No Sanction from This Hedge Fund Manager

Cliff Asness is a bona fide hedge fund manager -- 20 billion dollars worth.  But unlike most other hedge fund managers, he is not cowering in the shadows with his head low, hoping to go unnoticed by the bullies in Washington.  Here is a man with solid principles who is not about to be dragged down the road to serfdom without protest.  Last fall the New York Times published his views on the short selling ban in "Cliff Asness is Mad as Hell." His latest is an essay posted on his blog entitled "Unafraid in Greenwich Connecticut in which he refuses to accept President Obama's attack on hedge funds for "endangering Chrysler's future by refusing to sacrifice like everyone else." (CBSNews.com has the complete story, "Chrysler Bankruptcy Exposes Dirty Politics.)

Obama's call for for the hedge funds to sacrifice, Asness points out,  means simply that hedge fund managers are being called upon to steal from their investors, who did not invest their funds to be sacrificed to President Obama's political ends.  

The ethic of sacrifice is carried to its logical conclusion in Ayn Rand's Atlas Shrugged, a novel that describes today's economic predicament in philosophical terms.  Not only doesn't sacrifice work, it is downright evil and it will unravel the American Revolution.  Asness is a trustee of The Atlas Society and has read the book.  No wonder he is willing to stand up and speak out passionately and with moral certainty.

They Lied about Waterboarding

Nancy Pelosi says that the CIA lied to her about the use of waterboarding. See http://online.wsj.com/article/SB124231488742119859.html and http://apnews.myway.com/article/20090514/D9865AJO0.html

The acid test is this: Will Pelosi file a criminal complaint against these people for lying to Congress? Or is her assertion a PR ploy without substance -- i.e., is Pelosi the liar or is she willing to go to the mat?

It is easy to lie to the press. There are no significant consequences. Lying under oath before a Congressional committee is a different matter altogether. You could go to jail. So one should not expect an employee of a government agency to place his employment, retirement, financial well-being and liberty in jeopardy by lying to Congress. On the other hand, politicians readily lie to the press because there are no consequences other than the occasional lapse in credibility -- if the politician values credibility in the first place.

Thus, the logic of the situation favors the government employee. Accordingly, the burden of proof is on Pelosi.

Shame, shame, shame, that she should go to the press to defend herself. Any respectable Congressperson who was lied to by a civil servant under oath should vigorously pursue an indictment -- crunch those who would lie to the people. So let's see -- will Pelosi seek an indictment, or is she posturing (lying) to deflect the truth: that she was aware of waterboarding and, in the context of the times, like everyone else in Washington, overlooked the ethical issues. These clowns are so stupid that they can't see that ethical issues are always contextual. You have principles and you have the contexts in which those principles are applied. Their stupidity will kill us all.

How far a government ought to go in defending its citizens against attack is another question which we shall explore later in this blog. It is not easy to parse morality, legality, defense obligation and necessity. Those who think that bright lines can be drawn are deluding themselves.

Charles Krauthammer has an opinion. http://www.washingtonpost.com/wp-dyn/content/article/2009/04/30/AR2009043003108.html?hpid=opinionsbox1. And he has critics. http://www.alternet.org/bloggers/joshua/139421/charles_krauthammer's_tortured_defense_of_torture/?comments=view&cID=1203881&pID=1203319.

Let's not make light of these issues or politicize them. The Pelosis of the world are clueless and without a foundation in principles that would enable them to make judgments when faced with with real world situations. And judgments, applying principles in factual contexts are what counts.

I am getting very tired of Harry Reid's and Nancy Pelosi's laughable attempts to justify their irrational positions. What's the point? No one believes them anyway. Both are "trivial politicians" (thanks for the apt description, Newt).

Two Criminals Much Worse than Nixon

You have read on these pages a consistent adherence to civil discourse and reasoned positions. So it should get your attention when I assert that Henry Paulson and Ben Bernanke are criminals much worse than Richard Nixon.

Now I am not making wild assertions like some knee-jerk, attention-getting radical. I am, among many other things, a career corporate and securities lawyer who knows a patent criminal securities law violation when he sees one. Caroline Baum, who is one of most forthright commentators on Bloomberg.com, a respected financial reporter, reports as follows:

The latest example of what happens when the business of government is business was last week’s release of testimony from Bank of America Chief Executive Officer Kenneth Lewis to New York Attorney General Andrew Cuomo. In it, Lewis says he was strong-armed by former Treasury Secretary Hank Paulson and Federal Reserve Chairman Ben Bernanke to seal the deal to buy Merrill Lynch without telling his shareholders about the brokerage’s mounting fourth-quarter losses, which came to $15.4 billion.

According to the letter Cuomo sent to Congress and regulators, Lewis wanted to invoke the “material adverse event” clause to back out of the merger, but the bazooka-toting Paulson told him to stay mum and threatened to give him and his board the boot.

Paulson said via a statement that while the words were his, the sentiment was “what he knew to be the Fed’s strong opposition to Bank of America” backing out of the deal.

“No one at the Federal Reserve advised Ken Lewis or Bank of America on any questions of disclosure,” said Fed spokeswoman Michelle Smith.

Of course not, not in those terms. Lewis surely never asked Bernanke directly if Bernanke wanted him to conceal the truth from his shareholders and the Fed never directly advised him. But the deal was clear. Hey, folks, put it to a jury in a shareholders' suit and let's see what the people say to the nefarious activities of the Princeton and Goldman pukes. (I'm sorry, but do I sound extremely disgusted?)

It has never been part of our system of justice that any man is above the law, and that includes Treasury Secretaries, Federal Reserve Chairmen and Presidents. According to Bank of America Chairman Lewis in sworn testimony, Paulson and Bernanke solicited him to violate the securities laws by concealing material information from the bank's shareholders and the securities-buying public. He complied. In legal terms that is aiding and abetting and conspiracy to violate the securities laws of the United States. Forget their official positions or national emergencies or crises; they are not legally relevant. Ask any Bank of America shareholder who held or bought shares during the period and they will confirm that they expected to be informed.

Here is what Mike Shedlock has to say http://globaleconomicanalysis.blogspot.com/2009/04/let-criminal-indictments-begin-paulson.html

If Beranke and Paulson -- and for that matter all of the others who ran roughshod over the law to save their bretheren from self-induced financial ruin with government power -- succeed in ducking culpability for their crimes, the politicization of justice in the United States will mark the end of the 200-year American experiment in popular government based on individual rights.

While they may not view themselves as such, these two guys (and others) are criminals who should be accorded the same status in society as child molesters, robbers and rapists who prey upon the innocent and unsuspecting.

If they disagree, they should sue me for libel. Let's go to the mat and see who an American jury will accord the most credibility.

Update June 15, 2009: The Washington Post reports that the House Oversight and Government Reform Committee will be looking at this issue and has subpoenaed the Fed's records. The Associated Press also has a story on the matter. Better late than never guys.

Hyperinflation and Depression

Jim Sinclair, who has over 50 years international experience in precious metals trading, and whose commentaries are linked at the left, offers the following thoughts:

1. All hyperinflations are currency events, not economic events.

2. All hyperinflations have occurred in what can be called deep deflationary depressions.

3. Quantitative Easing, the wanton printing of money, has been the key to all hyperinflations in history, no exceptions.

4. The recent example of Zimbabwe certainly occurred in the deepest economic doo-doo ever.

5. Don’t mix up hyperinflation with a deflationary business environment as mutually opposed when they are locked in step.

There are now hundreds of billions of dollars in money and credit newly created that are out there sloshing around and ready to move. Hardly anything can bring them back without creating a business downturn or making the present one much worse. So, despite the Fed's lip service to fighting inflation, it won't happen. The Fed has lost its independence from political objectives. We now have a politically driven, short sighted currency. And the politicians are ignoring the inevitable consequences of printing money to reward risky financial behavior, just as the long-term financial consequences of Social Security and Medicare have been ignored.

It would be baffling that they even ignore the timing of their own elections considering that things will be worse two, four and six years from now. But they are counting on demagoguery to pull them through the next election -- lies, scapegoats and demons will be found on which to shift the blame.

The clowns in Washington have no idea what they are doing. Run for cover.

Paying Taxes is "Voluntary"

You have heard me say on these pages that you are forced by the government to pay your hard-earned money over to other people who are selected by the government, my proof being an invitation to you to experience the consequences of not paying your taxes. The Majority leader of the United States Senate disagrees.

After seeing the following video, I have further concluded that the Senate Majority Leader is either an idiot, a fraud, self-deceptive or a demagogue, or all of the above. But you don’t need to agree with me. Consider Harry Reid’s arguments in his own words. Not merely amazing. Absolutely astounding.

http://www.youtube.com/watch?v=H6q0slMhDw8

George Orwell would enjoy this.

If Harry Reid actually believes that you are voluntarily contributing to all of the expenditures that he and his cronies authorize to perpetuate themselves in office, it explains why they act without restraint or guilt.

The Slippery Slope

Eric deCarbonnel, who started a blog, MarketSkeptics.com, in 2007, has written an insightful essay on "Ten Major Threats Facing the Dollar in 2009." One of the threats he discusses is the moral hazard effect of bailouts --

The true moral hazard of bailouts

Most commentators misunderstand the true moral hazard of bailouts. While bailouts might have an adverse effect on the future actions of individuals and businesses by encouraging risk taking, the real problem is their effects on future actions of the government. Specifically, each bailouts makes it harder to say no to the next bailout. This pressure to fund future bailouts is made far worse if those receiving bailout money are truly undeserving. After all, If the government is going to give $45 billion to Citigroup (one of the banks responsible for our current mess) and insure $306 billion of its riskiest assets, then how can it say no to bailing out the state of California or South Carolina?

This "me too" phenomenon will get much worse after the treasury market collapses, and the fed starts monetizing the treasuries that were sold to fund the current bailouts. If fed printed money to bailout the banks, why shouldn't it print more money to fund unemployment benefits? Politically speaking, you can't bailout the irresponsible and then let the responsible sink, which means congress isn't going to be saying no to a lot of the bailout requests this year. Unfortunately, these bailouts will become increasingly meaningless because, when you bail out everyone, you bail out no one as you destroy your currency.

While it is an unconventional use of the term, moral hazard, this is a clear and succinct statement of where we are heading that no one wants to face. Read the entire essay, which brings to bear the important factors that will influence the viability of the U.S. currency.

How Bad Is It?

The Wall Street Journal reports that we just experienced the Worst January on Record for Stocks .

Calculated Risk has posted a series of graphs that depict just how bad various aspects of the economy are. See January Economic Summary in Graphs. Things are bad indeed -- many indicators are the worst on record.

But some of my friends in the banking industry tell me that they see a dim light at the end of the tunnel. Big bankers are looking favorably at the Obama administration's rescue plan insofar as it would decouple the fortunes of the housing market from the assets of the banks.

The plan to take the bad assets off the books of the banks supposedly would diminish the banks' exposure to the unknown risks of many mortgages, mortgage backed securities, and their derivatives, removing some of the uncertainty about the viability of the banks. Conceivably, the same would apply to credit cards, student loans and the rest of the toxic fallout from the credit bubble. What, then, will be left of the banks' portfolios of business (which, when all is said and done, is lending)? And how will the banks rebuild that business? Unemployment above 8% would be bad news for the banks and the rest of us. See Bankers' Fear of Unemployment.

The government's solutions are designed to restart lending. But what they really want is to restart borrowing. But with 40% of the world's wealth having vanished and unemployment rising, the attempts to get people to releverage will not work. Few want to crawl back up that slippery slope.

Look Who's Blaming Capitalism!

On January 29 the Wall Street Journal Online published an article by Marc Champion in Davos, Switzerland, and Andrew Batson in Bejing entitled "Russia, China Blame Woes on Capitalism." The article and the full text of the speeches of Vladimir Putin and Premier Wen, which are linked in the article, make interesting reading.

One thing you might overlook is that the word "capitalism" does not appear in the remarks of either Mr. Wen or Mr. Putin. Nor does it appear in the text of the article itself. The application of the word to the title of the article was no doubt the figment of the imagination of the Wall Street Journal's editorial staff. The word no doubt was selected as a headline shorthand for the U.S. economic system but it is a misnomer. The U.S. economic system is not capitalism. It is "state corporatism," economic fascism or a "mixed economy." They are all a mixture of government ownership of enterprise and privately owned enterprise that is government controlled. Capitalism, by contrast, is an economic system in which private enterprise is neither owned nor controlled by government -- i.e., laissez faire. See The Myth That Laissez Faire is Responsible for Our Financial Crisis . Also see The Credit Crisis and Moral Hazards.

The main stream press, yes even the Wall Street Journal, wittingly or not, continue to poison the public mind by corrupting definitions and equating the concepts of freedom with the concepts of slavery. George Orwell is spinning in his grave.

The remarks by the two world leaders exhibit a deeper understanding of the current worldwide economic crisis than most leaders in the U.S. exhibit, and possibly have a some decent advice to offer. Consider the following remarks of Mr. Putin --

There is a certain concept, called the perfect storm, which denotes a situation when Nature's forces converge in one point of the ocean and increase their destructive potential many times over. It appears that the present-day crisis resembles such a perfect storm.

Responsible and knowledgeable people must prepare for it. Nevertheless, it always flares up unexpectedly.

The current situation is no exception either. Although the crisis was simply hanging in the air, the majority strove to get their share of the pie, be it one dollar or a billion, and did not want to notice the rising wave.

In the last few months, virtually every speech on this subject started with criticism of the United States. But I will do nothing of the kind.

I just want to remind you that, just a year ago, American delegates speaking from this rostrum emphasised the US economy's fundamental stability and its cloudless prospects. Today, investment banks, the pride of Wall Street, have virtually ceased to exist. In just 12 months, they have posted losses exceeding the profits they made in the last 25 years. This example alone reflects the real situation better than any criticism.

The time for enlightenment has come. We must calmly, and without gloating, assess the root causes of this situation and try to peek into the future.

* * *

Esteemed colleagues, one is sorely tempted to make simple and popular decisions in times of crisis. However, we could face far greater complications if we merely treat the symptoms of the disease.

Naturally, all national governments and business leaders must take resolute actions. Nevertheless, it is important to avoid making decisions, even in such force majeure circumstances, that we will regret in the future.

This is why I would first like to mention specific measures which should be avoided and which will not be implemented by Russia.

We must not revert to isolationism and unrestrained economic egotism. The leaders of the world's largest economies agreed during the November 2008 G20 summit not to create barriers hindering global trade and capital flows. Russia shares these principles.

Although additional protectionism will prove inevitable during the crisis, all of us must display a sense of proportion.

Excessive intervention in economic activity and blind faith in the state's omnipotence is another possible mistake.

True, the state's increased role in times of crisis is a natural reaction to market setbacks. Instead of streamlining market mechanisms, some are tempted to expand state economic intervention to the greatest possible extent.

The concentration of surplus assets in the hands of the state is a negative aspect of anti-crisis measures in virtually every nation.

In the 20th century, the Soviet Union made the state's role absolute. In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.

Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.

And one more point: anti-crisis measures should not escalate into financial populism and a refusal to implement responsible macroeconomic policies. The unjustified swelling of the budgetary deficit and the accumulation of public debts are just as destructive as adventurous stock-jobbing.

* * *

Ladies and gentlemen, unfortunately, we have so far failed to comprehend the true scale of the ongoing crisis. But one thing is obvious: the extent of the recession and its scale will largely depend on specific high-precision measures, due to be charted by governments and business communities and on our coordinated and professional efforts.

In our opinion, we must first atone for the past and open our cards, so to speak.

This means we must assess the real situation and write off all hopeless debts and "bad" assets.

True, this will be an extremely painful and unpleasant process. Far from everyone can accept such measures, fearing for their capitalisation, bonuses or reputation. However, we would "conserve" and prolong the crisis, unless we clean up our balance sheets. I believe financial authorities must work out the required mechanism for writing off debts that corresponds to today's needs.

Second. Apart from cleaning up our balance sheets, it is high time we got rid of virtual money, exaggerated reports and dubious ratings. We must not harbour any illusions while assessing the state of the global economy and the real corporate standing, even if such assessments are made by major auditors and analysts.

In effect, our proposal implies that the audit, accounting and ratings system reform must be based on a reversion to the fundamental asset value concept. In other words, assessments of each individual business must be based on its ability to generate added value, rather than on subjective concepts. In our opinion, the economy of the future must become an economy of real values. How to achieve this is not so clear-cut. Let us think about it together.

Third. Excessive dependence on a single reserve currency is dangerous for the global economy. Consequently, it would be sensible to encourage the objective process of creating several strong reserve currencies in the future. It is high time we launched a detailed discussion of methods to facilitate a smooth and irreversible switchover to the new model.

Fourth. Most nations convert their international reserves into foreign currencies and must therefore be convinced that they are reliable. Those issuing reserve and accounting currencies are objectively interested in their use by other states.

This highlights mutual interests and interdependence.

Consequently, it is important that reserve currency issuers must implement more open monetary policies. Moreover, these nations must pledge to abide by internationally recognised rules of macroeconomic and financial discipline. In our opinion, this demand is not excessive.

Clearly, Mr. Putin is no capitalist. But having read that, ask yourself, who is closer to being a capitalist - the people who presume to be controlling the U.S. economy, or Mr. Putin?

Scientology, Seizures and Science

Dr. Edward L. Hudgins has posted an insightful editorial entitled, Scientology, Seizures and Science. While taking care not to suggest that the Travolta's tragedy can be laid at the feet of Scientology, he takes the occasion to shine the light of day on one of the more bizzare "religions." For those who have never been exposed to the "theology" underlying Scientology, the editorial is educational and worthy of your consideration. Hudgins continues to illustrate how social commentary can be forthright but civil, rather than nasty and strident. The approach is a good way to persuade people to want to listen to what else you have to say.

The Prescience of Ayn Rand

Yesterday, Stephen Moore, economics editor for the Wall Street Journal, published an editorial entitled, "'Atlas Shrugged': From Fiction to Fact in 52 Years." At the end of the piece, he addressed the planned movie of this cautionary tale by Ayn Rand:

David Kelley, the president of the Atlas Society, which is dedicated to promoting Rand's ideas, explains that "the older the book gets, the more timely its message." He tells me that there are plans to make "Atlas Shrugged" into a major motion picture -- it is the only classic novel of recent decades that was never made into a movie. "We don't need to make a movie out of the book," Mr. Kelley jokes. "We are living it right now."

Those of you who are having trouble understanding why "what you are living right now" is incomprehensible should read the book.

(Update 1/21/08) The Journal editorial has been wildly popular. Watch the video interview of its author.

Are We There Yet?

In a word, no.

There is no point in repeating what qualified and proven analysts such as Meredith Whitney and Nouriel Roubini have said and is obvious from the news, some of which is linked below. Roubini, known for his accurate predictions, thinks the contraction will be global and will last two years or longer. See Warning: More Doom Ahead

The Obama administration will be counting on consumer spending to again elevate us from a recession. Consumers’ $10 trillion in annual spending currently represents 70% of the GDP. Government deficit spending will be added to the $3 trillion in current government spending, which represents 20% of GDP. While the government might follow through on its promises to increase spending by $1-3 trillion, from the economy’s greater dependence on consumer spending it is apparent that the key to any recovery will turn on consumer confidence and whether consumers will spend the new-found money they will enjoy from a promised 3 million new jobs and a revived economy. But it will take quite some time from the passage of a new stimulus package and federal programs to “create” those jobs and for any money from them to filter into the economy. We have learned that putting cash directly into consumer pockets might provide some immediate but little long term effect on the economy.

Consumer confidence is not high at the moment and it is hard to see it improving significantly until the economic fundamentals improve generally – certainly not while unemployment is rising at an unexpectedly greater pace.

Additionally, the solutions offered by the Federal Reserve are based on the assumptions that if everyone borrowed more, they would spend more. That is not happening. And it may never happen. The economy will have to adapt to a paradigm shift. See Op-Ed: Social Mood Changes Forever
http://www.minyanville.com/articles/C-citigroup-jpm-RATE-oil-recession/index/a/20504

The credit crisis among the large financial institutions continues to serve as the core drag on the economy. The huge volume of over-the-counter credit default swaps outstanding represent contingent liabilities that are, as a group, three to four times the GDP and ten times the size of their underlying credit obligations. And many remain undisclosed on the books of banks, investment houses, hedge funds, insurance companies and others who sold or bought that form of insurance, which was backed by nothing but promises and the financial wherewithal of the counterparties. The downgrading of financial instruments and institutions will continue to grow the counter-party risk in the financial system.

A counterparty default would mean that an obligation, such as paying interest and principal on a bond, would no longer be insured – so that if a municipality or homeowner, for example, defaulted on bond or mortgage payments, the municipal bonds or mortgage-backed securities, and other financial instruments derived from them, would lose significant market value. That could cascade into downgrades of corporate or bank assets that would affect the creditworthiness of the institutions and their ability to raise capital. To date the solution has been for the Fed to take some of the assets at risk onto its own balance sheet and to conceal and minimize the extent of the problem in the hope that no one will see that the emperor has no clothes and the counterparties will come through when called-upon. The Fed has not explained adequately why they think that this will work – they apparently have no hard data on how many credit default swaps are backed by counterparties who have the financial wherewithal to deliver on their promises. That has contributed to a credibility problem among the banks themselves. No one knows who is really solvent.

The only permanent solution to this impasse is a level of forthrightness and transparency that would inspire confidence in the soundness of the financial institutions. But the largest banks are not sound and many suspect that public knowledge of the full extent of their exposure would crash the entire financial system. See Reggie Middleton’s analysis at http://boombustblog.com/index2.php?option=com_content&task=view&id=743&pop=1&page=0&Itemid=34 The banks are going to need more investment capital, period. And few are willing to invest in them. See http://www.bloomberg.com/apps/news?pid=newsarchive&sid=am_PuPZeNRQk

There is not a way to reverse the damage to banks’ balance sheets caused by the bursting of the housing bubble except to run the movie backwards – undoing defaults and foreclosures, reflating the value of each house mortgaged, fulfilling the unrealistic expectations of defrauded consumers, assuring that housing values will keep going up forever, and fixing it so that no one will ever need to call upon a counterparty in a credit default swap. It just ain’t gonna happen, folks. Moreover, the potential remains for still more mortgage defaults and foreclosures. See http://boombustblog.com/index.php/20090102740/The-banking-backdrop-for-2009.html
And home sales are not likely to rise until the employment picture improves – not any time soon. http://www.marketwatch.com/news/story/This-year-a-bad-time/story.aspx?guid={7FDA1504-8F8D-4795-B8F0-B4EA17FDDFF4}

The War of All Against All -- Reductio ad absurdum

Delicious.

Michael Shedlock reports that the porn industry is seeking a $ 5 billion bailout. While they are not losing money, they point out that their social value is essential as it serves a vital public health function.

Listen to me people. A whole host of supplicants can propose to serve socially useful functions with your money. While the porn industry might argue that it is socially useful, some might disagree; and the same reasoning could apply to others who want to tap into your taxpayer money. Who should decide? If your money is taken from you by force (taxation) or stealth (inflation), the decision is not yours. It is the decision of central planners and politicians, the same people who have led us to our present circumstances.

Larry Flynt and Joe Francis, with tongue in cheek, are emphasizing the absurdity of what Dr. Edward Hudgins has regularly termed the "war of all against all." To make government and its coercive powers the ultimate arbiter of what ought to be a free market decision is to create a vicious scramble for an access to your pocketbook that is beyond your control. You then become a resource, a slave to whatever objective that the politicians deem socially useful, or worse, in their own political interest. The answer to this very dark prospect is limited government and a monetary system that is beyond political control.

Aside from the subject matter in which he deals, Larry Flynt has proved himself to be a pioneer in staking out the boundaries of our First Amendment rights. Boundaries are important to our protections. Even though we might not go there, those boundaries keep the forces of government coercion far away from our private lives and assure that we need never worry that the government will storm our bedrooms.

Planning for Industry Life Cycles

The auto industry bailout failed to obtain Congressional approval this week although news reports indicate that a few tweaks to the bill might have brought aboard enough Senators to secure passage. But, true to form, the U.S. Treasury holds out the possibility that it still will give some of your money to help the auto makers. It sounds like an end run to me.

All of these bailouts are making people mad. Mish Shedlock says,"Bankruptcy is the best possible result. I am sick and tired of taxpayer money funding corporate ineptitude. Nonetheless I am fearful that Bush and Pelosi will try one more time to revive the dead." Let's hope that the effort will not be resurrected. The industry has had 3 decades to restructure in the obvious face of global competition and innovation and, supported by easy credit, has not prepared adequately for the inevitable.

A couple of decades ago I read an article in the editorial section of the Wall Street Journal describing the demise of the British Steel industry at the end of the 19th century. In 1875 the British had 40% of the world production of steel and exported 40% of their output to the U.S. By 1896 their share of the world steel market had dropped to 22.5% and they exported little to the U.S. The Journal article attributed the demise in part to the industry's reluctance to ignore their sunk cost in the aging Bessemer process and reinvest in the more efficient open-hearth process. A history of the steel industry concurs: "[Etsuo] Abé explores the record of iron and steel firms in Victorian England by analyzing Bolckow Vaughan & Company. The leading problem of the company was its focus on the wrong technology, not switching to the open hearth furnace method until long after the technology was developed. It is apparent that the company was not focused on long-term decision-making."

Long-term decision-making in business is not only about developing a 3-year strategic plan to sell cars and compete in the existing market with existing resources. In a major corporation, it is not even limited to a 5-year investment plan. It also includes careful evaluation of product life-cycles and planning, at least tentatively, decades out, for the long term health and survivability of the corporation. There are established methodologies for doing that, which are well-known by sophisticated business people and which are regularly revisited by the best companies. Different strategies, such as grow, harvest, or exit, apply at different points in the life-cycle; and those strategies have different implications for investment and marketing. I have experienced such planning and seen it work quite well in a variety of industries from vacuum tubes to hard rubber. Whether or not there is planning for it, change happens (see, e.g. The End of the U. S. Piano Industry). It will either happen for you -- or to you.

I suspect that many company executives are reluctant to face the prospect of radical reorientation of their business when they have become emotionally and professionally committed to a product or a technology, or a location for that matter. It is not easy for an executive to step outside the day to day, or year to year, and think about the demise of a business that he and his employees have struggled for a lifetime to build. But that's what an executive and his staff need to do. And they need to do it well because choosing the wrong path can lead to unnecessary collateral damage -- negligent damage to people.

After the Japanese consumer electronics manufacturers overtook the American television industry in the early 1970s, they moved the fast-maturing manufacture of picture tubes and television sets to Taiwan and Korea and upgraded their home capabilities to higher technologies. It was not by accident -- and this in a culture that was committed to lifetime employment.

Peter Drucker wrote an excellent little book, The Effective Executive, in which he noted the importance of an executive's taking time off from day-to-day management to close his door and contemplate the future of the business. That is a tough thing to manage, but it is a key to developing an objective view of the business and the corporation's ultimate viability. And the CEO's resulting foresight should move the organization to understand and plan for the realities of a dynamic marketplace.

I don't know what kind of process the auto-makers undertook to address the long term rise and fall of automobile manufacturing in the U.S. As an outsider, I don't see individual transportation disappearing in the next 50 years. I expect that to be around. But, like 19th Century British steel, U.S. auto maker tardiness in adopting new technologies has lowered their sales potential; and their fixed costs, including union contracts, have left them unprofitable.

Let's Hope the Auto Bailout has Failed for Good . It will not be the end of the world as we know it. Bankruptcy just might provide the industry an opportunity to consider all options, including some that will allow a future in the United States.

Stiglitz: Monday Morning Quarterback

Nobel Prize winning economist Joseph Stiglitz has written a critique of the financial crisis in Vanity Fair (see “Capitalist Fools”). But the critique is limited to an evaluation of where and how the “system” failed. And consequently any suggestions for avoiding future crises that he might have made or implied are limited to fixing his problems with the system – namely, elimination of the barriers between investment and commercial banking, non-existent or lax regulation, appointing as Chairman of the Fed, “a devotee of the objectivist philosopher and free-market zealot Ayn Rand” (a falsehood), tax cuts, opaque accounting practices, flawed incentive structures, and mismanagement of the bailouts. Having completed the critique, Stiglitz ends his piece with a conclusion that was not supported anywhere in his evaluation.

The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, “I have found a flaw.” Congressman Henry Waxman pushed him, responding, “In other words, you found that your view of the world, your ideology, was not right; it was not working.” “Absolutely, precisely,” Greenspan said. The embrace by America—and much of the rest of the world—of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.

Ipse dixit.

A free market is self-adjusting. But when government interferes in the market to eliminate the incentives, whether positive or negative, the market’s adjustments become distorted. The market then becomes moved, not by the invisible hand, but by an iron fist.

Had Dr. Stiglitz critiqued free market economic philosophy in his article, we might have been able to identify some specific point to debate, but alas, Dr. Stiglitz provides no statement of economic philosophy except the bare assertion that markets are not self-adjusting and that the role of government should not be minimal.

Oh yes, he does make an ad hominem argument against capitalist “ideology” – “a flawed economic philosophy” – by playing the Ayn Rand card. Such sophistry is certainly not beneath the likes of Henry Waxman, but you would think that it should be beneath the intellectual stature of a Nobel Prize-winning economist.

I guess not.

Stiglitz wants to perfect a system that itself is flawed to the core and cannot be perfected. He could have addressed the problem at the core – that the century-long experiment in central planning (the Federal Reserve System) has reached its logical conclusion. He might have engaged in a constructive discussion about how to establish a medium of exchange that is not subject to the whim of politicians or the coercive monopoly of a cartel of banks that are insulated from risk and indulge in moral hazards. See "Credit Crisis and Moral Hazards."

Instead, Stiglitz has revealed himself to be just another second-rate Monday morning quarterback.

P.S. The "flaw" in Greenspan's thinking was that he was attempting to apply free market principles to a system based on government control. If he were a "devotee" of Ayn Rand, he would have recognized the contradiction immediately and understood that one of his premises was wrong.

Kant and the Mindless Sheeple

As a younger person, I found it mystifying that an advanced, educated German population in the 1930s could be duped into allowing themselves and others to be sacrificed for the "good" of the group, the collective, the state. Then I learned about Immanuel Kant, Georg Hegel, Frederich Nietzsche and Martin Heidigger, the philosophers whose theories were used by demagogues to justify genocide and oppress a willing and docile population that had been conditioned by the intelligencia into rejecting the evidence of their own minds and blindly following evil people down the path of aggression and tyranny. Stephen Hicks has an excellent DVD, Nietzsche and the Nazis, about how this historic tragedy developed.

John Tate has written a succinct and readable summary of Kant's core premises. Check it out. You will detect the familiar ring of the relativism and the self doubt that plagues the humanities, political science and journalism departments of many of today's institutions of "higher" learning. These notions, which have been advanced, refined and blended with the ideas of Rousseau, have permeated the main stream media and, through them, the less educated population who, it appears, represent the majority of voters. Of those who recognize the origins of such distortions of reality, few stand up and speak out against the assault on common sense.

For more, read David Kelley's Evidence of the Senses and Stephen Hicks' Explaining Postmodernism.

A country populated by people who doubt their own minds and believe that one morality is just as good as any other will be easily (mis)led by power hungry and avaricious men who, while pretending morality, care nothing about it.

More important to the advancement of civilization than the current economic crisis (although largely responsible for it) is the crisis of philosophy. The conventional wisdom that philosophy is for impractical people with their heads in the stratosphere is a myth. If you want to consider yourself educated, you need to understand and adopt a philosophy. Develop a conviction, progressively, about what is real (metaphysics), the validity of your knowledge (epistemology), how to reason (logic), what is right and what is wrong (ethics), and how to live with other people in a mutually beneficial society (politics).

Why the Continued Panic?

There are those who, pursuing the contrarian viewpoint, are suggesting that the market might have bottomed. For example, the well-respected Aden Sisters have published Some Positive Signs. Carl Swelling in Very Oversold Market thinks that there might have been at least a temporary bottom. Why, then, if things are beginning to turn around, are the authorities continuing to dump a historic volume of greenbacks on what appears to be a garden variety recession. Well, it's because their solutions are not producing results but are making matters worse and they fear, not a recession, but a deflationary depression. Drake Bennett in the Boston Globe describes "Depression 2009: What Would It Look Like?" It seems that this vision has panicked those who feel that they have the responsibility to Do Something. Not that they have distinguished themselves by their economic acumen, but their apparent fear ought to give you a reason to consider your personal situation with this prospect as one of the realistic alternative futures before you.

Citibank Bailout

Mike Shedlock continues to be prompt and insightful in reporting developments in the financial crisis. Here he reports the summary of the terms of the Citibank bailout this past weekend (it always happens on a weekend). In an earlier post he had the following to say about the bailout.

I am not in favor of this bailout of course, but it is a far better scheme on the surface than blowing another $350 billion. The pertinent question is just how bad those $300 billion in assets will be. I doubt the Fed will disclose the assets it is guaranteeing.

One of the main causes of the downward spiral in the markets is that no one knows (not even the banks) what the value of their intangible assets and off-balance sheet obligations of the banks are. And the Financial Accounting Standards Board has postponed a rule requiring their disclosure. The markets and the government operatives are driven by fear of the unknown and, not knowing, they must assume the worst case consequences of telling the truth.

Philip Davis in "Options Trader:Monday Outlook" says

90-95% of [Citibank's troubled assets being guaranteed] are part of C’s $Tn in assets that are "on balance sheet." The bank has another $1.2Tn of assets that are not reflected in their books, many of which are tied to mortgages that will still need to be addressed down the road. The assets affected under the government plan are largely loans and securities backed by residential and commercial real estate. "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy," the Treasury Department, Fed and FDIC said in a joint statement issued late Sunday.

Whether this is enough to inspire long-term confidence in US financials or whether it leads to panics out of banks that are not given $300Bn by the government remains to be seen, but the immediate upshot of this is it is finally occurring to investors how far the US is willing to go to save the markets. Just looking at the mechanism put in place on the C deal, we can now see that $300Bn in TARP money can be leveraged by the Fed and Treasury into $4.5Tn of bailout funding WITHOUT further Congressional approval. The net effect of this is that gold is flying up in pre-markets as global investors are finally seeing how wet this flood of dollars might make us all (have I mentioned I like gold lately?).

If you are an ardent follower of market developments and are interested in keeping current, return here frequently and check the Recommended Commentaries at the left of this page.

Reggie Middleton's BoomBustBlog has a good comment on the Citibank bailout-- "It's the government version of 3 card Monte - Betcha 'ya can't guess which company the cash is under"
So does Naked Capitalism -- "US Agrees to Bail Out Citi"
And Seeking Alpha -- "Citi's Underwhelming Bailout"

Are Bernanke's Pants on Fire? I hope so.

Recently Congressman Ron Paul cross-examined Ben Bernanke on a new currency regime and the Gold Standard:

Ron Paul: Just last week there was a report that Iran purchased 75 billion dollars worth of gold, took their reserves out of Europe, bought gold and put it in Asia. So is that a sign of the times, is that moving on?

My question is, in your meetings, and you had a meeting just recently with other central bankers, does this thought come up about a new international world reserve currency, and if so, does the subject of gold ever come up?

How do you restore the confidence? Have you recently had conversations with any central banker, and is there a move on to replace the dollar system, because the dollar system is essentially declared dead, because it’s not working, but this indeed was predictable because of these tremendous imbalances that were never allowed to be corrected, and they were always patched up. We always came in. We’d spend, we’d inflate, we would run up deficits, and since ‘71 we’ve been able to correct these problems.

Could you tell me what kind of conversations you’ve had regarding a new reserve currency?

Ben Bernanke: Yes, Congressman. I don’t think the dollar system is dead. I think the dollar remains the premier international currency. We’ve seen a good deal of appreciation in the dollar recently during the crisis precisely because there’s been a lot of interest in the safe haven and the liquidity of dollar markets.

And the Federal Reserve has been engaged in swap agreements to make sure there’s enough dollar liquidity in other countries because the need for dollars is so strong. So I think the dollar system remains quite strong.

I do agree with you very much on one point, which is about the current accounts. The current account imbalances have proved to a very serious problem. It was in fact the large capital inflows in those current accounts which created a lot of the financial imbalances we saw and have led to some of the problems we are seeing, and one of the silver linings in this huge gray cloud is that we’re seeing some improvement and greater balance in our current account deficits.

Ron Paul: But does the subject of a new regime ever come up?

Ben Bernanke: No, it doesn’t.

Ron Paul: And does the subject of gold ever come up in any of your conversations?

Ben Bernanke: Only in terms of the sales that the central banks are planning.

I am not going to beat a dead horse by repeating explanations of why we need some kind of monetary standard tied to gold; but the bottom line is this: Either Bernanke is lying to the Congress (liar, liar, pants on fire) or we are doomed. We might escape a cataclysm greater than the Great Depression this time. We shall see. But there is no way to sustain a monetary system that is not tied to objective value and is run by politicians and bankers who reap the benefits of inflation and bubbles and pass the losses on to the little old ladies on fixed incomes and taxpayers.

The Republican/Conservative Loss -- What went Wrong?

The Republicans debate what went wrong. The obvious answer is that they did not have a message that resonated with the majority of voters. While Obama’s message (Change, Hope) was exceptionally vague, people were dissatisfied with the status quo and the message resonated. Countering that message with the “maverick” image apparently was not good enough. The Republican position on the issues to a great many people was indistinguishable from the Democrats and the Republicans did not appear to propose any significant change from the Bush policies. And the conservatives are too fragmented in their approach to the ill-defined “conservatism” to present any clear political philosophy that gives the voters an alternative, more optimistic view of the world. McCain was unable to distinguish himself from Bush and the Republicans were unable to distinguish themselves from the Democrats.

Last year Robert Bidinotto published an award winning article dissecting conservatism and identifying its fragments. His analysis is helpful in understanding why these people are having a hard time developing a unified approach. See “Up from Conservatism” linked here under Good Web Posts in the left-hand column.

The article below, Let's have some Real Change for a Change, explains why the Republicans are not able to distinguish themselves from Democrats.

In the U.S. we are in a Republic where the majority rules, limited only by the Constitution. If you can’t persuade the majority, your ideas -- even your ideas about the constitutional limitations on government -- can’t set the direction for the government because, as a practical matter, those limitations are only as good as majority support for them.

If you think that the ideas (or lack thereof) of the majority have begun to change the nature of the Republic, you need to become active and speak out in a way that will persuade other people to adopt your point of view. Either become vocal and politically active or stop grumbling, join the silent minority and suffer.

You are the Enemy of the State

There has been a raging debate about whether we have inflation or deflation. Likely, we have both. It depends on whether you define inflation as monetary inflation or price inflation. It is confusing because the press commonly uses inflation to mean prices going up and economists use it as meaning the money supply is going up (which eventually causes a bubble or prices generally to go up). For a more detailed explanation read Inflation, Deflation and Chaos.

The controversy centers around whether the Fed’s many actions to add liquidity to banks and restart the credit markets are inflationary. Those who say the actions are not inflationary say that the Fed is not increasing the supply of money and credit because the fed is taking collateral of equal value from the banks and, in any event, the loans are temporary. Those who say that it is inflationary include those who point out that the loans are proving not to be temporary and the collateral given to the Fed by the banks is garbage – so the banks are getting more than they are giving up. That means that the Fed is supporting the inflated values of paper held over from the credit bubble or they are adding new, good money to the system, which is an increase in value over the garbage it replaces. So it would seem to be important to know whether the collateral taken by the fed is worth the money loaned on it or whether the collateral is garbage as some allege.

Bloomberg, the financial news service, submitted a Freedom of Information Act request to the Fed to disclose information about the collateral it has taken from the banks. The Fed refused because much of its activity was undertaken using the Federal Reserve Bank of New York. So Bloomberg sued to get the information. It is noteworthy that the Fed argues that the Federal Reserve Bank of New York is not subject to the FOIA because the New York Fed is not a government agency. This is another official confirmation that the Federal Reserve System is a cartel of private banks, as I reported to you in March. Bloomberg is not giving up and political pressure is building for them to disclose the information.

The Fed is refusing to reveal information vital to us all – we need to know whether to be alert for and plan for the inflation that is going to be caused by the Fed’s actions. It is also refusing to allow the public to know whether taxpayers’ money is being poured down a black hole by taking clearly inadequate collateral from entities that under any rational accounting rules are already serious financial risks if not bankrupt.

As if granting a monopoly over money and credit to a cartel of private banks were not bad enough, allowing the national deficit to explode in one year and taking your money and giving it away in secret (part of which funds the bonuses of the clowns responsible for this mess) is beyond outrageous.

Secrecy is important when the enemy is a hostile foreign power. However, the enemy here is you -- they don't want you to know because you would act rationally to defend yourself and demonstrate that they are not acting upon your behalf but on behalf of their twisted concept of the greater good. In other words, the information is important to your financial well-being, which the government has placed in peril, and they don't want you to know it.

Making the citizenry the enemy is not unprecedented. When gold was confiscated in the 1930s, the World War I vintage Trading with the Enemy Act was amended to declare domestic gold “hoarders” enemies of the state when the President declared a “national emergency,” a term which is left undefined. Note the consistent position of the government that the current financial crisis is a national emergency.

As a general proposition, the politicians are learning that they can always get more power in an atmosphere of crisis. So the power-hungry will seek out and elevate crises before they seek more power. There are a great many potential crises out there, and there are a great many people promoting their special issue as an emergency. Just yesterday, former Vice President Gore said that President Obama “must make this January to begin an emergency rescue of human civilization from the imminent and rapidly growing threat posed by the climate crisis.” When someone cries emergency and crisis, it is a signal for you to look out. Once they frighten the population into giving the government more power and impairing the freedoms citizens once enjoyed, they never give them back.