Junior Deputy Accountant: http://www.jrdeputyaccountant.com/2010/01/fed-turns-45-billion-profit.html. Does no one at WaPo understand "cost of capital"? These guys can work for Citigroup. Fed accounting is a joke. Here's a link to my 29 December 2009 post on the Fed's laughable 2008 financial statements: http://skepticaltexascpa.blogspot.com/2009/12/zimbabwe-bens-audit.html. I blasted government accounting on 25 September 2009, and will continue to do so:

http://skepticaltexascpa.blogspot.com/2009/09/government-accounting.html.

"Last year the Fed earned $52.1 billion, with most of that income coming from interest payments on bonds that it bought during the year to shore up the economy and credit markets. Anyone with access to printing presses could have racked up similar gains. But the Fed's purchases leave it exposed. Its assets are 43 times its capital, compared with 15 times at Goldman Sachs", Peter Eavis at the WSJ, 13 January 2010, link:

http://online.wsj.com/article/SB10001424052748704586504574654780067214134.html.

"The Fed's 2009 earnings were up 47% from 2008, when the central bank generated a net income of $35.5 billion and transferred $31.7 billion to the Treasury", Meena Thiruvengadam at the WSJ, 13 January 2010, link: http://online.wsj.com/article/SB126333721463026795.html.

Imagine, even the Vampire Squid (VS) is better managed and has more accurate financials than the Fed.

I found a way out for the Fed, an exit strategy. Oh you of little faith, a Fed exit strategy! There's something in it for the VS! It's a win-win. Use the PEG ratio, "price-earnings growth", I think the PEG ratio is an absurd metric, but I'm not a Wall Street Managing Director. Since the Fed earned $52.1 billion in 2009, or 47% more 2008, let's assign it a 1 PEG, therefore the Fed is "worth" $2,449 billion ($52.1 x 47). Not going overboard, have the Fed issue new stock to the public of 20% of its "worth" or $490 billion ($2,449 x .20). Now Merrill Lynch "analysts" can swear 47X earnings for the right to counterfeit currency is cheap. Now enter He who does "God's work", Lloyd Antoinette Blankfein (LAB) who in the public interest will do the Fed's IPO for 50% of VS's normal 6.5% fee, 3.25%, a mere $15.9 billion ($490 x .0325). Oh, VS's sacrifices for Joe Schmoe, giving up $15.9 billion in fees to make the Fed IPO succeed. Who says Zimbabwe Ben has no exit? LAB will give up 75% of VS's fee on the 15% ($73.5 billion) overallotment. Oh LAB to think, leaving another $3.6 billion on the table for Joe Schmoe. What a patriot. And to think, I believed all along you had a shrine to Mammon in your office. Silly me.

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Any idiot can run the Fed at a "profit" if the idiot's cost of capital is zero.