A Darwinian Crisis
(or Doing God's Work
or "Say it ain't so, Joe")

Books like Andrew Ross Sorkin's "Too Big to Fail," Gregory Zuckerman's "The Greatest Trade Ever," and Michael Lewis's "The Big Short" present narratives where smart, talented and virtuous bankers and financiers prevail against the mob during the recent clusterfuck. (The authors still agree common sense reforms are needed of course.)

Joe Nocera however provides an analysis of a different kind of Darwinian moment:

Remember in the months leading up to the crisis, when the Federal Reserve chairman, Ben Bernanke, and Henry Paulson Jr., then the Treasury secretary, were assuring everyone that the "subprime problem" could be contained? In truth, if the only problem had been the actual mortgage bonds themselves, they might have been right. At the peak there were well over $1 trillion in subprime and Alt-A mortgages that were securitized on Wall Street. That’s a lot, to be sure -- but it was a finite number. You could have only as much exposure as there were bonds in existence.

The introduction of synthetic C.D.O.’s changed all that. Unlike a "normal" collateralized debt obligation, which contained the bonds themselves, the synthetic version contained credit-default swaps -- derivatives that "referenced" a particular group of mortgage bonds. Once synthetic C.D.O.’s became popular, Wall Street no longer needed to feed the beast with new subprime loans. It could make an infinite number of bets on the bonds that already existed.

And why did synthetic C.D.O.’s become popular? One reason was that the subprime companies were starting to run out of risky borrowers to make bad loans to -- and hitting a brick wall. New Century, a big subprime originator, went bankrupt in early April 2007, for instance. Yet three weeks later, the Goldman synthetic C.D.O. deal, called Abacus 2007-ACI, went through, because it was betting on subprime mortgage bonds that already existed rather than bundling new ones. It didn’t even have to go to the trouble of repackaging old C.D.O. tranches into new C.D.O.’s, which was also a common practice. (Goldman has vehemently denied any allegations of wrongdoing, pointing out that it lost $90 million on the particular Abacus deal that is the subject of the S.E.C. complaint.)

The second reason, though, is that synthetic C.D.O.’s gave people like John Paulson a way to short the subprime market. Mr. Paulson’s bet against the subprime market, which famously reaped the firm billions in profits, was the subject of a recent book, "The Greatest Trade Ever." Boy, I’ll say.

Both Gregory Zuckerman, the author of that book, and Michael Lewis, who wrote the current best seller "The Big Short," make it clear that the heroes of their narratives -- the handful of people who had figured out that subprime mortgages were a looming disaster -- were pushing Wall Street hard to give them a way to short the market. Maybe synthetic C.D.O.’s would have been created even without their urging, but it seems a little unlikely. They were the driving forces. (emphasis added)

 Reminds me of some lines James Diedrick wrote about Martin Amis's novel London Fields.

This exhaustion extends right down to the low comedy of Keith's petty criminality. Consider this description of what he and his cohorts discover when they enter a house they intend to rob: "it was all burgled out. Indeed, burgling, when viewed in Darwinian terms, was clearly approaching a crisis. Burglars were finding that almost everywhere had been burgled" (248).

Nocera makes an excellent point at the end of his piece:

In its filing on Thursday, the S.E.C. charged that Goldman never told investors of Mr. Paulson’s involvement. "Credit derivative technology helped people disguise what they were doing," said Janet Tavakoli, the president of Tavakoli Structured Finance, and an early critics of many of the structures that have now come under scrutiny.

There appear to be other examples of this, as well. Last week, Pro Publica, the nonprofit investigative journalism outfit, reported how a big Chicago hedge fund, Magnetar, helped put together some synthetic C.D.O.’s -- precisely so that it could bet against them. In his book, Mr. Zuckerman seems to have stumbled onto Abacus and similar deals. One banker, he writes, "suspected that Paulson would push for combustible mortgages and debt to go into any C.D.O., making it more likely that it would go up in flames." Which is precisely what the S.E.C. is claiming. But in his quest to lionize his central character, Mr. Zuckerman rushes past what by all rights should have been the most shocking revelation in his book.

Mr. Lewis, for his part, recounts a dinner, late in the game, in which one of his heroes, Steve Eisman, is seated next to a man who is taking the long position on many of the C.D.O.’s he is shorting. They get to talking, and the man says to Mr. Eisman: "I love guys like you who short my market. Without you, I don’t have anything to buy." He adds, "The more excited that you get that you’re right, the more trades you’ll do, the more product for me."

As a reader, it is hard not to love that moment, rich as it is in irony and foreboding. The guy on the long side -- who was making investments that the housing and mortgage markets would remain strong -- is an obvious fool; Mr. Eisman, on the short side the trade, is clearly going to be vindicated. (And, by Mr. Lewis’s account, Mr. Eisman never "helped" a Wall Street firm pick the bonds for the C.D.O.’s he was shorting, the way the S.E.C. says Mr. Paulson did.)

But on second reading, the passage isn’t quite so funny. The people on the short side of those trades were truly savvy investors, who, unlike so many others, did their homework and had insights that made them a great deal of money. But the rise of synthetic C.D.O.’s that they pushed for -- and their ability to use credit-default swaps to short subprime mortgage bonds -- took an already bad situation and made it worse.

And here we are now, all of us, paying the price.

Emphasis added. How did the savvy speculators make it worse? By encouraging enormous, over-leveraged bets by people who were - by design - in the dark about the fact that the "smart money" was betting against them. The game was fixed in other words.

To Do

My stack of books to read: Liaquat Ahamed's Lords of Finance, Dean Baker's False Profits, John Cassidy's How Markets Fail, Jonathan Cohn's Sick, Barbara Ehrenreich's Bright-Sided, Brad DeLong and Stephen Cohen's The End of Influence, Simon Johnson  and James Kwak's 13 Bankers, Alyssa Katz's Our Lot, Michael Lewis's The Big Short, David Plouffe's The Audacity to Win, Andrew Ross Sorkin's Too Big to Fail, Joseph Stiglitz's Freefall, David Wessel's In Fed We Trust.




In the "Your Decision" music video - embedding disabled by request - the invitation at the beginning reads "1023 Corinthians Drive." Corinthians 10:23 from the King James Bible reads:

All things are lawful for me, but all things are not expedient: all things are lawful for me, but all things edify not.

And from the Bible in Basic English:

We are free to do all things, but there are things which it is not wise to do. We are free to do all things, but not all things are for the common good.

A nice touch in the video is at 2:16 where a man is heading upstairs but is turned away from the VIP area and expresses frustration.

(John Paul Jones Memorial in DC)

During his engagement with Serapis, Jones uttered, according to the later recollection of his First Lieutenant, the legendary reply to a quip about surrender from the British captain: "I have not yet begun to fight!"

Justice John Paul Stevens recently announced his retirement from the US Supreme Court. Dawn Johnsen withdrew her nomination to the Office of Legal Counsel yesterday after facing a filibuster threat from Senate Republicans and Democrats Ben Nelson and Arlen Specter. Republican Senator Lugar from Indiana supported Johnsen's nomination.

Once obscure, the office [of Legal Counsel] became controversial in the administration of President George W. Bush when its political appointees, citing sweeping theories of presidential power, secretly signed off on interrogation and surveillance policies that bypassed statutory and treaty restraints. Ms. Johnsen was an outspoken critic of those claims after they came to light.

An Indiana University law professor, Ms. Johnsen had also served as acting head of the Office of Legal Counsel during the Clinton administration. During the Bush administration, she helped lead a coalition of Clinton-era alumni of the office in proposing changes to restore its reputation and independence.

In a 2008 essay titled "Restoring Our Nation’s Honor," Ms. Johnsen wrote: "We must avoid any temptation simply to move on. We must instead be honest with ourselves and the world as we condemn our nation’s past transgressions and reject Bush’s corruption of our American ideals. Our constitutional democracy cannot survive with a government shrouded in secrecy, nor can our nation’s honor be restored without full disclosure"

 
Obviously Obama should nominate her as Stevens's replacement.

I have tickets to see Them Crooked Vultures and John Paul Jones of Led Zeppelin fame at the Scaragon Brawlroom next month.

Republicans, Leukemia Team Up to Repeal Health Care Law

"Leukemia has always been a disease that veers to the right," said Newsweek columnist Ezra Klein, adding that Republicans have also sought out the support of high-profile illnesses such as sickle-cell anemia, type 1 diabetes, and sepsis. "And at the end of the day, you can't ignore the fact that this deadly blood disorder has a lot to lose if the bill succeeds."

After the Gold Rush

The New Republic now has a photo up of senior editor Michelle Cottle. I once shared a fiction writing class with her in college. From what I remember she had a very beautiful southern accent, although she rarely spoke in class. (I believe she came from a small town in western North Carolina.) My attempts to engage her in conversation after class always failed. I would heap praise on a story she recently shared with the class and she would respond with a polite thank you and excuse herself. Maybe it was my Yankee/Chicago accent and off-putting manner. Maybe it was her religiosity. Probably she just wasn't interested in the slightest and thought my stories were crap.

There were two Senior level fiction classes of 15 students (I'm pretty sure you had to be an English major). Students applied to the class by submitting a story, and luckily I was deamed worthy. The professor who taught the class and judged the stories was an elderly Southern gentleman who reminded me of the actor John Neville. Aloof but courteous. 

I labored on my story all summer and don't remember much about it except it involved a typewriter repair man who hitchiked even though hitchiking was unheard of in the story's universe because of a high crime rate and general distrust of strangers. I dropped proper names like Theodore Dreiser (An American Tradgedy), Norman Mailer (The Executioner's Song) and Neil Young.  

Not long ago, I was thinking about Neil Young and the cover to his album After the Gold Rush which I always found striking and memorable. Recently it dawned on me that the album cover reminded me of Bruegel's Landscape with the Fall of Icarus, which W.H. Auden discusses in his poem Musée des Beaux Arts.

About suffering they were never wrong,
The Old Masters; how well, they understood
Its human position; how it takes place
While someone else is eating or opening a window or just walking dully along;
How, when the aged are reverently, passionately waiting
For the miraculous birth, there always must be
Children who did not specially want it to happen, skating
On a pond at the edge of the wood:
They never forgot
That even the dreadful martyrdom must run its course
Anyhow in a corner, some untidy spot
Where the dogs go on with their doggy life and the torturer's horse
Scratches its innocent behind on a tree.
In Breughel's Icarus, for instance: how everything turns away
Quite leisurely from the disaster; the ploughman may
Have heard the splash, the forsaken cry,
But for him it was not an important failure; the sun shone
As it had to on the white legs disappearing into the green
Water; and the expensive delicate ship that must have seen
Something amazing, a boy falling out of the sky,
had somewhere to get to and sailed calmly on.

Damn the Gods
(or Release the Kraken)

New Godzilla Haikus every day.

James Carville once famously said,

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

In today's column, Tom Friedman prostrates himself rhetorically once again in front of the bond market:

If you step back far enough, you could argue that George W. Bush brought the Reagan Revolution — with its emphasis on tax cuts, deregulation and government-as-the-problem-not-the-solution — to its logical conclusion and then some. But with a soaring deficit and a banking crisis caused by an excess of deregulation, Reaganism has met its limit. Meanwhile, President Obama’s passage of health care reform has brought the New Deal-Franklin Roosevelt Revolution to its logical conclusion. There will be no more major entitlements for Americans. The bond market will make sure of that. (emphasis added)

At least he writes

"Obama is at least trying to push an agenda for pursuing the American dream in these new circumstances. I don’t agree with every policy — I’d like to see a lot more emphasis on innovation and small business start-ups — but he’s clearly trying. I do not get that impression from the Republicans, and especially those being led around by the Tea Partiers."

The New Pornographers - The Laws Have Changed

(via Salon)

Now Comes the Hard Part by Jonathan Cohn

Article on Elizabeth Warren.

She will not comment on whether she might head the [consumer protection] agency, for the same reason administration officials will not. "What we’re trying to do is build an institution that’s over and above any individual," Ms. Farrell said.

Ms. Warren does say that if she and the administration lose on the agency’s passage, she’d like them to lose big -- to force lawmakers, as she puts it, to leave "lots of blood and teeth" on the floor.

If that happens, Ms. Warren will still have her own platform, starting with her nearly constant stream of television appearances. Hosts and cameramen love her: she has the friendly face of a teacher, the pedigree of a top law professor, the moral force of a preacher and the plain-spoken twang of an Oklahoman.

"This is America’s middle class," she recently said on "The Daily Show With Jon Stewart." "We’ve hacked at it and pulled at it and chipped at it for 30 years now, and now there’s no more to do. We fix this problem going forward, or the game really is over."

"When you say it like that and you look at me like that, I know your husband is backstage, I still want to make out with you," Mr. Stewart responded.

If no agency or government post materializes, Ms. Warren says she will happily return to Harvard. Others expect her to do more, including Eliot Spitzer, the former New York governor who has come to know her through their shared interest in consumer advocacy.

"Plan B is to become Ralph Nader," he said.

I [heart] Joe Biden.

Turning Japanese

GISM was a Japanese mid-paced hardcore punk band (with heavy metal influence) formed in Tokyo, Japan in 1980. Even though the guitar style resembled heavy metal style riffs and solos, GISM were one of the first Japanese hardcore bands, while at the same time drawing influence from the early industrial/avant-garde music scene; something extremely uncommon in punk bands at that time.

The acronym GISM had many different variations; they include: God In the Schizoid Mind, Guerrilla Incendiary Sabotage Mutineer, General Imperialism Social Murder, Genocide Infanticide Suicide Menticide* & Gnostic Idiosyncrasy Sonic Militant.

GISM has attained a cult status in the international punk scene, duly for their unique blend of heavy metal and hardcore punk. Several Japanese punk bands have emulated the low-pitched vocal style of Sakevi Yokoyama.

...

In Lady Gaga's video for the song "Telephone," released in March of 2010, the performer wears a spiked leather jacket featuring a GISM back patch. Whether Lady Gaga is actually a fan of the band is unclear. However, the director of the music video, Jonas Akerlund, is former member of the Swedish metal band Bathory and could very well be the reason for the jacket's appearance in the video. The jacket also features patches for the UK crust bands Icons of Filth and Doom.

Krugman blogging about stagflation versus hyperinflation and the 1970s:

The kind of inflation we had in the 1970s, the famous era of stagflation -- high inflation combined with high unemployment -- was quite different. Deficits weren’t the issue -- actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts. There was never any risk of hyperinflation; the only question was whether and when we’d be willing to pay the price in high unemployment of bringing inflation back down.

Kinsley seems to be confusing the logic of the natural rate argument, which says that expected inflation gets built into price-setting, so you need an accelerating inflation rate to keep unemployment below the NAIRU, with the very different logic of hyperinflation, which is about people fleeing money.

Meanwhile, for those predicting hyperinflation, my question would be: what is it about the United States now that looks different to you from Japan in say, 2000? Big budget deficits and high debt? Check. Huge expansion in the monetary base? Check. And yet Japan’s GDP deflator has fallen 9 percent since 2000.

 (Lady Gaga: "Prepare to be assimilated.  We will add your 
biological and technological distinctiveness to our own.  You 
will adapt to service us.  Resistance is futile.")

--------------------------
* "the systematic effort to undermine and destroy a person's values and beliefs, as by the use of prolonged interrogation, drugs, torture, etc., and to induce radically different ideas."

Kurdish people total population: 23-36 million


Palestinian people: c. 12 million


Armenians: 7.3-7.4 million


Circassians: c. 4 million

Circassian beauties is a term used to refer to an idealized image of the women of the Circassian people of the Northern Caucasus. A fairly extensive literary history suggests that Circassian women were thought to be unusually beautiful, spirited and elegant, and as such were desirable as concubines. This reputation dates back to the Ottoman Empire when Circassian women living in the Sultan's Imperial Harem started to build their reputation as extremely beautiful and genteel, and then became a common trope in Western Orientalism.

As a result of this reputation, in Europe and America Circassians were regularly characterised as the ideal of feminine beauty in poetry, novels and art. Cosmetic products were advertised, from the 18th century on, using the word "Circassian" in the title, or claiming that the product was based on substances used by the women of Circassia.

In the 1860s the showman P. T. Barnum exhibited women who he claimed were Circassian beauties. They wore a distinctive Afro-like hair style, which had no precedent in earlier portrayals of Circassians, but which was soon copied by other female performers, who became known as "moss haired girls". These were typically presented as victims of sexual enslavement among the Turks, who had escaped from the harem to achieve freedom in America. 

... 

The legend of Circassian women was also repeated by legal theorist Gustav Hugo, who wrote that "Even beauty is more likely to be found in a Circassian slave girl than in a beggar girl", referring to the fact that even a slave has some security and safety, but a "free" beggar has none. Hugo's comment was later condemned by Karl Marx in The Philosophical Manifesto of the Historical School of Law (1842) on the grounds that it excused slavery.

----

WASHINGTON — The House Foreign Affairs Committee voted narrowly on Thursday to condemn as genocide the mass killings of Armenians early in the last century, defying a last-minute plea from the Obama administration to forgo a vote that seemed sure to offend Turkey and jeopardize delicate efforts at Turkish-Armenian reconciliation. 

The vote on the nonbinding resolution, a perennial point of friction addressing a dark, century-old chapter of Turkish history, was 23 to 22. A similar resolution passed by a slightly wider margin in 2007, but the Bush administration, fearful of losing Turkish cooperation over Iraq, lobbied forcefully to keep it from reaching the House floor. Whether this resolution will reach a floor vote remains unclear.  

In Ankara, the capital, the office of Prime Minister Recep Tayyip Erdogan immediately issued a sharp rebuke. “We condemn this bill that denounces the Turkish nation of a crime that it has not committed,” the statement said. Ambassador Namik Tan, who had only weeks ago taken up his post in Washington, has been recalled to Ankara for consultations, according to the statement.  

Historians say that as many as 1.5 million Armenians died amid the chaos and unrest surrounding World War I and the disintegration of the Ottoman Empire. Turkey denies, however, that this was a planned genocide, and had mounted a vigorous lobbying campaign against the resolution.

----

ISTANBUL — Turkey’s foreign minister said Friday that the vote by a Congressional committee in Washington condemning the mass killing of Armenians early in the last century as genocide would damage ties with the Obama administration and set back reconciliation efforts between Turkey and Armenia. 

... 

In recent years, Turkey has sought to play a bigger regional role, re-establishing ties with nearby Arab countries and reaching out to Armenia, whose border with Turkey has been closed since the 1990s, when Armenia was at war with its neighbor Azerbaijan, a Turkish ally. In 2008, Turkey’s president paid the first visit by a Turkish leader to Armenia in the two nations’ history. 

----
Interesting fact from a New York Times piece about China's trade policies:

I.M.F. policies call for it to disclose documents and information on a timely basis, with the deletion only of market-moving information. But under the rules a member country may decide to withhold a report, an organization official said.

China allowed the release of its reports until the monetary fund’s executive board decided in June 2007 that reports should pay more attention to currency policies. China has quietly blocked release of reports on its policies ever since, without providing its specific reasons to the I.M.F.

A person who has seen copies of the most recent report last summer said that the monetary fund staff concluded the renminbi was “substantially undervalued.”

The monetary fund regards a currency as substantially undervalued if it is more than 20 percent below its fair market value.

More than four-fifths of the I.M.F.’s members allow publication of the agency’s annual staff reports on their economies. Countries blocking release are mostly tightly controlled places like Myanmar, Sudan, Turkmenistan and Saudi Arabia, although Brazil has also not released its reports.

IMF/World Bank support of military dictatorships chart

---- Jonathan Chait quotes a Ha'aretz editorial:

There is one reason for the crisis: Netanyahu's persistence in continuing construction in East Jerusalem, in placing Jews in Arab neighborhoods and evicting Palestinians from their homes in the city. This is not a matter of timing but substance. Despite repeated warnings and bitter experiences, he stokes the flames over the conflict's most sensitive issue and is bound to get himself in trouble. Netanyahu has made it clear by his actions that American support for Israel, especially essential now in light of the Iranian threat, is less important to him than the chance to put another few Jews in the Sheikh Jarrah or Ramat Shlomo neighborhoods.

Isn't this just ethnic cleansing? Why don't people call it by its rightful name?

Metamorphosis / "why is a raven like a writing desk?"

I saw Tim Burton's Alice in Wonderland, and thought it was good. Anne Hathaway is very beautiful as the White Queen and the actress playing Alice is very good, as is Depp's Mad Hatter, Stephen Fry's Cheshire Cat, Helena Bonham Carter's Red Queen and the others.

What was interesting to me was how Alan Rickman's Caterpillar said good-bye to Alice as he finished making his cocoon in preparation of turning into a butterfly. It had a finality as if the Caterpillar would lose his memory after his radical transformation.

This article in the New York Times reports a person's genome can be decoded for $50,000.

Besides identifying disease genes, one team, in Seattle, was able to make the first direct estimate of the number of mutations, or changes in DNA, that are passed on from parent to child. They calculate that of the three billion units in the human genome, 60 per generation are changed by random mutation -- considerably less than previously thought.

So presumably, a child receives 120 mutated genes along with 2,999,999,880 duplicate genes from her parents. Alice certainly received the genes for imagination from her father. I like how she had all of those random thoughts while dancing with her suitor.

Solace in Excess

We were somewhere around Barstow on the edge of the desert when the drugs began to take hold. I remember saying something like, "I feel a bit lightheaded; maybe you should drive . . ."And suddenly there was a terrible roar all around us and the sky was full of what looked like huge bats, all swooping and screeching and diving around the car, which was going about 100 miles an hour with the top down to Las Vegas. And a voice was screaming: "Holy Jesus! What are these goddamn animals?" 

Then it was quiet again. My attorney had taken his shirt off and was pouring beer on his chest, to facilitate the tanning process. "What the hell are you yelling about," he muttered, staring up at the sun with his eyes closed and covered with wraparound Spanish sunglasses. "Never mind," I said. "It's your turn to drive." I hit the brakes and aimed the Great Red Shark toward the shoulder of the highway. No point mentioning those bats, I thought. The poor bastard will see them soon enough.

No Credit: Timothy Geithner’s financial plan is working--and making him very unpopular. 
by John Cassidy

The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry. "People just don’t get how these institutions got bailed out and their people are still making big bonuses," Mark Zandi noted. "It just does not compute. No matter what you say, you can’t persuade them it’s right."

Godzilla Haikus

(via Ezra Klein)

 

The Repo Man

Via John Cassidy, "Memo to Ben Bernanke, Alan Greenspan, Ric Mishkin and all other economists who still argue it is impossible to discern a speculative bubble while it is inflating. (This chart is from p. 27 of this year’s Economic Report of the President, which the White House Council of Economic Advisers released yesterday.)

"How Paul Krugman Found Politics" by Larissa MacFarquhar

Via Greg Mankiw, via Mark Thoma, Gary Gorton on the Financial Crisis. It was a bank run.

• As traditional banking became unprofitable in the 1980s, due to competition from, most importantly, money market mutual funds and junk bonds, securitization developed. Regulation Q that limited the interest rate on bank deposits was lifted, as well. Bank funding became much more expensive. Banks could no longer afford to hold passive cash flows on their balance sheets. Securitization is an efficient, cheaper, way to fund the traditional banking system. Securitization became sizable.
• The amount of money under management by institutional investors has grown enormously. These investors and non‐financial firms have a need for a short‐term, safe, interest‐earning, transaction account like demand deposits: repo. Repo also grew enormously, and came to use securitization as an important source of collateral.
• Repo is money. It was counted in M3 by the Federal Reserve System, until M3 was discontinued in 2006. But, like other privately‐created bank money, it is vulnerable to a shock, which may cause depositors to rationally withdraw en masse, an event which the banking system -- in this case the shadow banking system -- cannot withstand alone. Forced by the withdrawals to sell assets, bond prices plummeted and firms failed or were bailed out with government money.
• In a bank panic, banks are forced to sell assets, which causes prices to go down, reflecting the large amounts being dumped on the market. Fire sales cause losses. The fundamentals of subprime were not bad enough by themselves to have created trillions in losses globally. The mechanism of the panic triggers the fire sales. As a matter of policy, such firm failures should not be caused by fire sales.
• The crisis was not a one‐time, unique, event. The problem is structural. The explanation for the crisis lies in the structure of private transaction securities that are created by banks. This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default. There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo. The economy needs banks and banking. But bank liabilities have a vulnerability.

Joseph Stiglitz in San Francisco

Kaus and McCardle don't believe health care reform will happen.

As Senate Majority Shifts, So Does View of a Procedural Power Play by Jackie Calmes

WASHINGTON -- It is tempting to think that the authors of the 1974 federal budget law were feeling mischievously ironic when they chose "reconciliation" as the name for a particularly arcane process the bill established. ...

But even as they fulminate about the unfairness, Republicans carry a long record of having employed reconciliation themselves on big and controversial legislative packages.

Sixteen of the 22 "reconciliation bills" that have made it through Congress were passed in the Senate when Republicans had majorities. Among them were the signature tax cuts of President George W. Bush, the 1996 overhaul of the welfare system, the Children's Health Insurance Program, Medicare Advantage insurance policies and the Cobra program allowing people who leave a job to pay to keep the health coverage their employer provided (the "R" and "A" in Cobra stand for "reconciliation act").  

... In 1980 a Democratic majority used it for the first time to reduce that year’s deficit. Months later, however, it was the new administration and a new Republican Senate majority that pioneered using reconciliation to enact major legislation: a package of spending cuts to offset President Ronald Reagan’s tax cuts.

Republicans turned to reconciliation again the next year, 1982, but to pass a controversial measure rolling back some of the tax cuts and cutting spending to pare a growing deficit.

For years, reconciliation mainly was used to shrink deficits. But in 1999 and 2000, with budgets running rare surpluses, Congressional Republicans sent tax cut bills to President Clinton. He vetoed them, citing his vow to "save Social Security first."

Once Mr. Bush took office in 2001, however, Republicans successfully used the tactic to enact the much bigger tax cuts he had campaigned on. With the Senate bill lacking 60 votes, reconciliation was "the way it will have to be done in order to get it done at all," Senator Charles E. Grassley, Republican of Iowa, said at the time.

Obama is going to take health care reform through reconciliation if need be, which is what he said he'd do last June.

Via Yglesias, Newsweek summarizes Hank Paulson's new book:

Meetings with Senate Republicans were "a complete waste of time for us, when time was more precious than anything" (page 275). Ideas that Republicans do add are "unformed," like Virginia Rep. Eric Cantor’s plan to replace TARP with an insurance program. In a rare moment of sarcasm, Paulson goes off on the minority Whip: "I got a better idea. I’m going to go with Eric Cantor’s insurance program. That’s the idea to save the day" (page 285).

Eric Cantor is the Republican's number two man in the House, which is scary.

Daniel Gross writes about Paulson's book also:

Paulson love-bombs Barney Frank as "scary-smart, ready with a quip, and usually a pleasure to work with," praises Senate Majority Leader Harry Reid and notes that then-Sen. Barack Obama was "always well informed, well briefed, and self-confident."

But while Bush ("admirably stalwart") comes in for similar praise, Paulson has little positive to say about other Republicans. Sarah Palin annoyed him from the get-go. When he spoke to House Republicans about efforts to help Fannie and Freddie, he was chagrined that many responded with speeches about ACORN, the low-income housing activist group. House Minority Leader John Boehner was ineffectual. John McCain comes off worst of all: impulsive, ill-informed, and counterproductive. "This was crazy," Paulson writes of McCain's decision to suspend his campaign in late September 2008 and demand a White House meeting on the bailout. At the climactic meeting in the Cabinet room, Obama spoke for the Democrats, delivering a "thoughtful, well-prepared presentation." But McCain? "When it came right down to it, he had little to say in the forum he himself had called."

Abu Dhabi tightens grip on debt-stricken Dubai

Senior Hamas official assassinated in Dubai, probably by Israel.


Israeli officials declined to comment.

Assassinations are rare in Dubai, a polyglot business hub on the Persian Gulf where deposed foreign leaders sometimes sought shelter. But that began to change last year after a former Chechen rebel was shot dead in an underground Dubai parking lot. “The myth that Dubai is the eye of the storm, and no one will touch it because everyone has an interest, is being blown apart,” said Christopher Davidson, the author of two books on the United Arab Emirates, to which Dubai belongs.

A Profligacy of Greed
I've taken Mel Gibson off my Axis of Evil list on the right since his latest movie was good for a bad movie, even though the plot line seemed devised by a conspiracy-minded 9/11 Truther. Plus famous people like Gibson tend to go insane and it's not generous to malign the mentally ill.

In addition to my Axis of Evil list, I have my personal Rogues Gallery, particularly awful human beings I will touch on and discuss from time to time. People such that your heart sinks at the mere mention of their name. So far, I believe I've mentioned George Will, Robert Samuelson, and Mickey Kaus. Let me add that scourge of government debt Peter G. Peterson to the list. As Matt Yglesias has pointed out, the stimulus last year was too small, even though it was the largest in history. It was too small because people like Peterson have been spreading propaganda about the deficit for years. And so many more people than need be will be unemployed in the coming years, the economy will be worse off, and hence the Democrats and Obama will suffer at the voting booth.

Let me add this anecdote from Yves Smith:

The one and only time I met Steve Schwarzman was in 1986, when he and Pete Peterson had just started the Blackstone Group. I was a manager (meaning a mid level working oar) at McKinsey. We had teed up a deal and were assisting our foreign client in hiring an investment banker. This transaction was sufficiently sexy that Felix Rohatyn wound up working on it personally.

But what did we get when we presented the idea to Peterson and Schwarzman? We explained why we came to see them. We got 40 minutes (I kid you not, I checked my watch) of name-dropping by Peterson, of all the senior folks he knew in our client’s country. But that wasn’t why our client came to see him; had he bothered to listen, the matter at hand was in the US.

Then he and Schwarzman spent the next 20 minutes talking about Blackstone, and they make it abundantly clear how jealous they were of leveraged buyout king Henry Kravis (at the time, Peterson and Schwarzman were mere advisor types, their looting wealth creating opportunities were far more limited than if they had oddles of investor and bank money to play with).

So in effect, they spent an hour telling us that they really wanted to be doing LBOs, that was SO much better paid than M&A, they wanted to grow up to be Henry Kravis, but since they hadn’t raised the money to do that yet, then yeah, our client’s deal might be worth their while in the interim.

I have never seen a pitch meeting (and this had been arranged at the senior levels of the firm) devolve into such a naked display of personal greed. The two partners who were there with me, neither one of them naifs, were as appalled as I was. As much as I have seen a lot of unprofessional conduct in my life, this still ranks as one of real doozies.

The Rule of Law is Sacrosanct*
(or don't fear the reaper, i.e avoid a bunker mentality**)

Glenn Greenwald is positively overflowing in his praise for Obama's Attorney General Eric Holder. Holder has been trying to do what's right and best for America in the face of the usual suspects' demagoguery and bedwetting over terrorism. As Obama has said more than once, "Let's not allow the terrorists to scare us into a bunker mentality." The only thing to fear is fear itself, as FDR put it. Greenwald:

Independently, Rahm Emanuel is the absolute last person who ought to be exerting influence over the Attorney General's decisions regarding where and how to try Terrorist suspects; remember when all Good Democrats agreed that Karl Rove's attempts to influence the DOJ was really bad because prosecutorial decisions are not supposed to be politicized?

Easy Glenn, don't want to praise Obama's AG Holder too much, it might make your never-ending hyperbolic criticism of Obama, that he's no better than Bush, etc., seem incongruent.

Last week there were news stories about a possible ouster of Emanuel after the Massachusetts Senate race loss. I disagreed with those who thought he should go, but after reading this I now wouldn't argue so strongly for keeping him. Emanuel might be right in is his argument that it would be better to get health care reform than try terrorism suspect as civilians and thereby respect international norms and put the Bush administration's lawlessness in the past.

I would say it's better to get health care reform than perform a witch hunt on a previous administration, which is what Greenwald wants. (People who complained about the witch hunts against Bill Clinton seem especially inclined to return the favor. Seems .... hypocritical and double-standardsish.) My hope would be that Obama follows his AG's advice and manages to gets health care reform done. That seems possible - even likely - while I believe they would have to chose between health care reform or partisan witch-hunt. (Besides Obama's whole Presidential campaign theme was bipartisanship, something his critics always seem to forget or ignore.)

According to the New York Times article Greenwald points to, Holder is currently reading "The Girl With the Dragon Tattoo, a Swedish mystery-thriller, and Slavery by Another Name, about its unofficial persistence into 20th-century America."

My question to Senator Lindsey Graham - who I've always admired and who Emanuel is trying to placate - is that if we can treat anyone who is not an American in any manner we choose, why can't foreign nations do the same to American citizens? And if they do how can we protest?
--------------------
*sometimes
**As Rorschach says in prison to his fellow inmates - many of whom he put there, "You don't understand, I'm not in here with you, you're in here with me!"

Ezra Klein: 

In related news, Evan Bayh has decided to retire. He said he wants to spend more time scolding his family for moving too far to the left.

Left-liberal analysis failure

Maybe I'm just getting older and more compromised, but I was underwhelmed by left-liberals efforts to put Obama's feet to the fire and hold him to his campaign promised this past year. I know, I know, Obama explicitly asked for supporters to keep the pressure on and stay involved - the only recipe for success - but still reading this news reminds me of critics' evidence that the Obama administration would be a failure:

Mr. Tauzin is leaving his $2 million-a-year job as the top lobbyist for the drug industry amid complaints from drug makers that he bargained away their profits too cheaply, spent too much in his $150 million advertising campaign to sell the overhaul and miscalculated in his assessment that the passage of the legislation was all but inevitable.

Other drug industry lobbyists, speaking on condition of anonymity because they were not authorized to speak publicly, said his departure raised questions about whether the drug makers would continue to support the proposed overhaul, which has stalled in Congress.

Several of the lobbyists said Mr. Tauzin was undermined by a rival lobbying powerhouse -- Thomas J. Donohue, president of the United States Chamber of Commerce, who had fought the health care proposals from the start and complained to the drug makers that Mr. Tauzin had gone along too easily. A spokesman for Mr. Donohue declined to comment on Mr. Donohue’s behalf and later released a statement from Mr. Donohue praising Mr. Tauzin as "a great friend."

On the other hand many of the left-liberals who pointed to the drug industry deal never supported Obama.

Schism

Hitchens on Thomas Cromwell and the English Reformation.

He writes, "In Cromwell’s mind, as he contemplates his antagonist [Thomas] More, Mantel allows us to discern the germinal idea of what we now call the Protestant ethic:

He never sees More--a star in another firmament, who acknowledges him with a grim nod--without wanting to ask him, what’s wrong with you? Or what’s wrong with me? Why does everything you know, and everything you’ve learned, confirm you in what you believed before? Whereas in my case, what I grew up with, and what I thought I believed, is chipped away a little and a little, a fragment then a piece and then a piece more. With every month that passes, the corners are knocked off the certainties of this world: and the next world too. Show me where it says, in the Bible, "Purgatory." Show me where it says "relics, monks, nuns." Show me where it says "Pope.""

Ahmed Rashid on the present-day Taliban.

It's almost as if when the 21st Century "West" (and globalized Japan, China, etc.) looks at the Taliban, we are looking at our past.

From Rashid:

What [Taliban author] Zaeef omits or fudges is significant. He makes no mention of the ISI's financial and material support to the Taliban, and says hardly anything about al-Qaeda or how his hero Mullah Omar became so close to Osama bin Laden. He has nothing to say about the Taliban's repressive attitudes toward women, including the ban on their education, and he makes no mention of the Taliban's harsh punishments, including public stonings. 

By 2001, after UN sanctions restricted the Taliban's international contacts, Zaeef became the only Taliban leader who could meet with US and Western envoys. His relationship with the US embassy in Islamabad was dominated by American demands to hand over Osama bin Laden. In the days after September 11, he frantically tried to stave off the impending US attack on his country by appealing to Western embassies, writing letters to the UN, and trying to enlist support from Islamic countries. He met with Mullah Omar, who was convinced that the Americans would not dare attack. In Omar's mind, Zaeef writes, "there was less than a 10 percent chance that America would resort to anything beyond threats and so an attack was unlikely."

Review of Stewart Copeland's new book.

“Strange Things Happen” is just slightly more generous on the Police years than was Sting’s “Broken Music,” which dismissed the band in a single page. Copeland devotes 10 skimpy, highly impressionistic pages to the years between 1976 and 1984, at which time the trio became the biggest band in the world. (The guitarist Andy Summers was more expansive about the glory days in his endearing “One Train Later.”) Almost as much attention is devoted, for no clear reason, to a single show in which he sat in with middling alt- rockers Incubus, or an incomprehensible MTV event for which he accompanied the Foo Fighters. 

Above and beyond the Police, Stewart Copeland has had a pretty wild life. He was raised in the Middle East, the son of a C.I.A. operative. [Miles Copeland] He was something of a pioneer in the pop exploration of “world music,” recording with African musicians well before Paul Simon made his “Graceland” trek. He has worked on various documentary films and is an accomplished polo player. 

In “Strange Things Happen,” though, he glosses through these events at such high speed that at best, we get a wisecrack or a flip observation (“my daddy used to conduct his nefarious manipulation of local potentates with cocktail parties at our modest Ottoman palace”), but no real sense of what any of it means to him. 

 

Tony Blair on Iraq: "No Regrets."

As he says, the views in the Middle East are that the Sunni Saddam Hussein was a check on Shia Iran. But he's right that we shouldn't use one dictatorship to check another. He gave a big speech to that effect in Chicago in 1999.

Blair is the one politician I've changed my mind about. During the 90s, I believed he was a triangulator of the Clinton mold, and he was in a way. After 9/11 he took a lot heat for standing with America, but we are better off for it.

J.D. Salinger passed away.

Dana Stevens on why Catcher in the Rye was never adapted into a movie.

Howard Zinn is dead, too. He was a next-door neighbor to Matt Damon and his family, near Boston.

Damon's Will Hunting was a working class Holden Caulfield-type with a pronounced Southie accent.

Eccentric Cool
Hitchens on Gore Vidal:

More than a decade ago, I sat on a panel in New York to review the life and work of Oscar Wilde. My fellow panelist was that heroic old queen Quentin Crisp, perhaps the only man ever to have made a success of the part of Lady Bracknell in The Importance of Being Earnest. Inevitably there arose the question: Is there an Oscar Wilde for our own day? The moderator proposed Gore Vidal, and, really, once that name had been mentioned, there didn’t seem to be any obvious rival.

Like Wilde, Gore Vidal combined tough-mindedness with subversive wit (The Importance of Being Earnest is actually a very mordant satire on Victorian England) and had the rare gift of being amusing about serious things as well as serious about amusing ones. Like Wilde, he was able to combine radical political opinions with a lifestyle that was anything but solemn. And also like Wilde, he was almost never "off": his private talk was as entertaining and shocking as his more prepared public appearances. Admirers of both men, and of their polymorphous perversity, could happily debate whether either of them was better at fiction or in the essay form.

I recently read a description of actor Johnny Depp which called his style an eccentric cool. Like Vidal and Wilde, there's a confident independence. Even though Vidal is in Italy and Depp is in France, they are still "involved" and not hermits. Not too long ago I saw Vidal on Henry Rollins's show, which was funny. And Depp has a new Disney blockbuster Alice in Wonderland movie coming out.*

Louis Auchincloss just passed away and I remember Vidal always spoke highly of him. From the Times obituary:

Admirers compared him to other novelists of society and manners like William Dean Howells, but Mr. Auchincloss’s greatest influence was probably Edith Wharton, whose biography he wrote and with whom he felt a direct connection. His grandmother had summered with Wharton in Newport, R.I.; his parents were friends of Wharton’s lawyers. He almost felt he knew Wharton personally, Mr. Auchincloss once said.

Like Wharton, Mr. Auchincloss was interested in class and morality and in the corrosive effects of money on both. "Of all our novelists, Auchincloss is the only one who tells us how our rulers behave in their banks and their boardrooms, their law offices and their clubs," Gore Vidal once wrote. "Not since Dreiser has an American writer had so much to tell us about the role of money in our lives."

And yet five judges of the United States Supreme Court remain oblivious.  Obama's pointed disrespect ("With all due respect to the separation of powers...") last night was amazing. The Times obit also describes the class traitor Auchincloss's partrician/cultural elite personal style (which also could be said of Vidal.):

Mr. Auchincloss had a beaky, patrician nose and spoke with a high-pitched Brahmin accent. He had elegant manners and suits to match, and he wrote in longhand in the living room of an antiques-filled apartment on Park Avenue.

What was most memorable about Vidal's memoirs, to me at least, was the anecdotes about his mother. They are unbelievably funny and she comes off as highly intelligent and unsentimental (i.e. a major bitch) with no trace of self-doubt (like the mother/matriarch on the hilarious sitcom Arrested Development**). For all I know she was a nice, if distant, woman, but Vidal's portrait is unforgettable.
 -----------------------------
* It's good to see Depp working again with friends Tim Burton and Helena Bonham Carter. It's also exciting to see they invited Anne Hathaway down the rabbit hole to play the White Queen. Hathaway was unbearably heartbreaking in Jonathan Demme's Rachel Getting Married, a film that struck too close to home for me.
**That show is incredibly funny and absurd. I just started watching it.

State of the Union: Fabulous*

Gays in the military! Great speech by Obama as I expected. Very impressive outing by Obama and his speechwriting staff. Health care reform, jobs, climate change and immigration reform coming this year. Honest differences with the Supreme Court. Great optimism about the coming decade.
----------
* I stole this line from Chicago Disc Jockey Frank E. Lee, in reference to the Leettes(sp?). Obviously things aren't fabulous with 10% unemployment and the Democrats likely to lose elections in November, I just liked the way it sounded. Below, fabulous commercial nixed by the Superbowl people. (via Andrew Sullivan).

Taibbi's writings on the financial industry always seem a bit sloppy to me, if pleasantly hyperbolic. My estimation of him went up after reading his Baffler review of Blagojevich's book where Taibbi displays his knowledge of The Wire:

Fans of the HBO series The Wire who read this book will undoubtedly recognize in Blago’s public appeals for sympathy on the corruption charges--whatever he did, he did because he just loves the people of Illinois so goddamn much-- an almost flawless impersonation of Isiah Whitlock, Jr.s’ immortal character Clay Davis, a corrupt-as-fuck Maryland state senator. Indeed, the chief differences between the two are incidental: Davis quoted Aeschylus; Blago quotes Shakespeare.

...

The story that federal prosecutor Patrick Fitzgerald tells in his indictment of Blagojevich--copiously borne out by the wiretap transcripts-- is in the grand Chicago tradition of open graft. Blagojevich is trying frantically to sell the Senate seat to Obama’s people, who apparently wanted African-American lawyer Valerie Jarrett, a longtime confidant of the Democratic presidential nominee, to get the spot. "I’ve got this thing, and it’s fucking golden, and uh, uh, I’m just not giving it up for fucking nothing," he says, in one such voluble wiretapped call. Later on, Blago deputy John Harris is heard negotiating with then-aide and now-White House chief of staff Rahm Emanuel, saying that if Jarrett were to be Blago’s pick, "all we get is appreciation, right?" To which Emanuel says, "Right."

(Video via The Wire fan Yglesias)

One more reminiscence about 2009: some favorite bits of writing.

From the Onion's Gateways to Geekery: Krautrock:

The gist of krautrock is simple: It was Germany’s answer to the musical upheaval at play all across the planet in the late 1960s and ’70s, when rock did double-duty as revolutionary art-music and strived to be newly psychedelic and free.

Henwood at his new blog where in he wrote in literary fashion:

The IMF, which was off the scene for many years, is, like a vampire salivating at sunset, returning to action. It's already developed a program for Iceland, which is being put through the austerity wringer; apparently being white and Nordic doesn’t earn you an exemption. It's likely to lend some money to some countries that it deems virtuous on easy terms - among them Brazil but not Argentina. More on all this in the coming weeks.

In a piece for Rolling Stone, Matt Taibbi employed the vampire metaphor as well:

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

Hitchens on the deceased J.G. Ballard:

Fascinated by the possibility of death in traffic, and rather riveted by the murder of John Kennedy, Ballard produced a themed series titled The Atrocity Exhibition, here partially collected, where collisions and ejaculations and celebrities are brought together in a vigorously stirred mix of Eros and Thanatos. His antic use of this never-failing formula got him briefly disowned by his American publisher and was claimed by Ballard as "pornographic science fiction," but if you can read "The Assassination of John Fitzgerald Kennedy Considered As a Downhill Motor Race" or "Why I Want to Fuck Ronald Reagan" in search of sexual gratification, you must be jaded by disorders undreamed-of by this reviewer. Both stories, however, succeed in being deadpan funny.

And Rick Perlstein on the Tea Party phenomenon:

In Pennsylvania last week, a citizen, burly, crew-cut and trembling with rage, went nose to nose with his baffled senator: "One day God's going to stand before you, and he's going to judge you and the rest of your damned cronies up on the Hill. And then you will get your just deserts." He was accusing Arlen Specter of being too kind to President Obama's proposals to make it easier for people to get health insurance.

In Michigan, meanwhile, the indelible image was of the father who wheeled his handicapped adult son up to Rep. John Dingell and bellowed that "under the Obama health-care plan, which you support, this man would be given no care whatsoever." He pressed his case further on Fox News.

In New Hampshire, outside a building where Obama spoke, cameras trained on the pistol strapped to the leg of libertarian William Kostric. He then explained on CNN why the "tree of liberty must be refreshed from time to time by the blood of tyrants and patriots."

 Last November Obama attended a Town Hall in Shanghai. From Time:

Instead of being greeted by voters mulling their options, Obama on Monday met with several hundred well-dressed, attentive and relentlessly on-message students, handpicked by Chinese authorities for the occasion. They listened attentively, nodding in agreement at some of his answers and laughing at his jokes. Most of their questions were something less than challenging. "What measures will you take to deepen this close relationship between cities of the United States and China?" asked the first questioner, a young woman whom Obama picked randomly from the crowd. "What's the main reason that you were honored with the Nobel Prize for Peace?" asked another. A third followed up on the Nobel Prize line of inquiry. "What's your university/college education that brings you to get such kind of prizes?"

...

But the Obama Administration's initial hopes for widespread Chinese broadcast of the event were not, in the end, realized. Though the event was covered on Shanghai television, elsewhere in the country the broadcast networks did not carry the feed.

A bright spot for the new year was Secretary of State Hillary Clinton's forceful speech criticizing China over the "Great Firewall." The Chinese Communist Party immediately pushed back:

In an editorial, the English-language edition of a Chinese newspaper, Global Times, said that the demand for an unfettered Internet was a form of "information imperialism," because less developed nations could not compete with Western countries in the arena of information flow.

As Perlstein's examples above show, in the arena of information flow in the US, corporations dominate. The recent US Supreme court decision that campaign cash is free speech will ensure further domination of the corporate world-view.