Thanks Rick

By Capt. Fogg

I didn't listen to the President's speech Thursday night, partly because I had a meeting to attend and partly because I've ceased caring. Of course not listening to the president's ideas about reviving the economy by putting people to work seems to a matter of pride in this part of the swamp and one squints when asked "didja listen to to President?" with that certain tone. The proper answer is of course, "hell no!" Why should I care about a country wherein this sort of idiocy is called "patriotism?"

Of course I didn't listen to Rick Scott, our Governor/Medicare Fraudmeister either -- hell no. I save such things for later and I prefer to read that kind of news rather than to be waterboarded with it. That way I can take a deep breath when I read that before the speech, he snarked that there wouldn't be anything for Florida in it and my TV was safe from having my foot through the screen when I read that it's likely he'll turn down 7.5 Billion allocated to improve and upgrade our infrastructure. That's money that would employ a lot of people who would spend their income in Florida and make Florida more attractive and accessible to the tourists upon whom our economy depends.

It wouldn't be the first time Ricky has turned away an opportunity. He refused to accept 2 billion to build a high speed rail line - you know the kind of thing other countries we feel superior to have. The kind of thing that, once again, would boost tourism and tax dollars. Oops - I used the magic word tax and Rick doesn't like taxes. Of course he doesn't like employment and he doesn't like the President and isn't about to let him do anything about employment because the only way to get out of a recession is to make sure the state doesn't take in a dime and to fire so many employees and cancel so many necessary projects that hardly anyone has enough income to require them to pay any taxes.

And then you cut costs more which puts more people out of work which means they spend less and so less gets made and companies go out of business and fire more people so there are still fewer with any money to buy anything -- and by and by everything gets better. Don't get it? you must be a liberal, or so the Teabrains tell me and I'd rather argue with a toadstool than with the kind of fungi and pond scum that make up that seething ferment. I mean, who can afford to care any more?

(Cross posted from Human Voices)

Economic dodgeball

By Carl

This is long overdue:

President Obama yesterday announced a major offensive against businesses and wealthy individuals who avoid U.S. taxes by parking cash overseas, a battle he said would be fought with new tax laws, new reporting requirements and an army of 800 new IRS agents.

During an event at the White House, Obama said his proposal would raise $210 billion over the next decade and make good on his campaign pledge to eliminate tax advantages for companies that ship jobs abroad.

"I want to see our companies remain the most competitive in the world. But the way to make sure that happens is not to reward our companies for moving jobs off our shores or transferring profits to overseas tax havens," Obama said, flanked by Treasury Secretary Timothy F. Geithner and Internal Revenue Service Commissioner Douglas Shulman.

The nation's largest business groups immediately assailed the proposal, arguing that it would subject them to far higher taxes than their foreign competitors must pay and ultimately endanger U.S. jobs. Key Democrats were cool to the plan, and said Obama's ideas should be considered as part of a broader effort to streamline the nation's complex corporate tax code.

It's about time, says me.

The logic is very simple: if you incorporate in the largest economy on the planet and do not move your entire operation overseas (including the executive suites), then you should be subject to US tax on your income.

If you live in the United States and are a United States citizen, then you should be subject to United States tax on your income.

Period. End of discussion.

For far too long it's been way too easy for corporations and people to shelter income by offshoring it. That is, set up a foreign subsidiary (or bank account) and conduct business under that guise. You were exempt from paying tax on any of that income until you repatriated it.

Bollocks. There's a clear economic benefit from that income, even if it remains overseas, in terms of stock price and annual results. So either one of two things must happen: either that income doesn't count towards your annual results, or you owe taxes on it.

For you lay folks out there, please understand that there is little connection between a company's annual income as reported to shareholders and what it claims on taxes. This move is a major step towards what should be the ultimate goal: if you claim earnings to the public, then you owe taxes on those earnings and you should not be able to manipulate your taxable income so easily.

After all, if I tried to shelter American income offshore, I'd be hauled before a Tax Court in no time. But MicroSoft or ExxonMobil or Halliburton can pretty much with a straight face claim American income for the benefit of their shareholders and stock price, but suddenly hold out empty pockets for the tax man.

That's not right and it's not fair and must change. So kudos to President Obama for doing the right thing.

(crossposted to Simply Left Behind)

Here's a quarter...

By Carl

....call someone who cares.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

[...] I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

Point one: Liddy has agreed to take one dollar as compensation, despite the fact that most of this happened off his watch. Thuis writer has, as well.

Point two: The writer, Jake DeSantis, is an executive vice president of the Financial Products division of AIG, as "head of business development for commodities", the division that has very nearly, and still may yet, sunk the entire global economy. So I think the question must be asked...

Um, dude? WHERE THE FUCK WERE YOU????

OK, you had a different responsibility, I get that. But you know something?

I am an officer at a firm. My niche is very narrow, and I'm well paid for it. But as a point of order, we officers make it our business to understand what's going on in the rest of the company. Why?

You never know when you'll be put in charge of something else. That's the way American corporations work.

You ask why your CEO "betrayed" you. WHERE THE FUCK WERE YOU???? when your co-workers were scamming money and making bets on bets on bets?

If you want to understand what happened at the Financial Products division of AIG, let me put forth this analogy. It's simplistic and flawed, but it's not completely wrong.

I sell you a homeowner's insurance policy. That's a bet that I make that your house won't burn down. If it does, I owe you the agreed amount. If it doesn't, well, I've scored pure profit from you (your premiums, which are pooled and invested in order to cover any losses suffered by policyholders) but you've had the peace of mind of knowing you won't take a loss.

The way I make money is not directly from your premiums, but by spreading my risk around by selling more and more policies and trying to diversify who buys them, so that if a big fire hits a neighborhood, it will only affect a percentage of the money I'm holding onto.

That's the traditional insurance business. A similar scenario works in the traditional mortgage market.

Now let's move onto the Financial Products division.

I take that policy, and in order to score some quick cash, I let people bet that the policy will earn money. Then, in order to make even MORE money, I sell insurance to the gamblers that will cover their losses.

Oops. You'll notice what just happened: I've taken what risk I had spread out and consolidated it. Worse, I'm on the hook at both ends in the event the house burns down: I pay the policyholder and now have to pay all the gamblers who bet on the policy!

So, Jake, I ask the question again: WHERE THE FUCK WERE YOU???

If a simpleton like me, who only has an accounting degree, can understand that you're betting against yourself, why couldn't a high-powered executive vice president figure out from washroom conversations that your entire division was one big-ass house of cards? You're the head of development of business commodities! How could you not be curious about the products your own people are developing????

And there, right there, that's the problem. These aren't commodities. We're not talking about pork bellies or corn or oil.

We're talking about people's homes. Their lives. Their jobs.

So shut up, walk away, and be glad you got out with your skin and dignity.

(Cross-posted to Simply Left Behind.)

Greed is god

By Carl

This week seems to be my week to explore humanity and the emotional states underlying our current national crises of the economy and the political atmosphere.

So let's take this from a different perspective and try to tie them together.

Fortuitously, I was reading an article in National Geographic magazine about the burgeoning oil sand industry in Canada.

Lest you think that natural resource exploitation and the ravaging of native lands only happens in tropical climes, you need to read that article. However, it's this quote that caught my eye and got me thinking:

"It's my belief that when government attempts to manipulate the free market, bad things happen," Premier Stelmach told a gathering of oil industry executives that year. "The free-market system will solve this."

But the free market does not consider the effects of the mines on the river or the forest, or on the people who live there, unless it is forced to. Nor, left to itself, will it consider the effects of the oil sands on climate. Jim Boucher has collaborated with the oil sands industry in order to build a new economy for his people, to replace the one they lost, to provide a new future for kids who no longer hunt ptarmigan in the moonlight. But he is aware of the trade-offs. "It's a struggle to balance the needs of today and tomorrow when you look at the environment we're going to live in," he says. In northern Alberta the question of how to strike that balance has been left to the free market, and its answer has been to forget about tomorrow. Tomorrow is not its job. 

Today v. tomorrow. The now v. the then. Hmmmm... sounds familiar...

And this is the struggle that President Obama as well as every other world leader faces today, the juggling of the efficiencies of the free market against the need to protect the environment and the people, to state the general case.

There are no simple answers to be had here, as much as the conservatives would like you to believe. They want you to believe that because in an environment (pun intended) that is bereft of ideas, we cling to the past, to ideas that work sometimes if at all. The simple answer is to let the market sort it out.

I've said before that the power of the market, the real strength of it, is to weed out weakness, to promote a sort of economic evolution.

When it works well, it's extremely good at this. I don't think the market has worked well since the Reagan administration, and I'm not completely sure why.

Certainly, with Reagan, we saw the fledgling crony capitalist markets. The amount of money suddenly available in the junk bond market, the extraction of mythical valuations of "goodwill" and the raping of pension plans for the cash they contained, all combined to create barriers to entry in industries as diverse as banking and retail.

If you're wondering why Wal-Mart is ubiquitous, but you can't find an Alexander's or a Gimbel's (sorry, I'm Noo Yawk oriented), this is why: they were swept up in junk bond mania.

At first, this was an efficiency exercise. Truly there were companies that were wasting resources, paying, you know, salaries and pensions, among other things. The wave of mergers and acquisitions probably, at first, cut a lot of fat out of the marketplace, setting the stage for the enormous growth of the 1990s.

However, all good things become bad in due time, and the wolves howling at the door stopped wanting just fat and wanted the real meat.

The market, rather than be efficient, became cannibalistic.

We've seen this time and time again in America: they call it a "bubble" but in truth, it's the self-feeding cycle of cannibalism, developed through what Greenspan called "irrational exuberance".

Another Reagan-era monstrosity is the flow of corporate money into politics. A nonsensical and absurd ruling (1978 Boston v Bellotti) by the SCOTUS allowed that corporations, which are basically money magnets, have the same free speech rights as persons, and so should be allowed to contribute to politicians and to have a say in the running of the country.

All that money that had been paid out in dividends and re-invested in making the company more efficient and more responsive to their customers now became a cudgel to force legislators to bend the rules of commerce in their favor.

And now we have what we have: a Congress beholden to special interest groups, because the rewards of all that contributed money is more money to spend on advertising, which means the price of campaigning skyrockets, which means the only way a person can afford to run (even Obama) is to suckle at the teat of corporate America.

The Chinese have a saying: all feasts must have an end.

As well, governmental regulation has its good points, and its absurdities. Too much regulation can stifle creativity. Too little regulation, and you get salmonella in your peanut butter. The tendency in this swing of the pendulum is to enforce "just right sized" rules, but eventually, there will be too many and they will be too burdensome.

So which becomes the bigger burden? Too much regulation or too much money floating around?

Neither. Both. And there's the problem.

We'll continue this whipsaw back and forth until someone has the gumption to stand up and say "enough". No more corporate political contributions, get that stupid decision overturned and finally work for the people, the individuals, and not the aggolmerations of capital and political power that have worked to effectively disenfranchise the entire nation.

This is not a Republican issue (altho it tends to affect Republican administrations more than Democratic) or a Democratic issue, but a national issue.

Greed is god in this country, and it's time to tear down the idols and expose the feets of clay.

(Cross-posted to Simply Left Behind.)

A day in the life

By Carl

There's a man I see at the subway station where I exit the system to go to my office.

Let me describe the station: annexed to the Grand Central Terminal is a platform for the 42 Street Shuttle. It's an open air station, in that the token booths... I guess I have to call them Metrocard machines now, c'est dommage... are on a mezzanine, and there are four open stairways leading down to the train platform.

This mezzanine is shaped like an "H" and overhangs the platforms on one end. Along these corridors are office buildings with stairways that lead to the subway, one of New York's many hidden attractions.

One corridor leads to two buildings, and is lightly travelled, so lightly that the shops along this walkway have shuttered. There was a locksmith and a shoe store, both long gone and gated now.

Down this corridor, dimly lit with greying grimy walls, stands a emaciated man with an unkempt fro and the wisp of a beard. Usually, he's wearing some bizarre combination of clothing. Today, it was a pair of running tights, and a hoodie sweatshirt.

I understand why he wears what he wears: he gets these clothes donated by the overpriced clothing stores in the terminal itself, who probably throw clothes at him, rather than have him linger in their stores with the high priced running shoes and the double-mark-up shirts. Even his shoes speak of high end, albeit leftovers.

Sometimes I see him practicing karate katas, waving his hands with force and purpose, kicking high over his head, but nearly silently.

I'm sure the cops have warned him. There's usually a cop or three on the platform or on the mezzanine. You could say this is ground zero for the anti-terror forces of the NYPD.

Maybe he practices these forms because in his head he imagines kicking bin Laden in the teeth when he shows up wired and strapped with explosives.

Maybe he feels he needs to keep in shape because down in the subway, when things get tough in the city, is where death happens. Certainly, the number of homeless, which has crept steadily upward since the 90s, is beginning an inexorable geometry of expansion.

Maybe he's just insane.

Sometimes he just stands there. In the summer, he wears worn jeans cutoff at the knees and held up with a rope like Lon Chaney's Wolfman.

Sometimes he sings, but not very often and not very loud.

Sometimes, he's scary, screaming and ranting at everyone and everything, including me when I need to walk past him to get to the bank. I ignore it, of course. I've seen how high he kicks.

He holds court in this corridor, this dingy remnant of better days in corporate America. The fence that separates the mezzanine from the platform is embedded in a concrete knee wall, tiled with, well, white ceramic tile laid in the subway pattern.

A long banquette for his imaginary court.

He never harasses anyone who walks by, apart from the occasional angry running commentary. He never asks or demands spare change, which sets him apart from his homeless brethren and their imitators. He never accepts a handout. I know. I've tried.

And he never looks lost. He always seems to know that he is precisely where he needs to be, when he needs to be there, even when I've seen him patrolling the vaulted main room of the terminal, rummaging through the bins for leftover food.

This is his home, his castle, his palace, this grand and glorious monument to man's inability to remain in one place for very long.

Ironic, ain't it? He tolerates we many, we unhappy many, we band of bummers, because we cook for him, we clean for him, and we entertain him; hundreds of thousands of jesters a day, regaling in our finery. What must he make of us?

The station nominally closes its doors at 2AM for cleaning, but I know, I mean, I know, he's found a spot where he can't be seen and watches his staff cleaning his mansion.

Or maybe he doesn't care to hide himself. Maybe he's allowed by the MTA to wander freely, picking up the leftovers of the food court, sleeping on a bench somewhere because it's warm. I'd like to think so. I'd like to think that this man, whom we might pity, has been allowed the dignity by the bureaucrats and governance to remain in his home.

And yet, I can't help but feel that he deserves better than this Fisher King-like life he leads. Yes, he seems happy enough, and yes, he's refused help from me, but how can we know for sure that he isn't simply overly suspicious? How can we know he doesn't know how to ask for help? Indeed, how can we be certain that anyone's ever been able to ask him properly?

In a country overseen by Republicans for six of the past eight years, in a state run until recently by Republicans, in a city run by Republicans for decades until one finally had the sense to say basta! and became an independent, this man stands as his own monument to the torment and torture of the poorest of the poor, the meekest of the meek, the most trod-upon of our society.

A shining example of Republic-tude. Mental health be damned! We have wars to fight and cronies to enrich! Economic royalists, we say!

For this man's sake, and for the sake of others like him who have no voice, who hold no seat at the table of American politics but who have to live with our laws and our government, I truly pray that the new hope that Obama promises will include him.

By Jove, I am not covetous for gold,
Nor care I who doth feed upon my cost;
It yearns me not if men my garments wear;
Such outward things dwell not in my desires.
But if it be a sin to covet honour,
I am the most offending soul alive.

(Cross-posted to Simply Left Behind.)

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Stupid Republicans

By Capt. Fogg

If we think the very rich are indeed different from you and me, it may not be much of a complement to them.

The talk around the Yacht Club these days involves a lot of snickering about Barak Obama and what "that man" will do to the economy. No, I'm not joking, but then neither are they. Perhaps Malcom Gladwell is right that material success has as much or more to do with circumstances than with talent or intelligence. Take the fellow with a yacht worth far, far more than than Joe the Plumber will make in his lifetime; a fellow who thinks that we're seeing a "slowdown" that will "bounce back" shortly and a slowdown that has nothing to do with George Bush, a Republican congress, deregulation or the idea that debt has no consequences if you cut taxes and pour money down a hole. I have as much faith in his genius as he has in the notion that America's success has been the result of its Christian piety.

Obama, of course, will raise taxes. That's axiomatic because he's a Democrat. Raising taxes will harm the economy, they say, even though it would be as fair to say that a bullet will harm a dead horse and the economy has done better under Democrats since WWII. Supply-side economics will work eventually and even if it doesn't, even if the "slowdown" becomes a full blown depression, we have to keep making it easy for the Great Gatsby to keep the twin Diesels fed. Did I mention that Obama is going to ruin the economy by raising my taxes?

(Cross-posted from Human Voices.)

False truths

By Carl

My good friend, Britisher, makes a very cogent observation in comments from yesterday's post:

Im a technical ignoramus when it comes to high finance but...isn't this while mess ALL about debt? Debt incurred by gambling on future profits based not on tangibles but on "prospects"?.

It seems to me that for years now trade has not been based on identifiable tangible need ( barter as it were) so much as on desire.

I mean a lot of the money at stake is surely imaginary. A lot of the wealth accumulated was imaginary. Investments were made without any supporting collateral and then more investments were made on those investments that weren't supported by anything so everyone shuffling money got rich by pure accumulation.

In short investment banks started 'printing' money and trading that money for other money and more money which was also 'printed'.

This mess is actually a market adjustment.

Am I right? Or partly right?

Yes, Virginia, there was a Santa Claus.

I'm going to get financially technical for a moment, but bear with me. I think I can make it understandable.

All investments are speculations. When you purchase an investment, any investment, from your house to a 1952 Mickey Mantle baseball card to a diamond ring, you are placing a bet.

See, factored into the price you pay for your house/card/diamond/stock is what are called "future cash flows". These can either be income, like a dividend or an interest payment, or capital gains, meaning your purchase is going to go up in value.

This future income or profit is discounted and added to the cost of the investment (what it physically costs to create). In most investments, that cost is minimal (it is not in the purchase of a house).

As Michael Kinsley points out in Time:

How is the country any richer if the exact same stock of existing housing is suddenly worth, say, 20% more? Other markets produce things. They sell what they produce. When prices go up, they produce more. Not so with real estate, for the most part. This market consists primarily of trading the same thing again and again. And you know the old saw about land: They're not making any more of it. Real estate is the only major consumer market in which how much you'll pay someone depends on your belief about how much someone else will pay you. In this market, prices go up when people believe they will continue to go up. To restore confidence would mean restoring belief in the greater fool.

And he's right, of course. Land is a fixed commodity, but there is plenty of land in the country, believe it or not, since half the population lives within 150 miles of a coastline. Yes, you want to be close to your job, but on the other hand, the way the economy is trending and the way workforces are being distributed and outsourced, you might want to live away from a city and telecommute now.

Land prices should probably fall back further, based on this alone.

But I digress. Kinsley's larger point, that buying a home is betting that you can get a sucker to pay even more for it after you've lived in it and aged it, is valid. Not only valid, but has been the basis of real estate sales since postwar America in the 50s.

Too, the perception that, by mortgaging nearly 100% of the cost to purchase you are in effect playing with house money, feeds into this conceit. You are gambling with money you have little responsibility for, because if you walk away from the mortgage, hey, the bank will foreclose, sell your house, pay off your mortgage and you still have a little left over, if the system works "the way its supposed to".

That's not to trivialize foreclosures: they are painful processes and usually occur because of some other trauma to the family/owner: job loss, medical expenses, or divorce. But if you know the bank will be "taken care of", you have one less worry on your plate while dealing with the primary problem in your life.

The trouble is, as Brit points out, it's all a fucking illusion. All of it. Rather explicity, I might also point out.

When you purchase a house, you should be paying what you think it is worth now to you, to live in, to spend some time in, to establish a domicile. We're not talking about buying a stock. Stocks are like going to a casino: you shouldn't do it unless and until you can afford to lose all of the money you invest.

This is why brokers are formally referred to as "broker-dealers" because they're dealing cards at a blackjack table, and they hold all the aces. The investment game is rigged in their favor and so any bets you might make have to be carefully picked for you to beat the house.

A house is different. A house is real money for a real necessity. If it goes up in value, then that's a bonus. But that shouldn't be the reason you go out and buy a house. You should buy a house because you need a house.

Now, you're sitting there thinking I'm kicking the American homeowner while he's down. I am, but I'm also not, because I don't blame people for wanting to believe what they want to believe, or for believing that house prices would always go up.

That's what we've all been told. And there's where the blame lies. Who told us? The bankers, brokers and developers who right now stand to be bailed out. The people who marketed "zero money down, interest only loans" without warning us that in five years, you'd have to start paying down principal AND that interest rates would like double or even triple! There is no way in the world your income can triple in five years, unless you are extremely fortunate.

The difference here is, while those banks and you gambled that you might earn enough money in five years to actually pay down your loan, or that your house might accumulate enough new value to pay off the mortgage on a sale, you couldn't have known better, while they should have!

They are financially savvy and you are not. Or at least they are supposed to be, which is why they are supposed to be licensed mortgage broker-dealers. But past history dictates that even the "experts" are not expert when things get complicated enough.

Hell, even I couldn't have foreseen the depth of this crisis, altho I had an inkling and indeed let my "inner pessimist" run amok on this blog about the coming collapse of the American economy.

There's a bitter lesson to be learned from all this: nothing, no part of your life, is without risk, is not a gamble of one sort or other. Houses were supposed to be the safest investment you could make. Indeed, they were the single largest investment you could make.

You have to start thinking about what you buy and how much you pay for it in terms of purchasing a car (the second largest purchase most people will make in their lifetimes, and an object lesson): what can the actually asset you are buying do for you?

See, cars only lose value when you drive them off the lot, at least for the first twenty years, and even then, you have to have taken immaculate care of them for them to earn back your original purchase price, even. The rational decision with a car is to buy one you can drive into the ground, making it cost as little as possible for the value attained from it (hauling groceries, taking vacations, commuting). You want to drive the car so much that the cost to own per mile is as small as possible.

So it should be with your house. You ought to buy a house that means something to you in twenty years, that makes it worth the purchase price, and forget that it *might* increase in value enough for you to retire on.

And screw the economic royalists and their attempts to shove down your throat some illusion. You're better than that!

(Cross-posted to Simply Left Behind.)

What was left on the cutting room floor

By Carl

I'm struggling with how to characterize the jitters of the market and the surprising (if feeble) news out of the Federal Reserve this morning.

On the one hand, I can't recall a moment in history when the US had this much warning of a total meltdown in what many of the uninformed take to be the economy: the New York (and other) Stock Exchange. Stock exchanges tend to be lagging indicators of the economy, tho, so the steep drops we've been experiencing are echoes of what's really going on in the commercial sector of the country.

On the other, I can't recall such a feeble response: a stimulus package that actually might harm the economy longer term, as well as a pissant rate cut of a three-quarters* of a percent in the prime rate.

The tax cut and rebate package on the face of things sounds like a pretty good deal: put money immediately back in the hands of taxpayers, while giving businesses a break on their earnings.

The administration doesn't seem to get it. This is not a temporary economic correction, this is a full-blown recession that's teetering (if not already fallen) on the brink of depression.

If we take Paulson's words at face value, and assume he's just talking things up to avoid panic, well, a) he's not succeeding too well, based on the futures market as of 9:15 this morning, and b) we'd like to think that behind the scenes, there's some furious activity to fix things quickly.

There's some evidence of that, but it's easy to infer there are some major obstacles to creating an effective response.

Rumours on the European markets are that the Federal Reserve cut is the first of a series of central bank rate cuts, primarily in Europe, to be announced. Could be. As I said, I can't recall any emergency rate cuts in my lifetime. It would be indicative of a collaborative effort to announce the US rate cut before the others are announced.

The problem for Europe, however, is they've actually been raising their central bank rates in order to stem inflationary pressures. A cut now would send a very mixed message to their markets.

The Fed's three-quarter-point rate cut serves only to aggravate the markets here. They will open down about 300 points, and investors were expecting (funny how yesterday, there wasn't even the merest hint of a rumour of a rate cut, and now suddenly, they were "expecting"?) a half a point cut.

Not that any of this will really make a difference, of course. While credit markets are tight, it's not because interest rates are high, it's because the markets are terrified of the outcome of the mortgage default crisis. You could lower the discount rate to zero (a prime rate of 3%), and banks still wouldn't lend.

Asia is in total meltdown already, which means that China is experiencing its first market crash. There's no way of telling what response Beijing will make. This side note is a way of saying, "Gee, I sure hope they don't start calling in their chits on the American economy!"

The Bush legacy seems to be even further in the hole. His Hail Mary pass of a Middle East settlement is in disarray, and his one hope for any positive news was four years of relative economic strength. Not Clintonian, but Bush would have been able to point to positive growth, especially if you look at the last five years of his administration only.

Alas, even that slim margin of growth has been squandered, along with several hundreds of billions of dollars in Iraq and trillions domestically. Had we not had tax cuts of the severity that Bush insisted and the Republican Congress lapped at like Tommy Lee on Pamela Anderson, we might have some programs in place already to deal with the problems ahead.

Instead, we squandered like a drunk sailor on shore leave with a stolen credit card. Hey, the rich sure as hell won't ever have to pay these bills back, why should they care?

* The Fed sent out a press release correcting the initial announcement.

(h/t to Karyn Mannix for the graphic)

(Cross-posted to Simply Left Behind.)

It's like a glass of champagne...

By Carl

...all these bubbles bursting. Only it ain't champagne, more like sewage.

The housing market boom has turned to bust, and with it topple many cherished ideals of the Republican party platform: specifically, in this case, the tax cut.

When Bush proposed his tax cuts, coming on the heels of the first balanced budgets in decades and the first budget surplus in centuries, it was assumed that much of the tax burden would shift down the government scale: states and localities would be forced to raise revenue in order to finance unfunded mandates the Republican Congress was throwing their way, like, say No Child Left Behind.

States and localities, of course, were having their own tax battles. No one in their right mind, in the greed infested environment so polluted with the nonsensical notion that tax cuts were actually *good* for the economy, was about to impose new taxes.

Salvation came in the form of the housing bubble. A community could merely tweak the tax rate slightly, and generate brand new revenue based solely on the fact that house values were skyrocketing and all the community had to do was keep appraisals in line with that valuation.

Worked fine until the bubble burst:

The real estate frenzy that once filled public coffers with property taxes has over the last two years given way to a devastating bust. Rather than christening new facilities, the mayor [Eric Feichthaler, Cape Coral, Florida] finds himself picking through the wreckage of speculative excess and broken dreams.

Last month, the city eliminated 18 building inspector jobs and 20 other positions within its Department of Community Development. They were no longer needed because construction has all but ceased. The city recently hired a landscaping company to cut overgrown lawns surrounding hundreds of abandoned homes.

“People are underwater on their houses, and they have just left,” Mr. Feichthaler says. “That road widening may have to wait. It will be difficult to construct the high school. We know there are needs, but we are going to have to wait a little bit.”

Waiting, scrimping, taking stock: This is the vernacular of the moment for a nation reckoning with the leftovers of a real estate boom gone sour. From the dense suburbs of northern Virginia to communities arrayed across former farmland in California, these are the days of pullback: with real estate values falling, local governments are cutting services, eliminating staff and shelving projects.

So let me draw the picture for you: a lower tax base from the Federal government on down to your city or town; a crumbling infrastructure in terms of bridges (remember the I-35 bridge in Minnesota?), highways, streets, and public facilities like schools, hospitals, and services like police and fire departments; a shrinking tax base as baby-boomers begin to retire, forcing Social Security to call in its chits from the general tax revenue; an aging population demanding health care reform; a horribly tragic, wasteful war that's drained one trillion dollars plus from our collective nest eggs-- and the worst is yet to come.

Next year, another two million or so mortgages will have to be re-assessed as they are due for drastic rate hikes. That's going to create yet another contraction in the real estate market (barring a drastic intervention by the Fool On The Hill, George W Bush) that's going to fling off yet another wave of revenue cuts for states and communities.

And yet, Republicans nationwide applaud this kind of shit. I guess living in a gated community has some advantages but what happens when the gatekeepers can't get to work or can't get to an emergency room? Gates can trap inside as well as keep people out.

Not a pretty picture for the holiday season, huh?

(Cross-posted to Simply Left Behind.)

Droit de seigneur & economic royalists

By Carl

In feudal times, all who worked for the lord of the land submitted to droit du seigneur, which demanded, among other things, any virgin woman to be married was offered to the manorist first, in order to deflower her (aka prima nocti, or law of the first night).

Should she be silly or unlucky enough to become pregnant, well, that was her family's burden. In addition to spreading his genetic material (believing that peasants and serfs were of lesser blood, so "improving" his people), it was also a form of suppression: by humiliating his charges, they would be less likely to rise up in revolt or even to ask a boon of the lord.

Well, to no one's surprise, this elitist, royalist tradition continues today, albeit in a mutated form:

A Treasury-backed plan to stabilize a vital segment of the credit markets has been shelved, the banks involved said yesterday.

The strategy called for banks across the globe to create a $100 billion fund aimed at jump-starting the troubled market for short-term loans, acting like a credit card for companies.

But the architects of the plan, which was developed by Citigroup and other leading financial institutions at series of meetings convened by Treasury officials this fall, struggled to recruit other banks and called it quits this week.

This plan was a key privatized element of Bush's mortgage "bailout" plan, supposedly directed at borrowers but in truth, designed more to protect lenders.

The larger commercial banks, like Citibank or JP Morgan Chase, could afford to absorb some of the shortfalls and defaults that would cripple smaller lenders. The $100 million fund would limit their losses to this amount, and that risk would be spread out across a number of banks around the world.

Makes sense, right? This way, the credit markets don't dry up so quickly, and might even weather the storm.

So why is this being shelved?

Earlier this week, Paulson and the banks behind the plan said they were committed to its establishment. That changed yesterday after Treasury officials and the banks, which included Bank of America and J.P. Morgan Chase, said that the fund was "not needed at this time" because market conditions had improved.

Subtle, that.

Market conditions have improved, a little (read: bank earnings have stabilized), but the economy itself (and the money that goes to pay mortgages) has not. In business-speak, the banks took a look at the risk and realized they were a lot more likely to lose the entire $100 million than they were a month ago:

The plan would have helped major issuers of asset-backed commercial paper called structured investment vehicles (SIVs). These semi-independent funds, set up by Wall Street banks to make complicated investments, have suffered deeply from the credit crunch.

The SIVs issue short-term loans and invest that money in securities backed in many cases by mortgages. But after a wave of defaults and foreclosures swept across the nation, the value of the securities held by the SIVs plummeted. The debt markets panicked, and the SIVs found it impossible to sell off any holdings.

With those large losses and a climate of fear in the marketplace, the SIVs were unable to issue short-term loans.

Since then, many banks, in particular Citigroup, have moved more than $100 billion in troubled assets from their SIVs onto their own balance sheets, alleviating a key rationale for the rescue fund. The transfer means the banks are agreeing to back loans made by the SIVs.

Prima Nocti, indeed. These guys pumped the American homeowner full of their vile seed, and now walk away with millions of pregnant mortgages about to come due, which they can easily write off their books now. Essentially, the banks are telling Paulson, the Treasury Department and the Bush administration, "Screw you, this is your problem, you fix it!"

George Will, a man no one really need admire, has said one admirable thing in his life: the American capitalist system is designed to privatize profit, but socialize losses, except when it comes to the individual wage-earner. If a business loses it's headquarters in a foreclosure, that business can write that loss off. A human family? Eh. Not so much. If a bank forecloses on a mortgage it holds, it can write off that loss. I lend you a $100, and I have to go through hoops and garters to prove to the IRS there was indeed an actual loan if you can't pay me back. And our transaction was probably better documented than the banks!

Next year will be a pivotal year in the mortgage and credit markets. This move tells me the banks are expecting bigger problems than anyone anticipated.

(Cross-posted to Simply Left Behind.)