Whither Capitalism?

Up until, say, the beginning of 2008 this question of "Whither Capitalism?" might have seemed appropriate in a dry academic classroom. No more.

A few statitics to start the day. 9 major banks, including Goldman Sachs and Morgan Stanley, in the US received $175 billion in bailout money from Joe Public, so far. They have repaid $50 billion. The same 9 banks are to pay out $32.6 billion bonuses to their staffs with the senior executives receiving disproportionately larger shares.

During August 2008 when a number of banks could fold due to a collapse in confidence as well as in their over-leveraged balance sheets, then Secretary of Treasury, Hank Paulson, former chairman of Goldman Sachs had over 2 dozen conversations with his successor at Goldman, Mr Lloyd Blankfein.

This fact by itself should have been considered perfectly "normal". The top financial official should have his fingers on the pulse on Wall Street. Goldman Sachs was and remains a most important player.

Wait. During the same month, he talked only 4 times with Jamie Dimon, Chairman of JPMorgan Chase, 2 times with John Thain, then chairman of Merrill Lynch and 6 times with Fuld, then chairman of Lehman Brothers the collapse of which nearly brought down the entire financial industry of the US.

So why was Goldman Sachs receiving, at least on surface, more TLC, then others, one could legitimately ask.

Actually, silly question. Anyone familiar with the culture of Wall Street, especially at a firm like Goldman where "team work", "corporate loyalty" followed by multimillion bonuses know if there ever arose a conflict between private and public interest, barring blatant criminal acts, private (read Goldman) interest would take precedence. Paulson was a product of Goldman which made him not only Chairman but also one of the richest men on this planet. Few men, especially those from the money industry where money is the be-all-and-end-all objective, could rise above private concerns.

And that is at the heart of the question as to whether Capitalism can survive consistent partisan and parochial manipulation that is a by-product of maximizing private profit, the ultimate goal of the Wall Street culture.

Today's column in NY Times by Frank Rich points out a much larger issue regarding how the political process in DC is now increasingly in the hands of Money. Read here.

I will be writing on this and related political issues in due time.

Wall Street Mystique

I started this blog because I, a former denizen of "Wall Street", was offended by the blatant disregard of anything remotely resembling business ethics and political morality in Washington's rescue process.

Before I write further, let me declare. I love $$ as much, if not more, than the next investment banker. However, I also believe $$ ain't the be-all-and-end all for us to be human. Nor should it be the only defining value of what constitutes a useful, happy, productive life. By morality I don't mean I am on the side of angels. What I do mean is a society, any society, needs "balance". A society that allows certain groups, companies, individuals to influence a public policy to its own benefits without checks and balance is a society waiting for a disaster to happen.

What has been happening in Wall Street is more than about $$. It is about how one industry has managed to write the public policy for its own benefit -- with some key Washington public officials as cohorts.

I have over the past months written on this topic. I do not wish to bore you more.

The latest NY Times report on bonuses on Wall Street is just another reminder that democracy has to be safeguarded from any person, any company, any industry that can safely ignore public interests. Read here re how ineffective, how incompetent, or perhaps how inter-connected the economics team of the Obama administration is to Wall Street. What has Democracy got to do with bonuses on Wall Street?

As pointed out by any number of writers, including this one, the Goldman Sach's or the Morgan Stanely's could not have survived but for pubic money injected into them to bail them out.

To the rest of the nation, indeed to the world, it seems quite unseemly that high officials on Wall Street who had been a party to the bursting of the bubble are still getting paid humongous bonuses.

I only have this to say: "Very clever chaps, but remember your bonuses are from the savings of the poorer fellow citizens who have had to tighten their seat belts so that you can go aead and pay yourselves large bonuses.

I have only a small one: What exactly have you done to the country to warrant yet another round of super duper bonuses while the rest of the country continues to suffer?



Read this Ny Times article for illustration.

1 Child Policy Folly Down the Drain, Not a day too soon

It has been an article of faith of the Chinese Communist Party since 1949 that Chinese families should not have more than 1 child. The folly was based on the ignorant quasi-Malthusian theory that unchecked population growth would hamper growth.

I used to argue with my "handler" back in those days when foreigners needed to be chaperoned.

I said: "Hey, imagine every Chinese on the mainland was as productive as, say, a Chinese in Hong Kong or Taiwan [whose respective per capital was then and still is now multiples of China's], wouldn't you agree that you wanted MORE Chinese not less? And the way to up there was not to limit the size of the population but to increase its productivity by a) investing massively in education; and b) not suffocating China's talented citizens with mindless political mantras and thought control?"

I was, for sure, marked down as another ignorant "overseas" Chinese or, worse, a foreign agent attempting to spiritually pollute the minds of right thinking Chinese communists.

Well, guess what. The powers-that-be are realizing two things: quantity plus quality translates into 1 + 1 = 3; and second, the growing imbalance between young and old means that the aging population is putting on an increasing economic burden on the young to support it. China needs more young people. They have to be made not in a factory but by husbands and wives in families.

Hence, the following development. Read here.

Better late than never. Oh, a small footnote. The Communist royalty was never bound by the 1 child policy.

Robert McNamara - My last word

He died almost 2 weeks ago. Reams of obits have been published and now forgotten. A few bullet points stood out:

- A brilliant man. A "whiz" kid.
- Youngest Ford Motor Company President ever. Gave up $$ for public service summoned by JFK, head of the Camelot roundtable.
- Total confidence in quantitative method.
- Wanted to win in Vietnam.
- Lost faith in that policy but kept quiet and then years and years later said "I was wrong" and then tried to redeem himself at World Bank "fighting" world poverty.

Nearly all commentators left it at that personal level, implicitly giving him an absolution without exploring further the moral implications of what he had done. Afterall, he did say "sorry", didn't he, at least kind of? He actually never did say that.

Bob Herbert of the New York Times was closest to opening the pandora box in his sobering column. It should be read in full.

Here is one priceless excerpt:

"McNamara, it turns out, had realized early on that Vietnam was a lost cause, but he kept that crucial information close to his chest, like a gambler trying to bluff his way through a bad hand, as America continued to send tens of thousands to their doom. How in God’s name did he ever look at himself in a mirror"?

The word "God" was invoked.

The unexplored questions that jumped out of this paragraph are intuitively obvious: Was that war "just" in the eyes of God explored by Aristotle all the way down to St. Augustine and St. Thomas Aquinas?

If it was not a just war, as nearly everyone now believes it was not -- the war was based on the groundless thesis that if "We don't fight the war in Vietnam we will one day fight a billion Red Chinese in Los Angeles armed with nuclear weapons" in the immortal words of the then Secretary of State Dean Rusk -- then was it only McNamara who may not have been able to look at himself in a mirror?

If it was not a just war, would the precedent set by the US government in hanging WWII Japanese general Tomoyuki Yamashita for crimes committed by his troops in the Philippines apply to US leaders who prosecuted the war from JFK all the way to Richard Nixon?

Robert McNamara may have found peace with his God though many do not believe he ever did for reasons still unclear, how does one look in the eyes of those surviving family members who who lost over 4 million of their sons and daughters (adding up American and Vietnamese military and civilian lives) for mistakes made by a handful of American leaders? I am leaving out the "collateral" damage in Cambodia and Laos.

That's the question obit writers have missed or dismissed by design.

But that's really the only important relevant issue of moral responsibility. Do we need to wait for more years, decades, centuries for the future Aristotle's and Thomas Aquinas's to give it a proper airing before we can close the chapter on that war?

Oh, please don't even get me started on the Iraq war which, too, was based on premises that the war makers knew early on were untrue. Ah, yes, I can hear the same refrain: "If we don't fight them in Iraq, we will have to fight them in New York armed with nuclear weapons".

By the way, I absolutely love the folksy but crystal clear language Dean Rusk used to explain what the Domino Theory was. It put to shame those think tank types who wrote erudite books and learned articles justifying that Theory in obscure jargons.

Dollar Dominance & RMB

Any cursory reading of the news these days indicate that the Chinese authorities are not letting up on their to-your-face attacks of the dominance of the US$ as the global reserve currency.

The unspoken subtext is the time has come for China's own currency, RMB, to assume a role of a global reserve currency.

All professionals understand that it is premature for the RMB to take on such a role. Several well-known pre-conditions need to be met before the RMB could become a serious contender as a reserve currency.

They include high quality of governance of the banking system, transparency of monetary and economic policy making, rule of law not -- only in commercial but also in just about all other areas including criminal laws. The recent sudden arrests of 4 top Rio Tinto executives is one example of how commercial disputes could quickly morphed overnight into a state-to-state crisis. This is more the stuff of George Orwell than that of globalization.

And then the currency must be a totally convertible one before it can go global.

There is little doubt sometime in the future China would be able to meet those requirements.

The issue is not whether, but when. It is also clear "when" is not quite here yet. Not even close.

Yet there is another level on which the Chinese attack is entirely apropos.

The ability of the US to print any amount of money it wants -- as it has been doing since Vietnam where both guns and butter were considered ok -- without creating a classical "third world" currency crisis is because the US$ is the only reserve currency every country uses it as the basic unit of accounting and exchange.

If the US had had to watch out for current account deficits, like any "normal" country, it would not have been able to borrow its way out of financing unbounded consumer appetite for goods and for its leaders to finance overseas ventures mindlessly. The flooding of the US$ in the world economy has been the major source of financial instability the latest of which is still being played out.

China's attack on the US$ has a geopolitical dimension that has not been sufficiently aired in the public domain.

Goldman Sachs - 2

Paul Krugman's latest column is devastating. Read here. However, Washington DC is not listening. Or if it was, the message is predictably falling on deaf ears for reasons by now well argued publicly by a large number of commentators from MIT's Simon Johnson to Columbia's Joseph Stiglitz.

Goldman Sachs (GS) has become a 2 letter word

GS maybe the most powerful financial institution on Wall Street, or what's left of it, but its leaders cannot be very comfortable in their privileged position. Even the Wall Street Journal, the symbol of capitalism, and a very unlikely protagonist, is pissing on them.

Read its July 16 editorial below.

Clearly the editors of the Journal wanted to be sure the world did not miss the message. Alongside its editorial, it printed a scathing and sarcastic op ed by a veteren Wall Street denizen, a former fedge fund manager, Andy Kessler.

Kessler piece is reprinted here following the WSJ editorial.

You may not agree with all the points in them but to see the "Goldman's" of the world criticized by the Journal is worth the time you spend reading. Enjoy




A Tale of Two Bailouts
Goldman's profits, CIT's trouble, and 'too big to fail.'

Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."

What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.

CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic.

But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share.

There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent. CIT's bank is only a small part of the company and is so far walled off from trouble. CIT executives want permission to stuff some of the company's assets into the bank so they can finance them with brokered deposits. But that would put the FDIC's deposit fund at greater risk just when it is stretched from other bank failures. The FDIC should also be winding down its debt guarantee program, not extending it to new and riskier companies. Taxpayers shouldn't be put at risk for further losses via the FDIC merely because Treasury and the Fed don't want to admit losses on their TARP investment.

Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.

Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.

Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.

We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.

If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.

One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.
* * *

No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.

Andy Kessler

* OPINION
* JULY 16, 2009

The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.



By ANDY KESSLER

I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.

Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]

We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.

At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.

The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.

Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.

In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.

Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.

But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.

Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.

Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.

Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).

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California's IOU - 2

Well, guess what. No one it seems wants to accept Terminator's IOU's!

The Wall Street Journal reported in yesterday's edition that a group of large banks had announced it would not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.

California, were it a country, would be the 6th largest. Sad. But what happens now not only in California but in other deficit ridden states?

Stay tuned.

McNamara is Dead. Really?

"Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it", wrote George Orwell, the noted author of 1984.

Robert Strange McNamara, the most controversial Secretary of Defense of USA before Donald Rumsfeld bungled his way into Baghdad died two days ago.

His arrogance in dismissing critics of the Vietnam War summed up the hubris of a nation so sure of its military, moral and geopolitical footings that it went to kill needlessly tens of thousands of people in countries it hardly knew.

Robert McNamara admitted so in his own writing in his 1995 memoire (“the war was wrong, terribly wrong.”) and in his celebrated interview in the must see 2003 documentary: The Fog of War produced by Errol Morgan.

One time he went to Harvard to give a speech. Students protesting against the Vietnam War surrounded his motorcade. He got on to the top of his limo and shouted at the students: “I am smarter and tougher than you.”

He later greatly regretted. At his farewell lunch at the Pentagon he wept to the horror of those present. He wept not over his leaving but over his mistakes in believing the war was just.

The lessons of McNamara’s over confidence in using “scientific”, quantitative methods in running wars and formulating foreign polices are well-documented.

Yet, events subsequent to the Vietnam war, now again in full display in Iraq and Afghanistan show each generation makes similar mistakes all the time thinking it is smarter than the one before.

Hubris is not an American monopoly. Every major power in history at one time or another acquired it.

Winning the hearts and minds of those one wish to “conquer” remains just a slogan. Each power thinks firepower alone can do it. Yes, perhaps for a while. But as Vietnam, Cuba, Afghanistan invaded by Russia, Eastern Europe under Soviet Union and many in earlier centuries show clearly, power comes from the barrel of the gun, as Mao so cleverly put it, is an illusion in the long run. Just ask the Chinese leaders who are having to deal with unhappiness in Xinjiang and in Tibet. How long can you keep an unhappy people down with guns?

McNamara in many of his post War writings and interviews kept saying: “We must see the world from the eyes of the other side.”

And of course each generation ignores the lessons of history.

California's IOU and Money Supply

I promised to write if something important happens while I am still on vacation. Something has.

California, deep in a fiscal hole, unable to get its State legislature to pass a budget, is issuing IOU's as a money substitute. Go to this link: http://www.nytimes.com/2009/07/03/us/03calif.html?_r=1&hp.

Why is this important?

Remember only the Fed can print money. If all the states in United States of America begin to print IOU's to finance their debt, then there is not just one printing press. There will be 50 of them.

Amigos, that's how Argentina got its world class financial crisis 7 years ago because the provinces began to do exactly what California is doing. The country lost its control of quantity of money issued.

Argentina's much ballyhooed 1 to 1 fixed peso to dollar link cracked under massive inflation and the debasement of its currency.

Paul Krugman, the noted Nobel laureate economist, tirelessly reminds readers in his NY Times columns that higher savings rate in the US would mean a firmer US dollar. That maybe so in normal times. Indeed, current higher savings rate is probably sustaining a dollar that should have been a lot lower given the massive amount of credit and money printed or committed by the Fed to pop up a variety of institutions.

However, the precedent set by California could be a game changer if the size of IOU's gets bigger and if other states follow the same practice.

Get ready to take your $ to the nearest bank and buy Euro or Australian dollar. So watch how thie IOU"s business evolves in the weeks and months ahead.

Still On Vacation

I am still on vacation. Unless something dramatic has happened, I will only write occasionally. I apologize to you who follow this blog. I should be back in full swing in 3 weeks. Thank you for your patience and understanding.

Obama's 100 days+

Obama has done one thing that will go down in history as "game changing". I don't just mean getting himself elected. That certainly was a game changer. How quickly has the country (apart from a small minority of racist largely Republican) accepted a black president as "normal".

The really significant thing in my view is the number of "people of color" he has brought into his cabinet whose credentials are awesome. Steve Chu is a Nobel physicist. His new Supreme Court nominee is a Hispanic who graduated Summa from Princeton and onto Yale Law Review. And so on. Never again one should hear the argument that there are no qualified "minority" citizens. There are plenty and Obama has once put away that not so subtle racist argument.

However, as long time supporter of Obama, Frank Rich of the NY Times wrote in today's Sunday paper that some serious stuff is going down badly. The full column is here. It shoudl be read in full.

Here are a few excerpts:

...The administration’s two financial gurus, Lawrence Summers and Timothy Geithner, wrote to preview their plan [in the Washington Post]: “Some people will say that this is not the time to debate the future of financial regulation, that this debate should wait until the crisis is fully behind us,” they wrote by way of congratulating themselves on taking charge.

Who exactly are these “some people” who want to delay debate on the future of regulation? Not anyone you or I know. Most Americans were desperate for action and wondered why it was taking so long. The only people who Summers and Geithner could possibly be talking about are the bankers in their cohort who helped usher us into this disaster in the first place. Both men are protégés of one of them, Robert Rubin, the former wise man of Citigroup.

There are some worthwhile protections in the Summers-Geithner legislation, especially for consumers, but there’s little that will disturb these unnamed “people” too much.

Remember I raged over the lose-lose proposition of Geithner's Public/Private Investment Plan? To see how the issue of "conflict of interest" has been set aside for Obama's economic team working with some of the powerful people in the financial sector, just read in the same issue of NY Times a long article on Bill Gross's role in shaping government policy. I don't know to laugh or to cry. Read the full article as well here.

NY Times has been a huge supporter of Obama's Campaign for President.

Another longstanding "liberal" magazine close to the Center is also unhappy about Obama's increasingly "traditional" politics as usual presidency. The whole article by Kevin Baker needs subscription at Harper's Magazine, July Issue. But here is one excerpt.

Wall Street Won - 2

I am still on the road in the United States living off a suitcase with just time and energy to do emails. I try to keep up with the news but cannot blog as often as I would like. Very sorry.

However, one thing caught my eyes. Michael Lewis, one of best writers about Wall Street, is angry at the same thing I was sometime ago regarding how Obama, as advised by his two chief economic lieutenants, had cratered to Wall Street tycoons. The biggest of them all on Wall Street are those who run Goldman Sachs. Read here.

There are two fundamental issues in the financial rescue operation: systemic stability and economic justice. They are not mutually exclusive especially in this particular financial meltdown when the victims, the majority of taxpayers, are also footing the bill to rescue Wall Street.

It is simply wrong to save Wall Street in the name of restoring systemic stability at further disadvantage against the working stiffs who in California are experiecing a growing unemployment rate now at over 12% and rising.

Paul Krugman just came out with a short but punchy analysis of what was so lacking in Obama's new policy on regulating Wall Street.

The package is yet again an example of saving the backsides of the tycoons while plugging some holes related to systemic risks. Read here.

A Decaying Empire

It gives me no pleasure to lament over the sad state of many aspects of the United States who has given so many shelter, protection and a second chance in life from their unhappy past. Me included. My parents were refugees from China before 1949.

Yet, as the American Society of Civil Engineers, (ASCE) the nation's largest such association, has been warning over the past many years, the conditions of the American infrastructure, once the world's Gold Standard, are in dire conditions. Anyone who has visited mainland China (even!), or Korea which US once saved from the North or Taiwan, can spot the lamentable state of much of American roads, telecomunication, bridges. Internet speed is mostly slow even in the high income neighborhood. I compare it to what I have in Thailand. Read the latest from ASCE here.

It isn't just "hardware" that's a big issue in this country where I have been traveling the past weeks.

American airline companies these days, like Detroit automakers, must be prime materials in management courses as to how not to run any organizations.

Not only flight delays are routine, not only service is uncaring, even baggage handling is laughably "Third World". My short flight from San Francisco to Los Angeles was delayed for 3 hours. I checked in 2 hours before scheduled departure. Yet, the carrier managed to have left behind my luggage. If only my random experience were exceptional. But my story met with a knowing shrug among all my friends for it was apparently a common phenomenon. Sad

An Apology

I have been traveling constantly last 2 weeks in California on personal business living off a suitcase.  Two more weeks to go before I could sit down and do some serious writing.  Please accept my apologies.

Nothing fundamentally has changed.  Wall Street is still practically dictating what the economic team of the Obama Administration should or should not do.  

Financial markets like what they see, for now.  Despite reassurances from Washington that its policies are only anti-deflationary, inflation fears are increasingly affecting the bond market as the long end moves up.  Gold, Oil, other commodities have stayed very strong.  

Dr Doom, Marc Faber, an old friend, is going around the world saying US is going the way of Zimbabwe because the Feds have been printing and committing trillions to avoid Great Depression 2.  So inflation was to become hyperinflation.

Marc as usually overstates his case, but his directional prediction is not to be dismissed so quickly.  

For the time being, I can only contribute occasionally to my blog.  July should be when I get back to the swing of things.  

General Motors and Team Obama

GM is dead. Long Live GM. Uncle Sam is there to give you back life. Will the new GM work? Can a broken vase be put back together?

No one provides a better answer to the GM question by the normally conservative NY Times columnist David Brooks. His analysis is here.

The following rejoinder by a reader makes a good companion piece to Brooks' analysis:

David, your thinking is sound, but missing an historical context that would actually reinforce it.

There are two books that completely explain what GM was, is, and will become:

1. "My Years With General Motors" by Alfred Sloan

2. "Concept of the Corporation" by Peter Drucker

The first is by the quintessential GM insider. Sloan was chairman of GM during its formative years - and pioneered the ostensible virtue that proved to be GM (and other American) companies' demise. That is, of course, centralized finance and decentralized operations.

GM has always been run by its finance people. Recently, run into the ground. This is perhaps why Barack's team is so deceptively comfortable at its helm.

Everything by the numbers. The Corvair. The Vega. The Aztek. More harmfully, a succession of mediocre models.

The second is by the quintessential GM outsider - and about GM from an outsider's perspective. The poignancy here goes to the other fatal aspect of GM's culture - its insularity.

As Drucker wrote his book, GM's senior executive management grew so comfortable with him, they wanted to offer him a senior executive job. Upon reading the book, however, that thought dissipated. They had grown to see Peter as an insider - and so his outsider's view was seen as disloyal and even seditious. So Drucker brought his lessens elsewhere. To Japan.

Santayana's comment (incidentally, Barack, a Harvard man through and through) about those not remembering the past being doomed to repeat is eerily poignant here.

Lutz, from Chrysler - the engineering-oriented company of the big three - couldn't make a significant dent (pun intended) in GM's culture.

But our new young president might just get it right - and I certainly wish him and his team well to that end - and learn a valuable lesson in wealth creation.

GM's challenge is not creating a supply of cars. It is about creating demand.

For that - he needs to turn to the marketing-oriented company of the big three.

I see a Ford in GM's future. You heard it here first.

— W in the Middle, New York State

Beijing Ridiculed Tim Geithner

US Treasury Secretary, Tim Geithner, is in Beijing to reassure America's single largest creditor that it's bonds are "safe". Chinese Prime Minister, Wen Jia Bao, recently asked for reassurance as China is saddled with US government papers.

The Peking University audience to which Geithner addressed humiliated Geithner by laughing out loud when he said "Your assets are safe".

A former Central Bank governor of China told the press Geithner's math was dubious when Geithner claimed US could reduce its fiscal deficits substantially in the foreseeable future. It is rare that Chinese hosts so openly disparage a guest.

The coup de grace came when the ex Chinese central banker said "The Federal Reserve Bank is the world's largest investor in junk assets."

Three signs of any empire falling: a decaying economy, declining morality and a world losing respect of the emperor seen to be increasingly naked. The US unfortunately is well on its way to meeting those three pre-conditions. The Bloomberg report on Geithner's visit in Beijing is here.

Crony Capitalism V2

Wall Street has been shaping Geithner/Summers's financial rescue policies. This much is well-known. But the brazenness with which they do so and the docileness with which Geithner et al allow the Wall Street chieftains to walk all over Washington is getting a little obscene.

Here is the latest chapter on how Wall Street is effectively playing with public money in full view, buying up each other's toxic assets after getting bailout $$ to bid up prices of such assets which they couldn't sell to unconnected parties at unrigged market prices. Read this from NYU Professor Nouriel Roubini's famous website:

"In order to persuade the private sector to participate in the PPIP, the government is engineering solutions that sidestep the strings attached to direct government aid, in particular executive pay restrictions. Moreover, reports show that banks are planning to bid on each other's assets to drive up the price and take advantage of the subsidies, while the FDIC is mulling to let banks share in any upside if they participate in the program as Treasury wants to keep participation voluntary. Increasingly, questions arise about the legality of this approach starting with AIG's full bailout of counterparties with taxpayer money. Given the limited TARP buffer left ($150 billion after PPIP) and likely Congressional opposition to new TARP money, the administration is under pressure to restore the banking system with the help of private capital if it wants to avoid anything resembling nationalization. This puts Wall Street in a position to dictate the terms..."

Racial barriers in USA

President Obama is doing one thing really well. He is systematically tearing down the barriers in USA against "people of color". What an euphemism.

Obama has nominated Sonia Sotomayor to be a Supreme Court Judge who calls herself a NewYorkrican.

The cognoscenti will recognize that word to mean a New Yorker whose origin was Puerto Rico, a Spanish speaking Latin society and an almost US state.

Ms Sotomayor, a graduate of Princeton and Yale Law School, will be the first American of Hispanic heritage to sit on the Court if confirmed by the Senate.

One by one, Obama is showing his country "color" is no longer a relevant issue in USA. Well done.

Now, could you please fire Geithner and Summers for having taking too good a care of their buddies on Wall Street in their rescue package you have approved?

That's Crony Capitalism, don't you know?

Whither the Republican Party in USA?

Every thriving democracy needs at least one strong, intelligent opposition party.

USA, though a young country, has the longest democracy in history. The 2 party model (Democrat and Republican) in the US, Conservative and Labor in the UK, has been a shining example of how a democracy can work without splintered by multi-party chaos. Witness Italy.

That's why the decline of the Republican Party into becoming a fringe group representing a narrow electorate consisting mainly of white, Christian and ultra-nationalists, and often racist, is an alarming development.

The following two articles are worthy of your time. Paul Krugman in the NY Times is here and the Bloomberg article on former Secretary of State and retired General Colin General Powell is here.

It is sad to see the Party of Lincoln, Eisenhower and the Rockefellers, symbols of fiscal conservatism, cultural tolerance, political moderation abroad has descended into a totally unrecognizable party of intolerance.

Many traced that change to Richard Nixon. While a brilliant international tactician, he brought a dark side to US politics with his many brooding Freudian insecurities and "hatred" against his domestic "enemies".

Ronald Reagon was not a "hater" the way Nixon was. But he too had a black and white view of Democrats and Republicans; the tax cutters (GOP) vs the tax and spenders (the Democrats).

In fact under Nixon and Reagon, US began its march towards becoming a larger and larger debtor country.

Fiscal conservatism, long associated with Republican principles, was replaced by reckless tax cutting and spending at the same time. The worst is George W Bush, the last president, in economic policies and in his reliance on fundamentalists in USA to assume a key role in domestic politics.

US becoming a Third World Country?

I have been arguing that "crony capitalism" USA is damaging the country in public/private sector governance and credibility around the world.

Now, the other shoe is about to drop. USA is poised to lose its AAA bond rating as its national debt shoots up from a small single digit as a percentage of its GDP to a double digit in 2009-2011.

The Obama Administration is saying budget deficit will soon come down a couple of years out. No economists outside of the Administration buy that scenario. A very sad situation for US debt for as long as one can remember is the Platinum Standard for sovereign debt. Read the latest from Bloomberg News here.

Crony Capitalism USA

My view on "Stress Tests" distributed by Project Syndicate and published in the Japan Times, May 19, 2009 is Here.

Don't Fight The Fed

That old adage about "not fighting the Fed" is based on a simple but solid fact: ample liquidity translates into a strong stock market. And a strong market is what we have. The talk of a "bear market rally" is correct ONLY if liquidity was not a factor.

Yes, the general economy is still a mess. But the amount and the speed with which the Fed and other Central Banks are injecting liquidity into the global economy all but ensures a strong stock market. Even the length of the global recession is likely to be shorter than expected. Instead of a long flat bottom U shape recovery, we are likely to see one resembling a moderate V.

The Rise of RMB and the Fall of US$?

The latest hot topic in the press is the potential assumption of China's RMB as a reserve currency, perhaps even replacing the US$ as the world's global currency. Roubini wrote an op ed piece in the New York Times. Successful speculator Jim Rogers is "sure" the dollar is finished to be replaced by RMB.

The logic goes like this. The US$ assumed its central role after WWII as the monetary equivalent of the Sterling when Britannia Ruled the Waves. One empire fell, a new one took its place. Money went with the power. They went hand in hand, in fact. But Pax America is also over as it had squandered its resources.

Empires always fell when their economies declined. America's economy has seen its best days. The reasons are well-known. Insufficient savings by both the public and the private sectors. Insufficient investments. While hi tech is still alive and well in Silicon Valley -- but America is no longer the only place where hi-tech thrives -- not much else is.

Basic infrastructure in America is a sham. Education is a scandal, apart from the tiny elite circle of high schools and universities sought after by the world's elite families. The national average of a number of measurable indicators has been falling over decades compared to a large number of foreign countries.

China on the other hand is a big saver, a big investor in infrastructure and is aiming to catch up and overtake America. The drive and the energy of a nation starved for global recognition only makes America look tired.

The latest Wall Street bubble from years of incompetent national governance and less than honest private sector governance is just another sign of a nation lost in its own self-absorbed admiration of a past gone.

Question: is RMB ready to replace the US$?

There are signs that the Beijing government is keen to do so. But they are not in a hurry because they know more than outsiders that China continues to have a number of serious structural issues to deal with.

China's domestic legal structure exists more in name than in execution. Judicial independence is years, decades away from reality. The ranks of world class corporate management is still thin. Corporate governance is still subordinate to national policies as many senior managers are proxies of the ruling Communist Party.

The currency, increasingly credible, is years away from being a convertible currency. Its convertibility itself depends on the strength of its legal structure.

Can the currency of an authoritarian country assume the role of a global currency? It would indeed be a first if it did.

More on the RMB in future postings.

Stress Tests Meet Saturday Night Live (SNL) on NBC

SNL in a venerable American institution that has bred numerous successful comedians. Among them are Eddie Murphy, Chevy Chase, Tina Fey, Bill Murray, Dan Ackroyd, Adam Sandler and the late John Belushi and the late Gilder Radner.

The show also features VIP guests that have included not just Hollywood celebrities but many high government officials and public figures. Senator Obama, Clinton, Al Gore among others have done so. Late President Gerald Ford opened the show once. Others fight to be on it because the show is one of the most watched in the country.

Its satire of Obamamania during the last presidential campaign was cited by his then opponent, Senator Hilary Clinton, as "evidence" of media bias against her. Its satire of officials often had the effect of a "kiss of death". You don't want to be the target of its satire.

In this context, Tim Geithner, whose "stress tests" have been panned by many analysts, including this one, would be having sleepless nights because SNL has just done a skit on that very subject. Watch it here.

Stress Tests and Buying Bonds

The stock market behavior of late smells of "insider trading".  It seemed obvious many already knew what the Stress Tests "results" would be.

A number of highly respected financial professionals have commented on how non-rigorous the tests were and how incomplete the released information was.

Geithner managed to create the virtual reality that the banks under tests of "stress" needed only x amount of money.  Senior bankers rushed to say a) they would be able to raise it to satisfy government criteria; b) the tests were overly "pessimistic" while clearly happy that the government had given them a pass, and c) they couldn't wait to get the government out of their hair so that they could continue their way of paying themselves.  

Isn't it curious none of the Wall Street bankers nor the boards of directors to whom senior management was held accountable had been told to take a walk the way Detroit executives had?  

Crony Capitalism is not just an Asian thing in some third rate developing country, is it? 

I have long argued Geithner/Summers' approach to avoiding a total meltdown was not to solve the fundamental problem of getting rid of toxic assets, changing Wall Street's out-of-control management and looking after taxpayer's interest.  

They bought Wall Street's argument that nothing was fundamentally wrong except confidence using in effect FDR's well-known homely:  There is nothing to fear except fear itself.  

More specifically, the toxic assets on the banks' books were, as claimed by bankers, worth a lot more than what they were because the "market" then was wrong in marking those assets down as reflected in the tanking of banks' shares on stock exchanges.  To this day we have no idea how much of that toxic stuff the banks continue to hold.

Geithner/Summers devised the Stress Test program to allow the banks not to have to mark to market their toxic assets.  Meanwhile Bernanke on the side was pumping trillions of money and credit commitments to flood the market with liquidity driving interest rate to near zero.

With money coming out of one's ears, so to speak, a number of things happened:  stock markets took off as money became "cheap".  Bond prices declined as inflation fears have taken hold.  Oil and Gold are on the rise.

The way forward is to put money in inflation hedges: gold, oil, other commodities and short bonds.  Stock markets will rise but watch out. This Geithner/Summers plan can be a trap.

Stress Tests and Cheating

Imagine for a second you were back in university and had taken a final. The professor who was grading your paper called you up to discuss your grade before the grade was released.

You got a chance to argue with him or her about the fairness, indeed, even the accuracy, of that grade. In that process you got a chance to "explain" what you really meant in this or that paragraph the grading professor had misinterpreted.

This in a net shell is the meaning of the delayed release of the Stress Tests designed by Geithner/Summers to find out how healthy the banks have been. No one has analyzed and criticized it better than Arianna Huffington. Read here.

Wall Street and Stress Tests

Warren Buffett said the other day what was pretty much an open secret among financial professionals.  Geithner's stress tests of banks' capital adequacy were irrelevant to intelligent investment decisions even though Buffett's comment was specifically related to Wells Fargo Bank, his second largest holding in Berkshire Hathaway.  Read Here.

Geithner's "stress tests" served Wall Street on these grounds: first, these tests were a delay tactic  signaling to the nervous market the government was to "uncover" the true financial conditions of the banks.  The subtext was until the truth was revealed there was not reason to panic.  Second, the tests had enough ambiguity due to a lack of transparency to allow the banks themselves not to panic for it appeared those tests were not the same as "mark to market" discipline a free market demands.  Lastly, during this holding pattern while the tests were being conducted, Geithner's PPIP program was put in place to boost the value of toxic assets to further help the banks to pass those stress tests -- whatever they were. 

We still do not know how those tests were carried out, what assets did they apply do and indeed we read there is much internal government squabble as to when or how much the results should be released to the public.

A royal mess. 

Joseph Yam, Head of Hong Kong's Monetary Authority

Yam is the highest paid Central Banker in the world. His salary is about 7 times that of Bernanke and 3-4 times that of head of Bank of England,  European Central Bank and more than 4 times that of Japan's Central Banker. That much is well known.

What is less known is how he got to be paid so much. Elementary: he put on his compensation committee people whose businesses are regulated by the Hong Kong Monetary Authority he heads.    Second, he paid those below him huge salaries which automatically meant his own compensation had to be higher. It became a matter of how much higher, not whether it should be.

Instead of keeping the regulated at arms length, Joseph Yam embraced them for his self interest. And that was his worst and unforgivable sin.

Geithner's Wall Street Connection

There is no evidence Geithner or Summers is corrupt by any legal definition even though Summers had been paid handsomely by Wall Street for very little consulting work and speech making while he was president of Harvard, a curious side job for arguably the most prestigious academic job in the United States. Did he have insufficient work to do at Harvard?

However, as James Kwak, co-author of Baseline Scenario, a respectable economics blog, has so eloquently pointed out, Geither, Summers cannot but share many of values of Wall Street especially given their close connections to Goldman Sachs, the ultimate symbol of Wall Street culture. Read Here.

Those shared values played the central role in Geithner/Summers's bailout plan that is so biased in favored of the very bankers that had themselves helped manufacturer the biggest financial disaster since the Great Depression.

It is also instructive to note that Geither wants to kick out Vikram Pandit at Citibank as a belated acknowledgement that senior Wall Street bankers had behaved badly.

Yet, a cursory look at Vikram Pandit's cv shows he had been at his job for about a year, long after Citibank under previous tutelage of Bob Rubin, former Goldman Sachs co-chair and mentor of Larry Summers had done their damage at Citigroup.

How come no one at Goldman Sachs or Morgan Stanley have been singled out for a little public humiliatio, but Pandit who was never a Goldman Sachs alumnus?

US is Not Sweden, of Course. It is Thailand

It gives me no pleasure to compare USA to Thailand, the land of crony capitalism, notorious for not providing a level playing field to entrepreneurs, big, small or starting. Its politicians and business interests are inseparable.

I wrote about that comparison weeks ago published in the Bangkok Post, the country's leading English language paper. (Here.) I didn't expect to be taken seriously. After all, I was no world famous Nobel laureate.

My view is no longer so "weird". Read Columbia's Joseph Stiglitz, Nobel laureate in economics and Simon Johnson, MIT professor's testimony at the US Congress Joint Economic Committee on April 21. (Here.) Enough to make you do a Peter Finch "I am mad as hell and I can't take it anymore" in that classic movie "Network'.

Thomas Hoenig, president of the Federal Reserve Bank of Kansas, at that same hearing, weighed in with his thinly vieled criticism of the Geithner/Summers bailout strategy. Sober reading.

Worse than Meets the Eyes -- US Unemployment

The national unemployment rate in USA is 8.5% at the end of March. Regional rates show an astoundingly bad situation. Note how some of the largest states are doing, especially California, the 6th largest economy in the world, were it a separate country. Data are from the Bureau of Labor Statistics, US Government. The national average is helped by the less disastrous "farm belt" states such as Iowa, Wyoming, Utah and others. But unemployment there is also rising. So more bad news maybe expected.

Table A.  States with unemployment rates significantly differ-
ent from that of the U.S., March 2009, seasonally adjusted
--------------------------------------------------------------
               State                |          Rate(p)
--------------------------------------------------------------
United States (1) ...................|           8.5
                                    |
Arkansas ............................|           6.5
California ..........................|          11.2
Colorado ............................|           7.5
Connecticut .........................|           7.5
Delaware ............................|           7.7
District of Columbia ................|           9.8
Florida .............................|           9.7
Hawaii ..............................|           7.1
Idaho ...............................|           7.0
Indiana .............................|          10.0
                                    |
Iowa ................................|           5.2
Kansas ..............................|           6.1
Kentucky ............................|           9.8
Louisiana ...........................|           5.8
Maryland ............................|           6.9
Michigan ............................|          12.6
Montana .............................|           6.1
Nebraska ............................|           4.6
Nevada ..............................|          10.4
New Hampshire .......................|           6.2
                                    |
New Mexico ..........................|           5.9
New York ............................|           7.8
North Carolina ......................|          10.8
North Dakota ........................|           4.2
Ohio ................................|           9.7
Oklahoma ............................|           5.9
Oregon ..............................|          12.1
Pennsylvania ........................|           7.8
Rhode Island ........................|          10.5
South Carolina ......................|          11.4
                                    |
South Dakota ........................|           4.9
Tennessee ...........................|           9.6
Texas ...............................|           6.7
Utah ................................|           5.2
Vermont .............................|           7.2
Virginia ............................|           6.8
West Virginia .......................|           6.9
Wyoming .............................|           4.5

Anarchy in Thailand

Mr Sondhi, leader of the anti Thaksin "Yellow Shirts" was shot yesterday in Bangkok by an unknown assassin. His is only hurt. His driver is not so fortunate. He was shot several times and is in critical conditions. Read here.

The "Yellow Shirts" illegally occupied the airport last year with impunity earning Thailand the dubious right of becoming a member of the global club of banana republics. At that time, those anti-Thaksin Yellow Shirts suffered a dead whose funeral was attended by the Queen of Thailand.

The "Red Shirts", the pro-Thaksin mob, are not so fortunate. Military were called out in force to disperse the demonsrators. Two were shot dead. Over 80 were wounded. Leaders were put on "Wanted List" by the police.

The asymmestry of justice is now breeding lawlessness with exiled Thaksin widely believed to be funding the Red Shirts.

This cycle of political chaos is likely to continue as the institutions of democracy are being systematically trampled on by all sides.

Lying for the Greater Good?

Paul O'Neill was the Treasury Secretary under the first President Bush.

Mr O'Neill told ABC News:

“So they all took the money. Stop and think about that. What was the purpose of this policy? To deceive the people so that the public would not know which banks were in danger of failing? Why didn’t any of the CEO’s, claiming not to need the money, have the courage to refuse?” ...

“If banks now claim they want to return the money because they don’t need it, why do they have to raise new capital to replace the money from we the people in order to repay the government?”...

“Is the public ever going to have clear facts regarding any of the individual institutions?...

For months I have been calling for a public disclosure of all bank assets by rating class, along with facts showing the face value of so-called toxic assets along with the associated current book keeping value and associated reserve account. The public and members of Congress seem to be accepting of the idea that a handful of people in the administration and the Fed should do all of this in secret.”

I couldn't have said it better than he regarding the current Team Obama's refusal to be transparent and its favoritism towards Wall Street.

Thailand Country Risk Is Junk

Thailand's national debts are now rated as "Junk". Read Here.

What is really worrying is the increasing animosity of the rural vs urban (read Bangkok) and the poor vs rich.

Call him Evil, but the fact remains the ousted Thaksin did something concrete for the rural poor the traditional money bags in Bangkok never did. Apparently the rural folks do not believe the new government headed by Eton, Oxford educated Prime Minister Abhisit is any different. These rural guys are the hard core of the Red Shirts.

Blood in the Streets in Bangkok

The inevitable happened. The military has intervened. Read here. People are shot and wounded. The military claimed real bullets had only been used as warning shots aimed at the sky while non-lethal bullets "made of paper" only had been used against demonstrators!!! Read Here.

Easter and Thailand

Thaksin's Red Shirts mob disrupted the Asia Summit at the Pattaya beach resort near Bangkok to make a point. But what point? That the sitting Prime Minister is "illegitimate"? That Thaksin, now in exile, should be back in power?

Thaksin is not sitting idle abroad either. He has called for a military overthrow of the current civilian government. How ironic.

He was himself overthrown by the military a few years ago in a coup d'etat that was totally uncontitutional.

Thailand is now quite lawless. Some would say it had always been.

Constitutions come and go. The last government was declared illigetimate because some of the elected officials were found violating elections rules.

That's bad, of course. Except such rules had been violated by any number of officials on any side of the political spectrum and had always been part of the "accepted" price of democracy. Politicans had always gotten away with them as long as the principal leaders got elected fair and square. The Thaksin electoral victories had been monitored by foreign independent non-profit groups that do that stuff to promote democracy.

Oh yes, that does not excuse Thaksin of having been a blatant corrupt politican. Whilst in power, he looked after his own cronies and his alone, breaking traditional practice of being inclusive in sharing economic spoils with your political opponents. He was generous to the rural poor no Bangkok politicians had ever given two hoots about.

Thaksin was duly elected by a convicing majority -- twice. Those who couldn't stand him just couldn't dislodge him in fair and open elections.

As self-serving civilian politicians circle one another to grab or to remain in power, the country will continue to swing between factional struggles intervened by the military with a certain unmentionable power arbitrating from time to time behind a wall of secrecy. It is unmentionable for the law governing that particular topic is draconian, if not medieval. Bloggers and writers have found themselves behind bar in uncharacteristic haste not found in the rest of the economy.

Any expectation that Thailand would join the dynamic Asian tigers in the years ahead is highy imaginative.

What The Banks Want

The banks want 91 cents on the dollar for some of the toxic assets on their books! Read here.

If those assets were really worth that much, there would not have been a financial crisis in the first place.
But of course this is only the offer price. If you were running a zombie bank knowing that the PPIP scheme will be bidding for those assets at bloated prices, wouldn't you be asking for the sky as well?

Wall Street Won 2.0

On April 6, I wrote "Wall Street Won" on this blog.  That line was not quite "mainstream".  Some would call it a '"leftist" viewpoint.

Now even Newsweek, as mainstream as you can get,  is saying so.  See here. 

Anyone who wants to see Wall Street reformed to save Capitalism from its abusers can only shake his/her head in dismay.  

US Congress Spoke

The Congressional Oversight Committee headed by Elizabeth Warren has issued a second report on the +/- of the ongoing financial bailout programs.

The report made in part these two points: a) the Treasury may be relying on too rosy an economic scenario to guide its $700 billion bailout... The success of the program after six months is “mixed.”; b) "All successful efforts to address bank crises have involved the combination of moving aside failed management and getting control of the process of valuing bank balance sheets.” Emphasis added.

The Congressional Report is Here.

I have been arguing for sometime that keeping failed management on team Obama's bailout program is somewhat like keeping arsonists on fire department's payroll to help put out fires.

Perhaps arsonists do know how to help out since they would know how the fires were started in the first place.

Surely they are not the only ones who know how to put out a fire. More important, is it ethical to keep them around instead of putting them behind bars? Just asking.

The Fed: Don't Ask, Don't Tell

Efficient markets require information and transparency. The more we get, the faster the information is distributed to all the better it is for investors to make more intelligent decisions. We learn that in economics 101.

Regulators punish those who trade on insider information available to only a few. We also require quoted companies to publish their financial statements on a timely basis audited by reputable accounting firms. False information is a crime. Lack of disclosure is normally taken as a sign of troubles and markets mark down the prices of those who do not disclose much.

What is happening these days in Washington is mind-boggling. The Federal Reserve Bank is asking the banks not to disclose the results of "stress tests"which the Treasury secretary has so loudly touted as a central feature of his rescue operation. (Here.)

I have a better idea. Let's abolish the requirement that quoted companies must publish anything at all!

Krugman's "Boring" Banking Industry

Krugman's rumination on the rise and fall of the banking industry in today's New York Times is a mouthwatering teaser leaving the reader hungry for more. (Here.)

It is extraordinary that banking profits accounted for a third of all corporate profits in the last decade of the last century.

While "illusion" as Krugman put it was certainly a factor in the seeming success of that industry back then, there must have been a number of other important and fundamental factors at work. Unless we can understand better what those factors were, it is almost certain that the banking industry will again become the engine that drives corporate profits after we get out of this mess to begin another cycle of the same.

Krugman reminds his readers that Larry Summers ridiculed those who in as recent as 2005 warned against a financial meltdown. Summers was then the President of Harvard. At the age of 28 he was already granted tenure by Harvard. He was at the top of his game, wasn't he?

David Halberstam wrote that classic "The Best and the Brightest" in the early 60's as a satire of those with impeccable academic and intellectual credentials who guided the US into the disastrous Vietnam War. One wit called them members of the Harvard Alumni Association in Washington DC.

I have nothing against that great university. However, that institution does seem to breed hubris among many of its alumni who honestly believe they are the best and the brightest.

We maybe seeing history repeating itself in the current financial morass.

Financial Times and Geithner

Professor Willem Buiter of the London School of Economics wrote a critical column (April 6, 2009) on Geithner's latest inane statement regarding his supposed inclination to fire uncooperative Wall Street bankers. Here.

The technical shortcomings of the Geithner-Summers plan are now no longer news. However, Mr. Buiter and other critics remain circumspect on the sociological side of the Geithner-Summers plan: how much the economic team members of Obama share the same values, background and friendships with the Wall Street crowd and how much they defer to what Wall Street wants. Simon Johnson's article in the May issue of The Atlantic remains a classic.

Larry Summers, the "genius"?

Professor Summers' past is slowly but surely catching up with him.

In a widely read economics blog, Econospeak published online today, we learn of a financial analyst, Ms Iris Mack, fired by Harvard Management Company that manages Harvard's endowment for having written to Larry Summers, then President, back in 2002 warning him of the risks of derivatives the management company was getting into by fund managers who did not really understand those products. Ms Mack has a PhD in mathematics from Harvard.

Last fiscal year Harvard reported a decline of 22% in its endowment due to those derivatives blowing up. That story was published by Boston Globe: Here

We were also reminded that Summers was not forced out of his Harvard presidency only for his ill-considered comments on why women were not somehow constitutionally suited for scientific research. Rather he steadfastly supported his fellow Harvard academic, Andrei Schleifer, who had used his insider information as an advisor to the new Russian government to benefit from market trading under US government contract. Harvard had to reimburse USAID $26 million for Schleifer's fraudulent act.

Summers as Harvard's president not only did not terminate Schleifer's job at Harvard, he made sure he kept his tenure and gave him a prestigious endowed chair.

David McClintick, a writer at Institutional Investor, had written an exhaustive investigative report on that episode in Institutional Investor.

A Flawed Defense of the Geithner Plan

Professor Ricardo Caballero, head of the top ranked MIT economics department defended the Geithner Plan: click here.

He is making the same mistake in confusing "banks" with the current crop of Wall Street leaders.

Yes, we need bankers. But the world will not stop if the current group of "masters of universe" leave the scene, as they should do.

By kowtowing to these people, we are saying effectively we need the arsonists to help us put out the fire they helped set. What about the classic issue of "moral hazard" in banking?

Bank Centric World -- Arianna Huffington

I think Huffington is really smart. That Cambridge (the real one) educated lady with an accent is not someone with a PhD in economics can easily impress or intimidate with a few jargons. Her latest critique of the Geithner-Summers rescue plan, however, is almost on the mark. Click here for the whole essay on her homepage.

Her thesis boils down to this: Team Obama's manic obsessive "idea fixe" regarding banks' centrality in the economy is fundamentally wrong.

To her, that "cosmology" fogged their view and made them write huge wasteful checks to support the banks come what may.

I believe banks are central to the economy for they channel savings to investments without which the economy would indeed stop growing.

My problem with Obama's cosmology is that their world appears to evolve around the very same senior management people who were central in expanding the bubble, in profiting from the bubble personally while taking their firms to ruin.

The defenders keep saying we need bankers to help us out. To which I say, "yes, we do, but not the same people, mate".

Wall Street has a substantial number of talented professional not responsible for the mess we are in. They are perfectly capable of stepping up to take over the management of their own firms.

Obama has forced the resignation of Rich Wagoner at GM and has correctly ordered the restructuring of GM's irresponsible board of directors. Nothing of this sort has happened on Wall Street. Why? Cosmology has something to do with it for sure. There must be something else at work here. But what? Read my take here: Click here.

Wall Street Won

The public is getting more facts and faster regarding the links between Wall Street and Obama's economic team leaders.

New York Times has documented how Larry Summers was receiving payments from Morgan Stanley, Goldman Sachs, Citigroup and others which have received Federal aid. Moreover he was richly rewarded by D.E.Shaw, a large hedge fund. Click here for the story.

All payments were disclosed and were legitimate.

Obama's Chief of Staff Rahm Emanuel was employed by a Wall Street investment bank where he worked for 30 months and was paid more than$16 million. He had no prior experience as a financial professional. The payment was disclosed and was legitimate.

Tim Geithner's deputy was a Goldman Sachs lobbyist.

So what?

The public officials and those they are helping are all part of the same fraternity sharing common values. In the 3 cases cited above the officials were recipients of monetary rewards they in their careers could never ever make except for the generosity of Wall Street firms that have all since needed Federal (taxpayers) help to avoid financial collapse.

This calls into question whether the public servants were acting on behalf of the best interest of the public at all times or did they ever put the interests of those Wall Street above everything else.

For a devastating analysis of the elite in charge of public economic policy and those who are benefiting from it, read MIT professor Simon Johnson's article in the May issue Atlantic. Click here.

Geithner's Gamble

Jeff Sachs at Columbia has come up with an additional cautionary note on how Wall Street could "screw" the taxpayers under the Geithner Plan.   Click here.

Afghanistan -- Another Vietnam?

Afghanistan is NOT Vietnam just as the US is not Sweden. Have I said anything meaningful?

Defenders of Obama's new "surge" in Afghanistan as well as defenders of Geithner's Xmas gift to Wall Street avoiding temporary "nationalization" of banks deliberately obfuscate the relevant issues by drawing seemingly nonsensical comparisons.

What are the relevant issues?

Let me just start with two such issues that should not be controversial irrespective of one's political sympathies.

1) During the Vietnam War, the US had to constantly confront the issue that their ally in the South Vietnam government could not motivate its troops. US had to inject training, manpower, battle field leadership, hardware and huge amounts of money into the S Vietnamese military to keep it fighting. In the end the US had to send in half a million of ground troops to fight the war on behalf of their ally against the enemy -- the Vietcong's and later the Vietnamese troops from the North.

While the enemy also received military aid from its allies -- China and the Soviet Union, they never seemed to have a morale issue! Quite the contrary despite the fact that the communist hardware was vastly inferior to what the US possessed. They lived in primitive conditions without the animal comfort US money bought for the South Vietnamese troops.

We are seeing history repeating itself, alas, in today's Afghanistan.

The Talibans, the tribes, Al Qaeda do not seem to have a morale problem among their fighting men. They live in primitive conditions. And their military hardware is hugely inferior to what their enemy (that's NATO) possesses.

In fact they seem to be holding pretty well against a technologically superior force. 17th century still enjoying a military edge against 21st century.

Let me declare myself.

I think the Taliban's attitude towards women, education, religion is despicable. I think Al Qaeda is evil. Al Qaeda needs to be defeated. Taliban's should be avoided like a plague.

I also think the "legitimate" Afghan government in Kabul is also despicable. It is the wrong ally for the civilized world. The Karzai government is spelled "disaster waiting to happen."

The brother of the president is a well-known drug lord and is perhaps the single largest supplier of opium to the world with the US as the largest consumer. Everyone in Afghanistan knows it and is therefore unimpressed by the democratic rhetoric coming out from any Western leader.

Back in the Vietnam war days the US government also helped the international opium trade to gain support of the hill tribes in the Golden Triangle to fight the Vietcongs. James Bondian airline: Air America, a CIA company, transported opium from inaccessbile hills in that Triangle to facilitate that trade.

The result? Massive influx of narcotics into the US. Did that help the war effort? Yes. But in favor of the wrong side!

2) The corruption in Kabul and those allied with the US is rampant and is fueling popular resentment agains the "legitimate" Afghan government.

No military surge can really eradicate that.

The more US invests in that government, the more it wants to avoid defeat and the more money it will pull into Afghanistan which will further worsen official corruption.

Just as in the case in S Vietnam, more money would disappear into corrupt Afghan officials. Incidentally that has happened in Iraq as well.

Yes, Afghanistan is not Vietnam. But there are some serious issues that are common to both wars that are extremely troublesome to the Nato effort there. Any wonder no countries other than the UK agreed to send combat troops to help out Uncle Sam?

Many non US military experts have written that the effort would be futile unless the government in Kabul is not what it is -- just as in the case of South Vietnam.

Replacing one by another is also tricky. In Vietnam JFK decided President Ngo, a corrupt Catholic leader in a Buddhist country, had to go. CIA assassinated him. Then came a serial change of unsavory and equally corrupt leaders in the capital of South Vietnam - Saigon. It is now renamed Ho Chi Minh City.

Bankers vs Economy

Distinguished economics professor at Berkeley, Brad deLong, in his famous blog, defended Geithner's Public-Private Investment Program (PPIP)  saying: "Do we want to revive the economy or do we want to punish the bankers?  I don't think we can do both."

Geithner's much criticized PPIP,  by many analysts including myself,  is an amazing Xmas gift to the "bad guys" on Wall Street and to an exclusive, privileged group of Wall Street investors who get to buy toxic assets largely with taxpayers' money with minimal downside risks but with substantial upside rewards.

Professor deLong's defense is disingenuous because the choice is not black and white.  

We are not punishing "bankers" in their aggregate, only those policy setting senior managers who oversaw the demise of Wall Street.  There are plenty of bankers who can stop up to the plate to run their respective firms if only they were given a chance.  

Obama did fire the chair of GM and demanded the board of GM to be replaced.  Yet, he did not do any of this for Wall Street firms receiving public aids.  On the contrary, he went out of his way to invite the 20 odd financial leaders to the White House asking for their "help" to  get out of the crisis.  He didn't do that for Detroit.

Asking for Wall Street help is roughly equal to asking the arsonists who had set fire to the building to help the fire department to put out the fire. 

Wall Street and the Obama team. Lawrence Summers, a top economic adviser to President Barack Obama, was paid about $5.2 million in compensation from hedge fund D.E. Shaw during the past year, the Wall Street Journal said on its web site on Friday. In addition he was a frequent speaker at various Wall Street functions receiving high speakers fees.

Obama's chief of staff, Rahm Emanuel, was paid over $16 million for 30 months of work for a Wall Street investment firm. He had no prior experience as a financial professional.

The deputy of Tim Geithner was a senior executive at Goldman Sachs.

Obama's erstwhile advisor, Bob Rubin, was co-chair of Goldman Sachs and chair of Citigroup before he left in a hurry to avoid more media attention on his $150 million pay off and his supervision of Citi's demise.

Tim Geithner himself worked for Kissinger Associates, a advisory firm to many of the large Wall Street firms.

The closeness of Wall Street and Obama's Administration is surely a relevant factor in understanding how the team shaped its rescue package that is skewed in favor of Wall Street firms.

Did we hear a Geithner apology?

Washington Post has a long article today (April 3, 2009) on Geithner's role in the financial crisis before he became the Treasury secretary. I bold faced certain sentences for emphasis.

The article said in part: "... Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued.

That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound, according to interviews and a review of documents by The Washington Post and the nonprofit journalism organization ProPublica.

A confidential review ordered by Geithner in 2006 found that banking companies could not properly assess their exposure to a severe economic downturn and were relying on the "intuition" of banking executives rather than hard quantitative analysis, according to interviews with Fed officials and a little-noticed audit by the Government Accountability Office.

The Fed did not use key enforcement tools until later, after the credit crisis erupted, according to its records and interviews.

Geithner defended his tenure as New York Fed president in an interview last week. He said he had been "deeply concerned about risk in the system" and worked assiduously behind the scenes to cajole banking institutions to do more to identify weaknesses and protect the financial system. But he also took some responsibility for falling short.

"These efforts to improve risk management did change behavior, but they did not achieve enough traction," Geithner said. "We're having a major financial crisis in part because of failures of supervision."

Mark to Market

Wall Street scored again today by getting the Securities & Exchange Commission (SEC) in the US to suspend its mark-to-market accounting rule. This allows the banks to carry their toxic assets, and for that matter, any questionable assets, at just about any costs they wish. This further allows the banks to sell their toxic assets at artificially high prices to the new Public-Private Investment Program under the Geithner's plan. Shareholders of banks, bank managements and fund managers who buy those toxic assets would gain, taxpayers lose.